Whether the economy slumps this year or not, California shouldn’t feel as much pain as the rest of the country.
That’s the key finding Wednesday of the latest UCLA Anderson School California economic forecast.
It offers two plausible scenarios: One if a recession develops later this year and one if it does not.
The economy’s future became even more uncertain this week as the failures of two key banks rattled markets and raised questions about whether the Federal Reserve would continue its aggressive push to raise interest rates and slow the economy.
If there’s no downturn, “the California economy will grow faster than the national economy,” the 114-page report predicts.
Leading the way are a strong construction industry, a state government with a solid rainy-day fund to pay for unexpected expenses and more demand for military production, software and labor-saving equipment.
But there’s also the prospect of that downturn, which many economists have been forecasting for some time.
As the cost of living continues at a pace unseen in nearly 40 years, the Federal Reserve has continued to push up interest rates and has signaled it will continue to do so. That in turn usually cools demand, which means fewer jobs are needed.
But so far, the economy has defied that logic. The cost of living was up 6% in the year ending in February, the federal Bureau of Labor Statistics reported Tuesday, and mortgage interest rates are generally at their highest levels since 2007.
Yet the nation’s unemployment rate remains at nearly 50-year lows, reaching 3.6% last month.
The UCLA forecast predicted that a full-blown recession was a ways off.
“We are not currently in a recession, and if any recession does occur, it will only begin toward the end of 2023,” it said, but added, “the U.S. economy might avoid a recession altogether throughout our forecast horizon,” The forecast extends through 2025.
At the moment, UCLA said, “the economy is still expanding and adding jobs, consumers are still spending, and businesses are still investing.”
California unemployment
If the national economy continues to grow, the UCLA forecast said, the state’s unemployment rate should average 4% this year.
It should then drop to an average of 3.9% next year and 3.6% in 2025. The state’s unemployment rate in January, the latest data available, was 4.2%.
Prices would increase in California by an average of 3.8% this year, 3% next year and 2.8% in 2025.
The report explained that a key reason for the state growth is a continuing demand for housing, despite the higher mortgage interest rates.
Also contributing to the rosier scenario is allowing what the forecast calls “accessory dwelling units to be built throughout the state in neighborhoods zoned for single family homes.”
California’s unemployment rate, though, would remain above the national average, where it has been for some time. That’s partly because its leisure and hospitality industry, dependent on tourism and consumer spending, remains vulnerable.
The scenario in case of a recession is more grim, but not as dark as those of past downturns.
In a recession, “the California economy declines, but proportionately by less than that of the nation,” the UCLA forecast says.
In that case, it predicts, the state’s unemployment rate would average 4.3% this year, rising to 4.8% next year before dropping to 3.7% in 2025.
Consumer prices in this scenario would average increases of 3.9% this year, 3.1% next year and 3.4% in 2025.
UCLA would not say which of the scenarios is most likely. “Uncertainty about California’s 2023 economic outlook still abounds,” it said.
