No Recession, but the UCLA Anderson Forecast Foresees a Weak U.S. Economy in 2024
California’s economy continues to grow faster than the nation’s
Los Angeles (October 4, 2023) — For three consecutive quarters, the UCLA Anderson Forecast presented two potential scenarios for the U.S. and California economies. One path anticipated aggressive inflation-fighting action by the Federal Reserve that would push the economy into a mild, near-term recession, the other allowed for less impact from the Fed’s interest rate increases that would result in a slowing economy and no recession. While many economists held fast to a recession prediction, the UCLA Anderson Forecast viewed it as a 50-50 proposition.
In the latest U.S. report, the UCLA Anderson Forecast foresees a weak economy in 2024, followed by a return to trend growth rates, albeit below trend GDP levels, in 2025.
But no recession.
In California, the forecast narrative is much the same. Throughout 2023, the state’s economy stood at a fork in the road similar to that of the nation, and the possibility of a short-term recession loomed. But the state’s economy keeps chugging along, thanks in part to consumers who want to spend and stimulative fiscal policy. As in the national forecast, the current UCLA Anderson Forecast for California sees no recession in the near term.
The national forecast
The current forecast for the nation is nearly identical to the “no-recession” forecast presented last quarter. The debt ceiling crises turned out to be short-lived, the United Auto Workers’ current labor action and the potential government shutdown are incorporated into the forecast. Based on historical impacts of these types of events, they shaved only a few tenths of one percent off of the GDP growth forecast.
By contrast, retail sales continue to have robust growth, the backlog of durable goods orders has grown and factory construction is soaring. As core inflation continues to come down slowly, we expect the Fed to increase the federal funds rate by 25 basis points in fall 2023, and to hold the rate there until the sufficient weakness in the economy (forecast for 2024) results in some moderate rate reductions. With a return to trend growth rates in 2025, lower inflation and an unemployment rate hovering in the 3.9 range, the Anderson Forecast economists do not expect any 2025 movement in the federal funds rate after the first quarter of 2025.
But why did the recession that so many economists called for not occur?
Usually “this time is different” turns out to be incorrect. But this time was different. First, monetary policy tightened at the same time as fiscal policy eased. The combination of the CHIPS Act, the Infrastructure Act and the Inflation Reduction Act added significant demand to the economy and increased investment. In addition, the interest-sensitive sectors of housing and autos were not overbuilt. Instead, they were still recovering from unmet demand during the pandemic. Homeowners with 2%–3% mortgages were not opting to upsize or downsize into 7% mortgages, pushing post-pandemic demand for housing, particularly among the next generation, into newly built homes. Autos and light truck manufacturing has been increasing, as chips used in manufacturing became increasingly available. High gas prices also increased the demand for EVs and shifted auto manufacturers into large investments to meet that demand.
The oft-predicted but never seen “recession next quarter” has now faded in the face of expansionary fiscal policy, new national industrial policy and a consumer who is happy to continue spending. Nevertheless, the impact of higher interest rates will be felt in restraining growth in 2024. As the Fed turns its attention away from aggressive interest rate increases and inflation slowly works its way back to under 3% annually, the forecast calls for Fed policy to take a neutral stance and economic growth to rebound to trend rates.
Nevertheless, there are risks to the forecast. Will there be a protracted shutdown of government? Will geopolitical events upset the current growth pattern? Will the election result in different national economic policy in 2025? These risks are substantial and bear watching as they could well drive the economy off its current growth path.
The California forecast
The fall 2023 UCLA Anderson Forecast report for California features an in-depth look at the employment picture in the state.
There are normally two measures of employment considered when analyzing labor markets in California: the household survey metric, which counts the number of people employed; and the enterprise survey metric, which counts the number of payroll jobs. The difference between the two metrics can be partly explained by the difference in the definition of employment in the two surveys.
The household survey is a measure based on the domicile of the worker. If a former San Francisco office worker is now working remotely in Phoenix, then in the household survey they would not be counted in the labor force or employment numbers for California. This would represent a decrease in the state’s aggregate labor force. However, if their job was still at an enterprise in San Francisco, they would remain in the enterprise survey as employed in San Francisco. They are working in San Francisco (virtually) and living in Phoenix (in true life). The household survey reports that the number of people employed in August 2023 was 1.3% below the number in the pre-pandemic peak. Over the same period, California’s non-farm payroll jobs increased by 2.5% and now exceed the pre-pandemic level by 447,600 jobs.
In short, the employment picture in California looks different now than it did pre-pandemic, regardless of which measure one considers. Jobs were lost in some sectors and created in others, while other jobs simply moved out of state as a result of remote work. Many of the new jobs are in different sectors than those where job loss was the most acute. In the logistics, technology (professional, technical and scientific services and information), construction, durable goods manufacturing and health care sectors rapid job creation has numerically made up for more job losses in other sectors.
The California economy is, again, growing faster than the U.S. economy. The risks to the forecast are political and geopolitical. Interest rates might still disrupt the current expansion on the downside and increased international immigration and accelerated onshoring of technical manufacturing on the upside.
Over the three months ending August 2023, the employment picture continued to evolve. The two sectors with the largest gains in jobs have been the health care and social services sector, and public and private education. The next three sectors with the largest number of new jobs are construction, leisure and hospitality, and durable goods manufacturing. Of these five sectors, two — construction and durable goods manufacturing — are on average higher wage sectors. It is finally the case that low-wage employment is catching up to pre-pandemic levels.
Also, the pace of employment growth in California is geographically variable. Over the 12 months ending July 2023, coastal California counties have been star performers, outpacing the national growth rate. Inland counties’ economies have grown less rapidly because of a slowdown in logistics hiring and non-durable goods manufacturing, including food.
The unemployment rate for the third quarter of 2023 is expected to average 4.3%, and the average for 2023, 2024 and 2025 is expected to be 4.5%, 4.7% and 4.6%, respectively. The forecast for 2023, 2024 and 2025 is for total employment growth rates to be 0.7%, 1.0% and 1.8%. Non-farm payroll jobs are expected to grow at a rate of 2.4%, 1.9% and 1.8% during the same three years. Real personal income is forecast to grow by -0.2% in 2023 and 1.2% in 2024 and 2.0% in 2025.
In spite of the higher interest rates, the continued demand for a limited housing stock, coupled with state policies inducing new homebuilding, should result in the beginning of a recovery this year followed by solid growth in new home production thereafter. Our expectation is for 120,000 net new units to be permitted in 2023 and permitted new units to grow to 144,000 in 2025.
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. 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.
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.