March 13, 2019 - UCLA Anderson Forecast’s first quarterly report for 2019 examines the signs leading to weaker economic growth. When the waning effects of fiscal stimulus combine with the partial normalization of interest rates and weakness among global trading partners, the economists agree that slower growth in economic activity seems inevitable. Does the economy go into “stall speed” with slower growth before the negative growth of a recession? In his essay, Edward Leamer, UCLA Anderson School of Management distinguished professor, writes that “there is not much in the GDP data on which to base an alarm of a soon-to-come recession.”
The national forecast
In his outlook for the national economy, UCLA Anderson senior economist David Shulman notes that while the global economy started out strong in 2018, signs of its weakening will likely be everywhere by year’s end. “The weakness is being amplified by the protectionist policies being employed by the Trump administration and the uncertainties associated with Brexit,” he writes. “This economic weakness has triggered a major contraction in global interest rates, making it difficult for the Fed to conduct its normalization policy, and has put a lid on long-term interest rates.
“After growing at a 3.1 percent clip on a fourth-quarter-to-fourth-quarter basis in 2018, growth will slow to 1.7 percent in 2019 to a near-recession pace of 1.1 percent in 2020,” Shulman adds. “However, by mid-2021, growth is forecast to be around 2 percent.” Payroll employment growth will decline from its monthly record of 220,000 to about 160,000 per month in 2019 and a negligible 20,000 per month in 2020, with actual declines occurring at the end of that year. In this environment, the unemployment rate will initially decline from 3.9 percent in January to 3.6 percent later in the year and then gradually rise to 4.2 percent in early 2021.
Housing starts will likely remain below demographic demand, according to Shulman. “There are a number of explanations for housing’s failure to launch,” he writes. “They include the aftereffects of the Great Recession, high levels of student loan debt, the aging in place of baby boomers that is keeping housing units off the market, the concentration of job growth in high-cost metropolitan areas and environmental/zoning restrictions that are restricting supply.” As a result, housing starts won’t exceed an annual run rate in excess of 1.4 million units until late 2021.
One bright spot that remains in Shulman’s outlook is investment in intellectual property, which consists largely of software development, motion picture/TV production and corporate research and development. That sector is expected to continue to grow much faster than the broader economy over the next few years, thanks largely to continued movement of corporate computing to “the cloud” and a host of new entrants into motion picture production (namely, Amazon, Netflix and Hulu) that are buoying this segment of the industry.
The California forecast
In his essay, UCLA Anderson Forecast director Jerry Nickelsburg focuses on changes in the housing market that present a conundrum. “Home prices are falling in California, as is the level of building, and mortgage rates are higher, yet the fundamentals would suggest that there would be a surge in buying,” he notes.
Is that a trend that will continue through 2019? “With our national forecast for slowing economic growth, continued discussion on when the next recession will be, and the Fed indicating that the peak of the interest rate cycle could be near, we now expect weaker housing markets into 2020,” Nickelsburg writes. “As a consequence, our forecast for housing starts in 2019 and 2020 has been revised downward, with a recovery in building beginning in 2021.”
Concurrently, the state’s job growth remains strong. California’s average unemployment rate is expected to rise to an average of 4.5 percent in 2019 with slower national economic growth, and then subside to 4.3 percent in 2020 and 2021.
The forecast for 2019, 2020 and 2021 total employment growth is 1.3 percent, 0.6 percent and 0.5 percent, a slowing of 0.1 percentage points from the December outlook. Payroll jobs are expected to grow at a rate of 1.8 percent, 0.6 percent and 0.3 percent, respectively.
Real personal income growth is expected to be 3.2 percent, 1.8 percent and 1.6 percent in 2019, 2020 and 2021, respectively. Continued growth in personal income in 2020 reflects a changing mix of employment in California and tight labor markets in high wage occupations. Home building will be lower by 4,000 to 5,000 units per year than previously forecast for the next two years, but will accelerate to about 148,000 units per year by the end of the forecast horizon in 2021. This will be a response to easing zoning and regulatory requirements for developers, and an expected reduction in interest rates by 2021.
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.