Stocks, the dollar and interest rates soared after the surprising election of Donald Trump on the assumption of a major shift in fiscal policy. Now that immigration and trade issues have moved to the fore, the markets are less certain as to the magnitude and timing of the fiscal changes. In its first quarterly report for 2017, the UCLA Anderson Forecast will discuss the implication of these cross currents and present a second pass at Trumponomics.
Key questions addressed at this quarter’s conference include:
- Can Trump deliver on his proposed tax cuts?
- How much will immigration and trade restrictions weigh on the economy?
- How many times will the Fed raise interest rates this year?
The national forecast
In his outlook for the national economy, UCLA Anderson Forecast Senior Economist David Shulman wrote that some of his current expectations are similar to those of last quarter, including the approximately $500 billion a year in personal and business tax reductions, a repatriation holiday for accumulated foreign earnings, increased defense and infrastructure spending, Medicaid cuts, relaxed regulations, modest changes to trade and immigration policies, and reductions in food and aircraft exports, as several trading partners react to the policy changes. The impact of a large tax cut on an economy at or very close to full employment will likely result in a short-term growth spike, but will quickly fade. The forecast calls for real GDP growth of 2.4 percent, 3 percent and 2.2 percent in 2017, 2018 and 2019, respectively, noting that real growth trails off on a quarterly basis in 2019, as higher interest rates weigh on the economy.
Though job growth appears robust with 170,000 jobs a month expected in 2017 and 2018, the figures will trail off to about 110,000 a month in 2019 and become even slower if the administration embarks on a large-scale deportation program of unauthorized immigrants. Concurrently, the unemployment rate could bottom out at 4.1 percent in late 2018, before gradually rising.
Amid strong growth in consumer spending since 2014, Shulman wrote that a proposed tax cut could increase spending from a forecasted 2.8 percent increase this year to 3.6 percent in 2018. However, housing starts may plateau at the 1.2 million to 1.3 million range and 30-year fixed mortgage rates could exceed 6 percent in 2019, up from the current 4.25 percent and the recent low of 3.5 percent.
After six years of declines, the forecast expects defense purchases to become a priority and increase by 1.2 percent in 2017, then increase by 4.1 percent and 2.5 percent in 2018 and 2019, respectively.
Shulman wrote that the forecast has become “more concerned about the administration’s tone with respect to trade and immigration policies. The changes could be far more drastic than what we are now anticipating, thereby increasing the risk level to our forecast.”
The California forecast
UCLA Anderson Senior Economist Jerry Nickelsburg’s current forecast for California is slightly lower than his previous one, reflecting the delay in congressional approval of the Trump infrastructure and defense spending. Total employment was 2.8 percent higher than 12 months earlier and payroll employment 2 percent higher. The state’s rate of increase was higher than the nation’s, but slowed during the last three months of 2016. California’s unemployment rate is expected to have its normal differential to the U.S. rate at 4.6 percent by the end of the forecast period (2019).
“The weakness relative to the U.S. reflects the fact that California, having already reached near full employment, will benefit less from further stimulus than Rust Belt states and the fact that deportations of unskilled workers would impact food harvesting and food processing,” as well as garment manufacturing and residential construction, Nickelsburg wrote. What remains unknown are the effects that changes in Immigration and Naturalization Service rules of engagement, exchange rates, international travel visa protocols and the abortive travel ban may have on the state’s economy.
The forecast anticipates employment growth to be 2.1 percent, 1.2 percent and .09 percent for 2017, 2018 and 2019, respectively, with payrolls expected to grow at about the same rate. Real personal income growth is forecast to be 3.4 percent in 2017, 3.7 percent in 2018, and 3.2 percent in 2019. Home building will continue in California at about 118,000 units per year through the forecast horizon.
A lower corporate tax rate
A companion report by UCLA Anderson Forecast Economist William Yu questions whether the administration’s proposed corporate income tax cut will boost long-term GDP growth. The short answer is, yes, if the government’s budget deficit and debt levels are under control.
That forecast is based on evidence from Organization for Economic Cooperation and Development countries, such as Ireland, which cut the tax rate from 24 percent to 12.5 percent. As a result, Ireland attracted many international investments in pursuit of a low tax bill and became the destination of outsourcing and corporate inversion. With booming economic growth in recent years in Ireland, its GDP per capita in 2015 reached $65,000, surpassing the United States’ $52,000. Further evidence showed that if a country cut its corporate income tax by 10 percentage points, the GDP growth rate could increase by 1 to 1.6 percentage points.
UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation, and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state’s rebound since 1993. More recently, the forecast was credited as the first major U.S. economic forecasting group to declare the recession of 2001.