With this second quarter economic report for 2018, the UCLA Anderson Forecast introduces a new report, providing analysis and perspective on the outlook for the world’s two largest economies, the United States and China. The Cathay Bank/UCLA Anderson Forecast U.S.-China Economic Report will be published quarterly in collaboration with Cathay Bank.
The overall economy appears to be growing at a steady pace, but there are potential threats that could affect the United States and California economic outlooks, according to the UCLA Anderson Forecast’s second quarterly report for 2018. The risk of a trade war with one or more of the major U.S. trading partners, the uncertainties in Italian politics and their potential impact on the Euro-zone, the potential for withdrawal from NAFTA, and the now likely victory of Andres Manuel Lopez Obredor in the July Mexican presidential elections are among the elevated risks to the current forecast.
The national forecast and a look at housing
Noting that the era of ultra-low interest rates has passed and the economy is at full employment, UCLA Anderson Forecast senior economist David Shulman writes that real GDP growth is expected to reach 3 percent for the balance of the year when measured from the fourth quarter of 2017 to the fourth quarter in 2018, but it will dip to 2 percent growth in 2019 and 1 percent in 2020. This is because the current strong job growth, which averaged 200,000 jobs per month in 2017, is not sustainable in a full-employment economy. Job growth is expected to average 133,000 jobs per month for the remainder of 2018 before declining to 85,000 jobs per month and 60,000 jobs per month in 2019 and 2020, respectively. The unemployment rate will drop from its current 3.8 percent to 3.4 percent in mid-2019, but return to 3.8 percent by the end of 2020. As Shulman has noted in other forecasts, “A fully employed economy has difficulty growing without substantial increases in productivity.”
At the same time, the trade deficit, in terms of real net exports, could increase from $622 billion in 2017 to $814 billion in 2020, a “result of the U.S. consuming more than it produces and needing to borrow to fund an increasing federal budget deficit. This is a direct consequence of a very low national savings rate,” Shulman said. “All the Trump administration can do in this regard is move around the trade deficit among our import partners, not reduce it.”
Business investment, which may increase by seven percentage points in 2018 and 2019 before slowing in 2020, is expected to continue to be the driving force in the economy, thanks to the reduction in corporate tax rates, an allowance to write off 100 percent of equipment in the year it was purchased, and deregulatory policies of the administration in Washington, D.C.
The greatest current risks to the forecast of the U.S. economy stem from a potential trade war with China and the potential withdrawal from the North American Free Trade Agreement. “A trade war implies higher tariffs and non-tariff barriers that work as a tax on the American people that would raise prices and restrict output. That is hardly the recipe for economic growth,” Shulman writes.
In a separate report, Shulman writes that housing activity “has been the great disappointment of the economic recovery and expansion that began in 2009.” Although housing starts have more than doubled since their lows of 2009–2011, they remain below the long-term average and nowhere near earlier boom periods. Housing starts across the United States are forecast to increase from 1.2 million units in 2017 to 1.34 million units and 1.4 million units in 2018 and 2019, respectively, far below the 59-year annual average of 1.435 units between 1959 and 2017.
Homeowners in high-demand areas and fast-growing cities “are sitting pretty and enjoying rapidly increasing house prices,” Shulman writes. “On the other hand, if you are a middle-class potential homebuyer or a struggling renter in those areas, you are facing a very personal affordability crisis.”
The California report
California employment hit another record high in April 2018. As the economy has been expanding as expected, the current forecast has not changed much since last quarter’s forecast, released in March 2018. Full employment has been less of a constraint on this growth with recent increases in the labor force.
It is anticipated that California’s average unemployment rate will remain higher than the U.S. rate and be at 4.3 percent in 2020, a consequence of a younger and more entrepreneurial workforce.
The forecast for total employment growth for the current year and the next two years is 1.7 percent, 1.8 percent and 0.8 percent, respectively, with payrolls growing at about the same rate. Real personal income growth is forecast to be 2.5 percent, 3.6 percent and 2.9 percent in 2018, 2019 and 2020, respectively.
“Affordable housing in California continues to be the subject of considerable discussion,” writes UCLA Anderson Forecast director Jerry Nickelsburg. His paper examines the complex ties among the state’s employment growth, the attractiveness of California and the building, zoning and environmental restrictions affecting housing supply. Although the forecast calls for a continued rise in housing prices, “the impact on economic growth is not as great as one might expect,” he writes. (See Nickelsburg’s overview of the forecast in this video.)
Homelessness in the nation, California and Los Angeles
It’s no secret that the country is experiencing a crisis in homelessness, particularly in Los Angeles. In a companion piece, UCLA Anderson Forecast economist William Yu highlights these statistics: The percentage of the U.S. homeless population declined from 0.2 percent in 2012 to 0.17 percent in 2017. In California, the rate increased from 0.32 percent to 0.34 percent, and in Los Angeles, it rose from 0.35 percent (35,500 people) in 2013 to 0.52 percent (53,200 people) in 2018.
Similar figures exist for the unsheltered homeless populations: The rate for those without shelter in the United States dropped from 0.07 percent in 2012 to 0.06 percent in 2017. California’s rate, meanwhile, rose from 0.2 percent in 2012 to 0.23 percent in 2017, while the unsheltered homeless rate in Los Angeles increased from 0.23 percent (22,600) in 2013 to 0.39 percent (39,800) in 2018.
Los Angeles and California have a much higher proportion of unsheltered people among their homeless populations than the nation as a whole, with figures at 73 percent for Los Angeles and 68 percent for California, compared to 35 percent for the nation. The bottom line is that homelessness is a growing problem in Los Angeles. Yu’s analysis of the complex growing crisis in Los Angeles shows it is due to a variety of factors, including mild weather, high housing prices, high rental costs and disparity in household income.
The U.S.-China economic report
With trade and investment between the United States and China central to the risks shaping the forecast, the UCLA Anderson Forecast is pleased to announce a new series of reports, in collaboration with Cathay Bank, looking at the fundamental economic relations between the two countries and the implications of changes to these relations. The first report, published on June 13, and future installments in the series will be available on the UCLA Anderson Forecast website.
All of the economists’ reports will be presented at the UCLA Anderson Forecast’s quarterly conference on Wednesday, June 13. The conference also features a panel discussion that will focus on the current state of residential real estate and the effects of zoning on future home construction. Panelists will include: Stuart Gabriel, Arden Realty Chair, professor of finance, UCLA Anderson School of Management, and Director, UCLA Ziman Center for Real Estate; Scott Wiener, California state senator, District 11; Cynthia Strathmann, executive director, Strategic Actions for a Just Economy; Suzanne Fuentes, mayor of El Segundo; and Michael Lens, associate faculty director, UCLA Lewis Center for Regional Policy Studies, and associate professor of urban planning and policy, UCLA Luskin School of Public Affairs. John Tipton, partner with Allen Matkins, will provide results of the most recent Allen Matkins/UCLA Anderson Forecast CRE Survey.
The conference will be held in Korn Convocation Hall at UCLA Anderson School of Management.
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.