LOS ANGELES--(BUSINESS WIRE)--In its first quarterly report for 2017, the UCLA Anderson Forecast reacts to the anticipated major economic policy changes proposed by the new U.S. presidential administration. On a national level, there could be significant reductions in personal and corporate income taxes, along with a relaxing of regulation in the energy, environmental and financial arenas. The policy changes will elevate both inflation and interest rates, which will have a negative impact on the housing sector. In California, where employment is at record levels, multiple actions on the federal level could have significant impact on the state’s immigrant community and workforce, exchange rates and international travel.
The National Forecast
In his outlook for the national economy, UCLA Anderson Forecast Senior Economist David Shulman says some of his current expectations are similar to those of last quarter, including the approximately $500 billion/year in personal and business tax reductions, a repatriation holiday for accumulated foreign earnings, increased defense and infrastructure spending, Medicaid cuts, relaxed regulations, modest changes to trade and immigration policies, and reductions in food and aircraft exports, as several trading partners react to the policy changes. The impact of a large tax cut on an economy at or very close to full employment will likely result in a short-term growth spike, but will quickly fade. The Forecast calls for real GDP growth of 2.4%, 3.0% and 2.2% in 2017, 2018 and 2019, respectively, noting that real growth really trails off on a quarterly basis in 2019, as higher interest rates weigh on the economy.
Though job growth appears robust with 170,000 jobs a month expected in 2017 and 2018, the figures will trail off to about 110,000 a month in 2019 and become even slower if the administration embarks on a large-scale deportation program of unauthorized immigrants. Concurrently, the unemployment rate could bottom out at 4.1% in late 2018, before gradually rising.
Amid strong growth in consumer spending since 2014, Shulman writes that a proposed tax cut could increase spending from a forecasted 2.8% increase this year to 3.6% in 2018. However, housing starts may plateau at the 1.2 to 1.3 million range and 30-year fixed mortgage rates could exceed 6.0% in 2019, up from the current 4.25% and the recent low of 3.5%.
After six years of declines, the Forecast expects defense purchases to become a priority and increase by 1.2% in 2017, then increase by 4.1% and 2.5% in 2018 and 2019, respectively.
Shulman admits that the Forecast has become “more concerned about the administration’s tone with respect to trade and immigration policies. The changes could be far more drastic than what we are now anticipating, thereby increasing the risk level to our forecast.”
The California Forecast
UCLA Anderson Senior Economist Jerry Nickelsburg’s current forecast for California is slightly lower than his previous one, reflecting the delay in congressional approval of the Trump infrastructure and defense spending. Total employment was 2.8% higher than 12 months earlier and payroll employment 2.0% higher. The state’s rate of increase was higher than the U.S., but has slowed during the last three months of 2016. California’s unemployment rate is expected to have its normal differential to the U.S. rate at 4.6% by the end of the forecast period (2019).
“The weakness relative to the U.S. reflects the fact that California, having already reached near full-employment, will benefit less from further stimulus than rust belt states and the fact that deportations of unskilled workers would impact food harvesting and food processing,” as well as garment manufacturing and residential construction, Nickelsburg writes. What remains unknown are the effects that changes in the INS rules of engagement, exchange rates, international travel visa protocols and the abortive travel ban may have on the state’s economy.
The Forecast anticipates employment growth to be 2.1%, 1.2% and .09% for 2017, 2018 and 2019, respectively, with payrolls expected to grow at about the same rate. Real personal income growth is forecast to be 3.4% in 2017, 3.7% in 2018, and 3.2% in 2019. Home building will continue in California at about 118,000 units per year through the forecast horizon.
A Lower Corporate Tax Rate
UCLA Anderson Forecast Economist William Yu’s companion report questions whether the administration’s proposed corporate income tax cut will boost long-term GDP growth. The short answer is, yes, if the government’s budget deficit and debt levels are under control.
That forecast is based on evidence from OECD countries, such as Ireland, which cut the tax rate from 24% to 12.5%. As a result, Ireland attracted many international investments in pursuit of low tax bill and became the destination of outsourcing and corporate inversion. With booming economic growth in recent years, Ireland’s GDP per capita in 2015 reached $65,000, surpassing the U.S.’s $52,000. Further evidence showed that if a country cut its corporate income tax by 10 percentage points, the GDP growth rate could increase by one to 1.6 percentage points.
Tweetonomics: A Second Look @Trumpeconomicpolicy
All of the Forecast reports and Yu’s companion essay will be presented at the UCLA Anderson Forecast’s quarterly conference on Wednesday, March 8, 2017. The conference also features a panel discussion on the effects on Tweetonomics on the local economy, focusing on potential tax cuts, immigration, possible trade restrictions and interest rates. Panelists will include: John Krist, CEO of Farm Bureau of Ventura County; Mary Leslie, Los Angeles Business Council president; and Stuart Gabriel, professor and director of the UCLA Ziman Center for Real Estate at UCLA Anderson School of Management. For more information on attending the conference, please visit www.anderson.ucla.edu/centers/ucla-anderson-forecast.
About UCLA Anderson Forecast
UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation, and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state’s rebound since 1993. More recently, the Forecast was credited as the first major U.S. economic forecasting group to declare the recession of 2001. Visit UCLA Anderson Forecast at uclaforecast.com.
About UCLA Anderson School of Management
UCLA Anderson School of Management is among the leading business schools in the world, with faculty members globally renowned for their teaching excellence and research in advancing management thinking. Located in Los Angeles, gateway to the growing economies of Latin America and Asia and a city that personifies innovation in a diverse range of endeavors, UCLA Anderson’s MBA, Fully-Employed MBA, Executive MBA, Global Executive MBA for Asia Pacific, Master of Financial Engineering, Master of Science in Business Analytics, doctoral and executive education programs embody the school’s Think in the Next ethos. Annually, some 1,800 students are trained to be global leaders seeking the business models and community solutions of tomorrow.
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