Will Economic Growth Continue? Mihaylo Forecast Anticipates Continued Growth as the Expansion Matures

Former Mihaylo College Dean Anil Puri and Associate Professor of Economics Mira Farka reported that the long-term future of the economic expansion is tenuous, but in the near-term, the recovery should continue. "The good news is that in the near term, the current expansion is set to continue with the economy firing on more cylinders than at any point since the start of the recovery," they said.

Former Mihaylo College Dean Anil Puri and Associate Professor of Economics Mira Farka reported that the long-term future of the economic expansion is tenuous, but in the near-term, the recovery should continue. “The good news is that in the near term, the current expansion is set to continue with the economy firing on more cylinders than at any point since the start of the recovery,” they said.

Former Mihaylo College Dean and CSUF Interim Provost Anil Puri and Associate Professor of Economics Mira Farka presented the 23rd annual economic forecast to local business and academic leaders at The Hotel Irvine on Oct. 25, an event co-sponsored by the Orange County Business Council. The report, which examines the global, national and regional economies, anticipates a continuation of the economic expansion in the short term.

With increases in the gross domestic product (GDP), declining unemployment, increases in median household income, record homeowner equity and an improved economic outlook in other parts of the world, the U.S. economic expansion is continuing, at a slow but steady pace.

As director of the Woods Center for Economic Analysis and Forecasting Anil Puri and Associate Professor of Economics Mira Farka note, if the expansion continues through mid-2019, it will set a record for the longest such period in the post-World War II era.

“Odds are that it may make it, provided the policy environment is calibrated prudently,” they report. “Predictably, as time goes on and the current expansion advances in age, concerns grow about its longevity. In recovery terms, this expansion is practically geriatric: currently in its ninth year, the recovery is the third longest in the post-war era, shy of only two predecessors: the 120-month-long expansion of the 1990s and the 106-month-long expansion of the 1960s.”

While history might argue against a continued expansion, Puri and Farka note that macroeconomic indicators have shown continued resilience. “The global economy has continued to build momentum in 2017, surprising most market analysts to the upside,” they report.

According to Puri and Farka, prudent monetary policy pursued by the Federal Reserve may well be the determining factor in the expansion’s future.

“Our view is that the expansion might survive over the next couple of years, provided that the policy mix is carefully calibrated. If fiscal policy focuses on supply-side fixes (tax and regulatory reform) rather than demand-type stimulus, the Fed will not be forced to tighten aggressively to head off a potentially overheating economy. We anticipate that the package of tax cuts and fiscal spending that will ultimately get hammered out by Congress are likely to be relatively more modest than consensus expectations. As such, we anticipate the Fed will continue to raise rates gently and gradually over the forecast horizon, allowing the expansion a bit more room to run.”

Headwinds on the Horizon

When 2017 began, the world was considering the ramifications of the ascendency of billionaire business magnate Donald Trump to the presidency. While many Americans were concerned about the administration’s views on social issues and foreign policy, the business community had high hopes for the Trump Era.

“For most folks, the election of Donald Trump, a colorful businessman-turned-celebrity-turned-politician, and a Republican-majority Congress raised hopes for a pro-growth business-friendly agenda. Optimism ran sky-high on a number of issues such as tax reform, reduced regulatory burden, repeal of the Affordable Care Act (ACA), and fiscal stimulus in the form of higher defense and infrastructure spending,” they said. But the legislative environment in Washington has failed to live up to expectations. “So far, with the exception of the regulatory agenda, not much else has been accomplished: though 45 executive orders have been signed and 53 bills have been approved, none of those constitute the major planks of the broader agenda aspired to by the administration and Congress. It is safe to say that, ten months into this year, there is not much to celebrate in terms of legislative progress: we have gotten ‘more holes, in bigger cheese.’”

Despite the lack of political action, stocks have risen sharply since the start of the year, consistently shattering old records. Puri and Farka note that the New York Stock Exchange (NYSE) margin debt was at an all-time high of $550 billion at the end of August (or 2.9% of GDP), which is a worrying figure when compared to the levels of 2.6% of GDP in mid-2007 and 2.8% in mid-2000, before the Great Recession and dot-com collapse, respectively. “However hard as you try, there is no denying that the stock market appears frothy in virtually every metric,” they report.

Additionally, the legacy of the Great Recession has been one of uneven growth and damaged potential, part of an overall decline in economic dynamism that began in the 1980s. Business startup rates have declined, business investments have stalled and labor productivity growth (measured as GDP per hour worked) has averaged only 0.35% per year during the recovery, far below the historical average of 1.7%. Certain pockets of the economy continue to languish, with job gaps continuing in a number of states and undereducated males being particularly hard-hit.

“More than one in five prime-aged men with a high-school diploma does not work, compared with fewer than one in eleven men with a bachelor’s degree,” Puri and Farka note.

“Whatever the causes of the current productivity slump, one thing is certain: it is historically a notoriously difficult indicator to predict since bursts of innovation are hard to foresee,” they report. “But productivity is the key factor to higher growth and higher standards of living. Potential GDP growth (what an economy can essentially produce if it efficiently employs its resources) hinges on two things: labor force growth and productivity growth.”

Key Economic Indicators from the Report

VARIABLE 2017 2018 2019 2017-2019 Average Three-Year Change
U.S. Real GDP Growth Rate 2.3% 2.7% 2.5% 2.5%
U.S. Unemployment Rate 4.3% 4.1% 4.1% 4.2%
Consumer Price Index (CPI) Change 1.9% 2.1% 2.2% 2.1%
Personal Income Change 3.1% 4.0% 4.5% 3.9%
30-Year Fixed Mortgage Rate 3.95% 4.12% 4.32% 4.13%
Oil Prices (Dollars Per Barrel) $52.8 $57.4 $64.3 $58.2


The Short-Term Outlook

While the future may not be as bright as many might hope, Puri and Farka don’t see an impending disaster: “The good news is that in the near term, the current expansion is set to continue with the economy firing on more cylinders than at any point since the start of the recovery. The economy should be able to plod along even without the much anticipated fiscal package of tax cuts and spending, though prudent tax and regulatory reform are much needed to stimulate growth and rev up the economy. A shot of adrenaline through supply-side reforms would be much welcome: though the recovery has dragged on for the better part of a decade, it has been undoubtedly the weakest in post-war history.”

In the past few months, natural disasters, including Hurricanes Harvey and Irma and the unprecedented Northern California wildfires, have likely caused between $160 billion and $170 billion in damages, with about $130 billion of these losses due to the actual destruction, with the rest being due to lost output. Puri and Farka don’t expect these disasters to derail the economy, though they anticipate that they may impact economic performance in the short-run.

“One-off events like hurricanes Harvey and Irma will likely induce volatility in economic activity in the second half of the year, weighting on third quarter growth and adding to fourth quarter and early next year,” they note.

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Anil Puri and Mira Farka note that the uneven recovery since the Great Recession is part of an ongoing decline in productivity that began in the 1980s. But how long it will last is far from certain. “Whatever the causes of the current productivity slump, one thing is certain: it is historically a notoriously difficult indicator to predict since bursts of innovation are hard to foresee,” they reported.

The Southern California Perspective

Puri and Farka report that while nationwide job growth has remained strong, employment growth in California has stagnated. Local unemployment rates bottomed out in May 2017, but began to rise over the summer. Yet they caution against panic. “The picture, however, is not necessarily grim since local business leaders continue to be enthusiastic about local economic conditions and housing prices are still rising. Our statistical forecasts remain positive for continued growth for at least the next two years,” they say.

Housing prices have continued their upward rise, eclipsing the records set before the Great Recession and exacerbating the region’s affordable housing shortage. In September, Orange County’s median housing price reached a record $760,000, up 6.8% annualized from 2016. Prices have risen 8.1% in Los Angeles County, 10.3% in Riverside County and 8% in San Bernardino County.

Housing construction has slowed in Orange County but is expanding more rapidly elsewhere in the Southland. With some weakness in the local economy and indications that the Federal Reserve will continue to raise interest rates, housing price growth may well slow in 2018.

Puri and Farka reported that the Orange County Business Expectations survey (OCBX), conducted by the Woods Center for Economic Analysis and Forecasting, is still very high, but is beginning to decline.

“The index value for Q4-2017 is slightly higher compared to the fourth quarter of 2016 but lower than in the third quarter of 2017. The overall value of the OCBX index, which is a weighted average of several survey questions, was 88.2 in the fourth quarter of 2017, compared to 93.2 in the third quarter of 2017 and 84.4 in the fourth quarter of 2016,” they report. A reading above 50 is indicative of expected growth in the economy.

For More Information

For more on the Woods Center for Economic Analysis and Forecasting or to read the full report, visit the center online. The center provides a midyear report and regular interim studies in addition to their annual forecast.

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