Interest Rates to Rise This Spring as Economy Improves

As the U.S. economy moves forward and upward, interest rates should start to creep up in June.

That was the opinion of the economists who put together the most current quarterly UCLA Anderson Forecast, released on April 6.

The latest forecast predicts the national economy is expected to grow at a modest 2.7 percent this year, driven by consumer spending and new housing as well as an end to the inventory correction currently underway.

“Although we continue to believe the economy remains on track for moderate growth, we are not as ebullient as prior forecasts,” wrote David Shulman, senior economist at the UCLA Anderson Forecast. “The inventory correction we were looking for last quarter is taking longer than we expected.”

He noted that inventory accumulation added $78 billion to the country’s real gross domestic product in the fourth quarter of 2015, but by this year’s third quarter it will contribute only $25 billion to GDP. Although previous forecasts expected the U.S. economy to expand at 3.3 percent, that has been reduced to 2.7 percent.

With moderate growth comes moderate inflation. In February, the year-over-year inflation rate was 2.3 percent. By 2017, it is forecast to be close to 3 percent. That means the Federal Reserve will probably raise the federal funds rate in June, with two or three interest-rate increases anticipated this year. “Thereafter, we expect gradual increases with the federal funds rate, ending 2017 at about 2 percent,” Shulman noted.

Despite moderate growth, the economy should create 2.4 million jobs this year and 1.5 million jobs next year.

Commercial construction is gaining strength for office and industrial building, fueled by an abundance of capital seeking modest yields in a low-yield world.

Spending on retail structures is being driven by competition with the e-commerce world. Major malls around the country are making huge investments in renovations that total between $500 million to $800 million per mall on the high end, Shulman said.

A recession, which had been talked about at the beginning of the year, is not expected anytime soon as the markets are climbing back up after fears of a slowdown in China and how low oil prices have affected stock prices. “Strong data from the consumer side of the economy indicated that retail sales were solid and employment growth remained robust,” Shulman said.

The risk to the national forecast comes from outside the United States. In June, the United Kingdom is scheduled to vote on whether to stay in the European Union, which could cause market volatility. And everyone is watching to see how Japan’s and China’s economy progresses.

California’s economy is also anticipated to be growing nicely this year, with steady gains in employment. Jerry Nickelsburg, another senior economist at the UCLA Anderson Forecast, noted that the state’s unemployment rate this year will be close to the 5 percent unemployment rate in the U.S.

The state’s economic success has been helped in part by the wave of innovation that has prompted rapid growth in Silicon Valley and San Francisco in Northern California. “California’s research institutions will continue to provide the state with a disproportionate amount of innovation and therefore a faster growth in GDP than the average for the U.S.,” Nickelsburg wrote, warning that this kind of innovation comes in fits and spurts.

Real personal income in California is expected to rise 3.6 percent in 2016 and is forecast to be 3.2 percent in 2017 and 3 percent in 2018.