UCLA Anderson Forecast Expects Modest Growth and Some Disruptions

Could dysfunction in Washington spill over to the U.S. economy?

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Sep 27, 2017, 05:00 ET

LOS ANGELES, Sept. 27, 2017 /PRNewswire/ -- UCLA Anderson Forecast's third quarterly report in 2017 anticipates modest growth in real GDP with gains in employment. On a national level, a number of pro-growth economic policies involving proposed tax cuts, investment in infrastructure and regulatory relief were expected to be initiated this year by the new administration in Washington, but few have transpired. Although there has been some progress on the regulatory front, challenges remain on a host of issues, including immigration, health care and trade policies. In California, the forecast is slightly lower, reflecting the administration's difficulties in getting proposals passed.

The National Forecast
In his outlook for the national economy, UCLA Anderson Forecast Senior Economist David Shulman notes that the economy has grown, despite chaos in Washington, and is expected to continue to grow at more than 2%, while operating at full employment. He writes that growth will continue with real GDP increasing by 2.1%, 2.8% and 2.1% in 2017, 2018 and 2019, respectively.

The impact of tropical storms Harvey and Irma will lower growth slightly from previous expectations for the current quarter and possibly the fourth quarter, with an increase now expected early next year. As building efforts intensify, the optimism for 2018 is based on expectations that Congress will ultimately enact a tax cut and a formal infrastructure package later this year, which could increase the federal deficit to about $700 billion in 2019. "In this environment, the unemployment rate will remain at or below the current 4.4% for the forecast horizon," Shulman writes.

"On the spending side, we anticipate a $250 billion infrastructure program and a material increase in defense appropriations coming from increased global tensions, especially with respect to North Korea, which will make missile defense spending a top priority," he says. "Aside from defense, the sources of growth over the next two years will come from consumption, housing (in 2018) and equipment spending. Should we be wrong on the tax cuts, growth would be slower," Shulman adds.

Inflation will increase modestly, running slightly above the 2% range. The combination of full employment and somewhat higher inflation will prompt the Fed to continue its modest tightening path by raising interest rates roughly 25 basis points per quarter into 2019.

The California Report
The July jobs numbers brought good news to California, notes UCLA Anderson Forecast Director and Senior Economist Jerry Nickelsburg. The state's unemployment rate ticked up to a still low rate of 5.1% from July's 4.8%, likely a result of more job seekers brought into the market, but not more jobs.

The forecast for the state is projected to be slightly lower again this quarter, owing partly to the Trump administration's difficulty getting legislation through Congress. The tightening of immigration rules is expected to have a significant effect in California; however, because of protections put into place by the state, not as much an effect as previously anticipated. With a change in the tax law and an increase in home construction that has boosted growth in that sector, "we expect California to continue to grow at rates slightly faster than the U.S. The unemployment rate is expected to have its normal differential to the U.S. rate at 4.5% by the end of the forecast period (2019), the same as in June's forecast," Nickelsburg says.

In his report, Nickelsburg took an expansive look at housing affordability, which is a prime concern in Sacramento and in city halls throughout the state. "The current legislative initiatives will moderate the increase in the price of housing, but will not do much to alleviate the high cost of living in California in the near term," he says.

The forecast for 2017, 2018 and 2019 total employment growth in California is 1.1%, 0.9% and 0.9%, respectively. Payrolls will grow at about the same rate over the forecast horizon and real personal income is forecast to grow 2.0%, 3.1% and 3.1% in 2017, 2018 and 2019, respectively. Home building will accelerate to about 123,000 units per year through the forecast horizon.

Changes in the Retail Industry
UCLA Anderson Forecast Economist William Yu examined the decline in employment in the retail industry across the country. Despite continued economic expansion, employment in this sector declined by 29,000 in one year. What has been the second largest private-sector employer in the U.S. has now dropped to the fourth largest.

With an increase in online shopping and cashier-less stores, Yu questions whether retail will "become the next shrinking sector in terms of jobs over the next few decades."

In his report, Yu writes that some retail sectors were affected more seriously than others by the e-commerce competition. Department and electronics stores appear to be the most adversely affected, while others, such as Walmart, auto dealers and gas stations, maintained growth amid the auto boom and low oil prices.

The Life and Death of Retail in America
All of the Forecast reports will be presented at the UCLA Anderson Forecast's quarterly conference on Wednesday, September 27, 2017. The conference also features a panel discussion on the future of the retail market. Panelists will include: John Tipton, Partner, Allen Matkins; Gary Schoenfeld, former CEO, Pacific Sunwear and Vans Inc.; Randolph E. Bucklin, Peter W. Mullin Chair in Management and Professor of Marketing, UCLA Anderson School of Management; Daniel Busch, Managing Director, Green Street Advisors Retail Specialist; and Art Coppola, Chairman and Chief Executive Officer, Macerich. The conference will be held in the Korn Convocation Hall at UCLA Anderson School of Management. For more information about attending the conference, please visit www.anderson.ucla.edu/centers/ucla-anderson-forecast.

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. More recently, the Forecast was credited as the first major U.S. economic forecasting group to declare the recession of 2001. Visit UCLA Anderson Forecast at uclaforecast.com.

About UCLA Anderson School of Management
UCLA Anderson School of Management is among the leading business schools in the world, with faculty members globally renowned for their teaching excellence and research in advancing management thinking. Located in Los Angeles, gateway to the growing economies of Latin America and Asia and a city that personifies innovation in a diverse range of endeavors, UCLA Anderson's MBA, Fully Employed MBA, Executive MBA, UCLA-NUS Global Executive MBA for Asia Pacific, Master of Financial Engineering, Master of Science in Business Analytics, doctoral and executive education programs embody the school's Think in the Next ethos. Annually, some 1,800 students are trained to be global leaders seeking the business models and community solutions of tomorrow.