UCLA Anderson Forecast’s final quarterly report for 2018 indicates that the economy is in the process of downshifting from 3% growth in real GDP this year to 2% in 2019, and 1% in 2020. Recognizing that the nation and California are experiencing full employment, the Forecast asserts that 3% quarterly growth is not sustainable. With the Federal Reserve raising interest rates, trade tensions rising, the impact of the fiscal stimulus from tax cuts and spending increases waning, financial markets will likely experience increased turbulence. The big question In California, which has been benefiting from rapid growth in the tech industry, is how long that boom can continue.
In his outlook for the national economy, UCLA Anderson Senior Economist David Shulman says that “growth will gradually taper off in all of the major sectors of the economy.” While consumer spending has been strong, peaking at 4% in the second quarter, it is expected to decrease to 2% by the fourth quarter of 2019 and to 1.5% by the fourth quarter of 2020. Housing starts will advance to 1.26 million units this year, up from 1.21 million units in 2017 with modest gains to 1.31 million and 1.32 million units expected in 2019 and 2020, respectively. This level of activity lags below the 1.4–1.5 million units that would be consistent with long-run demand. In short, “housing activity remains in a rut,” Shulman says.
The recent volatility in stock prices appears to signal an end to benign financial markets. “Although most market pundits blame the increased volatility of Fed policy and a peak in the growth rate in corporate profits, when you look under the hood you may notice more serious risks facing the financial markets — namely, over-leveraged corporations and escalating trade tensions, especially with China,” Shulman writes. “And don’t forget that the energy, social media, banking and pharmaceutical industries will soon find themselves in the crosshairs of the newly elected Democratic House of Representatives. This looks to be a good year for Main Street and choppy year for Wall Street,” he adds.
Shulman’s essay does identify some bright spots that signal healthy economic growth. One is defense spending, which increased 3.4% this year and is forecast to rise by 4.9% in 2019 before leveling off with a 0.8% gain in 2020. “The Trump defense buildup is for real,” he writes.
Intellectual property is another promising area, forecast to increase at a “white-hot” annual rate of 9% beginning this quarter. This broad category includes computer software, research and development as well as filmed entertainment. Though growth in this sector is expected to taper off in the future, it will consistently grow faster than the economy as a whole.
The California Forecast
In his latest essay, UCLA Anderson Forecast Director Jerry Nickelsburg says that the Californiaforecasts for 2018 and 2019 have not changed much from the June 2018 outlook. He anticipates that California’s economy in 2020 will be slightly weaker, compliments of changes in fiscal policy that also will affect the national outlook. While the state’s economy has been evolving as expected, the risk of a trade war with China remains a concern, as it could adversely affect the logistics industry, one of the fastest growing sectors in California this past year.
Nickelsburg expects California’s average unemployment rate to have its normal differential to the U.S. rate, at 4.6% in 2020. Total employment is expected to grow in the mid-1% range in 2019 and slow to less than 1% in 2020. Real personal income growth is forecast to be in the upper 3% range in 2019 and will cool to just below 3% in 2020. Homebuilding will accelerate to about 140,000 units annually by the end of the forecast horizon in 2020.
All of the economists’ reports will be presented at the UCLA Anderson Forecast’s quarterly conference on Wednesday, December 5, 2018. The conference will also feature a conversation with David Kostin, Goldman Sachs strategist, and a panel discussion that will look at equity and bond markets. Panelists include Edward Gonzalez, VP & senior investment strategist at Wells Fargo Private Bank, Asha Joshi, managing principal with Payden & Ryge, Ivo Welch, distinguished professor of finance and J. Fred Weston Chair in Finance at UCLA Anderson, and Gilda Youdeem, executive vice president of enterprise risk analytics at Banc of California.
The conference will be held in Korn Convocation Hall at UCLA Anderson School of Management. For more information about attending the conference, please visit: http://www.anderson.ucla.edu/centers/ucla-anderson-forecast/december-2018-economic-outlook
