The UCLA Anderson Forecast Sees Big Changes in Store for U.S. Economy Through 2020

As of Wednesday, March 7, 2018

What a difference a year makes.

Last year, President Trump had just taken office and the economy was slowly slogging forward as unemployment rates dropped steadily, inflation was modest and interest rates were changing every-so slightly. One year later, the most recent UCLA Anderson Forecast, released March 7, sees benchmark interest rates increasing four times this year, inflation heating up, business investments becoming a prominent player in the faster-growing economy and trillion-dollar deficits on the horizon.

“Business investment is going to be driving the bus this year,” said UCLA Anderson senior economist David Shulman. “The economy is going to be powered by investments from the tax cuts and a lag in capital spending from previous years.”

With a $1.5 trillion corporate tax cut over the next 10 years and a faster timetable to write down depreciation of capital equipment, the country’s gross domestic product (which is the value of all goods and services produced) is expected to increase 2.9 percent this year, followed by 2.6 percent in 2019 and then a more sluggish 1.6 percent in 2020.

A slower moving economy in 2020 is because the country will be reaching full employment and businesses can’t expand without more qualified workers, which leads to lower productivity. Nevertheless, job growth in the country will continue with the unemployment rate hitting a very low of 3.5 percent in early 2019, which hasn’t been that low since 1969.

With lower unemployment, wages will undoubtedly rise, leading to inflation growth that in the past has been moderate. Last year, inflation was up 2.1 percent, which was on par with 2016 and the highest since 2011. It should continue to increase at that rate and even move up to see 3 percent growth by 2020.

“We are going to see inflation going up year over year in April and May because last year cellular carriers cut the prices of their data plans by 30 to 40 percent, which brought down the April and May consumer price index,” Shulman said. “We also think we are going to see real wage gains of about 4 percent when you factor in benefits and bonuses.”

Inflation won’t be helped by the fact that budget hawks were sidelined by President Trump’s new tax cut and a push to increase spending. On Feb. 9, the Republican-controlled Congress passed a two-year budget deal that raised spending by almost $300 billion and gave the Pentagon an 18 percent boost in its new $700 billion budget. “The era on contraction in that sector is over,” the UCLA Anderson economists wrote in their report.

This deficit-spending broke a long-standing promise by the Republicans to balance the budget in 10 years. The U.S. Treasury Department reported that the budget deficit for fiscal year 2017 was $665.7 billion, up from $585.6 billion the year before, and it will only be getting larger. One of the key drivers of the economy this year is going to be business fixed investment that can be written off faster than in the past. All three categories of business fixed investment (equipment, intellectual property and structures) will be expanding robustly in 2018 with real equipment spending leading the way with an 8.4 percent gain.

But growth will slow as the economy begins to operate at its full potential. Even though President Trump is railing about unfair trade with other countries, the U.S. trade deficit is expected to grow even though there is talk of putting a 10 percent tariff on aluminum and a 25 percent tariff on steel. That’s because as the economy heats up, U.S. consumers will be buying more goods and many of those items are imported. The UCLA Anderson economists expect the trade deficit to grow from $620 billion in 2017 to nearly $800 billion in 2020.

With more workers looking for homes, housing activity will continue to grow through 2019, but it will be far from a boom as higher interest rates and higher home prices make housing less affordable. In 2017, there were 1.2 million housing starts. That should inch up to 1.3 million starts in 2018, 1.38 million in 2019 and down to 1.36 million in 2020.

California still golden

California’s economy is the second fastest growing economy of all the 50 states, with Washington state being first with its tech giants including Microsoft and, coffee purveyor Starbucks, and Nordstrom department stores. Employment in California is at record highs with more than 16 million jobs now in the state, which is 9.9. percent higher than the pre-recession peak.

Job growth has been rampant in San Francisco, San Jose and the Silicon Valley but that is beginning to ease as high housing prices and limited office space take their toll. Job growth now will be seen more in the Inland Empire of San Bernardino and Riverside countries as well as the San Joaquin Valley and Sacramento.

With the new U.S. budget ramping up defense spending, California should be one of the winners as that infusion of cash beefs up manufacturing and engineering in Southern California and technological developments through the entire state. There are hundreds of Pentagon contractors from Santa Barbara to San Diego that will see a boost in orders for everything from fuselages to engines, drones and jets.

But Trump’s protectionist attitude towards trade may curtail imports and that would affect the large Los Angeles/Long Beach port complex, which sees about one-third of all container traffic in the United States passing through its gates. According to UCLA economist William Yu, the local ports in Los Angeles would definitely be impacted if a trade war were to break out between the United States and its trading partners. Still, economists are forecasting that California’s unemployment will remain at 4.3 percent by 2020.