UCLA Anderson Forecast’s first quarterly report in 2018 sees a definitive change in the nation’s economy, which is moving from one of sluggish growth and low inflation to one of accelerating growth and moderate inflation.

At the same time, with President Donald Trump’s announced plans to increase tariffs on steel and aluminum, things could get worse, as domestic costs rise and foreign producers retaliate. Amid the changes forecast for the national outlook, California, still leading the nation in job growth, is expected to continue to outperform the United States.

The National Forecast

The sudden 10-percent decline in stock prices and the rise in long-term interest rates in early February signaled what economists label a “regime change,” as the economic environment shifts from one of sluggish growth and low inflation to one of accelerating growth and moderate inflation. Concurrently, monetary policy is transitioning from one of accommodation to one of normalization, with four federal funds rate hikes in 2018; while fiscal policy moves from a moderate deficit to one with trillion-dollar deficits on the horizon. The $300-billion budget compromise during a two-year period, combined with the recently enacted $1.5 trillion tax cuts during a 10-year period, highlighted the demise of the so-called deficit hawks. The budget compromise also called for a substantial increase in defense spending, which ratified the forecast’s long-held belief that the era of tightening in that sector is over.

The Trump administration’s fiscal policy also will be playing a major role in increasing the trade deficit. “Because the United States is consuming more than it is producing, it needs to make up the difference through imports,” says UCLA Anderson Forecast Senior Economist David Shulman.

Real GDP growth is on track to continue its three-percent pace, established in the second quarter of 2017. A growth rate of 2.9 percent is expected for 2018, but will slow to 2.6 percent in 2019 and a sluggish 1.6 percent in 2020.

Why the slowdown? “Simply put, the economy is already operating at full employment and is bound by slow labor force growth and sluggish productivity,” says Shulman. Nevertheless, job growth is expected to continue, albeit at a slower clip than in recent years, with the unemployment rate hitting 3.5 percent in early 2019.

Although housing activity will continue to expand through 2019, it will be far from a boom, thanks to higher interest rates and higher home prices, which exact a toll on housing prices. After recording 1.2 million housing starts in 2017, the Forecast anticipates 1.3 million units in 2018 and 1.38 million and 1.36 million units in 2019 and 2020, respectively.

The California Report

California continued to be a leader in the nation in job growth, hitting all-time high employment in December 2017. Growth in net new jobs in the Bay Area in 2017, while still significant, eased toward the end of the year, but that was offset by increased growth in the Inland Empire, San Joaquin Valley and Sacramento and the Delta. During the last three months of 2017, employment growth accelerated in most of the state, with inland regions outpacing some of the faster growing, tech-dependent regions. It is expected that California’s unemployment rate will have its normal differential to the U.S. rate at 4.3 percent by the end of the forecast period (2020).

With a budget resolution calling for a significant increase in the purchase of sophisticated defense durable goods, demand for manufacturing and engineering in Southern California may increase, as will demand for technological developments throughout the state. “The increase in investment is likely to be in technologically advanced equipment and software. Thus, the California tech industry will see a bump in demand,” says UCLA Anderson Forecast Director and Senior Economist Jerry Nickelsburg. “To achieve this, more labor will be needed and wages will have to increase to draw the labor in, either from the sidelines or from outside the state.”

The forecast for 2018, 2019 and 2020 total employment growth in California is 2.2 percent, 1.7 percent and 0.9 percent, respectively. Payrolls will grow at about the same rate over the forecast horizon. Real personal income growth is forecast to be 3.1 percent, 3.6 percent and 2.8 percent in 2018, 2019 and 2020, respectively. Homebuilding will accelerate to about 138,000 units per year in 2020.