UCLA Anderson Forecast Predicts Moderate Economic Growth and Rising Housing Prices in California

If you’re expecting the economy to go gangbusters in the near future, forget about it. According to the recently released UCLA Anderson Forecast’s quarterly update, the next two years will be pretty much a repeat of the past several years—moderate growth with job gains. But future job gains won’t be quite as robust as in previous years.

UCLA Anderson Senior Economist David Shulman, who authored part of the forecast, predicts that the U.S. economy will grow 2 percent in 2017 and 2.5 percent in 2018, which is pretty much on par with this year.

“The problem is productivity. The growth in productivity has collapsed. That is the key thing,” said Shulman, who noted we are almost at full employment. "If you are operating at full employment, the economy can only grow as fast as the workforce grows and there is growth in productivity.”

He noted that productivity gains are not something that happens overnight. Productivity improvements could be made by better educating the nation’s workforce, improving roads and transportation systems to deliver goods more quickly or implementing some kind of new technology such as self-driving cars. “Nobody has a magic wand to do that,” Shulman said.

The economy over the next two years will be buoyed by consumer spending and the housing industry along with a rebound in capital spending as the oil industry starts to slowly recover.

In the United States, more houses will be built in the next two years, increasing from 1.19 million units this year to 1.38 million units in 2017 and 1.41 million units in 2018. This is a vast contrast from the recession years of 2009–2011, when barely 600,000 units were built in 2009. But housing prices will remain at a premium in California as supply doesn’t quite keep up with demand and as more renters decide to shift to home ownership.

One drag on the economy will be the auto industry, which is expected to be riding on cruise control as light-vehicle sales peak this year at 17.5 million units and then stay there for 2017 and 2018.

“There has been an increase in defaults in auto loans, which is tightening up credit and that pent-up demand for cars after the recession that has been filled,” Shulman said.

After hefty increases in recent years in the nation’s employment numbers, which have added on average 200,000 new jobs a month since 2011, job gains will taper off to about 150,000 jobs a month in 2017 and 125,000 jobs a month in 2018. That will bring down the U.S. unemployment rate to 4.8 percent to 5 percent over the next two years, pretty much sitting where it does right now at 4.9 percent because many people will be encouraged to re-enter the market after losing their jobs.

In California, employment is at record levels. There are now 16.5 million payroll jobs, which is 6.7 percent above the state’s previous peak. The number of people employed, including farm labor and the self-employed, has hit a record 18.2 million and is 7 percent above the previous peak. Still, since 2007, California’s population has grown by 9.5 percent, putting it at around 39 million, so there is room to add people to the workforce. Currently, the state’s unemployment rate stands at 5.5 percent.

Of course, the wild card in the economy is what happens with the presidential elections. Shulman said Hillary Clinton and Donald Trump are making all kinds of promises they believe will improve the economy, but both will add to the federal deficit.

Trump wants to substantially reduce taxes on businesses and individuals, increase tariffs, deport at least five million people and increase spending on immigration control, infrastructure and defense. “Needless to say,” Shulman wrote in his forecast, “the federal deficit would explode should all of his ideas be enacted.”

On the other hand, Clinton’s aim to increase taxes on high-income individuals, expand Social Security, increase healthcare spending, refinance or forgive student debt while increasing infrastructure spending would modestly increase the deficit. “Of course, whether any or all of these proposals get through Congress remains an open question,” Shulman noted.

When it comes to interest rates, the UCLA Anderson Forecast predicts that the Federal Reserve Bank will raise its key interest rate once before the end of the year and then make a few small increases next year, raising the rate by the end of 2017 to 1.5 percent.

California up in smoke

While California’s economy will continue to grow on par with the U.S. economy, two ballot measures could have different effects on the state’s growth.

Proposition 64, which would legalize the recreational use of marijuana in California, would give the economy a bit of a boost but nothing that would have state coffers overflowing with money.

UCLA Anderson Senior Economist Jerry Nickelsburg examined what happened in Colorado after it legalized the recreational use of marijuana two years ago. He concluded that Proposition 64 would probably add $501 million in sales tax to the state’s revenues, which is a mere 0.4 percent of the state’s general fund.

But there would be a boost in marijuana tourism as international and U.S. visitors would probably flock to California to take advantage of the freedom to buy recreational marijuana without fear of being arrested.

Proposition 55 would extend until 2030 the temporary income tax enacted under Proposition 30 on higher-wage earners. Nickelsburg said the impact of extending the proposition is unclear because during slow economic times or a recession, the wealthy see their income decline because they are dependent on the profitability of their businesses or the value of their business’s shares.

No one is predicting an imminent recession, but one will eventually occur as part of the traditional economic cycle.