April 06, 2016

UCLA Anderson Forecast: Cautious Optimism for the Nation, State and Region

LOS ANGELES (April 6, 2016) – UCLA Anderson Forecast’s first quarterly report in 2016 for the United States calls for continued, though slightly slower growth, while anticipating inflation to rise above the 2.0% target of the Federal Reserve Board. Growth in the national economy will be driven by increases in consumer spending and housing, as well as an end to the inventory correction currently underway. In California, the forecast has been revised down slightly from the past few releases, primarily due to slower than expected national economic growth in 2016. The current forecast for the state calls for a steady decrease in the unemployment rate through 2018, coming in at about 5.0% by the end of 2018.

The National Forecast

In his outlook for the national economy, UCLA Anderson Senior Economist David Shulman says that the recent fears of a national recession, fueled by the January to February drop in stock prices, have subsided. The markets, he says, were disturbed by fears of a significant slowdown in China, continued stagnation in Europe and Japan, a break in oil prices to below the financial crisis levels of 2009 and concerns regarding the European banking system. However, Shulman says, “The markets soon calmed down and wiped out much of their earlier losses, as strong data from the consumer side of the economy indicated that retail sales were solid and employment growth remained robust. Simply put, aside from modest declines in the industrial sector, there was no recession in the data.”

But Shulman says there are more disturbances on the horizon, including the United Kingdom’s upcoming decision on whether to remain in the European Union and a pair of major presidential candidates who want to “blow up” the global trading system. “Economists might not know all that much,” Shulman says, “but trade wars usually do not lead to prosperity, quite the contrary.”

While the Forecast continues to be on track for moderate growth, enthusiasm has dampened and expectations revised slightly downward. Instead of looking for 3.3% growth in real GDP for 2016 on a fourth-quarter basis, the Anderson Forecast now calls for a more modest 2.7% growth rate. Despite the lower GDP growth rate, the economy remains on track to create 2.4 million jobs this year and 1.5 million jobs next year, as the economy operates at full employment. Consistent with the March statement from the Federal Reserve Board, the Forecast expects two or three increases in the Fed funds rate, with the first one likely to be in June. As above, growth will be driven by increases in consumer spending and housing along with the end of the inventory correction we are now experiencing. The risks to the forecast come from outside the U.S., where disturbances in Europe and Asia along with domestic politics have the potential to cast a pall over the U.S. economy.

The California Forecast

In his current essay, UCLA Anderson Senior Economist Jerry Nickelsburg looks at the ways in which innovation affects growth in California. “While innovation is not the entire story of the economic recovery, it certainly is an important part of it,” Nickelsburg says. "The very rapid growth in Silicon Valley and San Francisco attests to this fact.” Nickelsburg says that, in the near term, the critical mass developed with California’s research institutions will continue to provide the state with a disproportionate amount of innovation and therefore a faster rate of growth in GDP than the average for the U.S.

“The fly in the ointment stems from the fact that innovation in productivity improvements is not like assembling aircraft,” Nickelsburg says. “It comes in fits and starts and is inherently unpredictable. Nevertheless, we expect California’s GDP growth rate to exceed that of the U.S. through our forecast period.” The current outlook is for continued steady gains in employment through 2018 and a related decrease in the unemployment rate in the state over the next two years. Nickelsburg expects California’s unemployment rate to be insignificantly different from that of the U.S. at 5.0%, by the end of the forecast period. The Forecast calls for total employment growth of 1.9% in 2016, 1.6% in 2017, and 1.0% in 2018. Payrolls will grow more at about the same rate. Real personal income growth is estimated to be 3.6% in 2016 and forecast to be 3.2% and 3.0% in 2017 and 2018, respectively.

Venture Capital Investment and Innovation Across the Country

In a companion essay, Forecast Economist William Yu looks at venture capital investment and innovation across the country. Robust venture capital investment on startups began to cool during the past two quarters, compliments of a bruised stock market. Though another dotcom bubble burst is less likely due to the absence of a bubble, investment specific to the software industry could present more risks to investors in some geographic areas. If innovation is measured by the number of patents issued, there has been healthy growth in innovation in recent years, which could partly be correlated to surging venture capital investing. Yu also says that the pace of foreign countries getting patents granted in the U.S. is robust and dominated by Japan, Germany and the United Kingdom.

Ideas + Innovation and the Los Angeles Economy

All of the economists’ reports will be presented at UCLA Anderson Forecast’s quarterly conference on Wednesday, April 6, 2016. The conference features a number of panels focused on how innovation affects the local economy. The keynote address comes from Henry Bzieh, Kia Motors USA’s chief technology officer. For more information on attending the conference, please visit http://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 on the Web 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. Follow UCLA Anderson on Twitter at http://twitter.com/UCLAAnderson or on Facebook at http://www.facebook.com/uclaanderson.

Contact Information

UCLA Anderson Office of Media Relations, (310) 206-7707, Media.relations@anderson.ucla.edu

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