Economists predict major growth for California economy

150 150 Matt Wrye

Lead economists speak at two separate events—Forecast L.A. (April 7) and the UCLA Anderson Forecast (April 2)—to community and business leaders (L-R): Chris Thornberg, Founding Partner of Beacon Economics; and Jerry Nickelsburg, Adjunct Professor of Economics at the UCLA Anderson School of Management.

Editor’s Note: This article was provided by the California Credit Union League, the state trade association representing the interests of 365 credit unions and nearly 10 million consumers across California who are member-owners of their credit unions. As not-for-profit financial institutions, credit unions play a unique role in helping Californians afford life and prosper.

Stop calling it a “recovery”—the California economy is in expansion mode, and it won’t taper for the foreseeable future.

That’s the message from two highly watched forecasts that say substantial growth is in store for consumers and businesses across the state, and by extension credit unions and their members.

California’s three-percent annual job gains from 2013-2014 has laid a solid foundation for future growth. The state’s unemployment rate will fall from 6.7 to 5 percent between now and sometime in 2017, or maybe even lower.

“We’re on fire,” said Beacon Economics Founding Partner Chris Thornberg during the Forecast L.A. event on April 7 at Loyola Marymount University. “Our economy is hot.”

Credit Union Weekly was represented at Forecast L.A., as well as the UCLA Anderson Forecast on April 2 at UC Irvine. Both events touted the immense improvement in California’s economy, and how it will drive positive momentum between now and 2020.

California businesses have more money to invest than in 2007 and “have every reason to invest it,” Thornberg said. The housing market is slowly improving and will gain more traction, which bodes well for future residential building activity and homeowner equity values. Continuing job growth will translate into higher wages for workers, which means an increasing affordability to borrow and spend more money, aligned with easier access to credit.

Inland suburbia remains a hot spot for expansion, namely the Inland Empire and East Bay regions. Logistics businesses and those catering to the goods-movement industry will contribute heavily to local communities. Cheaper housing in the new and used markets will continue attracting high-skilled workers who are willing to commute to metropolitan areas near the coast.

“Job growth in California will eventually catch up to population growth, and right now we’re catching up,” said Jerry Nickelsburg, senior economist with the UCLA Anderson Forecast. “Wages will increase as labor markets tighten. When you see this happen on the lower and minimum-wage end like we have recently, it eventually works its way up the labor chain to higher-skilled workers too.”

The UCLA Anderson Forecast pegs a federal-funds interest rate hike by the Federal Reserve in June. Beyond this, “The Fed will need to reduce its balance sheet in an appropriate amount of time,” Nickelsburg said. “It has increased from $800 million to $4.4 trillion since the recession.”

Highlights From Both Forecasts

  • The outlook—Healthy California and U.S. economic growth between 2015-2020 (Beacon Economics), or 2015-2017 (UCLA Anderson Forecast), with the U.S. economy growing 3 percent or more over the next two to three years.
  • Jobs, jobs, jobs—The state’s falling unemployment is due to genuine improvements in labor markets rather than more workers giving up on their job search, which is a positive sign. Jobs will increase 2-3 percent over the next couple years.
  • Employment better than it seemed—California’s economy created 216,000 more jobs in 2014 than previously thought because of yearly data revisions in early 2015 that painted a healthier picture. This bodes well for future growth.
  • Higher wages—Workers across the state will watch their incomes rise 4.2 percent on average during the next three years.
  • The home building front—100,000 housing units are expected to be permitted in California during 2015, a 22 percent increase over 2014 and the highest level since the Great Recession. This will be dwarfed by 120,000 units in 2016 and 137,000 in 2017.
  • Perceived housing bubble—Even with California home prices rising much higher than other regions across the nation, a so-called asset bubble isn’t here today and isn’t anticipated in the near future.
  • Record venture investments—In 2014, California hit a record level for venture capital investments. More than $19 billion bad been placed in firms, a 73 percent increase over 2013.
  • High taxes and regulations—California’s geographic and diverse benefits will continue outweighing the costs to most corporations with respect to its strict business climate.
  • High skilled manufacturing—While California’s business climate is not palatable for manufacturers in general, several key high-skilled manufacturing sectors are experiencing a robust uptick in activity and jobs.
  • Government defense spending—The negative U.S. trend from 2011-2014 will reverse between 2015-2017 and experience higher spending, a good sign for California.
  • Inflation normalizes—Currently low annual U.S. inflation will normalize to about 3 percent yearly by 2016 and most likely remain stable.

Areas of Concern

Home affordability, especially for so-called “millennials,” is one major area of concern that both forecast teams discussed.

“Homes were more affordable a generation ago, but not now,” said Joel Singer, president and CEO of the California Association of Realtors, and forecaster on the UCLA Anderson Forecast team. “The affordability crisis for Gen Y will get worse before it gets better. This will put a minor strain on the economy.”

California is short 750,000 housing units, according to Beacon Economics’ report.

Other ongoing issues affecting the economy include the following:

  • A rise in state tax revenue is not being spent to upgrade roads, highways, and other infrastructure projects—but instead on other expenditures.
  • When wages start rising across industries and skill level, higher-skilled workers will benefit the most.
  • As a share of household consumer debt, student loan debt has nearly doubled from 21 to 40 percent during the past 10 years.
  • For state lawmakers, conversations about taxes and wage reform are overshadowing these larger issues mentioned above. Instead, long-term structural issues should be addressed first, such as development in education and infrastructure.

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Matt Wrye is Manager of Media Relations, California & Nevada Credit Union Leagues.


Matt Wrye

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