Mihaylo’s Woods Center for Economic Analysis and Forecasting released its midyear economic forecast written by Dean Anil Puri and Associate Professor of Economics Mira Farka at the Irvine Marriott on April 28. In light of a rocky start to the year, Puri and Farka predict continued modest growth in the global and local economies.
“The start of 2016 was not for the faint of heart: gloom and doom seemed to have descended on equity market, which had the worst start of the year in more than two decades. China’s manufacturing activity ground to a halt, raising fears of an imminent recession that threatened the entire global economy. Emerging market wobbled, oil and commodity prices plunged, and market volatility shot up.”
That is how Mihaylo Dean Anil Puri and Associate Professor of Economics Mira Farka describe the tumultuous start of 2016, which prompted many business observers to talk about the possibility of recession. Yet stability has returned to the markets, altering the already uncertain outlook for the economy.
“Though things now seem less dire than in the deep of winter blues, questions remain as to whether the (nearly) seven-year recovery is nearing its end,” says the report.
The Case for a Continued Recovery
“We have consistently maintained that this recovery has a bit more room to grow, a few more inches to crawl before it is laid to rest,” say Puri and Farka. A number of factors argue against a recession: There are no cyclical excesses in the economy; balanced growth in consumer spending continues; the labor market continues to grow; the housing market shows modest improvement; and 2015 witnessed the first government spending contribution to real GDP in five years.
The report notes that the current economic recovery, which has thus far continued for 82 months, is the fourth-longest in the post-World War II era. Examining the maturing expansion, Puri and Farka believe the labor market will continue to expand, though at a measured speed.
“Going forward, we expect the labor market to continue to expand, though at a more moderate pace than what we have become accustomed to over the past two years,” they say. “When all is said and done, 2014 will mark the peak of job formation for this cycle, with payrolls averaging a robust 250,000 per month. Job creation has nudged down to an average pace of 210,000 in 2015 and is expected to come in at 195,000 in 2016 and 170,000 in 2017.”
Wage growth has been elusive in this recovery. “Our view is that wage growth will continue to increase during the forecast horizon as labor market slack shrinks, inflation ticks up, and energy prices stabilize and slowly start to pick up,” say Puri and Farka. “Longer term, the biggest risk to wage growth — and overall standard of living — is low productivity growth.”
A Look at the Global Economy
The report predicts that several factors that have weighed on the global economy in the past year, including a sharp downturn in oil prices and a strengthening dollar, should be alleviated in the short-run. While oil prices are likely to continue to remain low, they show signs of stabilization and a continued steady rise seems likely. As the Federal Reserve and central banks in other nations choose different paths, the U.S. dollar is expected to strengthen only marginally.
Yet a host of risks remain. The timing and pace of rate hikes by the Federal Reserve is an unknown that may have ramifications for financial markets; there is still the possibility of a sharper than anticipated slowdown in the Chinese economy; and the Eurozone banking system remains a trouble spot.
The volatile U.S. presidential election also adds to the uncertainty with virulent anti-establishment rhetoric from candidates. “Populist candidates on both sides of the spectrum have pledged dramatic overhauls to U.S. trade policies which will have a sizable impact on U.S. and global growth if they were to be enacted,” say Puri and Farka.
The report anticipates global economic growth to come in at 2.9% in 2016, the slowest rate since the Great Recession and below the average of 3.5% that the world has experienced over the past 35 years. China is expected to reach a 5.5% to 6.5% growth trajectory, with the Eurozone seeing a performance of around 1.5%. A rise of 1.9% in U.S. real GDP is predicted.
The Local View
In recent years, California has outperformed the rest of the nation in many economic metrics as it recovers from the Great Recession. In the six-county Southern California area, sectors such as professional and business services; education; health care; leisure and hospitality; and trade, transportation and utilities have witnessed the best performance, reaching their highest employment levels in Southern California history.
The report notes that in the past year, the construction sector has experienced the most spectacular growth, with a 10.2% increase in jobs in 2015. In Orange County, around 98,000 workers are employed in this sector, which is only slightly below the peak of the housing boom in the middle of the last decade.
While construction and the housing market have shown big gains in recent years, the Inland Empire continues to lag behind the rest of Southern California with a building permit level of less than half the pre-recession totals and home prices still well below the 2000s peak. However, the pace of home price increases in the Inland Empire continues to be faster than in Orange County.
“The question is whether the upward trend of job growth of the last four years will be sustained in 2016 and beyond,” Puri and Farka say, and they believe demographic changes may be responsible for a moderation in this growth. “An increasing number of baby boomers are expected to retire in the coming decade, and population growth continues to moderate.”
For more on the Woods Center for Economic Analysis and Forecasting, visit them online. The center provides an annual forecast, midyear update and interim studies on economic trends. The complete text of this year’s midterm forecast is available online.