Since March 2020, the state of the COVID-19 pandemic has determined the course of the economy nationally and across California. With each successive wave, the economy has grown more resilient to the effects of the virus, but by the end of 2020, it became clear that consumer behavior, not government restrictions, had the greatest effect on economic outcomes.
That’s evidenced by the facts that consumers cut back on in-person commerce and services even before governments imposed restrictions, and that service consumption fell about equally in areas that imposed restrictions and those that did not.
The recent arrival of the omicron variant of the coronavirus is not great news for the U.S. economy, not least because 70% of the economy relies on consumption, according to the latest report from the UCLA Anderson Forecast. The December forecast assumes the likelihood of a winter surge in COVID-19 cases and predicts that consumers will temporarily cut back their spending on in-person services. But Anderson Forecast economists expect the impact on the economy to be relatively short term, writing that consumer spending may dip over the next quarter and then rebound quickly.
The national forecast
For the current quarter, UCLA Anderson Forecast senior economist Leo Feler, author of the national report, forecasts growth of 6.9%, which would be the highest growth rate for 2021, as the economy rebounds from the wave of cases caused by the delta variant. Feler notes that the omicron variant emerged too late to have much effect on the quarter’s average growth rate.
For the first quarter of 2022, the UCLA Anderson Forecast has now adjusted its forecast to 2.6% growth from the 4.2% predicted in September, based on the assumption that omicron might be disruptive, while acknowledging that its effects cannot be predicted. But the forecast for the second quarter of 2022 calls for stronger growth than previously predicted, as the economists expect in-person service consumption to rebound. For the third and fourth quarters of 2022, growth is forecast at 4.6% and 2.4%, respectively.
In his essay, Feler notes that the economy continues to add jobs at a rapid pace; according to revised estimates, around 1 million jobs per month were added in June and July, and between 200,000 and 530,000 per month have been added since then. Those gains brought the unemployment rate down from 5.9% in June to 4.2% in November.
Still, a shortage of workers persists across the U.S., and Feler outlines two main reasons. First, he writes, labor force participation is still lagging, staying around 61.7% in recent months, below the 63.4% rate before the pandemic. This translates to 3.1 million fewer workers in the labor force, including workers who retired or parents who decided to stop working to care for children, given child care constraints caused by the pandemic.
In addition, Feler writes, fewer workers hold multiple jobs now than before the pandemic. Those workers contribute to higher labor force participation and lower unemployment rates, but they are a key factor in the large number of unfilled jobs.
Feler forecasts that the U.S. economy will add an average of approximately 200,000 to 400,000 jobs per month throughout 2022, with the potential for smaller gains in the year’s first quarter if the omicron variant forces consumers to cut back on in-person services.
Feler writes that much of the recent increase in inflation is related to higher oil prices, as demand has recovered more quickly than supply. He forecasts that supply will start catching up, meaning that oil prices will come down and act as a deflationary force against inflation in other goods and services.
In addition, prices have recently stabilized or declined for some goods and services that experienced the largest increases in inflation — used cars, for example — as the supply constraints that led to rising goods prices have begun to ease. The catch-up for prices of in-person services appears to have run its course. This doesn’t necessarily mean that prices will come down, Feler writes, but they will stop increasing at the rate they have over the past year.
Overall, the national forecast is for continued strong economic growth and labor market recovery, with a lessening of supply constraints and inflation. A more severe COVID-19 wave caused by the omicron variant could temporarily derail the forecast, but it’s still too soon to tell.
The California forecast
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.
The Southern California forecast
In a companion essay, UCLA Anderson Forecast Economist William Yu presents an analysis of Southern California’s economy and provides the economic outlook for the region over the next two years. Based on Yu’s estimates, Southern California’s GDP reached $1.6 trillion in 2021. This places it as the 13th largest economy in the world, falling between Australia ($1.62 trillion) and Brazil ($1.5 trillion).
Of the Southern California counties, Los Angeles has the highest estimated GDP for 2021, at $815 billion, followed by Orange County with $272 billion and San Diego with $256 billion. Real GDP for Southern California has been growing at a faster rate than the nation’s over the past two decades.
Given the national forecast over the next two years, the forecast is for Southern California’s recovery to continue. The Inland Empire’s economy is forecast to grow at a higher rate because of a continued influx of residents drawn by the lower cost of living and the resilient warehousing sector, while coastal Southern California is expected to grow at a slower rate. Yu forecasts payroll job growth in Southern California to be 3.9% in 2022 and 1.7% in 2023, and real GDP growth to be 4.2% in 2022 and 2.2% in 2023.
The Bay Area forecast
The San Francisco Bay Area, a well-known technology hub, is a driver of economic growth in California. The region’s real GDP made up about 30% of the total real GDP for California overall in 2019, and real GDP in the Bay Area grew an average of 3.9% per year from 2001 to 2019, compared to 2.8% per year for the entire state. Despite that strong growth and the technology sector’s solid performance through the pandemic, in some respects economic recovery in the Bay Area appears to be progressing a bit slower than for the state overall.
Economist Leila Bengali, author of the Bay Area report and a co-author of the California forecast, expects that, following a 7.9% decline in 2020, labor market headwinds will curb job growth in 2021 and into 2022, leading to job growth slightly lower than for the state overall during those two years.
The Bay Area in 2020 and 2021 showed strong growth in real personal income for a combination of reasons, including asset price appreciation (the sale of those appreciated assets increases personal income, for example) and various government stimulus programs. Those factors contributed to strong growth in 2020 and 2021. In 2022, because of the expiration of many government stimulus programs and the risk of inflation, real personal income growth is expected to decline by 1.7%, with positive growth returning in 2023.
