UCLA Anderson Forecast: Russia-Ukraine war adds new risks to U.S. and California economies
With the economic impact of COVID waning, Russia’s invasion upends a return to normal
Los Angeles (March, 9 2022) — Two years ago this month, rapidly unfolding events surrounding COVID-19 led to an early recession call by the UCLA Anderson Forecast when it became clear that nothing was “normal” about life during a pandemic.
The June forecasts for the United States and California still anticipate a robust recovery. The forecasts include moderately higher inflation in the short term, housing and services driving the recovery and employment levels recovering to previous peaks over the coming year, but some sectors not recovering until much later.
Now, just as the economy seemed poised to return to some semblance of normalcy, Russia’s invasion of Ukraine has injected a new sense of uncertainty and risk into the forecast, along with apprehension about a new world order whose outlines are still unclear.
The national forecast
In the latest economic forecast for the nation, UCLA Anderson Forecast senior economist Leo Feler notes that the nascent Russia–Ukraine war is already affecting the world economy. “We have already seen pronouncements from countries that they need to increase their defense spending,” he writes. “And even in the U.S., as part of our economic forecast, we model a substantial increase in federal defense spending, not only because of the current conflict between Russia and Ukraine but because of the possibility that the conflict might embolden other countries to become aggressors.”
The timing of the invasion, coinciding with the waning of the pandemic, underscores the interconnectedness of economic factors. A return to normal activities assumes a resumption of services spending and a reduction in goods spending, which, in turn, would ease pressure on supply chains and bring down inflation. And while an eventual return to normal is still anticipated, the invasion has derailed assumptions regarding lower inflation.
“Once again, our economic forecast comes with considerable uncertainty,” Feler writes. “It depends on the future course of the pandemic, and it depends on how long the war between Russia and Ukraine will last and whether it will spread to include other countries. These are the immediate risks we know of, not to mention the risks that are not at the forefronts of our minds, like global climate change and political divisions in the U.S.”
Inflation remains a concern, with higher oil and energy prices considered key factors that are continuing to push up inflation. During the early phase of the pandemic, in response to lower demand from people staying home and avoiding travel, oil production in the U.S. shrank. As people once again began going out, demand recovered, but oil supply has not kept pace.
With many distributors cutting purchases of Russian oil, Feler expects oil prices — now above $100 per barrel — to remain high and contribute to rising inflation through at least the second quarter of 2022. But with oil so profitable, he also expects U.S. shale oil producers who had ceased pumping during the pandemic to slowly resume production. Ultimately, the forecast predicts that a significant supply response in the U.S., along with an expected increase in production from OPEC states, will lead to a decline in oil prices and a check on inflation in the latter half of 2022.
Following average GDP growth of 5.7% in 2021, the current Anderson Forecast calls for continued economic strength in 2022, 2023, and 2024, forecasting 4.3% growth in 2022, 2.8% in 2023, and 2.3% in 2024. An uptick is expected in the second quarter of 2022, to 6.1% on a seasonally adjusted annual basis, as the economy moves past the pandemic and demand for consumer services surges. Growth is then expected to normalize around 3% to 4% on an annual basis for the remainder of the year. Driving this growth is the strength of consumer spending and business investment.
While production and employment have essentially recovered from the pandemic, Feler writes that the U.S. is still in a period of economic turmoil. The inflation we are experiencing, coupled with the current geopolitical conflict, poses substantial risks to the recovery. In previous forecasts, Feler expected a euphoric boom time for the American economy, and while the economy is still booming, the euphoria is now gone, he notes. With supply shocks exacerbated by the Russia–Ukraine war, and with inflation having become more persistent, the Federal Reserve now faces the difficult challenge of coordinating a “soft landing” for the economy, reining in inflation without sacrificing employment and output, Feler writes.
The California forecast
A number of sectors in the California economy are showing new growth, with the technology sector leading the way. But the state’s economy nevertheless has some weaknesses, according to UCLA Anderson Forecast director Jerry Nickelsburg, author of the California forecast. Sectors that require a high level of human contact in the sale of their services demonstrate the greatest disparity between the number of jobs before the pandemic and their current employment levels, he writes.
The leisure and hospitality sector, in particular, is suffering for two reasons. First, with many countries continuing with strict COVID-19–related restrictions, including long quarantine periods for returning travelers, California tourism, which is disproportionately dependent on international visitors, continues to lag its pre-pandemic level. Second, the pandemic created a work-from-home environment for many industries. Companies may, in fact, be growing their workforces, but if those workers are not in the office, then restaurants and other businesses dependent on employees’ gathering together in central locations will recover more slowly.
Nickelsburg’s report cites four sectors where job growth was strong in the latter part of 2021. Three of those sectors — technology, logistics and construction — are expected to be strong drivers of the California economy in both the short and long term. But the leisure and hospitality sector will remain a drag on economic growth.
Although leisure and hospitality and retail employment are not expected to return to their 2019 peaks by 2024 (the end of the current forecast’s horizon), Nickelsburg expects the California economy once again to grow faster than that of the U.S. as a whole. The risks to the California outlook are a new virulent wave of the pandemic and an acceleration of residents leaving the state on the downside, and increased international immigration and accelerated onshoring of technical manufacturing on the upside.
The state unemployment rate for the second quarter of 2022 is expected to be 5.7%, and the averages for 2022, 2023 and 2024 are forecast to be 5.5%, 4.5% and 4.3%, respectively. Non-farm payroll jobs are expected to grow at rates of 4.7%, 2.6% and 1.4% during the same three years. In spite of an expected increase in interest rates, the forecast predicts relatively rapid growth in home building. The expectation is for 123,000 net new units to be granted permits in 2022, climbing to 151,000 by 2024.
March 2022 Forecast conference
2022 and Beyond: An Economy in the Choppy Waters of Supply Chains and Inflation
In addition to presentations of the U.S. and California forecasts, the March 2022 Forecast conference will feature a keynote address by Gene Seroka, executive director of the Port of Los Angeles, and a panel discussion regarding supply chain and economic growth. The panel participants are:
• Edward Leamer, professor emeritus, UCLA Anderson School of Management
• Emily Desai, deputy director for international affairs and trade, California Governor’s Office of Business and Economic Development
• Karon Evanoff, vice president of global supply chain, QSC
• Vincent Iacopella, executive vice president of growth and strategy, Alba Wheels Up International LLC
• Christopher Tang, distinguished professor, Edward W. Carter Chair in Business Administration, senior associate dean of global initiatives and faculty director of the Center for Global Management at the UCLA Anderson School of Management
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.