June 2024 Economic Forecast
Despite Near-Term Subtrend Growth, UCLA Anderson Forecast Sees No Recession on the Horizon in 2024
- National election results could usher in new economic policies that influence forecast in 2025 and beyond
- California’s economy will grow faster than the nation’s in 2025, despite slower growth in 2024
Los Angeles (June 6, 2024) — Analysis by UCLA Anderson Forecast suggests the slowing of the economy does not portend a national recession, despite three months of subtrend growth in the first quarter of 2024 — following six solid months of growth that exceeded the 2.5% average growth of recent years — and two more quarters of subtrend growth forecasted for the summer and fall of 2024.
In California, the forces driving the state’s robust economy remain in place. These forces saw the state grow at a 3.7% compound annual rate in 2023, faster than all but three large states: Washington, Florida and Texas (though on a per capita basis, California grew marginally slower than Texas and faster than any of the other large states). However, in 2024, the continued slowing of the national economy will affect the state’s economy. Specific sectoral weaknesses in California, as evidenced by its high unemployment rate, will contribute to 2024’s being an atypical year of slower-than-U.S. growth for the state. The following two years, though, will be characterized by more typical, higher-than-U.S. economic growth.
The national forecast
In the U.S. forecast report, UCLA Anderson Forecast director Jerry Nickelsburg outlines two ways that slower economic growth might occur. The first is a contraction in demand, the type of slow growth that typically results in press reports detailing “a sharp slowdown in GDP growth” or a jobs report that “shows looser labor markets.” These reports make it sound as if the economy is on the brink of a recession. But there is another scenario that leads to slow growth. That occurs when demand is sufficiently strong for more rapid growth, but supply constraints are inhibiting economic growth. These can take the form of tight labor markets or a lack of physical productive capacity. At present, these latter conditions are slowing the economy and are also consistent with persistently high interest rates.
In circumstances where labor markets are loose, companies adjust their workforce to account for changes in demand, and such adjustments result in an elevation of the layoff rate. But the layoff rate is at historically low levels and it is not increasing. If firms were hoarding labor after the immediate, post-pandemic labor shortage, then the redundant labor would lead to a decrease in worker productivity. But in 2023, productivity increased by 2.9%, led by non-manufacturing business.
Faced with sufficient demand and a shortage of labor, firms are attempting to increase output with additional capital, as evidenced by record durable goods orders, increased manufacturing backlogs and the rush to build new factories. Petroleum extraction that provides fuel for economic growth, which declined because of weather events in the early part of the year, has now come back to 13 million barrels per day.
The June Forecast report is not dissimilar to the report presented in March. The forecast for the second and third quarters of 2024 are somewhat stronger, while the fourth quarter of the year is predicted to be weaker than believed three months ago, owing to the aforementioned capacity constraints. In this U.S. presidential election year, Congress has been passing bipartisan funding bills, and warning bells from Washington have been silenced for the time being. The forecast expects that the labor market constraints will ease in 2025 because of higher immigration rates coupled with higher wages, which in turn will induce higher labor force participation rates among prime working-age adults. Construction of new factories and current industrial policy should also ease production constraints in 2025 and 2026, contributing to slightly above-trend growth in the forecast.
The oft predicted but never seen “recession next quarter” alarm bells have been silenced in the face of expansionary fiscal policy, new national industrial policy and robust consumer spending. Inflation is slowly finding new equilibrium in the 2.2% to 2.7% per annum range, kept higher by residential rents, automobile repair and higher health insurance premiums, and the Forecast expects the Federal Reserve to take a neutral stance, while economic growth rebounds to trend rates.
There are risks to the forecast. A protracted shutdown of government has been averted, but the possibility still exists. Geopolitical events might upset the current growth pattern. An important risk of the forecast would be a radically different economic policy after the November elections. The election results might usher in different national economic policy in 2025. These risks are substantial and bear watching, as they could well drive the economy off the current growth path that is predicted to return the U.S. economy to trend growth of 2.5%. Because of those uncertainties, the forecast predicts weaker business investment in the third and fourth quarters of 2024, corresponding to a wait-and-see approach by some firms until after the November election. The upside of the forecast is productivity growth based on new technology that drives higher wages and higher GDP. The economists’ view of AI and robotics is that the impact will be felt after 2026, as technology adoption tends to take time; current tight labor markets could accelerate that timeline.
The California Forecast
In California, the housing market manifests some uncommon conditions. In theory, persistently higher mortgage rates should lower housing prices, but the absence of inventory and pent-up demand by households has resulted in a seasonally adjusted increase in median home prices by 1.6% from the peak in May 2022. Home prices, as measured by the S&P Case Shiller Index, have been climbing since February of 2023 in San Diego by 11.4%, in Los Angeles by 8.7% and by 5.2% in San Francisco. With existing home sales at depression levels, builders should be responding with new developments, but a very wet winter has resulted in no significant growth in building permits. On the plus side, the most recent Allen Matkins/UCLA Anderson Forecast Commercial Real Estate Survey reported that 32% of the panelists in Northern California and 55% in Southern California would begin one or more new multi-family projects this year. The slow start to new home construction has been factored into the forecast, with weaker housing in 2024 and a resurgence in 2025.
For the past year, the Forecast has documented the slowdown in goods moving through the seaports and airports of California, the data suggesting a bottoming out. The downturn in imported goods movement at the state’s three major seaports reversed between March and June 2024. Some of the prior sharp turndown occurred when trans-Pac shipping diverted to East Coast ports as a way for shippers to mitigate risk while unsettled labor issues at West Coast ports worked themselves out. But with new labor contracts in place, the risk has abated, while global weather conditions have slowed shipping through the Panama Canal into the Gulf of Mexico. As a result, the Forecast predicts an increase of goods passing through California ports in the coming year.
The three-year forecast for California, once again, is for the state to grow faster than the U.S. — but not by much after 2024. The risks to the forecast are political and geopolitical; potentially, interest rates might still disrupt the current expansion on the downside and increased international immigration and accelerated onshoring of technical manufacturing on the upside.
The unemployment rate for the second quarter of this year is expected to average 5.2%, and the averages for 2024, 2025 and 2026 are expected to be 5.1%, 4.5% and 4.2%, respectively. The forecast for 2024, 2025 and 2026 is for total employment growth rates to be –0.3%, 2.3% and 2.8%.
In spite of the higher interest rates, the continued demand for a limited housing stock, coupled with state policies inducing new home building, should result in the beginning of a recovery in 2024, followed by solid growth in new home production thereafter. The expectation is for 110,000 net new units to be permitted in 2024 and permitted new units to grow to 152,000 by the end of 2026. Needless to say, this level of home building means that the prospect for the private sector building out of the housing affordability problem over the next three years is nil.
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.