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UCLA Anderson Forecast sees higher interest rates and restrained growth in 2024, but likelihood of U.S. recession fades

By Paul Feinberg

California’s economy grows faster than the nation’s but faces the same political and geopolitical risks

Los Angeles, Calif. — The UCLA Anderson Forecast ended 2023 ringing an up note as its December forecast asserted that the long, lingering possibility of a recession had faded because of expansionary fiscal policy, new national industrial policy and a national consumer base that continued to spend, despite the perception of economic uncertainty. The first forecast of 2024 continues these themes, while also noting that the recurring threats of a government shutdown are short-lived and no longer sounding any serious alarms, and the strong second half of 2023 will carry into the new year.

While it’s true that January 2024 retail sales housing starts were down, the cause looks to be severe weather experienced in the eastern United States and not pullback by consumers or builders. Hiring remained strong in January and February and, though core inflation is coming down slowly, the forecast does not expect the Federal Reserve to decrease the Fed Funds rate until later in the year.

In California, the state’s GDP grew at a 3.8% compound annual rate from the first to the third quarter of 2023 (the latest data available), faster than the U.S. and all but three large states: Washington, Florida and Texas. Like California, Washington’s growth was driven by tech and aerospace, while part of the superior growth in Texas and Florida is attributed to in-migration, with more people moving to those states and working, rather than productivity and income gains. (In both of those states, construction of housing for new residents, and in Florida reconstruction of hurricane-devastated areas, contributed to their growth rates.) With a loss in population in California, per capita income growth continues to rival similar large states across the country. While there are still challenges ahead — notably, state and local government finance, homelessness and out-migration — the forces driving California’s economy remain robust.

The national forecast

At least one thing is clear regarding recent activity in the U.S. economy: In spite of — or because of — feeling uncertain about the future, Americans went shopping in a big way over the holidays. In December, the Forecast predicted gross domestic product growth in the fourth quarter of 2023 to be 1.7%. It ended up coming in at a much higher 3.2% annual rate of growth. That was owing, in part, to strong consumer spending, but also to inventory replacement after the holidays. The forecast now expects less inventory adjustment in the current quarter and a moderation of consumer spending growth. As a result, the GDP growth forecast for the first quarter of 2024 Q1 is lower, but still a respectable 2.2%.

U.S. labor markets remain strong, as they have been throughout the post-pandemic economic recovery. Total nonfarm payroll jobs increased by 2.5% and are forecasted to increase by 1.5% in 2024. That 2024 is lower is more a function of running out of workers than an absence of jobs.

With underbuilding over the last 15 years and a growing population, there remains latent demand for new housing. This is exacerbated by population migration to the Sun Belt and the lack of existing housing inventory since the onset of the pandemic. As a result, the March forecast is for housing to remain close to, but under, the historical average of 1.5 million per year, enough to create a little weakness in 2024, but not enough to induce a recession. Although the January new home starts were at a level suggesting further weakness in housing, the issuance of new permits at approximately 1.5 million units, and the unseasonal weather in the east and Midwest, indicate this is only a temporary downturn in residential construction.

The oft predicted but never seen “recession next quarter” possibility has now faded in the face of expansionary fiscal policy, new national industrial policy and a consumer who is happy to continue spending. However, the impact of higher interest rates will be felt in restraining growth in 2024. As inflation slowly works its way back to the neighborhood of 2.5% to 3.0% per annum — kept high primarily because of residential rents, automobile repair and new health insurance premiums — the UCLA Anderson Forecast expects Fed policy to adopt a neutral stance and GDP growth to rebound to trend rates.

Nevertheless, there are risks to the forecast. A protracted shutdown of government has been averted, but the possibility still exists. Geopolitical events might upset the current growth pattern. The election could result in different national economic policies in 2025. These uncertainties are substantial and bear watching, as they could drive the economy off the current growth path that would return the U.S. economy to trend 2.5% growth. The upside of the forecast is productivity growth thanks to new technology that drives higher wages and higher GDP. While our view of AI and robotics is that the impact will be felt after 2026 because technology adoption tends to take time, current tight labor markets could accelerate that.

The California forecast

The employment picture in California varies, depending on which survey one consults. The household survey, which counts the number of people employed, reports that the number of people employed in December 2023 was 2.0% below the number in the pre-pandemic peak. The decline in employment over and above the decline in the labor force led to an increase in the unemployment rate to 5.1% in December. The labor force decline is attributable to retirements, migration out of state and individuals’ choosing to spend their time in non-market activities such as child raising. According to the enterprise survey metric, which counts the number of payroll jobs, California’s non-farm payroll jobs increased, and it now exceeds the pre-pandemic level by 508,100 jobs, over the same period.

The difference between the two metrics can be partly explained by the difference in the definition of employment in the two surveys. The household survey is a measure based on the domicile of the worker. If a former San Francisco office worker now works remotely in Phoenix, then that employee would not be counted in the state labor force or employment numbers for California in the household survey. This would represent a decrease in the state’s aggregate labor force. However, if the job was still at an enterprise in San Francisco, the worker would remain in the enterprise survey as employed in San Francisco. They are working in San Francisco (virtually) and living in Phoenix (in true life). This, at least in part, explains the large decline in San Francisco’s labor force.

Nevertheless, there seems to be a disconnect between the two surveys. Since the household survey is based on a small number of interviews with individuals and the enterprise payroll job survey is based on a large number of required regulatory reports, the March 8 benchmark partially resolved the disconnect in the direction of the payroll employment data, but not entirely.

The housing market in California continues to misbehave. Higher mortgage rates should send prices lower. Although home prices are lower than their previous peak, and the median price of existing single-family homes sold in the state declined on a seasonally adjusted basis by 4.5% as of May 2022, they have been climbing since December 2022 in San Diego by 9.3%, in Los Angeles by 9.0% and in San Francisco by 3.9%. With existing home sales at depression levels, builders are responding with new developments. The Winter 2024 Allen Matkins/UCLA Anderson Forecast Commercial Real Estate Survey reported that 32% of the panelists in northern California and 55% in Southern California would begin one or more new multifamily projects in 2024.

The California economy is forecasted to continue to grow faster than the U.S. but not by much. The risks to the forecast are the same as those for the nation: political and geopolitical. There is the potential for interest rates to disrupt the current expansion on the downside, and increased international immigration and accelerated onshoring of technical manufacturing on the upside.

The unemployment rate for the first quarter of this year is expected to average 4.7%, and the average for 2024, 2025 and 2026 is expected to be 4.6%, 3.8% and 3.9%, respectively. The forecast for 2024, 2025 and 2026 is for total employment growth rates to be -0.6%, 2.1% and 1.5%. Non-farm payroll jobs are expected to grow at a 1.4%, 1.7% and 1.2% rate during the same two years.

Real personal income is forecast to grow by 2.0% in 2024, 2.9% in 2025 and 2.7% in 2026. In spite of the higher interest rates, the continued demand for a limited housing stock coupled with state policies that induce new homebuilding should result in the beginning of a recovery this year, followed by solid growth in new home production thereafter. Our expectation is for 123,000 net new units to be permitted in 2024, and permitted new units to grow to 159,500 by the end of 2026. Needless to say, this level of home building means that the prospect for the private sector to build out of the housing affordability problem over the next three years is nil.

Hollywood restructuring and the economic impact of the writers and actors strikes

In an accompanying report, Forecast director Jerry Nickelsburg provides an economic analysis of the writers and actors strikes that disrupted the entertainment industry in 2023. As Nickelsburg notes, the strikes led to near daily inquiries as to economic impact, and a fair amount of speculation from quarters. The problem with any speculation or analysis, Nickelsburg notes, is that economic conditions are quite complicated. For example, 2022 was a recovery year from the dearth of production during the pandemic years of 2020 and 2021. Should the comparison be between 2023 when the strike was going on and 2022 when the industry was producing additional content post-pandemic? That would certainly inflate the economic impact. But what about factoring in a more normal year like 2019? From then until now, the entertainment industry has been adjusting to digital media, streaming and business models that were not generating the required returns to continue as before. This has resulted in a downward trend in the production of film and television.

Nickelsburg’s report utilizes a number of methodologies to measure the impact of the strike, with several accompanying caveats. His conclusion, using available data, finds that the direct cost of the strike is likely to be in the $1.4 billion to $1.6 billion range, with an outside estimate of $2.3 billion. His expectation is that these numbers are high, in the sense that additional data ought to confirm that a larger part of the estimated cost was from a restructuring of the entertainment business. Therefore, he concludes that the $3 billion plus the value of swag is just that: a swag. The impact on both the Los Angeles and California economies was quite small in the aggregate, even as it was individually large and difficult for some.

The UCLA Anderson Forecast’s March 2024 Economic Outlook conference takes place in person at UCLA Anderson School of Management and via webinar on Wednesday, March 13. A panel of experts will discuss “AI and the Future Business of Entertainment.”

About UCLA Anderson Forecast

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. The Forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun.

About UCLA Anderson School of Management

UCLA Anderson School of Management is a world-renowned learning and research institution. As part of the nation’s No. 1 public university, its mission is to advance management thinking and prepare transformative leaders to make positive business and societal impact. Located in Los Angeles, one of the nation’s most diverse and dynamic cities and the creative capital of the world, UCLA Anderson places more MBAs on the West Coast than any other business school, and its graduates also bring an innovative and inclusive West Coast sensibility to leading organizations across the U.S. and the world. Each year, UCLA Anderson’s MBA, Fully Employed MBA, Executive MBA, UCLA-NUS Executive MBA, Master of Financial Engineering, Master of Science in Business Analytics and doctoral programs educate more than 2,000 students, while the Executive Education program trains an additional 1,800 professionals. This next generation of transformative leaders will help shape the future of both business and society.


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