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UCLA Anderson Forecast: Job growth, wage increases to push real GDP growth past 3% for first time since ’05

California forecast expects steady gains in employment through 2017

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L.A. Port
Port of Los Angeles

The California report found that the state’s port activity in September was at a historically high level.

UCLA Anderson Forecast’s fourth quarterly economic report for the U.S. says the Federal Reserve will start to normalize interest rates as its prolonged “zero interest rate” policy reaches its end with the most recent financial crisis long over and the unemployment rate indicating near full employment.

In California, the there is no indication of any slowdowns or declines in the continuing growth of both employment and income and, in fact, the state’s employment sector will grow throughout the forecast period.

The national forecast

In his forecast for the national economy, UCLA Anderson senior economist David Shulman cites a paradox in the current employment picture. While October’s 5.0 percent unemployment rate is essentially the traditional definition of “full employment,” the employment-to-population ratio is 59.3 percent — 4 percentage points below the level recorded prior to the start of the financial crisis in 2006. As such, the recovery might not feel like much of a recovery for many Americans.

“Nevertheless,” Shulman writes, “employment remains healthy, with the economy generating jobs at a 200,000-a-month clip that will bring with it further declines in the unemployment rate to 4.6 percent.”

The December forecast also says the Federal Reserve “is about to get the inflation it has been waiting for.”

As a result, Shulman writes: “With the financial emergency long over, the unemployment rate indicating near-full employment and the likelihood that inflation will soon approach its 2 percent target, we expect the Fed to begin normalizing interest rates by increasing the Federal Funds rate this month. … Thus, we forecast that by the end of 2016 the federal funds rate will be about 1.5 percent and it will approximate 3.25 percent at the end of 2017.”

Ongoing job growth and expected wage increases will drive consumption in 2016 leading to the first year of greater than 3.0 percent growth in real GDP since 2005. The higher wages, along with a modest rebound in oil prices and higher housing costs, will push the inflation rate above 2.0 percent, leading the Fed to begin a gradual tightening cycle beginning this month. Economic strength will be found in housing and commercial construction along with a booming automobile market. The collapse in oil-related capital spending will come to an end next year and defense spending will be increasing after five years of decline.

The California forecast

In his December essay, UCLA Anderson senior economist Jerry Nickelsburg looks at California’s most recent economic data, including trade through California’s ports, international arrivals at Los Angeles International Airport and San Francisco International Airport, state government finances, residential construction and employment. (These data represent the sectors that differentiate the state from the U.S. average forecast.) Nickelsburg cites data that indicate ongoing growth for California, including:

  • Port activity in September was at a historically high level.
  • International passenger arrivals at the Los Angeles and San Francisco airports have reached record numbers over the past year.
  • A (shallow) upward trend in sales taxes, which are still below the pre-recession peak when adjusting for inflation.
  • Continued growth in residential construction.
  • Impressive gains in California employment.

The current forecast is for continued steady gains in employment through 2017. The increase in U.S. growth rates will continue to fuel the local economy, leading to a steady decrease in the unemployment rate in California over the next two years. Anderson economists expect California’s unemployment rate to be insignificantly different from the U.S. rate at 4.9 percent by the end of the forecast period.

The forecast calls for a 2015 total employment growth of 2.6 percent, and 2.1 percent for 2016 and 1.4 percent for 2017. Payrolls will grow more at about the same rate. Real personal income growth is estimated to be 4.3 percent in 2015 and forecast to be 3.4 percent in 2016 and 3.2 percent in 2017.

Office-using employment growth

In another essay, Forecast economist William Yu looks at the growth of office-using employment across metropolitan areas in the U.S. from 2000 to 2015. Office-using sectors ¾ information, financial activities, and professional and business services ¾ pay their employees the highest salaries. The growth of office-using sectors is crucial to a city’s prosperity because of the high purchasing power of the people they employ. Thanks to the higher wages in the sector, office-using employment has become the backbone of city economies in the U.S. The resilience of these sectors will help cities achieve shared prosperity in the 21st century.

Yu demonstrates a disparity in office-using employment across cities in the past eight years. Some of the most dynamic growth was in San Jose and San Francisco, where it was fueled by the high-tech boom. Historically, however, the Bay Area tends to have a volatile employment cycle due to the boom-bust cycles of the high-tech industry.

The three biggest metropolitan areas in the country — New York, Los Angeles and Chicago — have seen lower growth in office-using employment over the past eight and 16 years compared to most other major cities. One of the reasons is that they lost a significant number of jobs in the finance sector during and after the financial crisis.

Quarterly conference at UCLA Anderson

All of the economists’ reports will be presented at UCLA Anderson Forecast’s quarterly conference on Wednesday, December 2. The conference features panel discussions on how technology is changing the office environment and its impact on the workforce. UCLA Anderson professor Uday Karmarkar will deliver the keynote address. For more information on attending the conference, please visit the Anderson Forecast website.

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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