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Downshift in growth expected for the nation and California, says latest UCLA Anderson Forecast

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Housing construction
Travis Wise/flickr

The forecast for California notes that the housing market could be dampened by the new U.S. tax bill that is expected to become law, which would reduce economic growth in the state.

UCLA Anderson Forecast’s final quarterly report for 2017 presents a somewhat mixed outlook, as the United States awaits the outcomes of a number of initiatives and proposals that could affect the economy.

For the nation, the near-term outlook is optimistic, anticipating a 3 percent growth in the economy, thanks to strong equipment spending, a potential tax cut and an uptick in consumer spending. However, by the end of the forecast horizon in 2019, real GDP growth could be running at a rate below 1.5 percent as the outlook becomes cloudy.

While the same is true for California, the rapid growth that has been driving a significant part of the U.S. recovery is slowing, consistent with an earlier prediction by the Anderson Forecast. The December 2015 Forecast anticipated a slower California growth rate of 1.6 percent increase in payroll employment and 1.2 percent increase in total employment in 2017. Through October of 2017, the state has seen a 1.3 percent gain for both payroll and total employment.

The national forecast

In his outlook for the national economy, UCLA Anderson senior economist David Shulman sees “a sunny 2018 with clouds coming in 2019.”

Shulman writes: “There is momentum coming from the recent strength in 2017, strong equipment spending, the likelihood of a tax cut and a consumer that is benefiting from higher asset prices and the prospect of higher wages.”

He anticipates that unemployment will drop below 4 percent and remain there throughout most of the forecast horizon as inflation experiences an uptick.

Shulman writes that with the tax bills working their way through Congress, “there is uncertainty surrounding the corporate tax rate, state and local tax deductions, child credits and the permanence of the entire package.” He appears more certain that defense spending will likely be on the rise over the next several years, increasing by 2 percent and 2.7 percent in 2018 and 2019, respectively.

The risks predicted by the current forecast include the enigmatic consequences of the Fed’s reducing its balance sheet and the potential failure of the ongoing NAFTA negotiations. Especially hard hit would be the U.S. automobile industry, where parts cross borders several times in the manufacturing of a single automobile. “In our view, should the U.S. leave NAFTA, the growth outlook would deteriorate and the chance of a recession in late 2018 or 2019 would significantly increase,” he writes.

The California forecast

In his essay, UCLA Anderson Forecast director Jerry Nickelsburg notes that the forecast for California differs from the previous one in two ways. First, the new tax bill, which is expected to pass in some form, may dampen the housing market, which will reduce economic growth in the state. Second, the investment incentive — in particular the bringing forward of investment because of expensing — increases the forecasted growth rate for employment and income in 2018, though reduces it slightly by the end of 2019.

“The most likely outcome of these two opposite economic forces is for California’s unemployment rate to fall to 4.6 percent by the end of the forecast period,” Nickelsburg writes.

The forecast for 2017, 2018 and 2019 total employment growth is 1.2 percent, 1.5 percent and 1.1 percent, respectively. Payrolls will grow at about the same rate over the forecast horizon. Real personal income growth is forecast to be 1.6 percent, 3.1 percent and 3.6 percent in 2017, 2018 and 2019, respectively. Homebuilding will reach about 121,400 units per year at the end of the forecast horizon.

UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation, and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state’s rebound since 1993. More recently, the Forecast was credited as the first major U.S. economic forecasting group to declare the recession of 2001.

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