The first quarterly UCLA Anderson Forecast of 2021 expects robust growth for the U.S. and California as the COVID-19 pandemic abates.

One year ago, the World Health Organization declared the COVID-19 outbreak a pandemic, and subsequent efforts to stop the spread of the virus led to an unprecedented decline of the U.S. economy as non-essential in-person activities came to a halt. For all of 2020, real GDP fell by 3.5%, the worst annual decline in more than 60 years.

The Anderson Forecast’s December 2020 report offered hope of a strong recovery, dependent on mass vaccinations. With vaccines becoming widely available, the March 2021 forecast now anticipates such a recovery, as well as the establishment of a new post-pandemic norm for the economy.

The National Forecast

It’s sobering to realize that even though the coronavirus devastated just about every sector of the 2020 economy, it might have been much worse. Government action — through the Paycheck Protection Program, extended unemployment insurance and stimulus checks — helped preserve many employer-employee relationships and bolstered household finances, setting the stage for a rebound as vaccinations continue and the pandemic wanes. In an essay titled “Robust Economic Growth and Recovery After a Dreadful Year,” UCLA Anderson senior economist Leo Feler writes, “For the economy, a waning pandemic combined with fiscal relief means a strong year of growth in 2021 — one of the strongest years of growth in the last 60 years — followed by sustained higher growth rates in 2022 and 2023.”

Following the 3.5% decline in real GDP in 2020, the national forecast calls for 6.3% growth in 2021, 4.6% growth in 2022 and 2.7% growth in 2023. These rates of growth are considerably higher than the 2.3% rate the country averaged during the recovery from the Great Recession between 2010 and 2019. The forecast expects real GDP to surpass its 2019 peak by the end of the second quarter of 2021 and to surpass the trend it was on prior to the pandemic in early 2022.

The economists expect the unemployment rate to decline from an average of 6.7% in the last quarter of 2020 to 5.2% in the fourth quarter of 2021, 4.1% in the fourth quarter of 2022 and 3.7% in the fourth quarter of 2023. Recovering labor force participation will slow the decline in the unemployment rate as workers who exited the labor force, including those who left for child care and home-schooling responsibilities, reenter and begin looking for work.

Feler’s essay also examines the longer-term impact of the economic responses to the pandemic on the economy. “We have embarked on a once-in-a-lifetime policy experiment to test the ability of government intervention to make even deadly pandemic-sized economic shocks a short blip in our economic history,” Feler writes, noting that governments around the world ensured a “vaccine race” by guaranteeing purchases and that U.S. policies helped keep businesses afloat and maintained employer-employee relationships. As Feler writes, “If the motto of the pandemic was to survive, the motto post-pandemic is to thrive, and because of the policies implemented to date, we’re in a position to have a rapid economic recovery.

“This all means we have the opportunity to test how much we can stimulate the economy and how rapidly employment can recover without overheating the economy,” Feler writes. “If real GDP goes above ‘potential GDP’ without generating sustained inflation, it will signal that we have been too modest in our assumptions about the productive potential of our economy … These next few years will help us discover if secular stagnation has been a myth we’ve mistakenly bought into and whether we have the capacity to grow much faster than we’ve done in decades.”

The California Forecast

Any comparison of the timing of an economic recovery in California relative to other states must take into account that the state imposed more restictive non-pharmeceutical interventions (including mask mandates, business closures and a ban on gatherings) than did many other states across the country. But, forecast director Jerry Nickelsburg writes, “Although the timing may be offset with California beginning a significant recovery later than some other states, we expect the California recovery to ultimately be, once again, faster than the U.S.”

In an essay on the California recovery, Nickelsburg says the leisure and hospitality sector will be the last to recover because of the depth of the decline in this sector and its reliance on international tourism. But he expects the recovery to come earlier in the business, scientific and technical services sector and in the information sector, owing to the demand for new technologies that support how we are working and socializing. Recovery will also be faster in residential construction, as California’s shortage of housing relative to demand drives new developments. “The more rapid growth we forecast for the U.S. economy — in light of how mass vaccinations have affected pandemic restrictions on economic activity and taking into account the new stimulus package from Washington — will also lead to a more optimistic California forecast than in December,” Nickelsburg says.

California’s unemployment rate for the first quarter of this year is expected to be 7.7%, and the average for 2021, 2022 and 2023 will be 6.8%, 5.1% and 4.1%, respectively. The forecast for 2021, 2022 and 2023 is for total employment growth rates to be 5.6%, 3.1% and 2.2%. In spite of the recession, the continued demand for a limited housing stock, coupled with low interest rates, leads to a forecast of a relatively rapid return of home building. The expectation is for 127,000 net new units in 2021, growing to 134,000 in 2023. However, this level of home building is low enough that the prospect of the private sector’s building its way out of the housing affordability problem over the next three years is nil.

Nickelsburg’s essay also examines the reality of an exodus from the Bay Area, as trumpeted by many in the media. In theory, the ability to work remotely allows for an escape from the high rents and property values of San Francisco and Silicon Valley. The important message from the data Nickelsburg examines is that it does not show unequivocal evidence of a mass exodus from the Bay Area. On the contrary, the data is consistent with a pandemic recession. Nevertheless, remote work and the experience of living elsewhere might, in fact, have an important impact on the growth and character of Silicon Valley and the entire Bay Area in the coming years.

Trends in the Health Care Industry

In the first of two special topic essays, forecast economist Leila Bengali looks at pre- and post-pandemic trends in the health care industry, particularly those that accelerated over the past year.

Bengali writes that since 2000, the health care industry has grown more than the overall economy. New types of firms continue to enter the health care market; after the 2007–09 recession, there was an increase in the number of firms at the intersection of health care and tech. Although that trend has abated somewhat, IPO activity in this area was strong in 2020. Types of care have evolved as well. As an example, the skilled nursing sector has been shrinking while the home care and telehealth sectors have grown. There has also been a trend toward consolidation in the health care sector as a result of integration and mergers.

“The 2020 pandemic and recession sowed the seeds of change in some areas, to be sure,” Bengali writes, “but change does not happen overnight. The influence of the government through Medicare and Medicaid provides stability and tempers radical deviations from past patterns.” The economist also writes that in addition to the growth in new types of care, demographics are also creating predictable trends: The population is aging and will need more health care as a result. “These two forces will likely have a strong influence on long-term change in the industry, which is generally on an employment growth trend and is unlikely to experience sharp deviations from that trend in the near term,” Bengali writes.

The Variation in COVID-19 Mortality Rates in the U.S.

In the second special topic essay, economist William Yu looks at the variations in pandemic-related U.S. mortality rates as of January 2021. Yu examined a variety of data, including those related to age, demographics, socioeconomic status, policy and politics, health factors, and the early shocks felt in places like the New York City and Boston metro areas. Using a multivariate regression approach, he was able to ascertain the relative contribution of each of these factors.