UCLA Anderson Forecast Looks at Economic Growth amid Presidential Elections

LOS ANGELES–(BUSINESS WIRE)–UCLA Anderson Forecast’s quarterly outlook for the national economy
foresees real gross domestic product growth in the 2.0% to 2.5% range
throughout 2017 and 2018, where it has been for the past seven years.
With the economy approaching full employment, employment growth is
expected to slow from what has been a consistent 200,000 jobs per month
to about 150,000 per month in 2017 and 125,000 per month the following
year. The national unemployment rate is predicted to be in the 4.8% to
5.0% range throughout the forecast period. In California, steady gains
in employment are expected through 2018, while the unemployment rate in
the state is expected to decrease during the next two years.
California’s unemployment rate is expected to be insignificantly
different from the U.S. rate at 5.4% by the end of the forecast period.

The National Forecast

UCLA Anderson Forecast’s current outlook, authored by Senior Economist
David Shulman, takes a look at the potential economic impacts of the
election of either Republican presidential candidate Donald Trump or
Democratic presidential candidate Hillary Clinton. Shulman clarifies
that the forecast (distinct from the more general analysis in the
report) assumes that Clinton will be elected president with at least one
house of Congress remaining Republican, as this is “the conventional
wisdom” at the time of the forecast’s release. Shulman’s analysis
considers the public positions and promises of the two candidates.

Writes Shulman:

Presidential candidates Hillary Clinton and Donald Trump are making
all kinds of promises which they believe will improve the economy for
the average person. In very simplified terms Trump wants to
substantially reduce taxes on businesses (including 100% expensing of
capital outlays) and individuals, increase tariffs, deport at least five
million people, [and] increase spending on immigration control,
infrastructure and defense. Needless to say, the federal deficit would
explode should all of his ideas be enacted. In contrast, Clinton wants
to increase taxes on high-income earners and use the proceeds to enable
free tuition at public colleges for most students, expand social
security, increase health care spending, refinance/forgive student debt
and increase spending on infrastructure. Her plan would modestly
increase the deficit, but it is silent on its potential to make economic
growth even slower than it is now. Of course, whether any or all of
these proposals get through Congress remains an open question.

The issue, as Shulman sees it, is that any effective economic plan must
jump-start productivity growth, which has been extraordinarily weak for
about a decade. Productivity improvements, says Shulman, don’t take
place overnight: It takes time for new technologies to diffuse into the
broader economy; workers must be retrained and new infrastructure must
be built. “The policies that both Clinton and Trump are talking about
potentially would only have a limited impact in the short run,” says
Shulman. “Over a longer time period an improved infrastructure, a more
efficient tax structure and a better educated workforce will help, but
again, in the fullness of time. In any event, with both Clinton and
Trump calling for more spending, and with tax increases difficult to
pass, the path of the federal deficit will be decidedly higher, thereby
reversing the trend of lower deficits in recent years.”

As for the forecast, the aforementioned economic growth will be rooted
in continued gains in the consumer and housing sectors, along with a
rebound in capital spending. Although real consumption expenditures will
not approach the 3.2% increase of 2015, Shulman says there will be solid
gains above 2.0% during the next two and half years. The drop off will
largely be owing to the automobile market’s peaking, with light vehicle
sales running at about a 17.5-million-unit rate. Housing activity
continues to go higher. Rising wages, low interest rates and higher
rents underpin housing demand with the latter factor triggering a shift
away from rentals toward ownership units. The forecast says that housing
starts will increase to 1.19 million units this year and to 1.38 million
units and 1.41 million units in 2017 and 2018, respectively, up from
1.11 million units in 2015.

The California Forecast

In his latest essay regarding the California economy, UCLA Anderson
Senior Economist Jerry Nickelsburg estimates that 2016 total employment
growth for the state will be 2.0%, and the forecast for 2017 and 2018 is
1.7% and 1.1%, respectively. Payrolls will grow more at about the same
rate over the forecast horizon. Real personal income growth is estimated
to be 2.6% in 2016 and is forecast to be 3.7% and 3.6% in 2017 and 2018,
respectively. Home building will continue in California at about 120,000
units per year in 2017. In spite of the Governor’s policy to ease
building restrictions, one million new homes in California are not in
the offing and home prices will remain at a premium.

Nickelsburg’s essay also considers the expected impact of a pair of
ballot measures in California — one is Proposition 55, which would
extend Prop 30’s expiring (in 2018) temporary income tax surcharges
until 2030. The other is Proposition 64, which would legalize
recreational marijuana. The California essay also considers the impact
of a possible “trade war.” In sum (please see the attached essay for
details), the eventual impact of Prop 55 is unclear, though it seems to
make the state vulnerable in times of an (eventual) recession;
legalizing marijuana will have a marginal (at best) impact on the
state’s economy; and a “trade war” could have a negative impact on
California’s logistics industry.

How Does the Economy Affect the Presidential Election?

In a companion essay, Forecast Economist William Yu takes a historical
look at how “the economy” influences presidential elections. Yu’s
research includes state data from 1968 through 2012. His work reached
the following conclusions:

  • The economic performance factor explains about 10% of variation of
    votes across states during this period. The non-economic performance
    factor explains 3.0% of variation.
  • The demography factor explains 13% of variation of votes. The religion
    factor explains 3.0% of variation of votes.
  • The state characteristic factor, which we assume remains constant for
    each state during this period, explains 51% of variation of votes
    across states.
  • The rest (20%) is unexplained, which could be attributed to factors
    such as candidates’ individual qualities and campaign messages, and
    strategies compounded with other issues of voter concern in each
    election cycle.

The Presidential Election: The Economies Behind the Policies

All of the Forecast reports and Yu’s companion essay will be presented
at the UCLA Anderson Forecast’s quarterly conference on Wednesday,
September 28, 2016. The conference also features a number of panels,
including a discussion on small business that features Kathy Bromage,
chief marketing and communications officer for The Hartford, and a trio
of panels related to the upcoming presidential election, with health
care, trade and labor as topics. For more information on attending the
conference, please visit www.anderson.ucla.edu/centers/ucla-anderson-forecast.

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. More
recently, the Forecast was credited as the first major U.S. economic
forecasting group to declare the recession of 2001. Visit UCLA Anderson
Forecast at uclaforecast.com.

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, Global Executive MBA
for Asia Pacific, Master of Financial Engineering, 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. Follow
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UCLA Anderson School of Management
Paul Feinberg,
Anderson Office of Media Relations