A new report out of UCLA has some great news for California's economy over the next few years. Forecasters say employment and payrolls should continue to see strong growth in the Golden State over the next three years. However, it's not all good news - issues like a rising federal deficit and problems with the nation's trade partners could disrupt the good times.
UCLA Anderson Forecast Director Jerry Nickelsburg wrote that California continued to lead the nation in job growth in 2017, with growth accelerating in the final three months of the year.
"Though California made a temporary tax more or less permanent, experienced record high cost of living and has been prone to being characterized - both inside and outside of the state - as one of the most business unfriendly states in the nation, it has done remarkably well,'' Nickelsburg wrote. "Among the states with over 5 million in population, California's GDP has grown consistently and over the period 2013 to 2017 is the second fastest growing state after Washington.''
Growth in California is forecast to continue at a strong pace of about 2.2 percent. The next two years are looking pretty good too according to the UCLA forecast, with a 1.7 and 0.9 percent increase predicted for 2019 and 2020.
Payrolls will increase at along the same rate Nickelsburg said, while personal income growth will increase. Homebuilding is also expected to be goosed by the favorable economic climate with an additional 138,000 units per year under construction by 2020.
But don't get too excited. It's not all good news. Nickelsburg warned that an increasing federal deficit could hinder the forecast growth along with trade actions that could put California at a disadvantage.
"The risks to the forecast remain elevated,'' Nickelsburg wrote. "The increase in the federal deficit will put pressure on the international trade deficit. That increases the likelihood of trade actions that would depress California's logistics and export industries.''
While California otherwise seems set to cruise along on its strong growth over the next few years, things nationally are undergoing a "regime change," according to UCLA Anderson Forecast senior economist David Shulman.
"The economic environment is changing from one of sluggish growth and low inflation to one of accelerating growth and moderate inflation,'' Shulman wrote. "Moreover, monetary policy is transitioning from one of accommodation to one of normalization and fiscal policy is moving from a moderate deficit to a high deficit regime with trillion-dollar deficits in the on-deck circle.''
Real GDP growth in the U.S. should hit 3 percent this year, with 2019 seeing 2.6 percent growth and down to 1.6 percent in 2020.
The downward trend reflects the U.S.'s ability to eek out any more productive capacity from its workers in a fully-employed economy, and not bad economic news.
"Why the slowdown? Simply put, the economy is already operating at full employment and it is bound by slow labor force growth and sluggish productivity,'' he wrote. "Nevertheless, job growth will continue, albeit at a slower clip than in recent years and the unemployment rate will hit 3.5 percent in early 2019.''
Or as Shulman puts it: "As with an automobile, when an economy runs hot, sometimes a few gaskets break."
Experts say the Federal Reserve is likely to raise interest rates over the next few months following the passage of the tax bill and the strong economy in order to fight inflationary pressures.