UCLA Anderson Forecast looks at economic growth amid presidential election

UCLA Anderson Forecast’s quarterly outlook for the national economy foresees real gross domestic product growth in the 2 percent to 2.5 percent range throughout 2017 and 2018, where it has been for the past seven years.

With the economy approaching full employment, employment growth is expected to slow from what have been a consistent 200,000 jobs per month to about 150,000 per month in 2017 and 125,000 per month the following year.

The national unemployment rate is predicted to be in the 4.8 percent to 5 percent range throughout the forecast period. In California, steady gains in employment are expected through 2018, while the unemployment rate in the state is expected to decrease during the next two years. California’s unemployment rate is expected to be insignificantly different from the U.S. rate at 5.4 percent by the end of the forecast period.

The national forecast

UCLA Anderson Forecast’s current outlook, written by Senior Economist David Shulman, takes a look at the potential economic impacts of the election of either Republican presidential candidate Donald Trump or Democratic presidential candidate Hillary Clinton. Shulman clarifies that the forecast (distinct from the more general analysis in the report) assumes that Clinton will be elected president with at least one house of Congress remaining Republican, as this is “the conventional wisdom” at the time of the forecast’s release. Shulman’s analysis considers the public positions and promises of the two candidates.

Shulman writes in the report:

“Presidential candidates Hillary Clinton and Donald Trump are making all kinds of promises which they believe will improve the economy for the average person. In very simplified terms Trump wants to substantially reduce taxes on businesses (including 100 percent expensing of capital outlays) and individuals, increase tariffs, deport at least 5 million people, [and] increase spending on immigration control, infrastructure and defense. Needless to say, the federal deficit would explode should all of his ideas be enacted.

“In contrast, Clinton wants to increase taxes on high-income earners and use the proceeds to enable free tuition at public colleges for most students, expand social security, increase health care spending, refinance/forgive student debt and increase spending on infrastructure. Her plan would modestly increase the deficit, but it is silent on its potential to make economic growth even slower than it is now. Of course, whether any or all of these proposals get through Congress remains an open question.”

The issue, as Shulman sees it, is that any effective economic plan must jump-start productivity growth, which has been extraordinarily weak for about a decade. Productivity improvements, Shulman said, don’t take place overnight: It takes time for new technologies to diffuse into the broader economy; workers must be retrained and new infrastructure must be built.

“The policies that both Clinton and Trump are talking about potentially would only have a limited impact in the short run,” Shulman writes. “Over a longer time period, an improved infrastructure, a more efficient tax structure and a better educated workforce will help, but again, in the fullness of time. In any event, with both Clinton and Trump calling for more spending, and with tax increases difficult to pass, the path of the federal deficit will be decidedly higher, thereby reversing the trend of lower deficits in recent years.”

As for the forecast, the aforementioned economic growth will be rooted in continued gains in the consumer and housing sectors, along with a rebound in capital spending.

Although real consumption expenditures will not approach the 3.2 percent increase of 2015, Shulman said there will be solid gains above 2.0 percent during the next two and half years. The drop-off will largely be owing to the automobile market’s peaking, with light vehicle sales running at about a 17.5-million-unit rate.

Housing activity continues to go higher. Rising wages, low interest rates and higher rents underpin housing demand, with the latter factor triggering a shift away from rentals toward ownership units. The forecast says that housing starts will increase to 1.19 million units this year and to 1.38 million units and 1.41 million units in 2017 and 2018, respectively, up from 1.11 million units in 2015.

The California forecast

In his latest essay about the California economy, UCLA Anderson Senior Economist Jerry Nickelsburg estimated that 2016 total employment growth for the state will be 2.0 percent, and the forecast for 2017 and 2018 is 1.7 percent and 1.1 percent, respectively. Payrolls will grow more at about the same rate over the forecast horizon. Real personal income growth is estimated to be 2.6 percent in 2016 and is forecast to be 3.7 percent and 3.6 percent in 2017 and 2018, respectively.

Home building will continue in California at about 120,000 units per year in 2017. In spite of the governor’s policy to ease building restrictions, one million new homes in California are not in the offing and home prices will remain at a premium.

Nickelsburg’s essay also considers the expected impact of a pair of ballot measures in California.  One is Proposition 55, which would extend Proposition 30’s expiring (in 2018) temporary income tax surcharges until 2030. The other is Proposition 64, which would legalize recreational marijuana. The California essay also considers the impact of a possible “trade war.”

In sum, the eventual impact of Proposition 55 is unclear, though it seems to make the state vulnerable in times of an eventual recession; legalizing marijuana will have a marginal, at best, impact on the state’s economy; and a trade war could have a negative impact on California’s logistics industry.

How does the economy affect the presidential election?

In a companion essay, Forecast Economist William Yu takes a historical look at how “the economy” influences presidential elections. Yu’s research includes state data from 1968 through 2012. His work reached the following conclusions:

• The economic performance factor explains about 10 percent of variation of votes across states during this period. The non-economic performance factor explains 3 percent of variation.
• The demography factor explains 13 percent of variation of votes. The religion factor explains 3 percent of variation of votes.
• The state characteristic factor, which we assume remains constant for each state during this period, explains 51 percent of variation of votes across states.
• The rest (20 percent) is unexplained, which could be attributed to factors such as candidates’ individual qualities and campaign messages, and strategies compounded with other issues of voter concern in each election cycle.

The presidential election: The economies behind the policies

All of the forecast reports and Yu’s companion essay will be presented at the UCLA Anderson Forecast’s quarterly conference today. The conference also will include a number of panels, including a discussion on small business featuring Kathy Bromage, chief marketing and communications officer for The Hartford, and a trio of panels related to the upcoming presidential election, with health care, trade and labor as topics. For more information on attending the conference, please visit the UCLA Anderson Forecast page on the UCLA Anderson School of Management website.