California Shifts To A Lower Pace of Job Growth

June 13, 2019—LOS ANGELES, CALIFORNIA—Despite the United States economy being on the edge of its longest expansion in history and a plethora of negative outlooks on the economy, a new forecast released today by Beacon Economics says there is no reason to anticipate a downturn until at least beyond 2020. While the new outlook warns of a slowdown in the nation’s economy, something that is already occurring, it argues that nothing on near-term horizon has the capacity to cause a contraction.

“We simply do not see the kinds of imbalances or rapid shifts that would be forceful enough or deep enough to push the economy into recession,” said Christopher Thornberg, Founding Partner of Beacon Economics and one of the forecast authors. “It’s certainly not going to happen in 2019, and highly unlikely to occur next year.” Thornberg is quick to point out, however, that no one should expect the expansion to reach or maintain 2018 levels and is forecasting the pace of U.S. economic growth to decelerate to approximately 2% this year. The slowdown is being driven by a number of sources including the end of the short-term stimulative effects created by the 2017 Tax Cuts and Jobs Act, intensifying trade disputes with key trading partners, and financial market wobbles that will keep investors looking for safety.

The new forecast points to the first quarter of 2019 as evidence of moderating growth. Although on the surface the nation’s 3.1% growth rate was one of the fastest in recent years, half of that expansion comes from highly transitional sources, including a large drop in imports and a build-up in business inventories. Growth in final demand in the first quarter was a weak 1.5%, the worst showing since 2015.

Perhaps the biggest threat currently facing the U.S. economy is the potential of spiraling trade disputes with China, and possibly Mexico and Europe. However, even that threat has been hyped to a level that exceeds reality, according to the forecast. The tariffs have indeed been a negative challenge for the groups and businesses directly impacted by them, but at its current level, the turbulence is not a threat to broader economic growth. That could change, however, if the disputes balloon or spread.

Additionally, the forecast raises concerns about the potential long-run consequence of conflating trade policy with foreign policy, as it appears the current administration is willing to do. “The trade-related actions now being taken by the U.S. undermine the nation as a protector of free trade in the broader global community,” said Thornberg. “Even if we win a specific trade war, the chaotic threats and unilateral policy choices destabilize the international trading system, and harm cooperative global political efforts at a time when governments around the world really need to address challenges in a collective way.”

Key Findings:

• U.S. consumer spending was weak in January and February, but in March recorded one of the largest jumps in a decade and was solid in April. The U.S. personal savings rate also increased in the first quarter indicating that the slower growth in spending was not being generated by income issues. All this suggests solid consumer spending numbers for the balance of 2019.

• Residential real estate has been a modest drag on the U.S. economy for over a year now. The market has swooned but will likely get a boost in the second half of the year given strong fundamentals and one of the tightest housing markets in decades.

• A counter-weight on the otherwise good fundamentals of the U.S. economy is the nation’s debt. The Federal government borrowed over $1 trillion in 2018 to cover the gap between revenues and expenses, twice the pace of 2017 and the worst showing since 2012 when the nation was clawing its way out of the Great Recession. While a public debt crisis is still far in the future, such misguided policy choices bring the day of reckoning closer.

• California’s economy has shifted to a lower pace of job growth in the first part of 2019 and will remain on that slower trajectory. Job growth in the state will continue, however, led by the tech-fueled economies of the San Francisco Bay Area.

• Despite the jobs slowdown, California continues on an impressive growth path with Gross State Product advancing by a 3.5% rate in 2018, faster than the nation as a whole and among the fastest growing states.
• California’s housing market may perform better this year than many expect. The 30-year fixed interest rate recently dropped to 4% and softer prices are expected due to an increase in the supply of homes for sale. Expect sales to improve in the second and third quarters of 2019 and the median price to advance modestly.

Download the full forecast for additional insights.

Beacon Economics is an independent economic research and consulting firm based in Los Angeles. This analysis was authored by Christopher Thornberg and Robert Kleinhenz. Learn more at www.beaconecon.com.