Resilient U.S. Economy Is Approaching a Crossroads

UCLA Anderson Forecast Says Resilient U.S. Economy Is Approaching Crossroads

Potential action by the Federal Reserve will determine whether nation experiences mild, short-lived recession in 2023

Los Angeles (December 7, 2022) — As 2022 draws to a close, the U.S. economy has reached a recession-related fork in the road. According to the UCLA Anderson Forecast, one path would lead to continued economic growth — although slower than the recent 2.4% growth rate — while the other would be a relatively mild, short-lived recession.

Despite dire predictions by some business leaders, the national economy has proved resilient as consumers continue to spend and businesses continue to invest. Whether the economy slips into a recession or doesn’t will depend largely on inflation stickiness and any additional actions the Federal Reserve takes to bring down inflation.

The important difference between the two scenarios is the exogenous decision of the Federal Reserve in setting monetary policy. In the coming months, the Federal Reserve will have to decide between two paths: continued aggressive tightening and moderation. The two forecast scenarios provide the likeliest outcome of each.

The economic outlook for California is similarly uncertain and, as with the national economy, the source of that uncertainty is national economic policy. The December forecast for the state — like the December U.S. forecast — consists of two scenarios. The difference between the state and the nation in both scenarios is that economic forces from sectors including construction, non–information technology fields and defense will lead the state to a more moderate outcome.

The national forecast

Whether the United States avoids a recession or endures a short-lived economic downturn is dependent on the actions the central bank takes to curb inflation. Regardless, the UCLA Anderson Forecast expects the final quarter of 2022 to be a strong one for the nation, economically speaking, with conditions buoyed by consumption and business investment.

Beyond that, the two scenarios diverge. If the country does not go into a recession in 2023, economic growth is expected to slow in the first quarter of 2023 and to be virtually nonexistent in the second quarter. From there, the economy is expected to pick up again in the last six months of 2023.

By the same token, if there is a recession, the economy is expected to contract at an annual rate of 2% to 3% in both the second and third quarters, to be flat the last three months of 2023 and then to begin to rebound in 2024.

If a recession occurs, it will be relatively mild and brief, the economists write, with consumer resilience the key factor. In the recession scenario, consumption is expected to stay flat for the first two quarters of 2023 and contract modestly during the next two quarters. The forecast projects consumption growth, under both scenarios, for 2024.

Historically, Fed-driven recessions have featured sharper declines in both business and residential investment. With higher interest rates and uncertainty surrounding consumption, businesses cut back on capital investment and inventory replacement. Both the recession and non-recession scenarios would be characterized by declining home prices, with slightly larger declines in the recession scenario.

In both cases, inflation eases at about the same rate through mid-2023. The Forecast economists reason that if there is not a recession, it would be in part because supply chain pressures will ease more rapidly and inflation will come down more quickly on its own. In the recession scenario, the decline in home prices would be tempered by a decrease in new housing supply.

The California forecast

The good news is that the actions taken by the Federal Reserve will have a milder impact on California’s economy.

The employment picture in California remains in flux. The state’s non-farm payroll jobs now exceed its February 2020 pre-pandemic level by 31,000 jobs, although many of the new jobs are in different sectors than those in which job loss was the most acute. Specifically, about 170,000 payroll jobs in leisure and hospitality and other services sectors have not returned.

In the logistics, technology and health care sectors, rapid job creation has more than made up for those losses. This explains, in part, why California’s GDP growth has been faster than that of the U.S. Rapidly growing sectors like tech and logistics are typically high-income sectors, while the slow-growth sectors are generally low-income.

Over the past three months, the picture has evolved slightly as the three sectors of health care and social services, leisure and hospitality, and education have shown the largest gains in jobs. And despite the statewide gains in leisure and hospitality employment, the landscape for that sector remains difficult in the major employment centers of San Francisco and Los Angeles. Ongoing flex work arrangements by California companies and the continued lack of Asian tourists arriving in the state have resulted in an incomplete recovery in both cities. With neither of those factors likely to change in the coming months, the recovery is expected to remain on a shallow trend.

The gain in education is partly a result of schools reopening after pandemic-era closures. The number of payroll employees in education has now returned to pre-pandemic levels, and significant additional gains are not expected.

Higher interest rates have led to a downturn in California’s housing markets. The median price of single-family homes in the state has declined on a seasonally adjusted basis. As of October 2022, the median price was 8.4% below its previous peak but had returned to early 2021 levels. Nevertheless, California housing is not overbuilt. The surge in construction of accessory dwelling units as well as new infrastructure and continued growth in construction of industrial space will shield the state from the more severe interest rate–induced contraction expected in the rest of the nation.

With employment growth in green tech, medical tech, aerospace and construction fueled by the infrastructure and defense budgets, and a healthy rainy-day fund in Sacramento, the 2023 forecast for California is for more a moderate slowing or, in the case of a recession, a milder downturn than for the U.S. overall.

The December UCLA Anderson Forecast Conference
Crypto, Central Banking and Digital Currencies: Are They Transformative Inventions or Market Mass Destruction Deja Vu?

In addition to presentations of the U.S. and California forecasts, the December 2022 Forecast conference will feature a conversation about central banking and digital currencies and an expert panel on the future of cryptocurrencies.

Central Banking and Digital Currencies
Sebastian Edwards, Distinguished Professor of Global Economics and Management and Henry Ford II Chair of International Management, UCLA Anderson
Jerry Nickelsburg, Director, UCLA Anderson Forecast

Future of Cryptocurrencies
Lori Santikian, Faculty Director, UCLA Anderson Fink Center for Finance
Nicole Dyskant, Global Head of Legal and Compliance, Hashdex
David Wax, Senior Director, Digital Assets Solution Lead, EY-Parthenon
Arif Ismail, Deputy Division Chief: Payment Infrastructure, International Monetary Fund

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.

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