California Bruised, Not Broken By Trade Disputes
By: Christopher Thornberg, PhD and Robert Kleinhenz, PhD of Beacon Economics
September 19, 2019—LOS ANGELES, CALIFORNIA—From the inverted yield curve to the trade war with China to the length of the current economic expansion, handwringing over a coming national recession continues to spiral despite a lack of evidence that a downturn is imminent. According to a new forecast released today by Beacon Economics, the U.S. economy is expanding at a safe and steady pace with no apparent stressor or imbalance that would have enough force to cause a major disruption.
The second quarter U.S. GDP release revealed an almost boring consistency: GDP growth in 2019 has averaged 2.55% compared to 2.5% in 2018 and 2.8% in 2017. “Where’s the overall economic turbulence? This feels a bit like crying wolf,” said Christopher Thornberg, Founding Partner of Beacon Economics and one of the forecast authors. “Consumer spending is solid, home sales are starting to tick up, home price growth is stabilizing, the U.S. job opening rate is significantly higher than the unemployment rate, and although tariffs have negatively affected trade with China, even that ‘war’ has yet to have any broad, overall impact on the nation’s economy.”
According to the new forecast, when exactly the next recession will hit is unknown, but for the foreseeable future, U.S. GDP growth is expected to continue at a steady 2.5% pace. As for that troublesome yield curve, Thornberg points out that correlation is not causation and short-run interest rates being higher than long-run interest rates has never, by itself, created a recession. “The strong correlation in this data has historically been driven by the Feds raising short-run interest rates to try and cool an overheating economy – it’s like the skid marks that are left when trying to avoid an accident,” said Thornberg. “But in this case, the nation isn’t headed for an accident.”
At the state level, California’s economy has performed solidly so far in 2019 and is forecast to stay on track into next year. As home to the largest port complex in the Western Hemisphere, the various trade disputes that have erupted over the past few years have been a point of elevated concern.
“California has a lot a stake when in comes to both cross-border and trans-Pacific trade activity,” said Robert Kleinhenz Executive Director of Research at Beacon Economics and one of the forecast authors. “The ongoing trade conflicts have hit certain industries and commodities, but the state’s overall economy has only been bruised, not broken, by these developments.” Kleinhenz points to record-low unemployment and sustained job gains as evidence that the California economy continues to advance.
- U.S. business spending has slowed in 2019 but there has been more than enough of a surge in public spending to offset that slowdown. Additionally, the slowing is coming off of two years of strong numbers, a result of the temporary stimulus created by the 2017 Tax Cuts and Jobs Act.
- U.S. Imports from China through the first half of 2019 were down 13% and exports to that nation fell 19% compared to the same period in 2018. But trade is fungible and the overall nominal value of U.S. imports and exports is largely the same as last year at this time.
- Inflation has not heated up as a result of the tariffs and has actually slowed to a modest 1.5%. Even for products that are directly imported, there has been little difference in price growth as a result of the tariffs. Much of this is being driven by the fact that the Chinese have allowed their currency to depreciate sharply, meaning they are shouldering most of the tariffs’ costs.
- The U.S. consumer savings rate has hit 8%, the highest it’s been since the 1990s (outside of an odd surge in 2012). The U.S. consumer sector hasn’t been this healthy in two decades and a healthy consumer sector can push the nation through major issues in the global economy.
- Despite the slowdown in job growth, California accounted for 16% of all job gains nationally through the first seven months of 2019, which is essentially the same share as over the past five years. The state’s health care, professional services, leisure and hospitality, and construction industries have led the way in adding jobs.
- Median home prices in California have been somewhat of a mixed bag with prices up in most areas, but flat or even declining in others. Home sales declined steadily in 2018 due to rising mortgage rates but turned around in the first part of 2019 and should improve through the rest of the year.
View 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.