Report: Economic Uncertainty Abounds, but State in Relatively Good Position

With financial experts awaiting news of the Federal Reserve’s next steps to combat inflation, California’s economic future remains in a state of uncertainty, but regardless of what decisions are made at the national level, the impact will be “milder” in the state than the nation as a whole, according to a UCLA forecast released Wednesday.

In a “soft-landing” scenario in which the nation avoids a recession, “California grows, and in fact continues to grow faster than the U.S., led by more construction, an ample rainy-day fund for state government, increased demand for defense goods and increased demand for labor-saving equipment and software,” Jerry Nickelsburg, director of the UCLA Anderson Forecast, wrote in his California economic report.

Nickelsburg predicted that under such a scenario, the state’s unemployment average for 2023 will be 4%, followed by 3.9% next year and 3.6% in 2025.

But if a recession emerges, the state’s economy will decline, “but by less than the U.S.”

“In this scenario the unemployment rates for 2023, 2024 and 2025 are expected to be 4.3%, 4.8% and 3.7%, respectively,” Nickelsburg wrote. “Non- farm payroll jobs are expected to grow at 1.1%, -1.2% and 1.9% rates during the same three years.”

In the non-recession scenario, mortgage interest rates will rise, but “the continued demand for a limited housing stock coupled with the enactment of laws permitting ADUs (accessory dwelling units) to be built in single-family house zoned neighborhoods throughout the state leads to a forecast of increased homebuilding through 2025,” he wrote. He predicted that permit numbers would grow to 150,000 in 2025.

In a recession, however, he predicted 92,000 net new units being permitted this year, growing to 152,000 in 2025.

“In the coming months, the Federal Reserve will reach that fork in the road between continued aggressive tightening and moderation, and it must decide which path to take,” Nickelsburg wrote. “… The good news is that unlike the past four slowdowns in economic growth we expect a milder impact on California’s economy from whichever path the Federal Reserve decides to take.”

On the national front, the Anderson Forecast stresses that the nation is “not currently in a recession, and if any recession does occur, it will only begin toward the end of 2023, with the important caveat that the U.S. economy might avoid a recession altogether throughout our forecast horizon,” which extends through 2025.

“While the economy has so far remained resilient to higher interest rates outside of some moderate softening in construction, that resiliency is what might lead to the recession scenario path,” according to the report. “The more consumers continue to spend despite higher prices and higher interest rates, the more gradually demand-induced inflation will come down, and the more the Federal Reserve might be expected to tighten monetary policy to combat inflation. The ‘might’ here could well be mitigated by falling commodity prices and new rental lease contracts.”