Just six months ago, the UCLA Anderson Forecast issued a bleak prognosis for the national economy, anticipating the impact of what was still being called the COVID-19 epidemic. Weeks later, as the epidemic became a pandemic, the forecast released the first interim revision in its 68-year history, declaring that the U.S. had entered a recession for the first time since 2008. In June, the forecast team wrote that the nation’s economy was in a “depression-like” crisis and would not return to its 2019 strength anytime soon.
With that negative assessment as prologue, the Anderson Forecast now cautiously offers an economic outlook that includes a “better than expected outcome.”
The National Forecast
In their essay, senior economist Leo Feler and forecast director Jerry Nickelsburg cite a number of factors for the shift. They credit the economy having reopened more quickly than anticipated, limited restrictions in many states despite a surge in virus cases, the quick adaptation by many consumers and businesses to virtual interactions and safe physical distancing, unprecedented monetary support by the Federal Reserve, and the fiscal stimulus that was approved early in the crisis, the effects of which continue to work their way through the economy.
The good news is not without its caveats.
“Our forecast assumes either widespread availability and usage of an effective vaccine in early 2021 or that the pandemic’s impact on economic activity abates and is relatively mild in 2021 and 2022,” Feler and Nickelsburg write. “It also assumes another, more limited round of fiscal stimulus before the end of the year. None of these assumptions is assured, and if they do not come to pass, our forecast … is too optimistic.”
The authors also note that the forecast assumes that the stimulus package, which they took into account for the forecast, does not contain transfers to state and local governments to offset falling revenues.
Following a 31.7% annualized decline in real GDP during the April–June time period (9.1% non-annualized), the forecast now calls for annualized growth of 28.3% for the July–September time period (6.4% non-annualized).
“The decline in the second quarter has been less severe than we expected, and the recovery, from such a low base, has been significantly faster than expected,” the report says.
But Feler and Nickelsburg offer a warning: Don’t be fooled by seemingly similar numbers. The 31.7% decline is from a much higher base than the 28.3% recovery. After the projected third-quarter increase, GDP would remain 4.5% below the fourth quarter of 2019. This compares to a 4.0% peak-to-trough decline during the Great Recession of 2008.
The economists issue a second caveat: The first part of the recovery was the comparatively easy part, they write. The bounce-back from such a steep decline was expected to be big. The size and speed of the recovery have been so great, in fact, that the current forecast for 2020 is stronger than previously expected, but weaker for 2021, since some of the growth has been pulled forward into this year.
Even as the economy recovers, the sticking point is unemployment. Following the peak of 14.7% in April, unemployment declined to 13.3% in May, 11.1% in June, 10.2% in July and 8.4% in August. The latest forecast is that the U.S. will end the year with 7.8% unemployment, and that the rate will continue to decline to 6.3% at the end of 2021 and to 4.7% at the end of 2022, but will not reach pre-pandemic rates until at least late 2024.
To V or Not to V, That is the Question
In a companion piece to the national forecast, Professor Emeritus Ed Leamer, formerly director of the UCLA Anderson Forecast, takes a detailed look at the potential nature of the post–COVID-19 economic recovery. Employing a visual shorthand, Leamer speculates as to whether the recovery graph will ultimately resemble a “V” or something more closely resembling an “L.” And if it is closer to a V, what factors might tilt the second stroke downward?
Leamer’s essay, “To V or Not to V, That is the Question,” examines sectoral payroll data accrued during the pandemic. His examination parses the level to which goods and services require personal contact, and how limiting that contact affects different sectors.
“The COVID-19 risk is like a transactions tax that is highest for crowds, less for touch and smallest for face-to-face transactions,” Leamer writes. “We can think of that tax as having two levels, a very high level in March and April when most of the country was on shutdown, and a lower level from then on, during which more control over behavior was given to private individuals.”
The essay contrasts sectors of the economy by the implicit transaction tax rates imposed by COVID-19 and by the extent to which it is easy to avoid that tax. Essential activities with low COVID-19 transaction taxes have already recovered and will grow as the economy grows. Avoidable activities with high COVID-19 transaction taxes have not recovered and will likely remain at low employment levels even as the economy grows.
The California Report
In its September 2020 forecast for California, the UCLA Anderson Forecast addresses two issues: the state of the state’s economy for the duration of the forecast period and the impact of federal stimulus programs on California.
In an essay titled “Pandemic Policies and the California Outlook,” forecast economist Leila Bengali discusses the effects on the economy of two federal initiatives: supplements and extensions to the unemployment insurance system, and the Paycheck Protection Program. Bengali writes that the forecast for California is shaped in part by these federal programs, although exactly what the economy would have looked like in their absence is difficult to assess.
The major patterns of the forecast are relatively similar to those in the June report. One key assumption is that pandemic-induced shutdowns will dissipate in 2021. If this assumption is too optimistic, then so is the forecast.
California’s economy is expected to largely track that of the U.S., with some areas displaying more weakness and others displaying more strength. For example, greatly reduced international arrivals at major airports in the state reflect the pain felt more broadly in the leisure and hospitality industry.
But the news is not all bad. Home sales dropped precipitously in the first quarter, only to bounce right back, which supports the projection of strong growth in residential building permits. Residential building permits are predicted to be back almost to their 2020 first-quarter level by year’s end, at 117,000 per year, and will reach approximately 130,000 units by the end of 2022.
The September release projects that the state’s economic outlook will improve substantially in the third quarter of this year, but that a full recovery will not occur before the end of 2022. For example, the outlook has payroll employment reaching 16 million by the end of 2020 (still far below the roughly 17.5 million jobs as of the first quarter of 2020), and the unemployment rate falling below 10% by year’s end, but still remaining close to 6% at the close of 2022 (compared to just under 5% for the U.S. as a whole).
The Gig Economy in the U.S. and Los Angeles
The gig economy refers to jobs held by workers who are independent contractors, freelancers or self-employed, and who report their income returns on form 1099-MISC. In his companion essay, economist William Yu notes that there are three reasons to focus on the gig economy.
First, since the pandemic and the recession hit the economy in March 2020, the employment rate among all Los Angeles County workers — including gig workers — declined by 19%. The decline was less dramatic when leaving out gig workers and counting only those with payroll jobs, 12%. Second, unlike in previous recessions, the CARES Act allows gig workers to receive unemployment benefits. Third, California Assembly Bill 5 (AB5), the so-called “gig worker” bill, went into effect on January 1, 2020, and sought to compel companies to treat many contract workers as employees.
Like the conventional economy, the gig economy is very diverse, Yu writes. In Los Angeles County, for example, there are 15,000 independent lawyers earning an average of $92,000 per year; 83,000 independent artists and writers earning an average of $46,000; and 70,500 Uber and Lyft drivers earning $22,100 on average. Unlike tech workers in the conventional economy who earn an average of $142,000 annually, gig workers in the professional, scientific and technical sector in Los Angeles earn a relatively modest $52,000 on average.
In the past two decades, there has been a rising trend of gig work. In Los Angeles County, the ratio of gig workers to payroll jobs increased from 19.3% in 2005 to 24.5% in 2018. The gig economy is positively correlated to the local economy in the long run.
Yu also reports that the tech industry and its workers have been doing well, with U.S. tech workers earning $134,000 on average. Silicon Valley, specifically Santa Clara County, has the nation’s largest tech workforce: 349,000 people, followed by Los Angeles County’s 250,000. While the Bay Area and New York have seen spectacular growth in the tech workforce in the past, Yu predicts slower growth in the future owing to greater acceptance of remote working.
The UCLA Anderson September Forecast Conference: Technology and the Post-COVID-19 Economy
In addition to presentations of the U.S. and California forecasts and the additional essays described above, the September 2020 Forecast Conference features several discussions and panels via online webinar. They include: a look at post-COVID tech financing with Dane Settle, co-founder and partner at Greycroft, hosted by Lori Santikian, faculty director of Anderson’s Fink Center for Finance; a conversation with Scott Brady, managing partner at Innovation Endeavors, hosted by Terry Kramer, faculty director of the Easton Technology Management Center; and a conversation with Damien Goodmon, founder and executive director of Crenshaw Subway Coalition, hosted by Jerry Nickelsburg. The conference takes place in an online webinar on September 30, 2020. Conference information may be found at uclaforecast.com.
