The Outlook for the U.S. and California Economies

Mark Schniepp
April 2024

The U.S. Economy             

Inflation has receded meaningfully in the U.S. without the corresponding increase in joblessness historically observed when restrictive policy is needed to extinguish inflation. The progress on inflation over the last year has led policymakers within the Federal Reserve to become more upbeat that their interest rate tightening has worked, and the target of 2.0 percent will be met this year.

Furthermore however, the urgency to cut interest rates this year—up to 3 cuts proclaimed by the Fed last December—is unlikely in view of recent reports of higher-than-expected inflation.

The fully anticipated recession of 2023 never manifested, and the Fed and economists in general are now more upbeat about a soft landing than they were last fall.  The “soft landing” refers to the continuous growth of the economy—with no recession—despite sharp interest rate hikes over the last 24 months.

Incoming data for the nation have generally been positive. The key reports indicate that consumers are feeling more optimistic about this year’s economy, homebuilding jumped higher in February, and homebuilders are becoming more optimistic about sales this year. Stock market prices are at record highs, industrial production ticked higher in February, and the index of leading indicators also moved higher in February for the first time since February 2022.

The labor market remains surprisingly strong evidenced by a low 3.8 percent unemployment rate, low numbers of unemployment insurance claim filings, historically high levels of job openings, and general wage increases. The latter threatens to stall progress on inflation this year if the rate of unemployment continues to remain under 4.0 percent, which it has for the last 26 consecutive months.

We believe that the election year combined with not-so-consistent progress on lowering overall headline inflation will not necessarily induce further rate hikes, but will postpone any rate cuts during much of 2024.

A meaningful part of the inflation problem rests with the housing component of the local CPI.  The improvement in housing inflation has been only marginal, and the increase in housing prices and rents generally eclipsed headline inflation through much of 2023.

The Housing Market                              

There remains a strong disincentive for homeowners to sell because they have locked in low mortgage rates on the homes they live in now.

With little supply in the market or waiting on the sidelines, home prices are rising again, and moved nearly 6 percent higher in February 2024 than a year ago. In California, because the paltry inventory of for-sale homes is so much more severe, prices are rising in all major metro markets of the state.

The forecast for inflation is for slower improvement in 2024, with more progress occurring in 2025.

The UCLA Anderson GDP forecast for 2024 was revised upward from 2.1 percent to 2.5 percent. Subsequently, UCLA predicts 2.5 percent growth for 2025 and 2026, and lower rates of unemployment than previously forecast back in December.

The California Economy              

Labor markets have been strong since the economic recovery began after the pandemic. Total jobs increased by 5.6 percent in 2022, 0.7 percent in 2023, and 1.5 percent growth is expected in 2024. The fact that 2023 is lower is more a function of running out of workers than an absence of jobs.

The slowdown in job creation suggests that out-migration and a reliance on hard-hit industries including technology and information are responsible factors.  Population in California has been in decline now since 2019, and this has negatively impacted the growth of the labor force, defined as people wanting to work in California.

Recent revisions in the employment data by the State show that California struggled with job creation from late 2022 through May of 2023, the period when layoffs within the tech and retail sectors were the most prolific. Job creation now appears to have stabilized, averaging 28,000 new jobs filled per month.

In the Southern California region, the growth of employment over the last 18 months has been similar across counties.  Riverside, Ventura, and Orange Counties have all now converged at 1.5 percent year over year growth in February 2024.

Construction employment in California reached a record high in 2023 due to the volume of new construction projects—both residential and non-residential—continues to expand.

Except for last year—2022—the total of new housing starts in 2023 was the highest volume since 2006. Expansions in Southern California, Sacramento Valley and the Central Valley led the state in homebuilding.

California’s seaports are now returning to normal again. International exports are no longer in decline. Cargo volumes are recovering at the principal ports in the state—Los Angeles, Long Beach, and Oakland—where the dockworker’s strike interrupted significant container activity for approximate 14 months. The labor dispute ended in August 2023.

But the slowdown in China, Germany, and elsewhere in the Pacific suggests that a complete rebound to 2021 or even 2020 levels of cargo is still a year or more away.

Nevertheless, with higher volumes of goods now arriving into California’s west coast ports, the growing need for warehouse and distribution space, along with conveyance systems will increase moderately in 2024, accelerating in 2025.

The 2024 Outlook for California                           

The expectation of California economic growth exceeding the U.S. remains probable this year, because of

  • The positive outlook for technology, especially AI development in the Bay Area
  • More venture capital investment coming into San Francisco and Los Angeles
  • The potential for expanded trade flows due to East Coast Port labor disputes and bottlenecks at the Panama Canal
  • Positive homebuilder sentiment and continued homebuilding exceeding normal levels over the last 10 years
  • The return of production in the TV, Movie and Sound Recording industries.

Real incomes are expected to rise in 2024, due to the containment of inflation. Consumer spending is forecast to slow but still contribute positively to the growth of gross state product over the year.

The unemployment rate will rise as open job positions fill and more workers are expected to enter the labor force, especially from the record college senior graduating class this June.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Will the Fed Lower Rates in 2024?

Mark Schniepp
March 2024

The Fed Controls the Federal Funds Rate

The federal funds rate has been at the 5.25% to 5.50% range since July 2023, the highest level since 2007. This is the interest rate that banks can charge each other and it’s the principal monetary policy instrument that the Fed controls.

After raising the funds rate 11 times in 15 months, the Fed forecasted as recent as December 2023 that it would make quarter point cuts—up to 3—by the end of this year, lowering the benchmark rate to 4.6 percent, or in a direction that has a more neutral impact on the economy.

Lowering the federal funds rate will also push down shorter term treasury bill and bond rates but not necessarily longer term bond yields like the 10 year which directly influences mortgage rates and vehicle loan rates.  However the actual act of cutting rates will likely rally the stock and bond markets, the latter which will push long bond rates lower.

Can We Expect Cuts Soon ?

The Fed indicated it needs to see more ”positive data” before pulling the interest rate lever. There are seven “Open Market Committee” opportunities for the Fed to cut rates this year, with the first one coming up this month on March 20.

What I believe this year is that the data won’t demonstrate compelling enough news for the  Fed to cut rates anytime soon, and (1) at least not until mid-year and (2) probably not until the end of the year. But whatever I think, it’s not going to be a factor.

A justification for the lowering of rates now is the progress made on the personal consumption and the headline inflation front. Even the core rate has improved considerably and it receives no help from lower prices for energy which have been in a general decline over the last year. Moreover, the Fed preferred personal consumption expenditure price deflator has now declined to 2.0 percent which is line with the Fed’s target.

And don’t forget it’s an election year so despite data that don’t comply, there will be pressure put on the Fed to lower rates to help the economy and stock market look good under the current administration.

In January, the Fed indicated a rate cut or more this year was still possible but said that cuts were not imminent.  This is because incoming data on the economy directly influences their decisions about monetary policy: quantitative easing and interest rate moves.

Incoming Data

GDP growth is still pretty expansive, running at 3.2 percent last quarter and currently estimated by GDPNOW at 2.2 percent for the current quarter of 2024.

That kind of growth really doesn’t need a boost from a drop in rates. If GDP growth slows in March and through the Spring, then the likelihood of a rate cut rises.  But with better economic conditions than expected being reported daily, growth is not slowing down.

Headline inflation has fallen to 3.2 percent. This is a big improvement over a year ago but progress in lowering consumer price inflation has stalled. Headline inflation has moved little since July 2023.  Food prices rose sharply between December and January, the highest monthly rate of increase in a year. Core inflation is still too high at 3.9 percent. We seem to be stuck in an inflation rut.

Unless progress on inflation resumes, and core inflation falls faster, the Fed might be reluctant to touch rates.  However, since their goal is a 2.0 percent inflation rate, which has now been met by their preferred Personal Consumption Expenditure Price Deflator, they are now becoming satisfied that enough progress on the inflation front has been made.  I’m not convinced of that yet. We need to see what happens in February and March.

There is wage inflation that is now exceeding general price inflation, a condition that adds upward pressure on the 2 percent inflation target.  But with rising productivity of workers, higher wages are in line with higher levels of output and add that results in less pressure on the price level. Furthermore, the share of labor in the economy has declined to levels lower than at any time over the last 20 years. This means that firms have higher profits than normal and as the labor share climbs back, the profit rate will return to normal as wages climb. Under this condition. Inflation pressures subside.

There is also the federal deficit which has soared to $34.5 trillion of which $1 trillion per year represents interest payments. This type of spending by Congress—now with sharply rising debt financing adding to the burden—is an automatic spending boost on the economy. How the Fed weighs this factor is unknown, and they will likely ignore it in an election year.

The evidence is mixed on what the Fed will do and when. I believe data needs to be more convincing; otherwise, we face a rapid increase in private spending to go along with Federal spending. That combination leads to growing pressures on the inflation rate.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Are We Starting out the Year Happy?

Mark Schniepp
February 2024

Yes, we’ve started 2024 being happier than at any time during 2023.

The sentiment and confidence indexes that measure how consumers feel about the economy both today and in 6 months hence have improved in recent months.

The latest measure shows consumer feelings about the economy at a 2 year high.

The economy in the survey is defined by inflation, job prospects, and interest rates. The improvement in January was the third straight month of upward movement and the highest since December 2021 when the pandemic was generally abating.

January’s increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead, and generally favorable employment conditions. The gain in sentiment was largest for people age 55 and over, but improved for all age groups.

Meanwhile expectations for inflation fell to a three year low and expectations of a recession this year also declined. Inflation expectations dropped to under 3.0 percent in January, which is down sharply from 4.5 percent in November.

The personal consumption expenditures price index, the preferred measure of inflation by the Federal Reserve, rose 2 percent for the month of December, following a 0.3 percent increase in October and a 0.8 decline in November. A year ago, this inflation measure was at 6.7 percent.

Conditions on the inflation front are clearly improving. These conditions, together with an all time high in the stock market, a tight labor market, and falling interest rates, are all responsible for the rising moods of consumers in early 2024.

The January jobs report was strong: employers hired about twice the number of people than economists had expected. The unemployment rate is also now at 3.7 percent —- still extremely low by anyone’s measure.

The strong economic reports in November, December and now January, have led to rising estimates of growth for the end of 2023 and the beginning of 2024.

The Con to Strong Growth

It was looking like the Fed was growing eager to initiate interest rate cuts this year in view of the progress on inflation. But wage inflation is still running at a 4.5 percent clip and that is too high the target rate—2.0 percent—-to be reached, probably not until the 2nd half of 2024.

Postpone therefore, the housing market rally in 2024 because it’s unlikely that mortgage rates are going to retreat much anytime soon.

Rigged Improvement through 2024?

The sentiment and confidence indices had been at levels consistent with recession through much of 2023, but with nothing but improvement in recent months, those signals are now retreating.

The vulnerability of the economy that pervaded much of last year is no longer evident now. And if the inflation reports continue to improve, the Fed just may be persuaded to begin cutting rates by mid-year.

Remember, 2024 is an election year so policymakers may make decisions that try to influence voters and this may be more likely as the year progresses into November. The Biden Administration would benefit from the semblance of a strengthening economy.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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The Workforce Gap

Mark Schniepp
January 5, 2024

We have been hearing about the “Forever” labor shortage and that we have to evaluate our hiring strategies from now on.

A principal reason for this is due to a demographic shift of the generations that can be demonstrated with some simple numbers:


                                                                        2010                          2020

                                                                         ——— percent ———-

Population age 65 and over                      12.8                            16.8

Population age 25 and younger                34.3                           31.5


Today, 65 and older populations now represent 17.4 percent.  This age cohort is increasing at an accelerating rate.

Today there are 16 million more people that are 65 or older than there were in 2010. So technically speaking, we are witnessing the slow departure of 16 million people from the labor force over time, and lately, that rate of departure has been hastened because the peak year for boomers was 1958, exactly 65 years ago.

A growing labor shortage is a critical concern affecting both workers and employers. As the baby boomer generation retires, workforce participation faces downward pressure due to an aging population.

Millennials, born between 1981 and 1997, comprise around 56 million workers. However, they won’t be enough to compensate for the skills gap left by retiring baby boomers. We have warned that this could result in a shortage of highly educated talent in the future, making it challenging for organizations to find skilled or experienced employees. And certainly enough, this condition is prevailing now.

After a meaningful decline from 2002 to 2012, participation rates in the labor force leveled off from 2012 to 2022. Now they are falling again.

In California, the growth of the labor force was consistently positive up until the pandemic. The labor force started coming back in 2021 but not entirely, and now it’s falling again.

The expectation is that less of the population under age 55 will be in the labor force by 2032. The only cohort that will participate more than now is age 65 and over, especially 75 and over. This is consistent with the Baby Boomer work ethic.

Today, boomers are 60 to 78 years old and many are still in the labor force. In 2032, they will be 68 to 86, and largely out of the labor force.

We need more workers now, but we’re not going to get them. If anything, we may see an accelerated rate of boomer retirement, especially if the stock market and home prices continues to rise.

So while we all fear becoming obsolete due to automation and the rapid onset of AI, we are safe at the moment because the labor market is at full employment and firms can’t really fill all their job openings.

Despite the slowdown I’ve been writing about these last few months regarding the 2024 economy, the labor market is going to be largely immune to the slower growth economy, particularly as long as job openings exceed workers.

Employers are going to need a strong and strategic workforce plan to replace retiring boomers. Gen X, the post-boomer generation, was smaller in total numbers and there will not be enough of them. Millennials lack essential work experience. Gen Z represent entry level age workers and many are still in school. Furthermore, they are not entering the labor force as past generations their age have. In 2002, 63.3 percent of 16 to 24 year olds were in the labor force. Today, 55.6 percent of the same age cohort is working. This is projected to decline to 51.3 percent by 2032.

The floods of immigrants coming over the border today may sound like a solution except that many of them entering into the U.S. from Mexico, other Latin American countries, China, Africa, Eastern Europe, and the Persian Gulf do not have the necessary skills.

The growing labor “shortage” is significant now and will only intensify going forward.

Demographic experts indicate this is not a temporary condition, but rather a permanent one. Longer term, these trends are reversible if Gen Z has more kids, but (1) that’s not yet the case, and (2) we can’t rely on it.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Strong and Weak Momentum as 2024 Approaches

Mark Schniepp
December 13, 2023

So the Nation and the State averted recession in 2023. Growth was above expectations for the year, the labor markets remained at full employment, wages continued to rise, people spent their earned incomes along with their savings, and nearly all the labor strikes got settled.

As we launch into 2024, here is why we don’t see any immediate vulnerability in the economy yet:

Black Friday apparently did not disappoint this year. Anecdotal accounts from major retailers allege a 7.5 percent increase in sales from last year.

Personal spending by consumers has been slowing as of late, but it’s still running ahead of inflation which to date has softened to 3.1 percent nationally, and 2.8 percent in California.

Employment for November rose by 199,000 jobs and the unemployment rate fell to 3.7 percent. Both of these economic measures were a surprise to the upside.  The rate of layoffs remains very low though we are seeing a short spurt here in December. The rate of workers filing for unemployment insurance remains very low.  Wage increases remain slightly ahead of expectations.

Despite the never-ending war in Ukraine, the new war in the Gaza Strip, the divisiveness in Congress, the divisiveness regarding university protests in favor of Hamas, consumer sentiment survey results from the University of Michigan showed a pronounced reversal in the persistent pessimism by consumers.

A rise in the index indicates optimism. The early December index rose  to it’ highest level since July. Expectations regarding inflation improved dramatically. Attitudes
regarding current economic conditions also rose sharply.


The visitor industry has continued to generate vibrant activity in recreation, entertainment and leisure services all year. Whereas taxable sales of goods is lower this year in California compared to 2022, expenditures at restaurants, bars, and entertainment venues is higher in 2023.

Most sectors of the economy remain in some form of positive growth or are stable. The big contributor to the job market has been healthcare along with recreation and leisure services. In Southern California, professional services including technology services has also accounted for significant hiring, despite the layoff surge that dominated the news cycle earlier in 2023.

In fact, it’s been Southern California that has done the heavy lifting of the state’s economy during most of the year. The level of new housing and new commercial and industrial development has been impressive in view of current interest rates and inflation.

However, the state government has imitated the federal government and has been reluctant to rein in spending.

The California Legislative Analyst’s Office reported that the fiscal deficit for California will rise to a record $68 billion in 2024-2025, the second straight year of massive deficits for the state. California needs to cut spending and use the rainy-day funds to bring next year’s budget into balance.

Income tax collections which are the principal source of revenue for the California State Government fell 25 percent in 2022-23.  They are projected to rise only marginally from those levels in the current year. State Government spending needs some restraint, but without it, look for policy makers to find some way to increase revenues.

Looking Forward

The long awaited recession that never came in 2023 is not necessarily postponed to 2024. There is no recession forecast, but much slower growth will characterize the economy along with a softening job market. The cooling off of labor market tightness is necessary for inflation to normalize to under 3 percent. Then the Fed will relax its restrictive policy and bond yields should ease some, helping out consumers.

This is what the stock market has presumed, and sure enough, the year is ending happy with all the major indexes at 2023 highs. This has boosted optimism and household perceptions of their wealth positions.

  • With inflation falling, the Fed will keep rates steady with perhaps even a rate cut towards the end of 2024.
  • That said, current mortgage rates and car loan rates will remain the same for much of next year. Housing inventory will remain low. Affordability of housing will remain low.
  • A presidential election has the potential to create a lot of flux in the markets.
  • International travel will remain strong, especially with a Summer Olympics in Paris. 89 percent of travel insurance purchases for trips, January 1 to December 31, 2024, are for trips abroad.
  • Taylor Swift concert prices will continue to defy gravity. The lowest price for a single ticket to her Eras Tour through Japan in February is $782 on Stub Hub.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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As 2023 Sunsets, Some California Issues Resolved; Others Remain

Mark Schniepp
November 15, 2023

The Labor Market

2023 was the year of labor disputes. SAG-AFTRA, Writers, Longshore workers, and hotel workers.

The Screen Actors Guild just resolved their 118 day labor dispute with studios in early November, in the wake of the Writers Guild resolution in September. Thousands of SAG-AFTRA members will now be back to work; 20,000 should return to wage and salary jobs in Los Angeles County alone.

The Longshore Workers were without a contract for 13 months, but their strike was resolved in June and union-ratified in August. The LA Hotel workers strike is still unsettled.  The union contract for some 15,000 workers–housekeepers, cooks, front desk agents–at about 60 hotels expired at the end of June. Since then, their union has been fighting for pay raises of more than $10 an hour.

With many of the strikes now over, more jobs needing bodies will be filled. But California still has a million unfilled job openings. So while the end to strikes will bring workers back, the labor market remains too tight.  Hence the leverage that workers on strike have had in their negotiations.

The layoff surge that alarmed the California labor market in late 2022 and early 2023 has subsided. Jobs in tech and retail were jettisoned the fastest, but since March, which represented the peak month, the layoff rate has returned to normal.  And jobs in the sectors that principally provide tech services, are rising again.

Summary: Pillars of the state’s economy—entertainment, technology, and the Ports—now have workers back on the job, but the California labor market simply needs more willing participants.


The progress on the inflation front has now stalled. October inflation at the national level came in at 3.2 percent, and 4.0 percent for core inflation.  The downward trajectory was interrupted in July and has moved laterally since.   In California however, local inflation is deflating faster, demonstrating continued progress. The rate for October was 2.4 percent in the greater Los Angeles metro area, and 2.7 percent for the core rate.

Sticky U.S. core inflation remaining at or about 4.0 percent is not going to appease the Fed and their mission to dampen down the rate to 2.0 percent.  Now, the biggest risk to the U.S. economy is that more rate hikes may be on the horizon.

Summary: General consumer price inflation at the national level has stalled, and core inflation remains too high, while regional inflation is making clear progress. Nevertheless, the potential continuation of restrictive monetary policy could tip over the economy in 2024.

State Budget

Income tax receipts to the state have floundered this year, leaving the state budget in a serious $32 billion general fund deficit before the current budget was adopted in July.

Spending cuts should eliminate about $8 billion of that deficit, but the remaining $24 billion is being reduced with gimmicks that delay spending to future years, and borrow money.  Stagnant revenue growth is the forecast from the Department of Finance and the Legislative Analyst’s Office, together with years of projected and meaningful deficits through fiscal 2027.  The principal problem with the state of the budget is the high level of spending that has never retreated from the exaggerated spending that characterized the 2020-2021 COVID -19 years.

Drawing on some of the $38 billion that sits in reserves would help the budget this year and next, but the Governor is reluctant to use those funds unless a bona fide recession hits.

Summary: The state budget today and in the next few years will run deficits, even if spending does not increase. We may see more bond issuance to pay for all the spending that has not been downsized to align with projected revenue growth.

The Prospect of Recession

The unemployment rate has risen, threatening to trigger a negative feedback loop of further unemployment that leads to a recession. When workers lose paychecks, they cut back on spending, and as businesses lose customers, they need fewer workers, and that leads to layoffs and higher unemployment, and on it goes . . . .

The signals however are inconsistent.

Hiring continues though it has softened.

The rate of layoffs is low

The rate of labor force growth is low and incomplete.

Consumer spending remains strong even after accounting for inflation.

So for now, not to worry.

Summary: not much evidence of recession yet.  And we remain on a vigilant watch.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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When Good News is Bad News A Slowdown is Coming

Mark Schniepp
October 10, 2023

General Condition Today

The economy continues to grow at a modest pace in 2023, though the third quarter that just ended will show accelerated growth of 4+ percent.

You as consumers are carrying the economy forward with your spending which is the key role in the growth of the economy this year

Despite high interest rates and persistent inflation, the outlook for recession has been cancelled for 2023. The labor markets remain too strong, but a change is coming.

There is still uncertainty whether the recession has merely been delayed or averted entirely.

Good News is Bad News

The September employment report indicated that twice as many new jobs were created than had been forecast by economists.  In numbers, it was 336,000.

And this occurred in the wake of the 25,000 participants in the United Auto Workers strike.  The unemployment rate remained at 3.8 percent.  In California, the unemployment rate for the latest month—August—is at 4.6 percent.

The news is that the labor market remains strong. Typically that is good news. But good news about the labor market in the current environment is bad news for the Federal Reserve as its main goal now is to bring down inflation.

The growth in wages—-or simply put: wage inflation—was not that strong in September, and that is good news.  Wage growth has now slowed to 4 percent for the last 12 months. We need to see growth slow further if general price inflation is going to be reduced to the Fed’s target of 2.0 percent.  The Fed is most focused on wage growth and how it affects overall inflation.

Therefore, unless there is clear progress of inflation approaching the 2.0 percent target, continued aggressive monetary policy in the form of interest rate hikes are probable.

Slowdown in the Cards

Higher interest rates will ultimately take their toll on more than just the housing and new car sales markets.

Over the next 6 months, the labor market is very likely to show more pronounced slowdowns in job creation and job turnover, which is people quitting and switching jobs.

  1. Consumers are reeling in their spending
  2. Using credit to consume is less attractive with high interest rates
  3. Higher rates also discourage business investment, which slowed in May, June and July
  4. Fewer goods can be purchased with the same expenditure level, due to inflation
  5. Fewer goods sold mean less sales, lower earnings of corporations, and lower stock prices.

And though inflation is forecast to decelerate on a path towards the 2.0 percent target, stronger labor markets lengthen the time period for inflation to align with this target.

What You Can Expect

The UCLA Anderson School forecast has growth slowing to less than one percent by mid-2024.

Consumers are the reason due to inflation adjusted income and spending recording no or very low growth in 2024.

A bona fide recession is avoided but the economy grows so slightly that a tipping point is not unlikely, and a mild recession lasting two quarters is within the forecast error.

Corporate earnings will suffer with the decline in demand, and stock market corrections will be more likely in 2024.

Headline Inflation remains persistently in the 3.0 to 3.3 percent range.

Mortgage rates stay high throughout 2024 and begin to contract in 2025.

The labor market does not suffer much though wage pressures will largely though not entirely be diffused.  Core inflation remains higher than 3.0 percent in 2024 and 2025.


The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Strong Growth Ahead But Look for Housing to Correct

Mark Schniepp
September 1, 2023

I wouldn’t say it if I didn’t have the evidence.

The long awaited recession in 2023 is postponed, and perhaps even cancelled.

The GDP estimate for the current quarter (which ends at the end of this month) is currently running at 3.9 percent annualized growth, says Moody’s Analytics.  The Federal Reserve of Atlanta has growth at 5.9 percent for the current quarter through August 24. These rates are quite healthy and entirely unexpected.

These preliminary estimates of GDP growth are based on the most recent incoming data on the economy and to date, there has been strength in a number of indicators:

People filing for unemployment insurance claims remain very low. The unemployment rate remains at a scant 3.8 percent.

Consumer spending remains surprisingly steady. Retail sales posted their fourth consecutive month of healthy growth in July. Orders for goods in general rose sharply in June.

Consumer sentiment, bumping along a record low for the last several months has now meaningfully improved.

Business investment is holding up well. Boeing reported net orders of 200 new aircraft.

Non-residential investment contributed nearly a full percentage point to GDP growth last quarter and it’s still increasing this quarter.

Industrial production reversed its downward trend and came in stronger than expected in July. And even manufacturing improved slightly in August.

Inflation is moderating and there will be disinflation in vehicle prices and housing rents this month.

New residential construction has recently accelerated, and new home sales have increased sharply between February and July. The lack of resale inventory is pushing prospective homebuyers into the new-home market and in turn supporting demand for new construction.

Housing not out of the woods

Soaring mortgage rates and rock-bottom affordability have crushed the demand for houses, but a simultaneous reduction in housing supply has supported prices.

Home prices at the national level climbed nearly a full percent in July (from June), topping their previous peak set a year ago.

We are observing rising home prices in California including the high end coastal areas. Selling values have generally risen in April, May, June, and July this year.

As a seller, we don’t think you’re out of the woods yet. With the rate on the 30-year fixed rate mortgage averaging near 7.5% over the last three weeks and a higher path of rates expected, more potential buyers will  be pushed out of the market.

The housing market will descend further into correction territory due to the significant headwind posed by an unaffordable and overvalued housing market. Prices are currently inflated relative to what economic fundamentals have supported historically. If demand does weaken as expected, prices should be pulled back toward their fundamental values. The outlook expects prices to decline about 5 percent over the next two years. The correction will be less noticeable in severely supply constrained areas.

Wake me up when September ends  (a song by Green Day)

Because that’s when I’ll know the current estimates of growth are real. The economy has proven to be much more robust and resilient than anyone thought this year. The growth estimates are more believable as we see momentum building. While some headwinds still exist, they are fading in many important sectors of economic growth.

The most aggressive Fed tightening in 40 years hasn’t delivered a recession punch to the economy and it appears it just might not. If inflation continues to improve and growth remains steady, we may not see any further rate increases and that will bury the final fears of recession in 2023.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Symptoms of a Tight Labor Market

They all lead to more inflation

Mark Schniepp
August 2023

I’ve written about the labor market of California and how there is not much in it this year. While the labor market  has cooled some, it’s still fundamentally strong and by most accounts, workers are fully employed.

Unemployment is still quite low, especially in the coastal counties, and wages for all sectors have risen.  Which leads me to the first symptom: rising wages that contribute to higher inflation for all goods and services.

While wage increase are generally great for workers and households, they further contribute to higher prices in general. This is not a good thing.

A tight labor market may be good for workers, but has a number of direct and indirect effects on inflation, which are significant and not in the best interest of the U.S. or California economy:

Quits by Workers

The monthly frequency of workers quitting their jobs in California has lessened over the last year, but at 350,000 per month, it’s still quite high. Total separations from work which include people quitting, retiring, or getting laid off is over 500,000 per month. And there are still over 1 million job openings in the state that remain unfilled. The high frequency of labor turnover increases recruiting and labor costs for businesses, which contributes to higher wage and product price inflation. Wage inflation is especially high for workers who quit to accept a new job.

Demand for remote working conditions

The high level of quits and unfilled open job positions have combined with worker demands to force employers to allow them to work remotely. This has led to meaningful declines in office demand and rising office building vacancy.  Empty office buildings result in less revenue earned by office building owners. Less revenue translates into lower commercial real estate values which amplify problems when commercial real estate loans require refinancing, especially in the current high interest rate environment.  This is now an expanding and scary issue for regional banks which hold massive amounts of commercial real estate mortgage debt. Refinancing these properties this year and next could potentially lead to a spate of foreclosures if not more bank failures in the state.

Quits and ultimatums by workers for remote setting work have led to worrisome rising vacancy of office space in the major urban markets of California.  Lease space is now extraordinarily high in Los Angeles and San Francisco, exceeding 30 percent.

Labor strikes

International Longshore Workers

The Longshore worker’s dispute lasted from May 2022 through June 2023. It’s still not entirely resolved and it will result in at least 8 to 10 percent wage hikes for dock workers at 29 West Coast ports.

Cargo volumes coming into the Ports of Los Angeles and Long Beach were diverted through the Panama Canal to east cost ports over the last year. This results in higher shipping costs and higher prices for imported goods.

Writers and Actors

The Writer’s Guild of American strike began on May 1. The Hollywood Actors strike commenced on July 17.   This is the first time that both the WGA and SAG have been on strike against the Alliance of Motion Picture and Television Producers at the same time since 1960, making it an unprecedented one. The WGA demands increased minimum compensation in all areas of media, and increased pension and health plans, and more. SAG is asking for an 11 percent increase in the minimum basic agreement this year, and 4 percent per year going forward. Actors also demand increased residual payments for film and TV.

Hotel Workers

Hotel workers have been striking and demanding higher wages and other benefits as they argue their existing salaries are unsustainable amid the region’s high cost of living, or more specifically, the cost of rental housing. The latest strikes are the largest that have been authorized in recent years in the hotel industry.

Unite Here Local 11, representing 32,000 hospitality workers across Southern California has coordinated a number of multi-day strikes in July impacting many hotels in Los Angeles and Orange County.

The union has been in contract negotiations since April. It demands an immediate $5 per hour wage bump and $3/hour annual increases over the next 2 years, health benefits and a pension.

Strikes in general disrupt services and frequently the provision of goods. However, and as we all know, higher wages compensate us, but contribute to rising prices for all goods and services that we as consumers must ultimately pay. And this leads to higher stubborn core inflation due to rising labor costs. While the headline inflation has now fallen to 3.0 percent, core is inflation is still at an unacceptable rate of 4.8 percent, more than twice the Fed’s target rate.

I’m not against fair labor contracts or fair wage levels for workers in any industry, but when there is an avalanche of  labor market disputes, this leads to the likelihood of meaningful increases in wages and ultimately prices of everyday goods which collectively make everyone worse off.

Amid rising labor costs, employers seek ways to reduce staffing, typically through automation. The onset of ChatGPT, other “generative AI” software for transforming the workplace, and robots will enable firms to ultimately displace workers in many fields, including the ones now in labor disputes seeking higher levels of remuneration.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Stormy Weather Remains at Bay

A Mid-Year Assessment

Mark Schniepp
July 8, 2023

Fortunately, current conditions are not yet supporting the widespread expectation of inevitable recession this year.

Back on March 27, the majority of economists forecast a U.S. recession in 2023, and for many good reasons. And while the economic clouds are darkening . . .there’s no storm yet.

The sharpest increase in interest rates in 40 years, the excessively inverted yield curve, growing more excessive by the week, and the dismal ratings in American polls regarding government leadership and the direction of the country have not tipped over the U.S. economy.

The Recent Evidence

The financial market indices are all higher during the first half of the year. The laggard is the Dow Jones Industrial Average, ahead by just 2.4 percent year-to-date. The S&P 500 index is up 15 percent and the Nasdaq Composite is soaring, up 31 percent.  The bull market in stocks is now about 9 months old.  Global economic  conditions are improving.

Surprisingly, despite mortgage rates hovering near their peak for the cycle, new home sales were higher in May.  Recent price declines have helped to increase sales. But now even home prices are reversing again, with a number of price indices rising in March, April and May.

Fed chair Jerome Powell said last week that he expects further interest rate increases, consistent with the assessment of his fellow policymakers at the June meeting of the Federal Open Market Committee.  We are very likely to see another hike in July.

Even absent more rate hikes, there is little doubt that recessionary risks have risen this year, and they will continue to haunt the economy for the rest of 2023. But as they do, firms continue to hire, households continue to spend, and the economy continues to grow.

The current level of consumer pessimism is consistent with past periods of economic recession, but that pessimism Is not deepening. . . . . . In fact, the consumer sentiment index rose 5 points in June and is 14 points higher than a year ago.  The labor market’s persistent strength is an encouraging sign that is leading to an uptick in optimism.

The GDPNOW estimate is running at 1.9 percent for quarter 2 which just ended.

The Atlanta Federal Reserve estimates GDP growth for the contemporaneous quarter, based on the economic indicator reports coming in daily.

We’ve had two positive growth quarters this year so far (both at about 2.0 percent), with some momentum building as we head into Q3. Inflation reports have consistently been lower every month for a year now.

Manufacturing indicators are mixed, so we can’t draw too many conclusions from that. Actual production has been contracting, but new orders for manufactured goods are rising. And business investment in both structures and equipment rose in the 2nd quarter, contributing about half of the positive growth in GDP for Q2.

While most economists have stubbornly not changed their position on recession in 2023, consumer expectations of recession significantly reversed in June, though their spending has become more cautious.

We expect real consumer spending growth to remain modest through the summer and then slowly gather momentum. On the plus side, the few remaining drags from supply constraints will lessen, inflation will continue to slow, and jobs will remain plentiful.

Despite many of the indicators moving in the right direction, admittedly, job growth is slowing, the level of inflation still remains high, wage growth has slowed, and household savings are being drawn down further. Real consumer spending rose 2.7% in 2022, and will grow less than 2 percent in 2023. But the fact that it is still growing is one of the more encouraging signs that a soft landing this year is not a remote possibility.


This mid-year assessment reports that the economy has heroically avoided recession so far, and that there is a rising chance that recession could be averted in 2023.  The strong indicators in the economy remain mostly unchanged, and many of the weak indicators are actually improving.

But we are not out of the woods.  Two more rate hikes threatened by the Fed could be a tipping point. Issues with the leadership of the nation are starting to take center stage in the news—including the fringe, the fake and the mainstream media. Depending on what transpires this summer, potential revelations could rally businesses and consumers or shock them.

That said, we don’t expect much overall improvement in the economy until late 2024 or early 2025 when interest rates will be in decline, the housing sector will have turned around, and inflation should have returned to the longer run average.


The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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