UCLA Anderson Forecast’s fourth quarterly release of 2014 foresees the United States’ economy likely growing at a 3 percent pace during the next two years, as lower oil prices and higher wages bolster consumer spending and the unemployment rate falls to 5 percent. Along with consumer spending, aggressive corporate spending in equipment and software will fuel this growth.

In California, steady gains in employment are anticipated through 2016, as the increase in national growth from construction, automobiles and business investment, along with higher consumer demand, continues to power the state’s economy. California’s unemployment rate will continue to decline throughout the forecast period. At 5.3 percent, it is expected to be insignificantly different from that of the U.S. by the end of 2016.

The December forecast includes an additional report that examines the impact of infrastructure and residential investment in Los Angeles. The research concludes that because Los Angeles is the most congested city in the nation, the city should invest more in its public transportation. The supply of homes has been insufficient in Los Angeles during the past 14 years, causing home prices to rise. Higher density in Los Angeles would partly solve the problem of housing affordability, creating a shared and prosperous economy for the next generation.

The national forecast                                                                                                    

The UCLA Anderson Forecast is predicting that the weak growth rates of 2009 to 2014, which hovered around 2 percent, are in the past, as the economy ramps up to a sustained period of 3 percent growth in real GDP.

“Specifically, we are forecasting 2.8 percent growth in the current quarter and anticipate growth to average 3.1 percent in both 2015 and 2016,” says senior economist David Shulman, the author of the national forecast.

He adds that this growth will bring “a sense of economic progress on Main Street,” a feeling not necessarily brought on by the tripling of stock prices since the lows of March 2009.

Shulman reports that the economy will generate 200,000 to 260,000 jobs monthly, reducing the unemployment rate to 5 percent by the end of 2016. Employment compensation will rise to 3.2 percent this year and next and 3.9 percent in 2016, besting an annual average of 1.8 percent between 2009 and 2013.

The recent drop in oil prices will have a significant impact on the national economy as well. After trading at $100 per barrel most of the year, prices have plummeted to $75 per barrel.

“Should the oil price remain at this level, and we expect it will, there will be huge benefits to consumers,” writes Shulman. “For example, such a price reduction translates to at least 50-cents-a-gallon price cut for gasoline. With the U.S. consuming about 135 billion gallons of gasoline a year, that calibrates into a $67 billion a year boon to consumers.”

Shulman does note that there is a downside to lower oil prices, as more than half of the consumer benefit will be absorbed by U.S. oil producers. That, in turn, will affect incomes, employment and capital spending in domestic oil producing regions, many of which have had the fastest growing economies in recent years.

The California forecast

Senior economist Jerry Nickelsburg’s outlook for California is essentially unchanged. The growth of housing starts has been slightly lower than expected, but this is likely due more to the difficulties associated with starting multi-family projects than to a change in demand for such dwellings.

Tepid growth in parts of Asia and Europe will reduce the growth of California’s manufactured goods sector. Despite these factors, Nickelsburg says the state’s forecast for 2015 will be similar to 2014 and a stronger 2016 growth rate will result in the unemployment rate dropping to 5.3 percent.

“Our estimate for the 2014 total employment growth is 1.8 percent, and for 2015 and 2016 the forecast is for 2.1 percent and 2.2 percent,” Nickelsburg writes. “Payrolls will grow at about the same rate in the three years. Real personal income growth is estimated to be 3.1 percent in 2014 and forecast to be 4.5 percent in both 2015 and 2016.”

According to the forecast report, the unemployment rate will hover around 7.1 percent through the balance of 2014. Unemployment will fall through 2015 and will average approximately 6.6 percent, a slight decrease from the previous forecast. In 2016 the un­employment rate is predicted to be approximately 5.6 percent, a half percent higher than the U.S. forecast.

Much of Nickelsburg’s essay, titled “The Changing Face of Construction and Manufacturing,” focuses on California’s evolving workforce and labor demands.

“The transformation of the Golden State to the Information Economy of the 21st Century will continue apace,” Nickelsburg writes. “The real implication is that having the appropriate skills in the labor force is critical to keep the faster-than-the-U.S. economic growth going for the long-term. Because of this, the shape of immigration reform, the ability of California to attract highly-skilled labor from other parts of the U.S., and home-grown workforce development could derail or accelerate the forecast growth rates presented here.”

Infrastructure and residential investment in Los Angeles

Economist William Yu authored a companion piece suggesting that Los Angeles build on investments in transportation and residential infrastructure.

In his essay, Yu shows that Los Angeles is the most congested metropolitan area in the U.S., and that Los Angeles’ future should include a shift in preference from suburban living to more affordable higher-density housing closer to the urban center. Higher-density cities do not necessarily have higher crime or lower-quality schools, and are actually more environmentally sound. Yu concludes that Los Angeles should continue and even expand its commitment to investing in public transportation and that a higher-density Los Angeles would partly solve the city’s problem of high home prices.

Rebuilding, reinventing and reimagining California’s infrastructure

The reports by Shulman, Nickelsburg and Yu will be presented at UCLA Anderson Forecast’s quarterly conference at 7:30 a.m. on December 10 at UCLA Anderson’s Korn Convocation Hall. The conference which will look at rebuilding, reinventing and reimagining California’s infrastructure. For more information or to register online, please visit the Anderson Forecast website.

UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation, and it 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.