June 12, 2014
UCLA Anderson Forecast: Not a Real National Recovery; New Home Construction Returning to Normal in California
LOS ANGELES, June 12, 2014 ⎯ UCLA Anderson Forecast’s second quarterly release of 2014 picks up where the March forecast left off, calling for “normal growth” in the three percent range through 2016. In California, the unemployment rate will continue to drop from 7.7 percent this year to 6.8 percent in 2015.
In companion articles, the Forecast examines a pair of real estate-related issues, as Senior Economist David Shulman looks at the nation’s commercial real estate sector and Economist William Yu reports on potential Chinese investment in the U.S. real estate market. The four reports will be presented publicly on Thursday, June 12, 2014, at the UCLA Anderson Forecast conference titled, “The Changing Landscape of Commercial Real Estate.”
The National Forecast
In his June national report titled, “Something is Seriously Wrong,” UCLA Anderson Forecast Director Ed Leamer examines a number of long-term issues plaguing the U.S. economy and potential reasons why it is growing more slowly compared to its pre-recession peaks. Leamer echoes Shulman’s March 2014 report regarding the short-term economy, noting that despite longer-term concerns, real GDP will bounce back from its dismal showing in the first quarter. “We forecast a 3.6% growth in the second quarter, with a 3% economy that gets a little healthier in 2016. Not a recovery, but normal growth,” says Leamer. “While the rate of unemployment continues to trend downward to 5.4 % in 2016,” inflation remains quiescent, rising above the Fed’s 2 percent target, according to Leamer. The Fed will sit on short-term rates until the first quarter of 2015, which may not affect the real economy, as housing starts edge slowly up to 1.5 million in 2016.
Professors Ed Leamer and Jerry Nickelsburg provide insight into the recovery.
Infographic: Housing Value in the U.S.
The bulk of Leamer’s essay examines some of the longer-term economic issues that might be hindering an economic recovery. These issues include: 1) a historic look at the components of GDP trends and the fact none of the last three recessions has been followed by a real recovery; 2) the issues caused by permanent displacement of jobs in both manufacturing and construction sectors; 3) problems associated with productivity and job displacements caused by microprocessors and technology; and 4) which components of GDP have been especially weak and how much of the problem is on the demand side.
The California Forecast
The California Forecast report, authored by Senior Economist Jerry Nickelsburg, focuses on home construction in the state. Titled, “Home Construction in California: Did It Stall from 1st into 2nd?,” the essay looks at a pair of current trends: the state’s falling home sales and dramatically rising prices. Nickelsburg’s essay concludes that the flat to negative growth in new homes sales, combined with increased prices, is an indication of a normalization in housing markets rather than a slowdown and, therefore, home construction should continue its return to normal activity. “While construction is still not a barn burner, and it is still not uniform across the state, we continue with our view that there will be a recovery in home construction before the end of the forecast horizon,” says Nickelsburg.
The 2014 Forecast anticipates total employment growth (payroll, farm and self-employed) of 1.8 percent, and 2.4 percent and 2.1 percent for 2015 and 2016 respectively. Non-farm payroll employment will grow similarly, at 2.1 percent, 2.3 percent and 2.1 percent for the three forecast years. Real personal income growth is forecast to be 3.1 percent in 2014, followed by 4.1 percent and 4.1 percent in 2015 and 2016. Unemployment will decline through 2014, averaging approximately 7.7 percent for this year. In 2015 we expect the unemployment rate to drop to 6.8 percent on average, a percent higher than our U.S. Forecast, and then to 5.9 percent.
Commercial Real Estate Reports
In addition to the U.S. and California economic reports, the Forecast is also releasing a pair of companion essays looking at commercial real estate. In an essay titled, “The Changing Landscape of Commercial Real Estate,” Shulman covers different sectors in the market, including retail, office, industrial, hotels and multi-family housing with a focus on disruptive technology that is undermining tenant demand for commercial real estate. In the case of commercial real estate, the disruptions are coming from e-commerce and the downsizing of the amount of office space required for each employee.
“Put simply,” Shulman writes, “disruptive technology is defined as a low-cost solution that offers lower performance, but represents a true value at the price.” In his conclusion he writes, “We have outlined several very important issues facing commercial real estate. We do not expect investors will focus on the technological disruption facing retail, office and hotel real estate until capital market conditions become less favorable. There is too much money pouring into real estate to worry right now. Simply put, the worriers don’t get the deals. Nevertheless, when the capital markets turn, investors will wake up to the changing landscape for commercial real estate.”
Economist William Yu writes about where Chinese investors will turn, now that the real estate bubble in China has started to deflate. He says that, “It will be a wise decision to relocate investment from China, a real estate market with low expected return and high risk, to the U.S., a market with a higher long-term return. Among the U.S. markets, large cities, such as New York, Los Angeles and Bay Area and Washington D.C., are good destinations in which to invest because of their depth and liquidity.” Yu also says that for Chinese investors, West Coast cities, such as Los Angeles, those in the Bay Area and Seattle, are ideal locations for investment due to their geographic advantages, such as direct flights to China, mild weather and large Asian communities.
The Changing Face of Commercial Real Estate
Shulman and Yu’s reports will be presented (along with Leamer’s U.S. and Nickelsburg’s California forecasts) at the UCLA Anderson Forecast’s quarterly conference on Thursday, June 12, 2014. The conference, which will look at the latest trends shaping commercial real estate across California and the nation, will take place in the Palisades Room, Carnesale Commons on the UCLA campus. Those interested in learning about and attending the conference may register here.
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 http://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, Global Executive MBA for Asia Pacific, Global Executive MBA for the Americas, Master of Financial Engineering, 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.
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