the ucla anderson forecast for the nation and california

116 Pages·2016·3.03 MB·English

THE UCLA ANDERSON FORECAST
FOR THE NATION AND CALIFORNIA
June 2016 Report
FORECASTS:
2016
2026
65th Year
UCLA Anderson Forecast
Director:
Edward E. Leamer
Professor of Global Economics and Management and
Chauncey J. Medberry Chair in Management
The UCLA Anderson Forecast Staff:
Jerry Nickelsburg, Senior Economist, Adjunct Professor of Economics, UCLA Anderson School
David Shulman, Senior Economist
William Yu, Economist
Patricia Nomura, Economic Research and Managing Editor
Eydie Grossman, Director of Business Development
George Lee, Publications and Marketing Manager
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THE UCLA ANDERSON FORECAST
FOR THE NATION AND CALIFORNIA
June 2016 Report
Nation California
It’s Not 9.8 Meters Per Second 11 California's Employment Gap is 71
Squared Anymore Barely Open
Edward Leamer Jerry Nickelsburg
Letting the Air Out of the Commercial 29 The Middle Class Across the 77
Real Estate Balloon United States
David Shulman William Yu
Charts 39 Charts 87
Recent Evidence Recent Evidence
Charts 43 Charts 92
Forecast Forecast
Tables 53 Tables 101
Summary Summary
Tables 57 Tables 103
Detailed Detailed
Tables 66 Tables 104
Long-Term Summary Long-Term Summary
Tables 67 Tables 105
Long-Term Detailed Long-Term Detailed

THE UCLA ANDERSON FORECAST
FOR THE NATION
JUNE 2016 REPORT
It's Not 9.8 Meters Per Second Squared Anymore
Letting the Air Out of the Commercial Real Estate Balloon

IT'S NOT 9.8 METERS PER SECOND SQUARED ANYMORE
It’s Not 9.8 Meters Per Second Squared Anymore
Edward Leamer
Director, UCLA Anderson Forecast
May 2016
The VERY Puzzling Behavior of the U.S. With that as the history, it is alarming to see how far
out of the narrow corridor we are now, and how we are
Economy
drifting even farther away as time goes on. More eerily,
GDP growth has been so steady since 2010 that it is defining
For forty years from 1965 to 2005 the U.S. economy an entirely new corridor of growth: 2% not 3%. It’s as if
behaved as if 3% GDP growth was a constant of the eco- suddenly it weren’t 9.8 meters per second squared, but only
nomic system, comparable in reliability to 9.8 meters per 4.2 meters per second squared. That would get the attention
second squared for the rate of acceleration of objects fall- of physicists, just as the sluggish growth in the aftermath
ing in vacuums. You can see the 3% “constant of nature” of the 2008/09 recession has started to attract the attention
in operation in Figure 1 which illustrates U.S. real GDP in of economists, who, I am sorry to report, remain puzzled.
billions of dollars using a logarithmic scale, which turns
curves of constant rates of growth into straight lines. The Something is different. TERRIBLY DIFFERENT.
steady rise in real GDP is surrounded by two straight lines What should forecasters be thinking? We are thinking
– the narrow corridor of growth. This corridor is growing 1.7% real GDP growth in 2016, 2.8% in 2017 and 2.1% in
at the rate of 3% per year and the width of the corridor is 2018, averaging 2.2, with a strong labor market averaging
±3% (applied to the level not the growth rate). Call that the about 200,000 increases in payrolls per month and a steady
3-3 Law of U.S. Real GDP Growth. unemployment rate around 5%. More of the same, in other
words. We are starting to see more evidence of inflation
This narrow corridor is quite unlike the hypothetical ahead, and are forecasting interest rate increases to keep
forecast “cone” illustrated in Figure 2 which flares outward real rates of interest pretty constant.
into the future to represent greater uncertainty the farther
ahead one is looking. The future was way more certain In this document, I discuss some of our thinking re-
than that forecast cone promised. That was then. Now the garding our forecast for real GDP and employment.
wide cone of uncertainty seems to offer the more relevant
view of the future.
This Isn’t the First New Corridor
It’s really quite remarkable that a complex evolving
As you become agitated with the new constant of
human economic system would have a 3% constant GDP
nature that applies to real GDP growth, it is wise to realize
growth for almost forty years. After all, this was a period
that we have been there before. Figure 3 shows that there
that included wild swings in crude oil prices, the end of the
have been four corridors of GDP: a 3% trend from 1951 to
Cold War, the Reagan tax cuts, sharps swings in the value
1962, a 4.8% trend in the roaring 60s from 1963 to 1969,
of the dollar, economic liberalizations in vast regions of the
the 3.1% trend in the long period from 1970 to 2006, and a
globe, the personal computer and the Internet, a housing
very disappointing 2% trend from 2009 to 2016. Looking
bubble, and so on and so on. Yet these important events
backward, it could be said that the 3% trend applies to the
affected neither the rate of acceleration in a vacuum nor the
fifty-six years from 1951 to 2006, interrupted by a period
rate of growth of U.S. real GDP.
UCLA Anderson Forecast, June 2016 Nation–11
IT'S NOT 9.8 METERS PER SECOND SQUARED ANYMORE
of 4.8% growth from 1963 to 1969. That raises the ques- growth might have begun early in the 1990s when real GDP
tion: why were the 1960s different? If we could answer that was crawling along the bottom of the corridor. Absent the
question, we might also be able to answer the other question: Internet Rush and the Housing Bubble, the arrow in Figure
What the heck is happening now? 4 might have approximated the path taken from 1994 to
2008, with perhaps a mild recession in 1995 and another
Our Current Problems Probably Go Back at Least mild downturn in 2008/09. After all, these two downturns
To 1990 were periods of cleansing made necessary by the excesses
of the bubbles, a time-out for investing in equipment and
Figure 4 offers a different look at the same data; one software when the Internet Rush switched off, and a time-out
that focuses the eye more clearly on the recessions because, for investing in new homes following the Housing Bubble
by removing the 3% trend, it turns the upward sloping cor- burst, in both cases accompanied with a period in which
ridor in Figure 1 into a horizontal interval of values, and financial markets, courts and governments decided on whose
your eye is not distracted by the upward slope. Here you balance sheets the paper losses would reside.
can see that real GDP is now slightly more than 16% below
the center of the corridor. Imagine that we had had a real By the way, there is an important lesson in the very
recovery and returned to the corridor. That would mean different aftermaths following these two periods of excess:
a 16% across-the-board increase in earnings. That would the force of mark-to-market for equity investments limits
make us all feel better. the damage of a bursting bubble in the stock market, but
the slow and painful adjudication of losses from bad debt
This graph has the official U.S. recessions in red, and on homes is costly in time and money, which can amplify
it is apparent that the recessions from 1970 to 1990 pushed the damage of a bursting bubble. The $7 trillion of paper
the U.S. real GDP down toward or below the bottom of the losses on the stock market when the Internet Rush ended
corridor, and then in the recoveries, super-normal growth (in in 2001 were almost instantaneously transferred to private
excess of 3%) pushed real GDP upward toward the top of the balance sheets, and the economy quickly moved on, with
corridor. In all these ups and downs, 3% was actually a rarity, the problems almost completely confined to business invest-
and occurred on a continuing basis in only two episodes. In ment, and hardly showing up in consumer spending at all.
the five year period from 1990 to 1995, real GDP crawled But the pretty similar level of $10 trillion of paper losses on
along the bottom of the corridor, which meant 3% growth. residences after the Housing Bubble ended late in 2005 have
Also from 2003 to 2005, the U.S. economy stayed right in still not been clearly allocated between lenders and borrow-
the middle of the corridor, which also meant 3% growth. ers more than a decade later, as “underwater” homes remain
Otherwise, it’s been up and down with no sustained periods a threat to the balance sheets of banks, since the borrowers
of “normal” three percent growth. That swinging makes the still have the legal right to foreclosure. When the bad debt
narrow 3% corridor all the more remarkable. The economy emerges and before it is clearly adjudicated both borrower
seems to be like a pendulum which swings back and forth and lender take defensive stances to prepare for the poten-
across the 3% vertical, never there, but averaging vertical. tial bad news ahead. Borrowers build up a cash reserve by
cutting back spending and lenders build up a cash reserve
Figure 4 includes shaded regions that identify the In- by cutting back lending. Both can be bad for the economy.
ternet Rush from 1996q1 to 2000q2 and the Housing Bubble
from 2003q3 to 2005q4. To support these labels, Figure Is it Just Mismeasurement of GDP?
5 displays the cumulative contribution to GDP growth of
equipment and intellectual property and Figure 6 displays The first step toward answering the forward looking
the cumulative contribution of residential investment. Each “What next?” question is to answer the backward-looking
graph includes an arrow to represent the historical normal “Why?” question: Why is the U.S. GDP so far out of the
contribution. Both equipment and intellectual property have historical corridor of growth? An answer to the question
a bump up in the Internet Rush, and residential investment “WHY?” might be mismeasurement. That raises the reverse
has a big bump up during the Housing Bubble. question: Why did measured real GDP grow at such a
constant rate for so long a period of time? Maybe 3% was
The point I am getting at is that our problems might decided by a political committee of the Bureau of Economic
have begun in the early 1990s but were masked by the Analysis back in the 1960s and they have been cooking the
Rush and the Bubble. Absent those two periods of excess, books ever since. But the one other country with a long his-
the transition of real GDP outside of the narrow corridor of tory of measuring real GDP is the UK, and the UK had its
12–Nation UCLA Anderson Forecast, June 2016