UCLA ANDERSON FORECAST: Surfing LA’s New Economy
Written by Peter Strauss of Iconic Investments
Iconic Investments attended the most recent UCLA Anderson Forecast. Focusing heavily on Los Angeles’ rising tech industry, the presentation, titled Silicon Beach: Surfing LA’s New Economy, provided insight into the growth of this sector and the impact it is having on the region. In addition, the UCLA Economists gave their national and local economic forecasts.
David Shulman – Senior UCLA Economist
David Shulman began his presentation with a quote by former Fed chairman Ben Bernanke:
“In 2020, Wile E Coyote is going to go off the cliff and he’s going to look down and that (stimulus) will be withdrawn at that point.”
Shulman predicts that, by 2020, we will see a hangover from the tax cut stimulus that has been pulling the economy forward. He also foresees a slowdown in spending that came as a result of the tax cuts. In addition, Shulman forecasts GDP Growth will slow from 3% in 2018 to 2% in 2019 and to 1% in 2020. He warned that when an economy hits a 1% GDP growth rate any little bump can push it into recession.
However, despite the negativity surrounding his 2020 forecast, he believes the economy will continue to remain strong well into 2019. Here are some more of Shulman’s predictions for 2018-2019:
· Unemployment rate will hit 3.5% in 2019 – Fed will keep on track and increase interest rates
· Inflation will continue to increase from the low the 2’s (2%) to high 2’s
· Government will hit a deficit of $1 trillion in 2019
· GDP will grow at 2%
Moving into 2020, Shulman forecasts inflation will rise to 3% while job growth will slow as it will be difficult to maintain 200,000 new jobs per month. He expects the national deficit to hit $1.5 trillion and unemployment to tick back up to 4.2%.
Shulman expects the Fed to continue to combat rising inflation with four rate hikes in 2019, resulting in a Fed Funds Rate north of 3% by the beginning of 2020. The Fed will continue to normalize its balance sheet by buying $40-$50 billion in bonds monthly, while the Treasury sells $130 billion in bonds monthly to cover the national deficit. The increased supply of bonds will push the 10-year treasury to 4% by 2019.
Jerry Nickelsburg – Senior UCLA Economist
California Forecast – We had superior growth over the last year. However, risks are elevated in the construction and logistics sectors, and government programs. California experienced explosive GDP growth of 3.5% from 2017 to 2018, 100 basis points greater than the overall US economy. Colorado ranked highest at 4.5%. Since 2008, state employment has increased by 16%, but it has recently started to flatten.
Two primary sectors fueling the California economy are construction and logistics. These two sectors have elevated risks due to rising interest rates and looming trade wars. It remains to be seen if California is ready to weather a recession. Outgoing governor Jerry Brown is setting aside a rainy-day fund of $13.8 billion – Nickelsburg predicts the total impact could be a deficit of $36 billion (over 2 years), far exceeding this fund, and posing a serious risk to public services.
PREDICTIONS 2018 2019 2020
Payroll Growth 2.1% 1.6% 0.6%
Unemployment Rate 4.3% 4.2% 4.4%
Personal Income Growth 1.4% 3.8% 2.7%
The tech industry has been doing very well and is a major contributor to the strong economic growth in California, in particular for San Francisco and Silicon Valley. Surprisingly, though, Los Angeles now has 400,000 tech jobs compared to 325,000 in Silicon Valley.
Questions Asked to Economists
What are chances of a recession? Schulman predicts that the economy will weaken in 2020. In terms of percentages, he feels there is a 15% chance of a recession in 2019 and a 33% chance in 2020. In a recent article in the Los Angeles Times, Chase Bank predicts there is a 60% chance of a recession in 2020. In addition, the Congressional Budget Office predicts GDP growth of 3.1% in 2018, 2.45% in 2019 and 1.7% in 2020.
How will a trade war impact cheap goods? In the short term, a trade war will have significant impact on cheap goods. The substitution effect of shifting manufacturing to other countries: finding locations, building factories, training a new work force, creating supply chains - will take time. Shifting clothing production is much easier than more technical products. In the long run, prices of goods will come down as costs are absorbed and amortized.
Proposition 10 & Interest Rates
Iconic caught up with Shulman after the forecast to get his opinion on the proposed repeal of the Costa Hawkins act (Proposition 10). He feels that a repeal would whack apartment starts. Developers would be disincentivized to build as the City would limit a developer’s ability to capture rent growth. This would either limit apartment starts or put downward pressure on land value. When asked about apartment values, Shulman agreed values would quickly drop if landlords are stripped of vacancy decontrol. Another major risk to apartment values is the rise in interest rates.
