LOS ANGELES – The UCLA Anderson Forecast revised downward its expectations for both California and the national economy.
The Anderson Forecast's second quarterly report in 2016, released Wednesday morning, calls for continued slow, but steady GDP growth in the 2% range nationally.
Instead of looking for 3.3% growth in real GDP for 2016 on a fourth quarter-basis, the Anderson Forecast anticipates a more modest 2.7% growth rate.
Despite the lower GDP growth rate, the economy remains on track to create 2.7 million jobs this year and 2.1 million jobs next year, as the economy operates at full employment, the forecast said. Consistent with the April statement from the Federal Reserve Board, Anderson still expects two or three increases in the Fed funds rate, with the first one expected this July. Despite coming off a weak first quarter of 2016, real annual GDP is expected to grow 1.7% this year.
As forecast in Anderson's spring report, national economic growth will be driven by increases in consumer spending and housing, along with an end to the inventory correction currently underway. In California, the forecast anticipates continued steady gains in employment through 2018 and a steady decrease in the unemployment rate over the next two years. California's unemployment rate is expected to be insignificantly different from the U.S. rate at 5.1% by the end of the forecast period.
UCLA Anderson Senior Economist Jerry Nickelsburg, who writes the California forecast, said California is currently experiencing what economists consider to be full employment.
Inland California, with its traditional emphases on manufacturing, government and agriculture, continues to suffer in terms of employment, while the coast, with its technology, information and trade sectors, led the recovery, he wrote.
He warned that the potential expiration of Proposition 30 temporary income tax hikes enacted in 2012 leaves the state government vulnerable in times of recession. A referendum to extend the higher taxes will be on California's November ballot. Another concern is that the trade policies created by the next president might have an impact on international trade, a sector on which California relies.
The California Forecast has been revised downward slightly, as a consequence of slower than expected growth in the U.S. in 2016. The current forecast calls for continued steady gains in employment through 2018 and a steady decrease in the unemployment rate in California over the next two years.
UCLA Anderson Forecast Director Ed Leamer wrote that U.S. GDP growth, which had remained at 3% for nearly 40 years until 2005 – has hovered at 2% since the recession, so eerily steady that it is defining an entirely new corridor at 2% instead of 3%.
"Something is different, terribly different. What should forecasters be thinking?" Leamer wrote. "We are thinking 1.7% real GDP growth in 2016, 2.8% in 2017 and 2.1% in 2018, averaging 2.2%, with a strong labor market averaging about 200,000 increases in payrolls per month and a steady unemployment rate around 5%."
He added, however, that economists are "starting to see more evidence of inflation ahead, and are forecasting interest rate increases to keep real rates of interest pretty constant."