At the 25th Annual Economic Forecast Conference on Oct. 30, Cal State Fullerton economists Anil Puri and Mira Farka examined the outlook for the global, U.S., and Orange County economies over the next two years. While they predict that the U.S. economy will avoid a recession over the next 12 to 18 months, they expect a slowdown in growth and emphasize a degree of high risk due to political instability.
In October 2019, the U.S. economy marked 124 consecutive months of economic growth since the Great Recession, the longest sustained economic expansion in the nation’s history. While unemployment rates remain low, recession fears have risen, both because of historical precedents of the length of expansions and the aggregation of a number of subtle but troubling signs.
“Recession fears reached a fever pitch in mid-August, when an escalation of the trade war between [the] U.S. and China, downbeat data from Europe and China, and an inversion of additional portions of the yield curve simultaneously combined for a dour outlook,” reported Woods Center Director and Provost Emeritus Anil Puri and Co-Director and Associate Professor of Economics Mira Farka.
“There is no denying that the chances of a recession are uncomfortably high, the highest since the end of the Great Recession. As it ages, the expansion becomes more vulnerable to all sorts of shocks – much like the aging process in humans, while a younger physique may be able to sustain numerous body-blows without succumbing (as this expansion has), doing so at an older age becomes inevitably harder.”
Still, recognizing that all post-World War II recessions have had a catalyst, such as a financial crisis, overheating, fiscal tightening or oil price shock, none of which are present today, the veteran economic observers predicted a continuing expansion in their presentation to Southern California business leaders at the Hotel Irvine on Oct. 30.
“Our baseline scenario is that, while flirting dangerously close to recession over the next 12 – 18 months, the U.S. economy will manage to escape it, but just barely,” they reported. “This is perhaps the hardest call we’ve had to make since the end of the Great Recession, and it may easily go awry not in the least because it hinges deeply on policy and (more worryingly) on political whims, which we are neither well-equipped nor sufficiently deluded to begin to parse out with any suitable degree of confidence.”
Looking at the major threats to the economy, Puri and Farka identified political-related shocks, such as impeachment proceedings, Britain’s impending exit from the European Union, and trade wars.
“Our hope (and main baseline assumption) is that opportunistic self-preservation instincts on the part of the political class would prevail in dictating if not optimal outcomes, at least solutions that assuage somewhat the current pains,” they reported.
The recognition of the economy’s importance in the lead-up to the 2020 U.S. presidential elections and the 100th anniversary of the Chinese communist party in 2021 are some of the events in the near-term that Puri and Farka believe could spur policymakers to take necessary action to keep the economy afloat.
And there are some hopeful signs in this regard – the U.S. and China appear to have stepped away from the brink of a trade war, the housing market has recovered as it is buoyed by lower mortgage rates, and consumer fundamentals though a bit weaker than last year, continue to remain solid.
Divining a Slower-Growth World
While cautiously optimistic that a complete recession will be averted, Puri and Farka agree that the economy is not in position for robust growth.
“Businesses are on edge; financial markets are anxious, and consumers are turning more cautious. This is not a recipe for faster growth,” they reported. “Though we expect the economy to slog through these risk factors without sliding into a recession, a lot hinges on the policy response and political goodwill.”
With oil price shocks less threatening to the economic outlook today than in decades past due to a decreasing dependency on foreign oil and a realization that overheating, and financial exuberance are unlikely to doom the present expansion, overall conditions are more positive than at the eve of previous downturns.
And Puri and Farka noted that the sectors of the economy facing the greatest strain at present are also relatively small.
“The troubled spots of the economy – manufacturing, agriculture, and potentially transportation and distribution industries (which move in tandem with the production side) – combine for a relatively small portion of GDP, roughly one-fifth,” they reported.
“Manufacturing alone makes up only about 12% of GDP and 9% of employment rolls. Should it skid any further (as it did back in 2016 when China wobbled and energy prices plunged), it will not, by itself, drag the economy into a recession. Likewise, cyclical components, such as residential investments and investment in structures no longer pack the punch they once did: The share of residential investments has shrunk to 3% of GDP from a historical range of 5% – 6% while investment in structures make up only 2.7% of GDP (down from a historical average of 5%).”
Establishing a Recession Watch dashboard to look for the leading indicators of economic downturns, Puri and Farka noted that only the yield curve is signaling an imminent recession.
Still, momentum for continued economic growth is down according to most indicators. But while the economy has slowed to 1.9% in the third quarter, down from 2.1% in the second and 3.1% in the first, growth remains better balanced, and there is little reason to fear a falloff in consumer spending, on which the resiliency of the present expansion has largely depended.
The labor market remains solid, for while the pace of new job creation might be slowing, as long as about 100,000 new jobs are added per month, unemployment rates will remain in the 3% range, the lowest in a half century.
“Recession fears will spike up if the unemployment rate begins to nudge up (roughly around 0.3 – 0.4 percentage points over a three-month period). But as long as payroll employment rises by roughly 100,000 jobs per month (the pace consistent with labor force expansion), the unemployment rate will continue to remain at rock-bottom levels,” they reported. “So far, employment rolls have grown at a pace above the 100,000 break-even level. Other labor market leading indicators are equally upbeat: Unemployment claims continue to remain at exceptionally low levels, and the job opening rate is at all-time highs. More encouragingly, the quits rate is also at the top of its historical range, indicating that workers are confident in switching jobs when they wish to.”
Business investments, which have slowed sharply during 2019, are a notable weak spot in the outlook.
The Orange County Outlook
Examining conditions locally, unemployment rates have fallen to 2.4% in Orange County, 3.5% in the Inland Empire and 4% in Los Angeles County, all among the lowest rates in recent times. Statewide, the jobless rate stands at 3.5%. These figures are despite the repeated underestimation of employment trends in the Southland by the state Employment Development Department (EDD).
On the business side, there is a more upbeat mood among executives in Orange County compared to their nationwide counterparts, according to the Orange County Business Expectations Survey (OCBX), conducted by the Woods Center for Economic Analysis and Forecasting at Cal State Fullerton’s Mihaylo College of Business and Economics. The survey gauges local business sentiment and identifies the main strengths and headwinds.
While 38.5% of Orange County business leaders named political turbulence as the primary threat to the economy and 34.6% named tariffs and trade agreements as the leading risk, more than 60% felt that the risk of a recession occurring in 2020 was 20% or less.
As for the local housing market, while prices in Orange County and Los Angeles County are the highest on record (though still below the pre-Great Recession peak in the Inland Empire), home price appreciation slowed down considerably in 2018 and 2019. Prices even fell slightly for four of the first eight months of 2019 in Orange County on a year-over-year basis.
“Future construction will be conditioned by the general state of the economy and household confidence,” reported Puri and Farka. “Home price appreciation will be restrained at best.”
Key Economic Indicators from the Report
|VARIABLE||2019||2020||2021||2019-2021 Average Three-Year Change|
|U.S. Real GDP Growth Rate||2.3%||1.8%||2.0%||2.0%|
|U.S. Unemployment Rate||3.7%||3.6%||3.8%||3.7%|
|Consumer Price Index (CPI) Change||1.9%||2.1%||2.2%||2.1%|
|Personal Income Change||4.6%||4.0%||3.4%||4.0%|
|30-Year Fixed Mortgage Rate||3.35%||3.55%||3.87%||3.59%|
|Oil Prices (Dollars Per Barrel)||$65||$58||$72||$65.0|
For More on the Woods Center
For more on the Woods Center for Economic Analysis and Forecasting or to read the center’s full economic reports, visit the center online. The center provides a midyear report and regular interim studies in addition to their annual forecast.