UCLA Anderson Forecast anticipates continued modest growth in its report for the second quarter of 2017.
In an essay accompanying the report, Edward Leamer, director of the forecast, addresses three critical questions: “Is the risk of recession elevated?” (His answer: No); “Can President Donald Trump make America great again in the sense of getting GDP growth back up to 3 percent after seven years of 2 percent?” (Not likely.); and “Are inflation and interest rates likely to jump up soon?” (That’s hard to say.)
Leamer writes that the president and Congress need “to figure out how to get us back into the 3 percent corridor, or better yet, make America great again by turning the clock back to 1960 when the growth rate was 4.8 percent.” Those efforts are critical to keep and support programs such as Medicare and Social Security. “A more rapidly growing economy would produce greater tax revenues and would help a lot with the burden of taking care of our elderly.”
Although the country is currently experiencing its 32nd quarter of expansion, the “current expansion has had the mildest rate of growth of any U.S. expansion in the data set,” Leamer writes. A number of factors contribute to the slow rate of growth, including the decline in manufacturing jobs, a weaker auto sector, decline in the growth rate of the working population and in total hours worked, as well as a productivity growth rate of only 0.5 percent since the Great Depression.
“To make America great again, we have to solve three problems: how to increase the rate of growth of the working age population; how to increase the rate of growth of hours by making more of the new jobs full-time, not part-time; and how to increase the rate of growth of productivity,” Leamer writes.
Leamer writes that the near-term GDP growth forecast exceeds 2 percent, but falls below 2 percent in 2019, with unemployment expected to drift downward to 4.1 percent in 2019. Inflation, above 2 percent in 2017, moves up to 2.7 percent by the end of 2019.
National housing outlook
UCLA Anderson Forecast senior economist David Shulman focused his quarterly report on the outlook for the housing industry, which he writes continues to “slowly grind higher as it has since the cyclical bottom in 2009.”
Although the recovery is far from complete, he writes, pointing to recent statistics, “it has certainly been lengthy by historical standards. Although we marked up our forecast from last quarter to 1.27 million units in 2017 and 1.34 million units and 1.37 million units in 2018 and 2019, respectively, that level of activity remains below the 1.4 million to 1.5 million units per year we estimate to be consistent with long-run demand. What makes the under-building so puzzling is that it is occurring against a backdrop of modest economic and employment growth and a sustained period of very low mortgage interest rates.”
Concurrently, house prices have rebounded significantly since 2012 and are now up 44 percent, just 5 percent below the prior peak in 2006.
There has also been a boom in rental housing.
“Multifamily housing starts, after crashing during the great recession to 112,000 units in 2009, surged to 392,000 last year,” Shulman writes. “We are forecasting multifamily starts to run at about a 400,000 unit annual rate over the next three years.”
Explanations for the long, slow recovery in housing starts include slow income growth, much tighter credit standards compared to the earlier boom, the hollowing out of the middle class and the millennial generation’s reluctance to making long-term commitments. In addition, regressive zoning and environmental regulations have played a role in reducing the overall supply of housing.
Although not as strong as employment growth, household formations averaged about 1.2 million per year from 2012 to 2017, and are forecast to accelerate to about 1.5 million in 2018 and 2019, still well above housing starts.
The April jobs numbers continued to be good news for California, according to UCLA Anderson senior economist Jerry Nickelsburg. The state continued the downward trend in the unemployment rate, landing at 4.8 percent in April, just 0.4 percent above the national rate. California’s unemployment rate is expected to remain at its normal differential to the U.S. rate and beat 4.5 percent by 2019, the end of the short-term forecast period.
The current forecast is slightly lower. “This reflects the difficulties that the Trump administration is having in getting its stimulus packages passed,” Nickelsburg writes. “For example, the increase in the size of the Navy through the addition of a large number of ships, purchases which would have benefited San Diego, did not even appear in the current budget proposal. In addition, the threat of deportations of unskilled workers is impacting food harvesting and food processing earlier than anticipated.”
The forecast for 2017, 2018 and 2019 total employment growth is 1.4 percent, 1.0 percent and 0.9 percent, respectively. Payrolls will grow at about the same rate over the forecast horizon. Real personal income growth is forecast to be 3.1 percent, 3.3 percent and 3.2 percent in 2017, 2018 and 2019, respectively. Homebuilding will continue in California at about 118,000 units per year through the short-term forecast horizon.
Housing markets in Los Angeles
UCLA Anderson Forecast economist William Yu’s report looks at California’s increasingly expensive and unaffordable home prices, particularly for first-home buyers in the Bay Area and Los Angeles. Of the seven least affordable metropolitan areas in the country, six are in California, measured by the ratio of the median home price to the median household income. The report indicates that the market is equally tough for California renters, many of whom need to spend more than half of their income on rent.
Housing market research suggests that limited supply to meet demand is one of the major causes of high home prices in coastal California. Despite its stronger economic recovery, California still has relatively limited housing supply because of its stringent regulations, such as the California Environmental Quality Act, as well as the “not in my back yard” culture, a similar finding in the forecast’s national outlook.
The report explains the disparity of rents and home prices by ZIP code in Los Angeles by identifying several factors: income, human capital, distance to ocean, Chinese residents’ density and millennial residents’ density. The report suggests that urban vibrancy and its cultural amenities might contribute to higher rents. During the past three years, homes in high-priced ZIP codes in Los Angeles have tended to have a lower price growth rate while those in low-priced ZIP codes have tended to have a higher growth.
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.