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UCLA Forecast: Federal Reserve Decisions to Heavily Impact Economic Outlook

Published on Thursday, December 8, 2022 | 5:38 am

The California and economic picture for the coming year are difficult to predict, hinging largely on upcoming decision-making on inflation control by the Federal Reserve that could determine whether the country slips into recession, according to a UCLA forecast released Wednesday.

“With the Federal Reserve moving from rule-based policy to discretionary policy, the December forecast for the state, following the December U.S. forecast, will consist of two scenarios,” Jerry Nickelsburg, director of the UCLA Anderson Forecast, wrote in his report. “… 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.

“… The good news is that unlike the past four slowdowns in economic growth, we expect a milder impact on California’s economy whichever path the Federal Reserve decides to take,” he wrote.

The Anderson Forecast report suggests a pair of possible scenarios — one in which the nation falls into recession, leading the U.S. economy to contract at an annual rate of 2% to 3% in both the second and third quarters, to be flat the last three months of 2023 and then to begin to rebound in 2024. In the other scenario, there is no recession, and U.S. economic growth slows in the first quarter of 2023 and is virtually nonexistent in the second quarter before picking up again in the second half of the year.

Nickelsburg notes in his California report that if the U.S. avoids a recession, the state’s economy will actually continue to grow thanks largely to “more construction, an ample rainy-day fund for state government, increased demand for defense goods and increased demand for labor-saving equipment and software.”

Under such a scenario, unemployment is predicted to be 3.6% in the fourth quarter of this year, then average 3.9% and 4% over the next two years, according to the report.

Under a recession scenario, “the California economy declines, but by less than the U.S.,” Nickelsburg wrote. he predicted that unemployment would still be 3.6% for the fourth quarter of the year, then average 4.4% and 4.5% over the next two years.

UCLA economists noted that if the country does fall into recession, it will be relatively “mild and brief,” with consumption remaining flat for the first half of 2023 and only reducing slightly in the second half of the year, bouncing back the following year.

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