Stretched Out Recovery

The UCLA Anderson Forecast conference was held this morning in hybrid format, Zoom and limited in-person. In essence, as compared to the June outlook, the Forecast now suggests a stretched out recovery with the third quarter of 2021 (the current quarter that is now finishing) slowed by a combination of the delta variant of the coronavirus and supply-side constraints leading to shortages. The economy gets back to its old trendline sometime in 2023 under this scenario. From the official news release:

...In June, UCLA Anderson economists noted that the COVID-19 pandemic continued to cast a shadow over the California forecast. Three months later, that shadow persists. But as progress toward a vaccinated population and the state economic reopening continue, a clearer, though still uncertain, picture emerges. The availability of multiple vaccines, along with a drop in new cases from the latest peak, suggests a reduced impact of the pandemic on the state’s economy.

The California analysis, written by UCLA Anderson Forecast director Jerry Nickelsburg (based on the forecast he co-authored with UCLA Anderson Forecast economist Leila Bengali), includes the assumption that future COVID-19 variants will create less serious economic impact. However, the memory of the delta variant will continue to spook consumers, creating a slower return to earlier consumption behavior than previously forecast.

One striking aspect of the recession and recovery, according to Nickelsburg, is how it has disproportionately hit lower-income Californians, exacerbating inequality in the state. Income inequality, particularly given the state’s high housing costs, is a concern for a variety of social and economic reasons. The California report delves into whether this rising inequality might affect future economic growth but finds no evidence that it will.

Although California began a significant recovery later than some other states because of its stricter public health interventions, Nickelsburg and Bengali’s forecast expects the California recovery and expansion, once again, to outpace those of the U.S. as a whole. They point to two factors. First, the delta variant notwithstanding, the state’s better public health outcomes should result in a more rapid return to normalcy. Second, the transition to new ways of work and social interaction will disproportionately benefit California through its technology sectors. The leisure and hospitality sector will be the last to recover because of the depth of its decline, the comparatively slow return of demand for restaurant and bar services, and the subsectors dependent upon international tourism.

The recovery will be considerably faster in higher-income technical services and faster in residential construction as California’s shortage of housing relative to demand drives new development. While Nickelsburg expects these differentials in rates of recovery to exacerbate California’s inequality, which is the worst in the nation, he does not see it as a drag on economic growth — yet.

The unemployment rate for the third quarter of 2021 is expected to be 7.2%, with the annual rates for 2021, 2022 and 2023 anticipated to be 7.6%, 5.6% and 4.4%, respectively. Total employment growth rates for 2021, 2022 and 2023 are expected to be 3.5%, 3.9% and 2.7%, respectively.

In spite of the recession, the continued demand for a limited housing stock coupled with low interest rates leads to a forecast of a relatively rapid return of home building. The economists expect 123,000 net new units to be built in the state in 2021 and continued growth to 139,000 net new units for 2023. Nonetheless, Nickelsburg writes, that level of home building means the private sector will not be able to build its way out of the state’s housing affordability problem over the next three years...

Full release at https://newsroom.ucla.edu/releases/ucla-anderson-forecast-solid-growth-us-economy-delta-variant.

You can see the Forecast event at the link below:

Or direct to https://www.youtube.com/watch?v=Q3v-XzWhWrk.