The U.S. Economy Cruises Along But With Speed Bumps Down the Road

As of Thursday, September 27, 2018

Could the U.S. economy be partying like there’s no tomorrow only to be faced with a hangover in two years?

That is entirely possible, according to the most recent UCLA Anderson Forecast, the report from the University of California, Los Angeles, which took a look at the U.S. economy for the third quarter of 2018 and beyond.

The forecast, released Sept. 26, said all signs right now point to a vibrant economy marching along through this year and next, fueled by tax cuts, spending increases and low unemployment. That will translate into a healthy 3 percent uptick in the nation’s gross domestic product this year followed by 2 percent GDP growth next year and then ratcheting down to1 percent GDP growth in 2020.

But those economic stimuli will peter out in 2020, and a federal deficit totaling more than $1 trillion a year will be the burden the country will be hauling around for years to come. In fiscal 2016, the federal deficit stood at $587 billion.

“The slowdown will be caused by the natural constraints of a fully employed economy with a 3.5 percent unemployment rate next year and a waning of the administration’s stimulus policies,” wrote UCLA Anderson Forecast senior economist David Shulman. “With the inflation rate moving closer to 3 percent than 2 percent, the Federal Reserve will continue to pursue its interest-rate normalization policies, which will bring the Fed funds rate above 3 percent.”

Higher interest rates mean mortgage rates will start climbing, which will put a damper on the housing market because buyers will find it more expensive to purchase homes due to increased borrowing costs.

The UCLA Anderson Forecast noted that housing remains the one disappointing sector of the economy. The housing industry is not producing the average 1.5 million units a year needed to keep up with demand. Instead, housing starts in the country are forecast to peak at around 1.35 million units next year and then decline as higher mortgage rates cut into the affordability of a home.

When the economy was booming 10 years ago, housing starts totaled 2 million units a year.

“There is a lot of housing demand, and prices have moved up due to land-use regulations such as zoning, environmental rules and limits on the number of units per acre,” Shulman said. “Southern California is the poster child for this.”

Trade policy is the wild card that could put a constraint on the U.S. economy. On Sept. 24, the Trump administration’s $200 billion in additional tariffs on Chinese imports went into effect on top of a previous $50 billion in tariffs. The 10 percent tariffs, which climb to 25 percent on Jan. 1, are being placed on items including textiles, handbags, electronics, food products, tools and housewares.

With higher prices to import goods, tariffs could chip away at economic growth as the cost is passed on to consumers.

“We imported about $537 billion in goods from China last year. If you put an average 15 percent tariff on those items, that translates into an $80 billion a year sales tax on the American public,” Shulman said. “That is going to be a big bite. Some of that could be avoided by shifting production to Thailand, Vietnam and Bangladesh. That is how tariffs get avoided.”

Like the U.S. economy, California’s state of economic affairs will slow down in the next two years, said UCLA Anderson Forecast senior economist Jerry Nickelsburg. “Nevertheless, California is expected to continue to grow faster than the U.S.,” he said.

In the state, there were 17.2 million nonfarm jobs, which is 10.6 percent higher than the pre-recession peak in 2007. Total employment is expected to grow 1.7 percent this year, 1.8 percent next year and drop to 0.8 percent by 2020. Growth in jobs will be dominated by the healthcare sector followed by leisure and hospitality, reflecting the demands of the aging baby-boomer population in California.

Everyone is breathing a sigh of relief that a free-trade pact with Mexico is about to be signed with fewer drastic changes than anticipated. But it is still to be seen whether Canada joins the free-trade agreement known as the North American Free Trade Agreement.

But on the trade front, increased tariffs on Chinese goods could wallop cargo container volumes at the ports of Los Angeles and Long Beach, the busiest cargo- container port complex in the United States. “If a significant slowdown in trade occurs, the logistics industry—one of the fastest-growing sectors in California in the last year—will be adversely affected,” Nickelsburg wrote in the economic forecast.

The Port of Long Beach and the Port of Los Angeles are coming off some of their strongest years in terms of cargo-container volume. In 2017, the Port of Los Angeles handled more cargo containers than ever, with 9.3 million 20-foot containers passing through the docks, up 5.5 percent from the previous year.

At the Port of Long Beach, cargo-container volumes in 2017 were also at an all-time high of 7.5 million 20-foot containers, an 11 percent increase over the previous year. The ports support outside jobs in warehouses, the trucking industry and cargo processing.

One shining star is the tech industry, which remains strong in the Los Angeles area, where 446,000 people are employed. This is followed by Northern California’s Silicon Valley with 346,000 jobs and San Francisco with 268,000.

However, San Francisco had the largest number of investments last year, with 909 deals funded, amounting to $22.2 billion. The Silicon Valley reported 643 funding deals totaling $18.3 billion, followed by Los Angeles with 307 funding deals worth $9 billion.

Startup investments have grown considerably in Los Angeles—from $2.75 billion in 2011 to the recent $9 billion.