California and United States:

No Recession in Sight as Economy Continues Slowdown in 2020 and 2021

California’s economic growth should continue in 2020 and well into 2021, as there is no foreseeable reason for it to stop. However, the economic expansion will continue slowing down due to an ever-tightening labor market, fading government fiscal stimulus, geo-political trade tension, and other drivers.

That’s according to the most recent forecasts published by Chapman University, the UCLA Anderson Forecast, Beacon Economics, the California and Nevada Credit Union Leagues, Filene Research Institute, and Moody’s Analytics in November and December. The keynote speakers’ opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately.

Chapman University
Presented on Dec. 10 by the A. Gary Anderson Center for Economic Research:

As the economy continues slowing, California’s payroll employment growth rate (companies and organizations) will continue to decrease and stoop to an annual 1.5 percent in 2020. “Real” U.S. Gross Domestic Product (GDP), the most common measure of economic growth nationwide, is expected to be 1.9 percent in 2020, noticeably lower than the previous few years. The national economy’s labor market will add 1.9 million new jobs in 2020 (about 158,000 per month), which is slightly lower than the 2.2 million in 2019 (about 183,000 per month). The U.S. unemployment rate is expected to hover around 3.6 percent in 2020.

Other California forecast highlights include: California trade with China is expected to decrease from $178 billion in 2018 to $153 billion in 2019. The state’s population growth rate will continue being pushed down by an ever-larger increase in net population outflow to other states and a higher death rate. Manufacturing employment growth will continue to be positive, albeit at a low rate of growth; and education/health care services employment will be the leading sector. Total residential building permits (single and multi-family) took a dive in 2019 but should recover to 115,000 units per month in 2020, with multifamily permits growing at a higher rate compared to single-family permits. Home sales decreased in both 2018 and 2019 but will return to positive growth in 2020, with the median single-family housing price increasing at 3.9 percent in 2020 (compared to 2.8 percent in 2019).

National highlights include: Gross U.S. private business investment continues slowing down. However, consumer debt service payments as a percentage of disposable income are at their lowest in decades, and consumer spending is still going strong. Additionally, an indicator that leads economic cycles (composed of employment, new auto sales, building permits, consumer sentiment, interest rate spread, and purchasing managers index) turned negative for the past several months — however, it did not reach a level low enough that would normally precede an economic recession. Moreover, tight supply of existing homes for-sale will propel housing starts upward and lead to a “strong” housing sector in 2020.

Presented on Dec. 4 by the UCLA Anderson Forecast:

On one hand, economic growth in California is slowing. On the other hand, this is (in part) because unemployment rates are very low. “Therefore, it follows that the rate of hiring should slow down,” the forecast report states. “Through April of this year, that had not happened. Indeed, the rate of hiring for non-farm payroll jobs increased by 0.2 percentage points from 2018’s hiring rate. At some point, capacity constraints become binding, and with the October job numbers in place, there are indications that the slowdown in hiring has occurred.”

In spite of trade tensions between the United States and China, the economic news for California remains positive. In 2020 and 2021, California’s total employment growth rates (corporate payroll jobs plus independent contractors/consultants) are forecast to be 0.9 percent and 1.3 percent, while just company payroll jobs will grow at 1.9 percent and 0.9 percent, respectively.

Home building will be lower in California in 2020 than previously forecast. “But we remain optimistic with regard to 2021’s new residential construction,” the forecast report states. However, “weakness in home building, even with the newly eased state regulations and zoning, means that the prospect of the private sector solving California’s housing affordability problem over the next three years is nil.”

U.S. Gross Domestic Product (GDP) — the traditional measurement of economic growth — will register 1.7 percent in 2020 and 1.9 percent in 2021. “With improved financial conditions, a better housing and employment outlook, some relaxation of trade tensions and a modest improvement in business fixed investment, the forecast has been upgraded,” the forecast report states.

However, the national portion of the forecast sees a slowdown in consumer spending, largely coming from much weaker automobile sales as credit tightens in that sector. Overall, the interest rate environment, aside from auto credit, will remain benign. “But make no mistake, although we have lowered the risk of a recession, the second half of 2020 remains problematic for the economy,” the forecast reports states. “There remains a significant risk of recession in late 2020, though the risk is not as great as it was in prior forecasts.”

Over the past year, economic performance has diverged as strong consumer spending is masking significant weakness in business investment. This is a “two-track economy,” somewhat surprising as most observers assumed that the reduction in business taxes (as a result of the 2017 congressional tax act) would spur business spending on capital improvements. “This has not occurred, as trade tensions made planning ahead problematic, particularly with respect to global supply chains,” the forecast report states. “Indeed, real business fixed investment actually declined in both the second and third quarters of this year. Nevertheless, we think the worst is over (for business fixed investment), and we anticipate a modest recovery over the next two years.”

For adults ages 25 - 34, California experienced the highest “human capital gain” from 2011 to 2017 among 50 states, possibly because of the technology sector boom that attracted a highly educated workforce during this period. “Human capital levels have been steadily improving over the past several years for most metropolitan areas, but the distribution of human capital is far from equal across the country,” the forecast report states, noting the UCLA Anderson Forecast’s City Human Capital Index (CHCI). “Larger metro areas tend to have higher levels of human capital. Urbanization and the agglomeration effects in the 21st century help bolster the size and human capital of a bigger city at the cost of shrinking and fading smaller towns. The exceptions are so-called ‘college towns,’ where higher education is the major local industry, attracting students and employees with higher human capital potential than the rest of the country and the world.” The CHCI correlates with other socioeconomic variables, such as median household incomes, poverty rates and housing prices.

For more insight: view the essay "The Two-Track Economy".

Beacon Economics
Released on Dec. 11 by the Beacon Economics’ forecast team:

The California and U.S. economies are in the middle of the longest expansion in recorded history, and it is expected to continue along the same growth trajectory for at least the next two years (2020 – 2021). Particularly, the health care/social assistance and leisure/hospitality employment sectors are driving California job growth — and the state’s annual median home-price appreciation is showing a noticeable slowdown (although still very much in the positive).

“Currently, there is little sign of the kind of collapsing imbalances or rapid shifts in aggregate demand that would be capable of pushing the economy into a downturn or even a protracted slow-growth slump,” the forecast report states. California’s economy will grow in tandem with the United States as the nation’s Gross Domestic Product (GDP) — the traditional measurement of economic growth. The U.S. economy will experience approximately 2 percent “real” GDP growth in 2020 and 2.5 percent in 2021. Much of the confidence surrounding the health of the U.S. economy lies with the consumer. Consumer spending is now growing at roughly the same quarterly pace as U.S. GDP.

This should not imply that there aren’t “stressors” on the economy. “Rather, nothing on the current horizon rises to the level of imbalance or shock that could cause a downturn,” the forecast report states. However, it is cautioned that the outlook could change. “It is critical to maintain vigilance in monitoring economic trends and activity given the unpredictability and hyper-partisan nature of current U.S. policymaking.”

Nonetheless, long-term threats clearly imperil the nation’s economic health. “The healthcare cost crisis, the desperate need for pension and entitlement reform, dangerous trends in wealth inequality, and other issues are serious and growing risks that are largely being ignored and will come back to haunt us,” the forecast report states.

As a result of record-tight labor markets, many U.S. workers have seen significant jumps in wages. In 2014, compensation for employees made up 60 percent of national income compared to 63 percent in 2019. Notably, most of this income has shifted from corporate profits, which fell from a near record-high of over 14 percent of all national income in 2014 to less than 12 percent this year.

The one weak spot in the nation’s GDP data in 2019 was in business investment. However, spending is down in this area for a number of narrow reasons (but not many general ones). Weak export data has played some role in slowing investment; but overall, the impact of the trade war with China has been highly overrated.

Employment in California keeps on soaring, with the state economy adding 308,000 jobs (a 1.8 percent growth rate) from October 2018 to October 2019. About 40 percent of this job growth came from just two sectors — healthcare/social assistance and leisure/hospitality, which is indicative of a growing elderly population and strong consumer health. Notably, the rate of job growth in the nation as a whole, at 1.4 percent, was lower than in California during this period.

Falling interest rates are the reason the nation’s housing market is starting to bounce back, with sales of new and existing homes up and home-price appreciation beginning to accelerate. Moreover, none of the conditions for a major housing bust are in play. The nation is experiencing “clean” mortgage lending, no excess supply being built, and increases in overall affordability as measured by the housing cost share-of-income for U.S. households.

Home price growth in California finally started to show signs of exhaustion over the past year. The median price for a single-family home in California grew 2.2 percent — which, when adjusted for inflation, means that price growth has effectively been flat. This should not be surprising given the relentless pace of appreciation that has occurred in recent years, something that cannot realistically continue.

“More home building is needed,” the forecast report states. Residential building permits in California peaked in the first quarter of 2018 but turned negative in the third quarter and have remained there throughout 2019. “Constrained housing supply will continue to hinder home affordability and limit growth in the state’s labor force,” it adds.

For more: view the entire California trend analysis on pages 9 – 16 of the report by clicking "Beaconomics: An Economic Forecast for California and the U.S."

California and Nevada Credit Union Leagues
Presented on Dec. 9 by Dr. Robert Eyler, economist at Sonoma State University and board member of Redwood CU:

What credit union members may perceive is happening in the economy, geo-politics and the financial markets as it’s reported in the news media versus what’s realistically happening doesn’t always align. “We should expect the buzz surrounding current national trade policies to eventually come to a rest for the United States — and end up maybe even being a positive for the United States. But for now, it just leads to more volatility leading into the presidential election,” Eyler said. “These and many other financial market issues are things that your employees and members are going to see a lot of news around, as well as consternation going into 2020.”

A “mild” recession may hit the economy sometime in 2021 or 2022. It might be so mild that annual U.S. Gross Domestic Product (GDP), the traditional measurement of growth, could still squeeze out somewhere between a zero-to-1 percent growth rate for the 12-month period surrounding the beginning and end of that contraction.

Leading economic indicators in California and Nevada show the states’ economies are slowing down in tandem with the entire nation right now. Yet neither are signaling an imminent recession within the next 12 months. Next year, 2020, could impact 2021 if potential impeachment by both branches of Congress ever led to removal of President Donald Trump from office. It would cause upheaval in the U.S. and global financial markets. However, such a scenario most likely won’t play out. In fact, it’s highly likely Trump could be reelected given historical, economic and political context.

“We have to assume uncertainty will rise as we creep toward the summer of 2020,” Eyler said. “However, the Federal Reserve’s short-term interest rate target is likely to move down again going into 2020 and then stall until the elections. The California and Nevada economies are likely to continue growing, but slower.”

For more: Credit union leaders can view the “2020’s Big Questions: Economy, Rates, and President Trump” archived webinar at any time.

Filene Research Institute
Presented on Nov. 14 by experts at Filene Research Institute:

Researchers think credit unions can immediately prepare for the next economic recession whether it happens in two months or two years. No matter what “flavor” of downturn the economy experiences in the future, the industry can glean historical lessons from the high performers of the past, according to the recent “Get Your Credit Union and Members Ready for Recession” online discussion.

Chief Research and Development Officer Gorge Hofheimer and Senior Research Director Taylor Nelms discussed plans that credit unions can implement today to prepare. Some are strategies that many credit unions are (or aren’t) known for practicing in past years as the economy heads into recessions.

For more: view the post-event article by clicking "CUs That Grew During Past Recessions Took 'The Long View'."

Moody’s Analytics
Presented on Nov. 21 by Equifax and the Consumer Bankers Association:

Those working in financial services should focus on the severity of the next recession. If an economic downturn began this quarter, it would probably be one of the mildest recessions in modern history. If it began in late 2020, it would probably turn out “average.”

“The economy is in fairly good shape to deal with a recession when it comes, but the wildcard is whether both monetary policymakers and fiscal policymakers are ready to act,” said Cristian deRitis, deputy chief economist for Moody’s Analytics. “There’s a lot of uncertainty regarding how the next recession will be managed.” He and Amy Graybill, vice president of USIS Strategic Initiatives for Equifax, spoke during the “2020 Outlook: Plan for the Best—Prepare for the Worst” webinar, discussing not only the economy but the latest U.S. consumer credit trends.

Unsecured personal consumer loans are on a growth streak and will continue at a healthy rate in 2020 before slowing in 2021. All other lending/borrower credit categories will continue slowing down in 2020, with some ticking back up in 2021 (retail financing and credit cards). “The consumer credit forecast is good” deRitis said. “We don’t want to see consumers over-extending themselves in an economy that, for now, is forecasted to continue slowing down.”

For more: view the post-event article by clicking "Credit Trends: As Economic Risks Abound, Consumer is Savior for Now"

Local County-Level Perspectives
The California Department of Transportation (Caltrans) has released its updated 2019 – 2050 demographic forecast for all counties in California regarding local jobs, wages, home prices, population, personal income, taxable sales, net migration, wildfire issues, public policy implications, legal cannabis, industries, workforce, and more.

For forecasting purposes, the shorter-term economic projections for 2019 – 2024 within this annual county-wide report by Caltrans do not factor in an economic recession into its local scenarios. They are only highlights stemming from a baseline projection (view the report above for more information).

California Occupational/Industry Trends
Additionally, download Chmura Economics and Analytics’ latest California Economic Overview to see 10-year future trends in worker occupations, employment, wages, cost of living, and industries.

Your Local Region’s GDP: 2001 - 2018
The U.S. Bureau of Economic Analysis has released an overview and history on "Local Area Gross Domestic Product from 2001 - 2018" for individual counties in California, Nevada and the entire nation. It includes highlights and trend breakdowns for large, medium and small-population size counties, as well as the U.S. dollar size of economies for each county. Tables and files are included for download and review.

Latest CA Population and Demographic Trends
The California Department of Finance has released its latest news — "State's Population Increases by 141,300 While Rate of Growth Continues to Decline" — regarding 2018 to 2019 population growth, which includes highlights and snapshot trends of each county and region across the state. (You can also download the long-term 2010 to 2019 demographic tables by clicking here)

Also, the department's deeper demographic breakdown (age, race, income, employment, poverty, health care, education, and social/housing characteristics), courtesy of the American Community Survey by the U.S. Census Bureau, can be found by clicking here.

County Income and Poverty Estimates
The U.S. Census Bureau has released its "Small Area Income and Poverty Estimates (SAIPE) Program", which gives single-year estimates of income and poverty for all counties in California, Nevada and the entire nation — as well as estimates of school-age children in poverty for all 13,000-plus school districts.

Demographic Profile and Projections: California

  • Total population: 40 million (and will hit 42.3 million by 2025).
  • Working-age individuals (15 - 64 years old): 67 percent of total population in 2015 (and will fall to 64 percent by 2025).
  • Labor force (at least 16 years old who are working/looking for a job): 19.3 million out of 31 million adult population.
  • Labor force participation rate (adults who “want” to work): 62 percent (or 19.3 million individuals).
  • Unemployment rate: 3.9 percent (versus 3.6 in U.S.)
  • Unemployed workers: 718,000.
  • Median household income: $71,800 as of 2018 (compared to $60,400 for U.S.)
  • Poverty rate: 15 percent (versus 13 in U.S.)
  • Education of population: 34 percent have a college degree; 29 percent some college; 20 percent high school diploma; and 17 percent no high school diploma.
  • * Data as of September 2019 from the California Center for Jobs and the Economy; California Employment Development Department; California Department of Finance; Federal Reserve Bank of St. Louis; U.S. Bureau of Economic Analysis; and U.S. Census Bureau

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