In March, the UCLA Anderson Forecast’s first economic outlook for 2021 touted “robust growth for the U.S. and California” in anticipation of an abatement of the COVID-19 pandemic. The June 2021 forecast remains optimistic but also acknowledges the historical reality that economic recoveries are never smooth, and that ups and downs in the data that inform such predictions are to be expected.
The June forecasts for the United States and California still anticipate a robust recovery. The forecasts include moderately higher inflation in the short term, housing and services driving the recovery and employment levels recovering to previous peaks over the coming year, but some sectors not recovering until much later.
The national forecast
The June forecast for the nation is based on several assumptions: The U.S. will continue to make progress on vaccinations, the number of COVID-19 cases will continue to fall and a nearly full economic reopening will occur by early July.
The U.S. forecast report, authored by UCLA Anderson senior economist Leo Feler, has moved up its prediction of the reopening of the U.S. economy to the second quarter from the third quarter of 2021, which means faster growth in the second (current) quarter than previously anticipated.
“The faster growth in services consumption reflects a release of pent-up demand for leisure and hospitality, recreation and deferred health care, and a return to prior trends in education and social services,” Feler writes, noting that slower growth in goods consumption indicates satiation after a year of above-average goods purchases and a shift in household spending to experiences.
With the easing of supply constraints, continued strength in motor vehicle purchases is expected. Due to a strong housing market, purchases of furniture and appliances are also expected to grow.
The debate about impending inflation informs the June report. The national forecast calls for moderately higher inflation through 2021 as the economy transitions from the pandemic and supply catches up to demand. Although Feler expects the current surge in inflation to be transitory, he anticipates moderately higher inflation by 2023 than was seen during the past decade. Overall, he expects the next three years to feature strong GDP growth, a robust employment recovery, faster wage growth and higher labor productivity. But the recovery won’t necessarily be smooth, the report cautions. Although the data do not seem to support a sustained surge in inflation, it’s a risk worth monitoring, Feler writes.
Average annual real GDP growth of 7.1% is expected in 2021, followed by 5.0% in 2022 and 2.2% in 2023. The nation will surpass the pre-pandemic peak of real GDP in the second quarter of 2021 and will surpass the pre-pandemic GDP trend by the fourth quarter of 2021. The next several years will feature rising productivity. The rising wages associated with a labor shortage will be matched by rising labor productivity, meaning that unit costs will remain fairly constant during the next two years. Home price appreciation will continue this year at 11.9%, with the increase in home prices abating to 7.5% in 2022 and 4.6% in 2023.
The California forecast
The COVID-19 pandemic continues to cast a shadow over the California forecast. As progress toward a vaccinated population continues and the state begins its economic reopening, a clearer, though still uncertain, picture emerges; the availability of multiple vaccines, along with a drop in the number of new cases from the latest peak, suggests a reduced economic impact of the pandemic in 2021.
Still, there is much that is not fully known. Uncertainties over national immigration policy, the potential for domestic out-migration, the future of remote work and the impact of California’s comparatively stringent pandemic mitigation measures are key to the growth and prosperity of the state. Currently, the state has the lowest infection rate in the nation, but its 8.3% unemployment rate, compared with the 6.8% national rate, raises an “at what cost?” question.
In his California forecast essay, UCLA Anderson Forecast director Jerry Nickelsburg writes that states such as California that have had stricter non-pharmaceutical interventions during the pandemic — for example, mask mandates and business closures — had better health and economic outcomes, relative to states with less stringent measures, with very few exceptions.
Nickelsburg writes that job losses in California were concentrated in sectors where a high degree of human contact is important to the services provided. These sectors — leisure and hospitality, education, retail trade, and health care and social services — accounted for 75% of all job loss in the state in 2020. As the pandemic recedes and business restrictions are eased, many of these lost jobs will return.
Nickelsburg expects the California recovery to outpace that of the U.S. Nevertheless, the leisure and hospitality sector will recover last because of the depth of its declines. Recovery will come earlier in business, scientific and technical services, and in the information sector because of the demand for new technologies that power the new ways we are working and socializing. Recovery will also occur faster in residential construction, as California’s shortage of housing relative to demand drives new construction.
The unemployment rate for the second quarter of 2021 is expected to be 7.7%, with the average rates in 2021, 2022 and 2023 anticipated to be 7.1%, 5.2% and 4.3%, respectively. The total employment growth rates in 2021, 2022 and 2023 are forecast to be 5.3%, 4.0% and 2.2%, respectively. Non-farm payroll jobs are expected to grow at rates of 2.6%, 5.4% and 2.2% during the same three years. In spite of the recession, the continued demand for a limited housing stock coupled with low interest rates leads to a forecast of a relatively rapid return of homebuilding.
Digital infrastructure, the economy and online microbusinesses
In a companion piece to the U.S. and California forecasts, economists William Yu and Leila Bengali explore the relationship between digital infrastructure, economic activity and small businesses with an online presence, or online microbusinesses.
Yu and Bengali investigated whether there is a relationship between digital infrastructure and economic outcomes. They found that counties with a higher fraction of residents with broadband access tend to have stronger labor market outcomes. They also found that such counties tend to have more online microbusinesses and that the presence of these businesses correlates with better labor market outcomes.
In addition, Yu and Bengali write that the relationship between online microbusinesses and local labor markets holds when using measures of the intensity of online microbusiness activity, their “intensive margin,” and not just their prevalence, their “extensive margin.”
The paper notes proposals by the administrations of President Joe Biden and California Governor Gavin Newsom to expand broadband access, and concludes that broadband constitutes necessary and important infrastructure in the 21st century.
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. The Forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun.