UCLA Anderson Forecast: Solid but unspectacular growth for U.S. economy as Delta variant spreads

LOS ANGELES, Sept. 29, 2021 /PRNewswire/ -- In its last two quarterly reports, the UCLA Anderson Forecast has anticipated a robust recovery from the COVID-19–induced recession that began in March 2020. The June 2021 quarterly report did come with a caveat: Recoveries are never smooth.

That caveat proved prescient. Now, hopes for blockbuster economic growth have been tempered by the spread of the Delta variant and stagnating vaccination rates, which in turn have led to consumer caution and supply constraints. As a result, what could have been a couple of years of blockbuster economic performance will now likely feature solid but unspectacular growth.

The national forecast

The September 2021 forecast for the nation represents a shift from the past two quarters. The March and June reports showcased hopes for a strong recovery as COVID-19 vaccines became widely available and new case rates went down. But heading into the final quarter of 2021, "good" and "solid" replace "blockbuster" and "spectacular" as the relevant descriptors of the national economic forecast.

Since June, vaccination rates have plateaued and the Delta variant has spread quickly in the U.S. and around the world. As a result, consumer enthusiasm has turned to caution and global supply chains continue to battle disruptions, leading to a reduction in expectations for the economy.

"What makes this growth 'ho-hum' is the comparison to what could have been if, globally, we had gotten COVID under control and had been able to transform pent-up demand, pent-up savings and a tremendous amount of government support into faster economic growth," writes UCLA Anderson senior economist Leo Feler in his September forecast.

According to Feler, services — not goods — are driving GDP growth. Services consumption remains 1.5% below its pre-COVID peak in the fourth quarter of 2019. However, it has been recovering rapidly, faster than the rate of GDP growth, and is therefore one of the drivers powering the recovery.

Although goods consumption is currently 14.2% above its pre-COVID peak, that percentage is shrinking, and goods consumption is no longer a principal driver of the economy. Given supply constraints and the fact that a return to public health restrictions is unlikely, Feler expects consumers to continue their shift away from goods consumption toward services.

The economy is currently down 5.3 million payroll jobs from its pre-COVID peak, and Feler notes there is little evidence to suggest that the expiration of enhanced unemployment benefits will lead to a surge in job applications.

"The forecast is for more gradual gains in employment over the next several quarters," he writes. "We are no longer forecasting average monthly gains over 1 million. Going forward, we are forecasting average monthly gains of 330,000 in the near term, declining to 170,000 by the end of 2023."

The current forecast for 2021 is for average annual GDP growth of 5.6%, down from the 7.1% rate predicted in June. For 2022, growth is expected to be 4.1%, down from the 5.0% rate forecast in June; for 2023, the projection is now 3.1%, up from the 2.2% rate predicted in June. The reductions in growth for 2021 and 2022 and the increase in growth in 2023 represent a shifting of consumption and investment further into the future.

The California report

In June, UCLA Anderson economists noted that the COVID-19 pandemic continued to cast a shadow over the California forecast. Three months later, that shadow persists. But as progress toward a vaccinated population and the state economic reopening continue, a clearer, though still uncertain, picture emerges. The availability of multiple vaccines, along with a drop in new cases from the latest peak, suggests a reduced impact of the pandemic on the state's economy.

The California analysis, written by UCLA Anderson Forecast director Jerry Nickelsburg (based on the forecast he co-authored with UCLA Anderson Forecast economist Leila Bengali), includes the assumption that future COVID-19 variants will create less serious economic impact. However, the memory of the Delta variant will continue to spook consumers, creating a slower return to earlier consumption behavior than previously forecast.

One striking aspect of the recession and recovery, according to Nickelsburg, is how it has disproportionately hit lower-income Californians, exacerbating inequality in the state. Income inequality, particularly given the state's high housing costs, is a concern for a variety of social and economic reasons. The California report delves into whether this rising inequality might affect future economic growth but finds no evidence that it will.

Although California began a significant recovery later than some other states because of its stricter public health interventions, Nickelsburg and Bengali's forecast expects the California recovery and expansion, once again, to outpace those of the U.S. as a whole. They point to two factors. First, the Delta variant notwithstanding, the state's better public health outcomes should result in a more rapid return to normalcy. Second, the transition to new ways of work and social interaction will disproportionately benefit California through its technology sectors. The leisure and hospitality sector will be the last to recover because of the depth of its decline, the comparatively slow return of demand for restaurant and bar services, and the subsectors dependent upon international tourism.

The recovery will be considerably faster in higher-income technical services and faster in residential construction as California's shortage of housing relative to demand drives new development. While Nickelsburg expects these differentials in rates of recovery to exacerbate California's inequality, which is the worst in the nation, he does not see it as a drag on economic growth — yet.

The unemployment rate for the third quarter of 2021 is expected to be 7.2%, with the annual rates for 2021, 2022 and 2023 anticipated to be 7.6%, 5.6% and 4.4%, respectively. Total employment growth rates for 2021, 2022 and 2023 are expected to be 3.5%, 3.9% and 2.7%, respectively.

In spite of the recession, the continued demand for a limited housing stock coupled with low interest rates leads to a forecast of a relatively rapid return of home building. The economists expect 123,000 net new units to be built in the state in 2021 and continued growth to 139,000 net new units for 2023. Nonetheless, Nickelsburg writes, that level of home building means the private sector will not be able to build its way out of the state's housing affordability problem over the next three years.

Who pays sales tax?

The September 2021 Forecast report includes two companion essays. The first, written by Bengali, reviews how the statutory incidence of sales tax — meaning whether the buyer or the seller is required to pay the tax — affects reported taxable sales, and thus sales tax revenue. Bengali's analysis includes consideration of both the Supreme Court's 2018 South Dakota v. Wayfair Inc. decision, which reversed an earlier decision on states' physical presence rules, and California Assembly Bill 147, which dealt with tax collection by remote sellers and which California passed in response to the Wayfair decision.

Although Bengali acknowledges that this targeted analysis only technically explains how reported taxable sales for online retailers changed in response to AB 147, the analysis does answer the question, "Does statutory incidence affect tax revenue?" The answer seems to be "yes." One explanation, according to Bengali, is that placing the statutory incidence on sellers lowered the cost of compliance and enforcement, resulting in more reported taxable sales. More reported taxable sales mean more sales tax revenue.

But what are the implications for the forecast? Taxable sales forecasts are key to many local government agencies. One effect of AB 147 is a level shift up in reported taxable sales. An additional possibility is that the law could cause reported taxable sales to grow at a faster rate. This could result from compliance with or enforcement of AB 147 improving over time. If e-commerce sales in general continue to grow faster than brick and mortar sales, that could also result in a higher growth rate of reported taxable sales because, with AB 147, more of those (high-growth) online sales will be reported and thus taxed.

The effects of COVID-19 on economic inequality in Los Angeles

The second companion essay, by UCLA Anderson Forecast economist William Yu, looks at the correlation between COVID-19 and inequality in the Los Angeles economy. Yu notes that the U.S. economy fully recovered in terms of real GDP in the second quarter of 2021, but that payroll jobs are still suffering a 3.5% loss in the U.S. and an 8.7% loss in Los Angeles, compared with their pre-COVID peaks.

He writes that Americans who were in better economic situations before the pandemic are doing much better during this recovery period than those who were not.

Specific to Los Angeles, Yu says that the local economy was hit more severely than the nation by COVID-19. Low-wage workers, in particular in restaurants, experienced more job losses than those in other sectors. Tax return data show a hollowing out of the middle class in both the U.S. and Los Angeles, with only 23% of U.S. households and 21% of the city's earning middle-class wages. More than a third of households in Los Angeles and the U.S. overall are earning less than $25,000.

Yu's analysis finds a strong and positive correlation between human capital and household income within Los Angeles and across the country. Los Angeles, with its relatively low percentage of human capital, has a lower median household income than other U.S. metropolitan areas. On a positive note, some colleges in the Los Angeles area are promoting equality of opportunity and upward mobility. The report finds that many California State University and University of California campuses are among the top in the nation for high economic mobility rates, defined as moving students from the bottom 20% of household income brackets to the top 20% after graduation.

September 2021 Forecast Conference: Income Inequality, Economic Growth and Recessions

In addition to the UCLA Anderson Forecast team's presentations of the U.S. and California forecasts and the essays described above, the September 2021 Forecast Conference will feature a keynote address and a discussion panel via webinar.

The keynote will be delivered by Mary C. Daly, president and chief executive officer of the San Francisco Federal Reserve Bank, in conversation with UCLA Anderson Forecast economist Leila Bengali. The panel, titled Inequality and Opportunity: Economic and Political Implications for the Macroeconomy, will be moderated by UCLA Anderson Forecast director Jerry Nickelsburg. The discussion will include: Michael Tubbs, advisor to California Governor Gavin Newsom on economic mobility and opportunity, and former Mayor of Stockton (2017–20); Paul Ong, research professor and director of the Center for Neighborhood Knowledge at UCLA Luskin School of Public Affairs; Sarah Bohn, vice president of research, senior fellow and John and Louise Bryson Chair in Policy at the Public Policy Institute of California; and Martin Gilens, professor and chair in the Department of Public Policy and professor of public policy, political science and social welfare at UCLA Luskin School of Public Affairs.

About UCLA Anderson Forecast
The 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. 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 Executive MBA, 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. anderson.ucla.edu

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SOURCE UCLA Anderson Forecast