THE UCLA ANDERSON FORECAST FOR THE NATION AND CALIFORNIA September 2014 Report FORECASTS: 2014 3rd Quarter 2016 4th Quarter 63rd Year UCLA Anderson Forecast Director: Edward E. Leamer Professor of Global Economics and Management and Chauncey J. Medberry Chair in Management The UCLA Anderson Forecast Staff: Jerry Nickelsburg, Senior Economist, Adjunct Professor of Economics, UCLA Anderson School David Shulman, Senior Economist William Yu, Economist Patricia Nomura, Economic Research and Managing Editor Eydie Grossman, Director of Business Development George Lee, Publications and Marketing Manager The UCLA Anderson Forecast provides the following services: Membership in the California Seminar Membership in the Los Angeles and Regional Modeling Groups The UCLA Anderson Forecast for the Nation and California Quarterly Forecasting Conferences Special Studies California Seminar and Regional Modeling Groups members receive full annual forecast subscriptions, invitations to private quarterly meetings of the Seminar and the right to access the U.S., California and Regional Econometric models. 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The Quarterly Forecast: “September 2014 Economic Outlook” Upcoming Events: Winter Quarterly Conference December 10, 2014 Spring Quarterly Conference March 11, 2015 Summer Conference June 2015 THE UCLA ANDERSON FORECAST FOR THE NATION AND CALIFORNIA September 2014 Report Nation California UCLA Anderson Forecast 11 September's Outlook for California: 49 for the Nation Another Sunrise, Still Looks the Same David Shulman Jerry Nickelsburg Charts 15 Employment and Wages in Los Angeles 55 Recent Evidence William Yu Charts 23 Charts 63 Forecast Recent Evidence Tables 33 Charts 68 Short-Term Forecast Tables 37 Tables 75 Detailed Summary Tables 79 Detailed THE UCLA ANDERSON FORECAST FOR THE NATION SEPTEMBER 2014 REPORT UCLA Anderson Forecast for the Nation UCLA ANDERSON FORECAST FOR THE NATION UCLA Anderson Forecast for the Nation 2014 3rd Quarter - 2016 4th Quarter David Shulman Senior Economist, UCLA Anderson Forecast September 2014 Growth Ramping to a 3% Economy from a 2% cally we are forecast growth of 3.2% in the current quarter Economy and 2.9% in the fourth quarter. On annual basis GDP growth will rebound from 2014’s 2.1% to 3.1% and 3.4% in 2015 and 2016, respectively. Payroll job growth should average After declining by 2.1% in first quarter and growing at 230,000/month and by the end of 2016 the unemployment 4.2% in the second quarter we forecast that real GDP growth rate will drop to 5.3%. will now run at about a 3% over the next few years. Specifi- Real GDP Growth Job Growth to On Track for 3% Unemployment Rate to Drop Below 5.5% Average 230k/Mo. (Percent Change, SAAR) (Millions) (Percent) 6% 150 10% 4% 9% 145 2% 8% 0% 140 -2% 7% -4% 135 6% -6% 130 5% -8% -10% 125 4% 2006 2008 2010 2012 2014 2016 2006 2008 2010 2012 2014 2016 2006 2008 2010 2012 2014 2016 UCLA Anderson Forecast, September 2014 Nation–11 UCLA ANDERSON FORECAST FOR THE NATION Instead of Contracting Defense Spending will be on Inflation on the Rise the Rise As we discussed in prior forecast we believe that infla- In a major change from prior forecasts, we now antici- tion as measured by the headline and core consumer price pate that defense spending will increase rather than decline. indices at 2% or higher over the next two years. The main The rise of ISIL in Syria and Iraq along with the presence drivers of the inflation will come from rising residential rents of Russian troops in Ukraine will cause a rethinking of the and increasing healthcare costs. Thus the core CPI will be U.S.’s defense posture. We have modeled in an additional rising by about a ½% higher than the overall index. $24 billion in defense spending by 2016. For those with a long memory we would note that the Reagan defense build- Housing and Healthcare to Drive Core Inflation Higher up started under President Carter in 1979 after the Iranian Revolution and the Soviet invasion of Afghanistan. (Percent Change Year Ago) 6% Geopolitics to Increase Real Defense Spending 4% (Percent Change) 8% 2% 6% 4% 0% 2% 0% -2% 2006 2008 2010 2012 2014 2016 -2% Headline Core -4% -6% Fed to Raise Rates in March 2015 -8% 2006 2008 2010 2012 2014 2016 In response to declining unemployment and rising inflation we forecast that the Fed will increase interest rates at its March 2015 meeting. Thereafter we expect a gradual increase in the Federal Funds rate to about 3% by the end of 2016. Fed to Respond With Higher Funds Rate in March 2015 (Rates) 6% 5% 4% 3% 2% 1% 0% -1% 2006 2008 2010 2012 2014 2016 Fed Funds 10-Yr. T-bonds 12–Nation UCLA Anderson Forecast, September 2014