As the coronavirus continues to evolve and mutate, so does the pandemic’s impact on the California economy. The winter surge, which was not accounted for in the September forecast, is now anticipated to have a dampening effect on the state’s economy and recovery time. The December forecast, authored by UCLA Anderson Forecast director Jerry Nickelsburg and economist Leila Bengali, begins with the same assumptions about the pandemic reflected in the national forecast.
Under those assumptions, some labor market headwinds are expected through the end of 2021 and into 2022. An increase in COVID-19 cases will curtail economic activity in some sectors if consumers pull back from, or are slow to return to, in-person activities and travel.
Job growth will slow in sectors with high levels of personal contact and in sectors that cater to tourists, as comparatively few international tourists are expected to visit California over the next 12 months. But the pullback from in-person activities will also lead to a slower-than-expected decline in goods purchases. This will contribute to higher demand in the logistics industry, which should spell solid growth in that sector, especially as ports continue to work through backlogs.
In a slight change from the projections they issued in September, the economists now expect the economy to be somewhat weaker in late 2021 and early 2022, before picking up in mid-2022, although the potential effects of the omicron variant represent a downside risk to the forecast.
California’s unemployment rate is expected to reach 7.0% in the fourth quarter of 2021, before falling to an annual average of 5.6% in 2022 and 4.4% in 2023. The economists expect non-farm payroll job growth for 2021, 2022 and 2023 to be 1.9%, 4.7% and 2.5%, respectively.
Inflation in the state is expected to be higher than in the past, but largely below inflation in the U.S., with rates of 4.0%, 4.1% and 2.9% year over year in 2021, 2022 and 2023. Inflation will reduce real personal income to some degree, although real personal income is expected to grow at a faster rate in California than in the U.S., increasing by 2.6% in 2021, declining by 2.2% in 2022 and growing by 2.9% in 2023. (The expected decline in 2022 is a result of government stimulus programs’ ending.)
California home prices continue to climb, and a lack of affordability has become increasingly important in both the policy sphere and for forecasting the Golden State’s economic growth. Over the past two years, the state’s median home price as reported by the California Association of Realtors has increased 33.6% to a record high of $800,000. According to the S&P Case Shiller Home Price Index, prices on same-home sales in San Diego increased by 34.9%, in Los Angeles by 26.1% and in San Francisco by 25.9% over the same period. Those prices will result in increased residential construction, with permits expected to reach 119,500 in 2021, and then increasing to 123,700 in 2022 and 139,700 in 2023.
Recent data indicate increased relative affordability compared to other cities. The data also point to other factors that can reverse that trend, such as the Bay Area’s tech sector boom from 2012 to 2017. The implication for the forecast is that net out-migration ought to continue to slow and become less of a drag on aggregate economic growth. However, the data do not indicate when net out-migration will become zero or positive.
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