Despite economic uncertainties abroad, analysts expect the U.S. economy to continue to grow – albeit slowly – this year, with California continuing to outpace national growth.
Regional and national economists interviewed by the Business Journal have all lowered their expectations for U.S. gross domestic product (GDP) growth in 2016, although not by much, citing international concerns as the primary cause.
Mark Vitner, senior economist for Wells Fargo, has adjusted his outlook from 2% GDP growth to 1.9% growth. “That’s pretty close,” he said. “We put decimal points in there to humor ourselves.”
Steven Cochrane, managing director of Moody’s Analytics, also predicted 1.9% GDP growth for 2016. Locally based economist Robert Kleinhenz, who serves as executive director of research for Beacon Economics, had a slightly better outlook, estimating national GDP could increase between 2% to 2.5% this year.
Slow growth in China’s economy and volatility in its equity markets were creating uncertainty in the states at the start of 2016, Cochrane and Vitner both pointed out. Now, news of the Brexit has created further uncertainty, playing into both of the economists’ adjusted GDP outlook.
Some have expected the Brexit to impact U.S. exports because, in the wake of Britain’s vote, the value of British currency dropped while the American dollar’s value increased. But Cochrane had a measured response to this concern. “Trade with the U.K. [United Kingdom] is a small part of the economy and actually hits the East Coast more than the West Coast,” he said. Pharmaceutical companies on the East Coast export their products to Britain, he explained. “I don’t think California and the West have that much to worry about.”
In Cochrane’s view, the Brexit could actually help one aspect of the U.S. economy: real estate. In the wake of Brexit, interest rates – which are at historic lows – are unlikely to increase, which means home “mortgage rates should fall and that should add a little kick to the housing markets,” he said.
Overall, the American consumer is the strongest cog in the wheels turning the economy right now, as Cochrane put it. Kleinhenz observed that consumer spending has increased by about 3% “on a rolling basis in the last four quarters.” In the first quarter of 2016, after adjusting for inflation, consumer spending increased 2.6%, he added.
While consumer spending continues to increase, the rate of increase has slowed, Kleinhenz noted. “There was a really torrid pace of purchases of consumer durable goods for quite some time as people had to replace automobiles they might have hung on to longer than they otherwise would have during the recession,” he said. “You saw huge increases in consumer durable goods that really drove a lot of retail spending for a period of time. But I think that’s tapered off.”
In 2015, U.S. GDP increased by 2.4%. National GDP has increased at an average rate of 2.1% per year during the past seven years of economic recovery, according to Vitner. “This has been a frustrating economic recovery from the onset,” he said. “Given how deep the recession was, a lot of folks were expecting the recovery to come roaring back. . . . Sometimes the harder you fall, the harder it is to get up. That has been the case.”
Vitner continued, “There are parts of the economy that have been doing very well, and there are other parts that have really been struggling to generate any growth at all. That’s what’s fueled all this anxiety about income inequality.”
Kleinhenz had a similar take. “There’s really nothing exceptional about the performance of the [national] economy right now. We’re talking about an economy that’s doing okay, or it’s doing not badly, but nowhere can I say that the economy is doing great,” he said. “The exception to that statement would be that when we talk about the California economy there are some great things to say.”
California’s economy has been outpacing the nation’s rate of recovery in multiple areas. “California was the fastest-growing state in the United States last year, with a 4.1% growth rate in gross state product year over year,” Kleinhenz said. As recent data from the International Monetary Fund illustrated, that puts California as the sixth largest economy in the world, surpassing even France.
“The fact of the matter is, for a state that gets beaten up all the time for having heavy regulations, high cost of business and high real estate prices, it’s good to see that it’s not just doing well but that it has outperformed the other 49 states and the U.S. as a whole,” Kleinhenz said.
While California’s May unemployment rate of 5.2% is higher than the country’s rate of 4.7%, the state is adding jobs faster than the nation, Kleinhenz pointed out. While the United States as a whole has been adding jobs at a rate of about 2% annually, California has been pacing at about 3% growth annually, he explained.
In Long Beach, the unemployment rate in May was 4.7%, down from 7.5% a year ago, according to Kleinhenz. “This is really good news for Long Beach,” he said. Major job-creating industries in Los Angeles County include retail, leisure and hospitality (more so eating and drinking places than attractions), and professional, scientific and technical services, he noted. In Long Beach, major contributors to job growth are the health care and transportation and warehousing sectors, he added.
International trade through the San Pedro Bay ports increased 4% from January through April compared to the same period in 2015, Kleinhenz said. If that rate of growth continues, the combined ports of Long Beach and Los Angeles could achieve a record year, he said. However, while the Port of Long Beach Chief Executive Officer Jon Slangerup expects growth to continue at his port this year, he has downgraded his forecast (see story in this economic outlook section.).
Despite international uncertainties causing a slight pullback in expected economic growth this year, Kleinhenz emphasized that the U.S. is largely driven by domestic factors. “It’s really important to note that the U.S. economy, however strong its linkages happen to be with the rest of the world, is still a fairly insular economy,” he said. “Those internal dynamics – domestic consumer spending, domestic business spending and domestic government spending – make up 85% or so of the overall economy. As long as those parts are going well, then the situation with foreign trade is not going to derail growth in the U.S. economy and it is certainly not going to be a source of recession anytime soon.”
While Vitner said a recession isn’t currently outlined in his forecast for the next few years, it doesn’t mean it won’t happen. “I am not trying to scare people, and I’m not trying to downplay the risk,” he said. “We are seven years into this economic expansion. Rarely has the economy gone as long as we have between recessions – and we don’t go into recession just because we’re due. But the further you get out into the business cycle, the more strains are likely to be present that could potentially trip us up and put us into recession,” he explained.
“At this point in the business cycle, the risk/reward relationship has changed to the point that, whenever we have some sort of shock in the global economy, it can have a surprisingly significant impact on business fixed investment,” Vitner continued. “And that’s one of the reasons that we are as concerned as we are about the Brexit. . . . It’s one of the reasons I’m concerned about the presidential election – because of where we are in the business cycle. So if someone were to say, when’s the next most likely time to have a recession? I’d say it’s somewhere in 2017 or 2018, even though it’s not in our forecast.”