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UCLA Anderson Forecast: Nation should see moderate economic growth

California can expect steady improvement in unemployment

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A companion report issued by the Anderson Forecast projects that Los Angeles should benefit from robust activity in the high-tech field, which could set the city on a course for long-term prosperity.

UCLA Anderson Forecast’s second quarterly report in 2015 for the United States indicates that the nation’s economic growth, for the second year in a row, was slowed due to inclement weather experienced during the first quarter of the year. The U.S. is expected to return to a 3 percent GDP growth rate by the third quarter, and that pace should hold through the end of 2016.

“At that rate of growth, the economy will likely be generating jobs at a 250,000 per month clip and the unemployment rate will close out 2015 at just below 5 percent,” the report said. The California forecast calls for continued steady gains in employment through the middle of 2016. The state’s economy will be buoyed by the increase in U.S. growth rates in construction, automobiles and business investment, as well as higher consumer demand.

For the June publication, the UCLA Anderson Forecast includes two additional reports. One updates the Human Capital Index work that the research center has been examining for the past few years, and the other looks at the tech sector in Los Angeles. The latter report ties into the theme of the June UCLA Anderson Forecast conference, Tech and the California Economy: Is the Future in the Code? The conference will be held from 1 p.m. to 4:30 p.m. on June 3, 2015 at UCLA Anderson’s Korn Convocation Hall (map). Scott McGregor, the president and CEO of Broadcom, will deliver the keynote address.

The national forecast

In his forecast for the national economy, UCLA Anderson Forecast Senior Economist David Shulman says that despite the first-quarter bump in the road, the U.S. economy remains on track with a 3 percent growth path for GDP. He expects consumer spending to rise due to declining oil prices and anticipates that the drop in oil-related capital spending will first abate and then reverse, while housing starts and equipment spending will rise. Taken in total, such conditions create the underpinnings for moderate economic growth.

“In this environment, the unemployment rate will drop below 5 percent, inflation will move above 2 percent and the Fed will embark on a gradual tightening process starting this September,” Shulman said.

“We have yet to see the approximately $150 billion annualized reduction in gasoline prices to flow through to consumer spending,” Shulman noted. Instead of spending these savings, Shulman said, consumers have been paying down debts and increasing their savings. He added that such behavior belies “the historical economic playbook,” but he expects that “the ‘tax-cut effect’ of lower gas prices will gradually find its way into higher consumer spending.” Housing and equipment investing will help to power economic growth, as will an increase in military spending.

A modest increase in the federal funds rate will likely occur in September, which would likely have little impact on the stock market. Shulman writes, “For those who fear the impact of higher short-term interest rates on the stock market, we would remind them that history suggests that it takes several rate hikes to cause a significant correction in stock prices. Moreover, although the Fed takes into account the effect of asset prices on the economy, it would be a mistake to believe that Fed Chair Janet Yellen is the stock market’s ‘fairy godmother.’”

The California forecast

The June California forecast, authored by Senior Economist Jerry Nickelsburg, says that the increase in U.S. growth rates from construction, automobiles, and business investment, as well as higher consumer demand, will translate into a steady decrease in the unemployment rate in California during the next 18 months. “We expect California’s unemployment rate to be insignificantly different from the U.S. rate at 4.9 percent during the forecast period,” says Nickelsburg, “and employment growth to then be constrained by the growth in the U.S., immigration, and natural growth in the working age population.”

The Forecast estimates total employment growth at 2.5 percent in 2015, 2.1 percent in 2016 and 1.3 percent in 2017. Real personal income growth is estimated to be 4.5 percent in 2015 and forecast to be 4.4 percent and 3.5 percent in 2016 and 2017, respectively. At the same time, the unemployment rate should hover around 6.2 percent through the balance of 2015. Unemployment will fall throughout the next year and will average 5.2 percent — a slight downward revision from the March forecast. The forecast expects the 2017 unemployment rate to be approximately 5 percent, the same as for the U.S.

The June California forecast report considers how and when the state will reach its “employment potential.” Nickelsburg says that “the current economic expansion has had an unusually large spike in the number of long-term unemployed” and that this spike corresponds more or less to the decline in manufacturing, the reduction of the housing sector impacted by a housing bubble, and shifts in the finance, legal and professional services sectors.

Silicon Beach and the Los Angeles economy

Economist William Yu looked at the high tech industry’s impact on the Los Angeles economy.

“The high tech sector is growing in counties across the U.S., though Los Angeles is not among the top leaders in terms of patents, capital, or salary,” Yu said. “However, there is a large information sector in Los Angeles, currently concentrated in vibrant small-sized firms. Silicon Beach is on the rise, and hopefully, it will continue to rise.”

Yu also said that as Northern California’s tech sector grew beyond Silicon Valley into San Mateo and San Francisco, Los Angeles should benefit from the activity currently centered in Silicon Beach. Jobs in the information sector require specialized knowledge and skills, and a highly educated workforce and, as a result, pay better than most other jobs, making growth in such jobs vital for Los Angeles due to its high cost of living.

With high-tech products and services in continued demand worldwide, this sector should continue to grow in the 21st century, creating wealth for local economies, which could also set Los Angeles on a course for long-term prosperity.

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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