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No recession, but U.S., California economies continue to slow


Key takeaways:

  • The U.S. is not currently in a recession, and the chance of a recession in the next 12 months is less than 50%.
  • Still, uncertainty remains, and several factors, including the Fed’s approach to interest rates, could ultimately drive the economy into a recession.
  • California’s economy remains robust, but its outlook is weaker than it was three months ago as a result of the weakening national economy.

The U.S. economy is likely to muddle along with below-trend growth and continued high inflation over the next 12 months, according to the UCLA Anderson Forecast’s latest report. And while no recession is forecast at this time, Forecast economists say the possibility still exists that persistent inflation and aggressive interest rate policy will lead to a “hard landing” of the economy, potentially precipitating a recession.

In California, strength in a number of sectors will buoy the economy, while increases in defense spending and demand for technology will likely keep the economy growing. The greatest risk to the state’s robust economy remains the economic weakness in the rest of the country and in sectors such as transportation and logistics, as consumers nationwide continue to shift from goods to services consumption.

The national forecast

Despite mixed economic signals and competing opinions about the state of the national economy, the UCLA Anderson Forecast’s data-driven analysis suggests that the U.S. is not currently in a recession and that the chance of a recession in the next 12 months is less than 50%.

This assessment is based on several factors, including a robust labor market, strong consumer spending, an easing of COVID-19–related supply chain constraints, an increase in government defense spending resulting from geopolitical instability, and the return of manufacturing to the U.S. from overseas. Business have begun to “reshore” production, or have chosen domestic expansion over expanding manufacturing capacity overseas, in response to supply chain issues and mounting geopolitical instability over the past year. That means more business investment will occur domestically rather than abroad going forward.

On the flip side, a number of factors could drive the economy into recession, including persistent and broad-based inflation; the likelihood that the Federal Reserve will continue to aggressively raise interest rates, constraining consumer spending and business investment; consumer pessimism, usually a leading indicator of economic conditions; a downturn in housing markets related to rising mortgage rates; worsening worldwide economic conditions contributing negatively to U.S. exports; and potential labor unrest, as work stoppages and strikes may contribute to supply constraints.

“There is tremendous uncertainty about what will happen over the course of the next 12 months and through the end of our forecast horizon,” says UCLA Anderson Forecast senior economist Leo Feler. “While we have not forecast a recession at this time, the risks to the U.S. economy are asymmetric to the downside.”

The UCLA Anderson consensus forecast is that the economy will grow, on average, 1.5% in 2022, 0.3% in 2023 and 2.0% in 2024. Quarter by quarter, the forecast expects seasonally adjusted annualized growth rates of 0.0% to 0.4% between the third quarter of 2022 and the second quarter of 2023. It is only in the latter half of 2023 that the forecast expects growth to pick up, to around 1% in the third quarter and then 2.1% in the fourth quarter. By 2024, the forecast expects the economy to rebound and growth to accelerate slightly above long-term trends, to 2.3% to 2.5% annualized growth each quarter.

The forecast does not expect core inflation, as measured by the CPI and PCE indexes, to decrease during the next two years to the 2% level experienced before the COVID-19 pandemic.

The California forecast

In the September 2022 forecast for California, UCLA Anderson Forecast director Jerry Nickelsburg examines the impact of the state’s recent declines in population on its economy. He notes the migration out of the state, coupled with a lack of international immigration and lower birth rates, has resulted in a historic reversal of California’s annual population gains. At the same time, California’s GDP was $3.36 trillion, which would make the state the world’s fifth largest economy if it were a country. This poses a question: Are the companies and entrepreneurs exiting California a signal that the state’s great economic run is at an end, or is this out-migration merely a spillover of the state’s prosperity into other parts of the U.S.?

In his report, Nickelsburg looks at a number of factors, including GDP, investment, job…



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