THE UCLA ANDERSON FORECAST FOR THE NATION AND CALIFORNIA

Transcription

1 THE UCLA ANDERSON FORECAST FOR THE NATION AND CALIFORNIA December 2017 Report FORECASTS: 2017Q4 2019Q4 66 th Year

2 UCLA Anderson Forecast Director: Jerry Nickelsburg, Adjunct Professor of Economics, UCLA Anderson School The UCLA Anderson Forecast Staff: David Shulman, Senior Economist William Yu, Economist Patricia Nomura, Economic Research and Managing Editor 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. For information regarding membership in the California Seminar and the Los Angeles and Regional Modeling Groups or to make reservations for future Forecast Conferences, please call (310) The UCLA Anderson Forecast Sponsorships: Are recognized at each conference event, audience includes business, professional and government decisions makers from all over California and the United States Receive prominent placement on conference materials, promotions for event on Forecast website, and Forecast publication Priority admission to all conference events Promotional table at the conference events. For information regarding sponsorship of the UCLA Anderson Forecast, please call (310) or visit This forecast was prepared based upon assumptions reflecting the Project s judgements as of the date it bears. Actual results could vary materially from the forecast. Neither the UCLA Anderson Forecast nor The Regents of the University of California shall be held responsible as a consequence of any such variance. Unless approved by the UCLA Anderson Forecast, the publication or distribution of this forecast and the preparation, publication or distribution of any excerpts from this forecast are prohibited. Published quarterly by the UCLA Anderson Forecast, a unit of UCLA Anderson School of Management. Copyright 2017 by the Regents of the University of California.

3 The Quarterly Forecast: Bursting Bubbles or Soaring Balloons? Financial Markets in 2018 Upcoming Events: UC Hasting/UCLA Anderson Forecast Joint Conference Jan/Feb 2018 Spring Quarterly Conference March 7, 2018 Orange County Regional Economic Outlook March 28, 2018 Summer Conference June 6, 2018 Fall Quarterly Conference September 2018 Winter Quarterly Conference December 2018

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5 THE UCLA ANDERSON FORECAST FOR THE NATION AND CALIFORNIA December 2017 Report Nation California Sunny 2018, Cloudy David Shulman Charts 21 Forecast Tables 31 Summary Tables 35 Detailed A Downshift in Growth Foretold 47 Jerry Nickelsburg City Growth, Cost of Living, 57 and Human Capital William Yu Charts 65 Recent Evidence Charts 70 Forecast Tables 79 Summary Tables 81 Detailed

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7 THE UCLA ANDERSON FORECAST FOR THE NATION DECEMBER 2017 REPORT Sunny 2018, Cloudy 2019

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9 SUNNY 2018, CLOUDY 2019 Sunny 2018, Cloudy 2019 David Shulman Senior Economist, UCLA Anderson Forecast December 2017 Of a sudden, propelled by strength (8% quarterly growth) in equipment spending, the economy is growing at a 3% clip and the near-term outlook has become decidedly sunny. (See Figures 1 and 2) Moreover, the 3% pace of growth is expected to continue through the second quarter of However, as the unemployment rate drops below 4% and employment growth stalls in the face of a labor shortage, economic growth will drop back to the 2% growth rate we have been used to since the end of the financial crisis eight long years ago. Indeed, by the end of the forecast horizon in 2019 real GDP growth could very well be running at a rate below 1.5% as the outlook becomes cloudy. (See Figures 3 and 4) Figure 1 Real GDP Growth, 2007Q1 2019Q4F Figure 2 Real Equipment Spending, 2007Q1 2019Q4F (Percent Change, SAAR) 6% 4% 2% 0% (Percent Change, SAAR) 40% 20% 0% -2% -4% -20% -6% -8% -40% -10% % Sources: U.S. Department of Commerce and UCLA Anderson Forecast Sources: U.S. Department of Commerce and UCLA Anderson Forecast UCLA Anderson Forecast, December 2017 Nation 11

10 SUNNY 2018, CLOUDY 2019 Figure 3 Nonfarm Employment, 2007Q1-2019Q4 Figure 5 Federal Deficit, FY FY2019F (Millions) (Billions $, Annual FY Data) $0 $-200 $-400 $-600 $-800 $-1000 $-1200 $ $ Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast Sources: Office of Management and Budget and UCLA Anderson Forecast Figure 4 (Rate) 10% 9% 8% 7% 6% 5% 4% Unemployment Rate, 2007Q1-2019Q4 rate profits in This last point is one of the reasons why the federal deficit declines in (See Figure 5) We are more certain that the next few years will reverse the seven-year annual decline in defense spending. (See Figure 6) With the potential for missiles from North Korea reaching the West Coast, continued fighting in the Middle-East and growing worries about Russia and China, defense spending will likely be on the rise over the next several years. We are assuming real defense spending will increase by 2% and 2.7% in 2018 and 2019, respectively. If anything, our forecast is more likely to be low than high. 3% Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast Questions about Fiscal Policy As we are writing in late November, many questions remain about the major tax bills now working their way through Congress. There is uncertainty surrounding the corporate tax rate, state and local tax deductions, child credits and the permanence of the entire package. For modeling purposes we have assumed a ten-year $1.5 trillion tax cut, with a 25% corporate tax rate (a compromise from 20%), some allowance for state and local tax deductions and $100 billion in revenues coming from a tax on repatriated corpo- Figure 6 Real Defense Spending, FY 2007 FY 2019F (Percent Change, Annual Data) 8% 6% 4% 2% 0% -2% -4% -6% -8% Sources: U.S. Department of Commerce and UCLA Anderson Forecast 12 Nation UCLA Anderson Forecast, December 2017

11 SUNNY 2018, CLOUDY 2019 Monetary Policy in the Post-Yellen Era With the appointment of Jerome Powell as Fed chairman, the Janet Yellen era is coming to an end. Because Powell s views on monetary policy are very similar to Yellen s we do not anticipate any significant changes. However, with respect to regulatory policy, Powell is believed to be far more open than Yellen to reviewing the financial crisis regulations that were put into place from Figure 7 (Rates) 6% 5% 4% 3% Federal Funds vs. 10-Year U.S. Treasury Bond Rates, 2007Q1-2019Q4F Thus, we expect that the gradual interest rate normalization policy that has been underway for a year will continue well into 2019 with a 25 basis point increase from the current 1.375% rate in December and three more increases in By the end of 2019, the fed funds rate will likely approximate 3%. (See Figure 7) We caution that the futures markets, in contrast to our forecast and the Fed s dot plots, are forecasting only one rate hike next year. 2% 1% 0% -1% Fed Funds 10-Yr. T-bonds Sources: Federal Reserve Board and UCLA Anderson Forecast 2019 Concomitantly, with the rise in short-term interest rates long rates will rise as well and we would not be surprised to see the yield on 10-year U.S. Treasury bonds to exceed 4%, up from the current 2.4%. Rising inflation will be the driver in the increase in long rates, more on that below. The Powell Fed will also continue the policy of gradually shrinking the Fed s bloated balance sheet that began in October. (See Figure 8) Simply put, after three phases of quantitative easing that expanded the balance sheet from $800 billion to over four trillion dollars will be unwound over a period of several years with the ultimate target of $2.5 - $3.0 trillion, quantitative tightening if you will. (See Figure 8) But make no mistake the balance sheet shrink the Fed is attempting to do is unprecedented. Figure 8 Federal Reserve Assets, 2003 Nov. 15, 2017, In $ Millions, SA Sources: Federal Reserve Board via Fred UCLA Anderson Forecast, December 2017 Nation 13

12 SUNNY 2018, CLOUDY 2019 Inflation on the Rise Figure 9 Headline vs. Core Inflation, 2007Q1-2019Q4F It now appears that the second quarter slowdown in inflation was transitory and the future quarterly track in inflation will be in excess of 2% throughout the forecast horizon. (See Figure 9) This will hold true for both headline and core consumer prices. Further, oil prices now appear to be tracking about $10/barrel higher than our forecast of just one quarter ago. The primary source of the rising rate of inflation will be a significant rebound in wage growth. After creeping along in the 2% range, we forecast acceleration in total compensation growth to approximately 4% by late 2018 on a year-over-year basis. (See Figure 10) The recent rise in labor productivity buttresses our view that the long-anticipated increase in wages is at hand. Consumer Spending Supported by Rising Wages and Asset Prices Real consumption spending is maintaining its strength experienced in 2016 by increasing 2.7% and 2.8% in 2017 and 2018, respectively. (See Figure 11) However, as auto sales slow in 2019 consumption growth will slip back to 2.2%. (See Figure 12) Simply put it is getting very late in the auto cycle. However, as long as stock and house prices remain elevated the consumer, or at least the high-end consumer, will remain in good shape. (See Figures 13 and 14) In the case of the lower end consumer we are encouraged by Wal*Mart reporting a strong 2.7% increase in year-over-year same store sales in their latest quarter. One of the big puzzles in recent years is the lack of robustness in new single-family housing construction. Given low interest rates and strong employment growth housing activity should be doing much better. Two factors that are being discussed more and more are the unwillingness of the baby boom generation to move as they age in place and highly restrictive zoning in the booming coastal cities. As a result, housing starts have remained below the underlying demographic demand of million units a year for a decade. We are forecasting modest increases (Percent Change Year Ago) 6% 4% 2% 0% -2% Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast Figure Total Compensation per Hour, 2007Q1 2019Q4 (Total Compensation, %CHYA) 6% 5% 4% 3% 2% 1% 0% -1% Headline 2013 Core Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast in housing starts from an estimated 1.19 million units this year to 1.27 million and 1.34 million in 2018 and 2019, respectively. (See Figure 15) 14 Nation UCLA Anderson Forecast, December 2017

13 SUNNY 2018, CLOUDY 2019 Figure 11 Real Consumption Expenditures, F Figure 12 Light Vehicle Unit Sales, F (Percent Change, Annual Data) 4% (Millions, Annual Data) 18 3% 2% 16 1% 14 0% -1% 12-2% Sources: U.S. Department of Commerce and UCLA Anderson Forecast Sources: Bureau of Economic Analysis and UCLA Anderson Forecast Figure 13 S&P/Case-Shiller 20-City Composite Home Price Index, Dec 1999 Aug 2017, December 1999 =100, SA Sources: Standard & Poor s via FRED UCLA Anderson Forecast, December 2017 Nation 15

14 SUNNY 2018, CLOUDY 2019 Figure 14 S&P 500 Stock Index, 18 Nov Nov 17 Sources: Standard & Poor s via BigCharts.com Figure 15 Housing Starts 2007Q1-2019Q4F Figure 16 Real Export Growth, F (Thousands of Units, Annualized Data) 1600 (Percent Change, Annual Data) 15% % 5% % 600-5% % Sources: Bureau of the Census and UCLA Anderson Forecast Sources: U.S. Department of Commerce and UCLA Anderson Forecast 16 Nation UCLA Anderson Forecast, December 2017

15 SUNNY 2018, CLOUDY 2019 Exports Rebounding, But NAFTA Risk Looms In response to a recovering global economy, real exports are recovering from the near zero growth of 2015 and Real exports are estimated to increase by 3.2% this year and 4.5% and 4.1% in 2018 and 2019, respectively. (See Figure 16) According to a recent Goldman Sachs report, world economic growth is forecast to increase 3.7% this year and 4.1% in Growth will come from, 2+% growth in the Euro Area, 6.5% in China, a very strong 8% in India and a rebound in Brazil from O.9% in 2017 to 2.7% in (See Figure 17) Lighthizer. Although news from the Mexico City negotiations is not on the front burner, it would be advisable to pay very close attention. Why? Leaving NAFTA is not so simple because it would undo countless supply chains among the three countries (U.S., Canada and Mexico) involved. Just as a reminder, the gross trade volumes among the three NAFTA partners amounts to over one trillion dollars per year. 2 Especially hard hit would be the U.S. automobile industry where parts cross borders several times in the manufacturing of a single automobile. In our view, should the U.S. leave NAFTA the growth outlook would deteriorate and the chance of a recession in late 2018 or 2019 would significantly increase. Figure 17 Global Real GDP Growth, F, Annual Data Conclusion Country/Region 2016A 2017F 2018F 2019F Japan Euro Area UK China India Brazil World (incl. U.S.) Source: Goldman Sachs The real risk to our export forecast and for that matter the entire forecast is political. In less than a year, President Trump has blown up the Trans Pacific Partnership (TPP) trade treaty and the global climate accord. The North American Free Trade Treaty (NAFTA) could be next especially given the hawkish views espoused by Secretary of Commerce Wilbur Ross and Trade Representative Robert With our weather forecast analogy for a title we are hoping to be as accurate as modern weather forecasting. Economics has a lot to learn from near-term weather forecasting. It looks like 2018 is shaping up to be a pretty good year. There is momentum coming from the recent strength in 2017, strong equipment spending, the likelihood of a tax cut and a consumer that is benefitting from higher asset prices and the prospect of higher wages. Unemployment will drop below 4% and remain there throughout most of the forecast horizon and inflation will experience an uptick. The Fed will respond by continuing to normalize short-term interest rates with the Fed Funds rate on a path to 3% by However, as we get into 2019, inflation could be approaching 3% and the economy will slow as it reaches capacity constraints. The risks to the forecast include the unknowable consequences of the Fed reducing its balance sheet and the potential failure of the ongoing NAFTA negotiations. All told a sunny 2018 with clouds coming in See Hatzius, Jan et al., As Good as it Gets, Goldman Sachs, November 15, See Shulman, David, Extreme Makeover: Second Pass at Trumponomics, UCLA Anderson Forecast, March 2017 UCLA Anderson Forecast, December 2017 Nation 17

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17 THE UCLA ANDERSON FORECAST FOR THE NATION DECEMBER 2017 REPORT Charts

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19 CHARTS FORECAST Real Disposable Income and Consumption (4-Qtr. % Ch.) (3-Yr. % Ch.) Consumer Expenditures on Medical Services: Quantity % + Price % = Expenditure % Consumption Disposable Income Quantity Price (4-Qtr. % Ch.) 20 Real Export and Import Growth Exports Imports (5-Yr. % Ch.) Real GDP Growth Developed World vs. U.S U.S. Developed World UCLA Anderson Forecast, December 2017 Nation 21

20 CHARTS FORECAST (4-Qtr. % Ch.) Real GDP Growth (Bil $) Actual Real GDP Vs. Potential Real GDP Actual Real GDP Potential Real GDP (Percent) Defense Spending As A Share of GDP (% Ch. 12-Qtr. Mov. Avg.) 8 Real Purchases of Goods and Services by the Federal Government Nation UCLA Anderson Forecast, December 2017

21 CHARTS FORECAST (% of Real GDP) Change in Real Business Inventories (3-yr. Moving Average) (3-yr. % Ch.) Real Investment-Equipment & Software Info. Processing Equip. vs. Other Equip Total Less Info. Equip. Information Processing Equip. Nonres. Fixed Investment Share of Real GDP Vs. Equip. & Software Share of Bus. Fixed Invest. (Percent) Nonres. Fixed Investment Share Equip. & Software Share/Nonres.Fixed 2016 (Percent) (3-Yr. % Ch.) 20 Real Investment in Nonresidential Structures Total vs. Commercial Bldgs Total Commercial Bldgs. UCLA Anderson Forecast, December 2017 Nation 23

22 CHARTS FORECAST Nonresidential Fixed Investment Share of Real GDP Vs. Capital Stock Growth (Invest. Share %) 15 (4-Qtr. % Ch.) Nonres. Fixed Investment Share Capital Stock Growth 8 Real Investment in Residential Structures Vs. New Housing Starts (Bil $) (Mil. Units) Real Investment (Left) Housing Starts (Rt.) (10-Yr. % Ch.) Real Hourly Wage Compensation Vs. Productivity in Nonfarm Sector (Percent of GDP) Real Wage Productivity Federal Surplus or Deficit 24 Nation UCLA Anderson Forecast, December 2017

23 CHARTS FORECAST Consumer Price Index Inflation Real Refiner's Cost of Crude Oil (Percent of GDP) 6 (2009$/barrel) (Indexed: 2005 = 1.00) 1.4 Real and Nominal Exchange Rate Industrial Countries Trade Weighted Average Nominal Exchange Rate Real Exchange Rate (Percent) 15 Treasury Yields Vs. CPI Inflation Inflation 30-Year Bonds 90-Day Bills 2019 UCLA Anderson Forecast, December 2017 Nation 25

24 CHARTS FORECAST Unemployment and Capacity Utilization Mfg. Federal Transfers to Persons Postwar Business Cycles (Percent of GDP) (%) (100% - Capacity Util.) Unemployment Rate Capacity Util. Mfg. Rate (Percent of GDP) Federal Transfers to Persons For Health Insurance (Mil. Units) U.S. Housing Starts Vs. Mortgage Rate (Percent) Housing Starts Mortgage Rate 26 Nation UCLA Anderson Forecast, December 2017

25 CHARTS FORECAST (Mil. Units) U.S. Retail Sales of Automobiles and Light Trucks Federal Net Interest Payments on National Debt (Percent of National Income) Automobiles Light Trucks UCLA Anderson Forecast, December 2017 Nation 27

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27 THE UCLA ANDERSON FORECAST FOR THE NATION DECEMBER 2017 REPORT Tables

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29 FORECAST TABLES - SUMMARY Table 1. Summary of the UCLA Anderson Forecast for the Nation Monetary Aggregates and GDP (% Ch.) Money Supply (M1) Money Supply (M2) GDP Price Index Real GDP Interest Rates (%) on: Federal Funds day Treasury Bills year Treasury Bonds year Treasury Bonds Moody s Corporate Aaa Bonds yr Bond Less Inflation Federal Fiscal Policy Defense Purchases (% Ch.) Current $ Constant $ Other Expenditures (% Ch.) Transfers to Persons Grants to S&L Gov t Billions of Current Dollars, Unified Budget Basis, Fiscal Year Receipts Outlays Surplus or Deficit (-) As Shares of GDP (%), NIPA Basis Revenues Expenditures Defense Purchases Transfers to Persons Surplus or Deficit (-) Details of Real GDP (% Ch.) Real GDP Final Sales Consumption Nonres. Fixed Investment Equipment Intellectual Property Structures Residential Construction Exports Imports Federal Purchases State & Local Purchases Billions of 2009 Dollars Real GDP Final Sales Inventory Change UCLA Anderson Forecast, December 2017 Nation 31

30 FORECAST TABLES - SUMMARY Table 2. Summary of the UCLA Anderson Forecast for the Nation Industrial Production and Resource Utilization Industrial Prod. (% Ch.) Capacity Util. Manuf. (%) Real Bus. Investment as % of Real GDP Nonfarm Employment (mil.) Unemployment Rate (%) Inflation (% Ch.) Consumer Price Index Total less Food & Energy Consumption Chain Index GDP Chain Index Producers Price Index Factors Related to Inflation (% Ch.) Nonfarm Business Sector Wage Compensation Productivity Unit Labor Costs Farm Price Index Crude Oil Price ($/bbl) New Home Price ($1000) Income, Consumption and Saving (% Ch.) Disposable Income Real Disposable Income Real Consumption Savings Rate (%) Housing and Automobiles--millions of units Housing Starts Auto & Light Truck Sales Corporate Profits Billions of Dollars Before Taxes After Taxes Percent Change Before Taxes After Taxes International Trade Factors Nominal U.S. Dollar--% change Industrial Countries Developing Countries Exports Imports Net Exports (bil. $) Real U.S. Dollar--% change Industrial Countries Developing Countries Exports Imports Net Exports (bil. 09$) Nation UCLA Anderson Forecast, December 2017

31 FORECAST TABLES - QUARTERLY SUMMARY Table 3. Quarterly Summary of the UCLA National Anderson Forecast for the Nation 2017:2 2017:3 2017:4 2018:1 2018:2 2018:3 2018:4 2019:1 2019:2 2019:3 2019:4 Monetary Aggregates and GDP (% Ch.) Money Supply (M1) Money Supply (M2) GDP Price Index Real GDP Interest Rates (%) on: Federal Funds day Treasury Bills year Treasury Bonds year Treasury Bonds Moody s Corporate Aaa Bonds yr Bond Less Inflation Federal Fiscal Policy Defense Purchases (% Ch.) Current $ Constant $ Other Expenditures (% Ch.) Transfers to Persons Grants to S&L Gov t Billions of Current Dollars, Unified Budget Basis, NSA Receipts Outlays Surplus or Deficit (-) As Shares of GDP (%), NIPA Basis Revenues Expenditures Defense Purchases Transfers to Persons Surplus or Deficit (-) Details of Real GDP (% Ch.) Real GDP Final Sales Consumption Nonres. Fixed Investment Equipment Intellectual Property Structures Residential Construction Exports Imports Federal Purchases State & Local Purchases Billions of 2009 Dollars Real GDP Final Sales Inventory Change UCLA Anderson Forecast, December 2017 Nation 33

32 FORECAST TABLES - QUARTERLY SUMMARY Table 4. Quarterly Summary of The UCLA National Anderson Forecast for the Nation 2017:2 2017:3 2017:4 2018:1 2018:2 2018:3 2018:4 2019:1 2019:2 2019:3 2019:4 Industrial Production and Resource Utilization Production--% change Capacity Util. Manuf. (%) Real Bus. Investment as % of Real GDP Nonfarm Employment (mil.) Unemployment Rate (%) Inflation--% change Consumer Price Index Total less Food & Energy Consumption Deflator GDP Deflator Producers Price Index Factors Related to Inflation--%change Nonfarm Business Sector Wage Compensation Productivity Unit Labor Costs Farm Price Index Crude Oil Price ($/bbl) New Home Price ($1000) Income, Consumption and Saving--%change Disposable Income Real Disposable Income Real Consumption Savings Rate (%) Housing and Automobiles--millions of units Housing Starts Auto and Light Truck Sales Corporate Profits Billions of Dollars Before Taxes After Taxes Percent Change Before Taxes After Taxes International Trade Nominal U.S. Dollar--% change Industrial Countries Developing Countries Exports--% change Imports--% change Net Exports (bil. $) Real U.S. Dollar--% change Industrial Countries Developing Countries Exports--% change Imports--% change Net Exports (bil. 09$) Nation UCLA Anderson Forecast, December 2017

33 FORECAST TABLES - DETAILED Table 5. Part A. Gross Domestic Product Billions of Current Dollars Gross Domestic Product Personal Consumption Expenditures Durable Goods Autos and Parts Nondurable Goods Services Gross Private Domestic Investment Residential Nonres. Structures Equipment Intellectual Property Change In Inv Net Exports Exports Imports Government Purchases Federal Defense Other State and Local Billions of 2009 Dollars Gross Domestic Product Personal Consumption Expenditures Durable Goods Autos & Parts Nondurable Goods Services Gross Private Domestic Investment Residential Nonres. Structures Equipment Intellectual Property Change In Inv Net Exports Exports Imports Government Purchases Federal Defense Other State and Local UCLA Anderson Forecast, December 2017 Nation 35

34 FORECAST TABLES - DETAILED Table 5. Part B. Gross Domestic Product Annual Rates of Change of Current Dollar GDP Components (%) Gross Domestic Product Personal Consumption Expenditures Durable Goods Autos and Parts Nondurable Goods Services Gross Private Domestic Investment Residential Nonres. Structures Equipment Intellectual Property Exports Imports Government Purchases Federal Defense Other State and Local Annual Rates of Change of Constant Dollar GDP Components (%) Gross Domestic Product Personal Consumption Expenditures Durable Goods Autos & Parts Nondurable Goods Services Gross Private Domestic Investment Residential Nonres. Structures Equipment Intellectual Property Exports Imports Government Purchases Federal Defense Other State and Local Nation UCLA Anderson Forecast, December 2017

35 FORECAST TABLES - DETAILED Table 6. Employment Employment (Millions) Total Nonagricultural Natural Res. & Mining Construction Manufacturing Trans. Warehous. Util Trade Financial Activities Information Professional & Busi Education & Health Leisure & Hospitality Other Services Government Federal State & Local Population and Labor Force (Millions) Population aged Labor Force Unemployment (%) Table 7. Personal Income and Its Disposition Billions of Current Dollars Personal Income Wages & Salaries Other Labor Income Nonfarm Income Farm Income Rental Income Dividends Interest Income Transfer Payments Personal Contributions For Social Insurance Personal Tax and Nontax Payments Disposable Income Consumption Interest Transfers To Foreigners Personal Saving Personal Saving Rate(%) UCLA Anderson Forecast, December 2017 Nation 37

36 FORECAST TABLES - DETAILED Table 8. Personal Consumption Expenditures By Major Types Billions of Current Dollars Personal Consumption Durable Goods Autos and Parts Nondurable Goods Services Billions of 2009 Dollars Personal Consumption Durable Goods Autos and Parts Nondurable Goods Services Annual Rates of Real Growth Personal Consumption Durable Goods Autos and Parts Furniture Other Durables Nondurable Goods Food and Beverages Gasoline and Oil Fuel Clothing and Shoes Other Nondurables Services Housing Transportation Serv Health Care Recreational Service Food Svcs. Accom Financial Services Other Services Table 9. Residential Construction and Housing Starts Housing Starts (Millions of Units) Housing Starts Single-family Multi-family Residential Construction Expenditures (Billions of Dollars) Current Dollars Dollars % Change Related Concepts Treas. Bill Rate Conventional 30-year Mortgage Rate Median Sales Price of New Homes (Thous $) Real Disp. Income % Change Nation UCLA Anderson Forecast, December 2017

37 FORECAST TABLES - DETAILED Table 10. Nonresidential Fixed Investment and Inventories Billions of Current Dollars Nonres. Fixed Investment Equipment Intellectual Property Nonresidential Structures Buildings Commercial Industrial Other Buildings Utilities Mining Exploration Other Billions of 2009 Dollars Nonres. Fixed Investment Equipment Intellectual Property Nonresidential Structures Buildings Commercial Industrial Other Buildings Utilities Mining Exploration Other Percent Change in Real Nonresidential Fixed Investment Nonres. Fixed Investment Equipment Intellectual Property Nonresidential Structures Buildings Commercial Industrial Other Buildings Utilities Mining Exploration Other Related Concepts Annual Growth-Price Deflator For: Producers Dur. Equip Structures Moody s AAA Rate(%) Capacity Utilization in Manufacturing(%) Final Sales(Bil $) Change in Business Inventories Current Dollars Dollars UCLA Anderson Forecast, December 2017 Nation 39

38 FORECAST TABLES - DETAILED Table 11. Federal Government Receipts and Expenditures Billions of Current Dollars Unified Budget Basis, Fiscal Year Receipts Outlays Surplus or Deficit (-) National Income & Products Accounts Basis, Calendar Year Current Receipts Current Tax Receipts Personal Current Taxes Taxes - Corporate Income Taxes - Production/Imports Contributions for Soc. Ins Income Receipts on Assets Current Transfer Receipts Surplus of Gov t. Enterprises Current Expenditures Consumption Expenditures Defense Nondefense Transfer Payments Government Social Benefits To the Rest of the World Grants-in-Aid To S&L Governments To the Rest of the World Interest Payments Subsidies Surplus or Deficit (-) Table 12. State and Local Government Receipts and Expenditures Billions of Current Dollars Receipts As Share of GDP Personal Tax and Nontax Receipts Corporate Profits Indirect Business Tax and Nontax Accruals Contributions For Social Insurance Federal Grants-In-Aid Expenditures As Share of GDP Purchases Transfer Payments Interest Received Net Subsidies Dividends Received Net Wage Accruals Surplus Or Deficit Nation UCLA Anderson Forecast, December 2017

39 FORECAST TABLES - DETAILED Table 13. U.S. Exports and Imports of Goods and Services Billions of Current Dollars Net Exports-Goods & Serv Current Account Balance Merchandise Balance Exports-Goods & Services Merchandise Food, Feeds & Beverages Industrial Supplies Motor Vehicles & Parts Capital Goods, Ex. MVP Computer Equipment Other Consumer Goods, Ex. MVP Other Services Imports-Goods & Services Merchandise Foods, Feeds & Beverage Petroleum & Products Indus Supplies Ex. Petr Motor Vehicles & Parts Capital Goods, Ex. MVP Computer Equipment Other Consumer Goods, Ex. MVP Other Services Billions of 2009 Dollars Net Exports-Goods & Serv Exports-Goods & Services Imports-Goods & Services Exports and Imports -- % Change Current Dollars Exports Imports Constant Dollars Exports Imports Production Indicators - % Change U.S. Industrial Production Real GDP -- Industrial Countries Real GDP -- Developing Countries Price Indicators Price Deflators (% Ch) Exports Imports Crude Oil Prices ($/barrel) Real U.S. Dollar Ex. Rate-Indust. Countries %Change Ex. Rate-Dev. Countries %Change UCLA Anderson Forecast, December 2017 Nation 41

40 FORECAST TABLES - DETAILED Table 14. Price Indexes for GDP and Other Inflation Indicators (Percent Change) Implicit Price Deflators GDP Consumption Durables Motor Vehicles Furniture Other Durables Nondurables Food Clothing & Shoes Gasoline Fuel Motor Vehicle Fuel Services Housing Utilities Electricity Natural Gas Water & Sanit Health Care Transportation Recreation Food & Accomm Financial & Insur Other Services Investment Deflators: Nonresidential Structures Equipment Intellectual Prop Residential Government Purchases Federal State & Local Exports Imports Other Inflation Related Indicators Consumer Price Index All Urban Producers Price Index Nonfarm Sector Indicators Wage Compensation Productivity Unit Labor Costs Crude Oil Prices (dollars/barrel) West Texas Intermediate Nation UCLA Anderson Forecast, December 2017

41 FORECAST TABLES - DETAILED Table 15. Producers Price Indexes Annual Percent Change All Commodities Industrial Commodities Textiles & Apparel Fuels Chemicals Rubber & Plastics Lumber & Wood Pulp & Paper Metals & Products Equipment Trans. Equipment Farm Processed Foods & Feeds By Stage of Processing Crude Materials Intermediate Materials Finished Goods Consumers Producers Table 16. Money, Interest Rates and Corporate Profits Billions of Dollars Money Supply (M1) Money Supply (M2) Percent Change Money Supply (M1) Money Supply (M2) Interest Rates (Percent) Short-term Rates 3-Month Treas. Bills Prime Bank Loans U.S. Government Bond Yields 5 Year Maturity Year Maturity Year Maturity State and Local Governments Bond Yields Domestic Municipal Bonds Corporate Bond Yields Moodys AAA Corp. Bonds Conventional Mortgage Rate Corporate Profits (Billions of Dollars) Profits Before Taxes Inventory Valuation Adj Profits After Taxes UCLA Anderson Forecast, December 2017 Nation 43

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43 THE UCLA ANDERSON FORECAST FOR CALIFORNIA DECEMBER 2017 REPORT The California Report: A Downshift in Growth Foretold City Growth, Cost of Living, and Human Capital

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45 A DOWNSHIFT IN GROWTH FORETOLD A Downshift in Growth Foretold Jerry Nickelsburg Director, UCLA Anderson Forecast Adjunct Professor of Economics, UCLA Anderson School December 2017 California is slowing down. The engine of growth driving a significant part of the U.S. recovery seems to have run out of its full head of steam. The business, scientific and technical services sector and the information sector home for much of the tech boom have ground to a growth halt in much of the State. But what sounds bad on the surface is just a symptom of good labor markets and tight, very tight, housing markets. This slowdown is one foretold some time ago, at least by the Anderson Forecast. As far back as two years ago we predicted a slowing growth rate for the California economy in The forecast produced in December 2015 was for the current year to come in at 1.6% growth for payroll employment and 1.2% growth for total employment. In this regard we have done quite well. Through October of 2017 we are right on track with a 1.3% gain for both payroll and total employment. In this essay we will examine the economics that led us to forecast as well as we did and what it means for the next few years. Job gains and losses depend on business conditions. When firms are doing well, they expand and hire more workers and when they are doing poorly they do the opposite. A key element to this process is finding the workers that fit the firm s requirements. Coming out of a recession when many skilled workers are unemployed, it is not difficult to hire. In an economy going full bore, one has to search longer, or engage in in-house training or both to fulfill the requirement. This is where we are now in California and it is a story about good job markets and constrained housing markets. This essay will look first at job markets in the State; what is happening and where there might be room to move the needle towards faster job growth; and second at the housing market as a constraint on finding qualified workers for potential California employment. The final evidence that slower growth in California is real comes from airborne trade through the State s regional airports. Employment Retrospective California economic growth depends on three elements; growth in the workforce, growth in the stock of physical capital, and growth in productivity. The last two have been growing, but rather slowly, during this expansion. If Congress passes a tax bill that includes the expensing of investment (charging 100% of depreciation in the year in which the capital good is purchased) as is assumed in our U.S. forecast, then there will be a slight boost to California GDP due to increased capital and increased worker productivity (for the impact of the proposed tax bill on housing, skip ahead to the next section). But this boost to investment and productivity is expected to be short-lived. Sustained rapid growth needs a growing workforce. Thus far, California has been successful in this regard, but that engine is slowing down. UCLA Anderson Forecast, December 2017 California 47

46 A DOWNSHIFT IN GROWTH FORETOLD California s population is on average younger than the rest of the U.S., due to it being an immigrant heavy state. Therefore, one expects the unemployment rate differential to be at about the levels currently experienced relative to the national rate. Younger workers take longer to find employment as they lack as compelling a resume as older workers, and they tend to change jobs more often as they experiment with alternatives for life-long careers. Thus, the slightly higher unemployment rates are not suggestive of room for more rapid job growth. As shown in Chart 1, a fall in California s unemployment rate has been associated with the slowing in employment growth. However, the surge of new entrants to the labor force over the last three months--200,000 people entered the workforce--does suggest there may be some more room for increased employment. Our analysis suggests that there is not much room though. On a sectoral level, job gain has been widespread during the past twelve months. Mining and logging and non-durable goods manufacturing sectors continued to post job losses over the last twelve months (Chart 2). The big winners during this time have been construction, education, health care and social services, and leisure & hospitality (Chart 3). Continued growth in construction is threatened by higher interest rates and the new tax bill. Health care and leisure and hospitality are at risk from changes to Obamacare and reductions in international tourism, respectively. The professional and business service sector, long a bright spot in the recovery from the 2008/2009 recession, has been flat over the last twelve months. Chart 1 Percent 7.0% Change in Non-Farm Payroll Jobs (3 Mo. Ave, SA) & Unemployment Rate Jobs % % % % % % 0 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Source: 48 California UCLA Anderson Forecast, December 2017

47 A DOWNSHIFT IN GROWTH FORETOLD Chart 2 Change In Jobs By Sector (Oct to Oct. 2017) Health Care & Soc. Svc. Construction Leisure & Hospitality Education (pvt + public) Other Svc. State & Local (excl Ed.) Wholesale Trade Tsp. Whs. & Util. Information Thousands Finance Mgmt of Companies Durable Goods Prof. Sci. & Tech. Retail Trade Administ. Svc Federal Gov't. Mining & Logging Non -Durable Goods Source: Chart 3 Percentage Job Growth By Sector (Oct to Oct. 2017) 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% Construction Other Svc. Health Care & Soc. Svc. Education (pvt + public) Tsp. Whs. & Util. Leisure & Hospitality Mgmt of Companies Wholesale Trade State & Local (excl Ed.) Information Finance Durable Goods Prof. Sci. & Tech. Administ. Svc Retail Trade Federal Gov't. Non-Durable Goods Mining & Logging Source: UCLA Anderson Forecast, December 2017 California 49

48 A DOWNSHIFT IN GROWTH FORETOLD To see what this means for the possibility of organic labor force growth in the State, consider the employment to population ratio (Chart 4). The chart shows the working age population divided into an estimate of the number of payroll jobs. There is a long-term downward trend in the State beginning in This corresponds to a national trend towards lower employment/population. The reasons are not entirely clear, though in part the secular decline relates to the decline of manufacturing and the ability of displaced workers to obtain disability insurance, and to some extent to an increase in stay-at-home parents raising children. The dips in the chart correspond to recessions. In the latest expansion, the increase in employment in California lifts this ratio above the previous trend but it remains slightly below the 2007 peak. When we disaggregate by regions (Chart 5) we find that in most of California the ratio (now of total employment to total population) has returned to or exceeded the 2007 peak. This occurred even though demographics would suggest that the ratio should be somewhat lower. Therefore, it is unlikely that these regions have a pool of labor that can be brought back into the work force, and inducing those who were previously not in the workforce would require substantially higher wages. There are several regions that have not returned to the 2007 employment to population peak. There are a number of potential reasons including data errors to be corrected in the expected benchmark revisions coming in March, but there is a sense in which California can still grow faster Chart 4 Ratio of Payroll Employment to CA population (Ages 18-64) Source: U.S. Census 50 California UCLA Anderson Forecast, December 2017

49 A DOWNSHIFT IN GROWTH FORETOLD Chart 5 Percentage Points 9.00% Employment/Population Ratio Difference (2017 less 2007) 7.00% 5.00% 3.00% 1.00% -1.00% -3.00% -5.00% East Bay SJ Valley LA Mid Coast Orange Inland Empire Sacramento San Diego San Francisco Silicon Valley Ventura Source: U.S. Census, than the U.S. The Mid-Coast, Ventura County and the San Joaquin Valley, have lagged in the recovery. As lower cost regions of the State, they may well be the next rapid growth regions, though the basis for this is purely speculative. The Orange County and San Diego data are suspect as they have unemployment rates of 3.3% and 3.7% respectively. It may be that San Diego is experiencing a demographic shift with a single-family housing boom in North County increasing the percentage of children in the county and that Orange County is all about an aging population, but we won t know if either are true or just a good story for some time. Though the national data does not suggest a significant downturn in economic growth over the next twelve months, the ability of the growing U.S. economy to be led by growth in California as it has over the past 8 years, is in doubt. Indeed, to continue the very rapid growth in employment likely requires domestic or international immigration to the State or both. With Trump s policies decidedly reducing international immigration, net domestic migration to California would be required. And that brings us to the high cost of housing. Housing Affordability and Population Growth In previous California Reports, we have focused on the affordability of housing in the State, and therefore, we won t rehash the data here. Suffice it to say that California housing is expensive, it will remain so over our forecast horizon, and it will be a deterrent for domestic migration into the State. Home prices in the major metropolitan areas now exceed their housing-bubble peaks, and with a lack of home building, will continue to go up. This is not organic, but a direct function of the demand for housing increasing as people from California and all over the world want to avail themselves of the California weather and lifestyle, faced with a relatively fixed number of homes. UCLA Anderson Forecast, December 2017 California 51

50 A DOWNSHIFT IN GROWTH FORETOLD Building in the State has increased modestly of late. The number of permits has climbed on an annual basis to approximately 119,000 units per year (Chart 6). We expect that to increase a bit more due to State Legislature initiatives on affordable housing and the rebuilding of homes lost in the tragic wildfires this year. Nevertheless, the numbers will neither be large, nor sufficient to move the price needle. Not enough homes translates into a lack of support for a much larger population. Chart 7 plots the number of new housing units permitted as a percentage of the number of households. Though there has been a modest increase since 2009, the levels are considerably below the averages that supported significant migration to the State in the past. At about a 1% increase in the housing stock per year, new homes are being added at a rate that is only marginally greater than the indigenous increase in population. One wild card in home building is the proposed new tax law. As of the time of this writing, tax-exempt municipal bonds for the purpose of constructing affordable units are poised to lose their tax exemption. As well, there is a proposal to eliminate State income tax and possibly property tax deductions on Federal income tax returns. This will lower disposable income in the State thereby reducing the demand for housing. Lower demand (fewer bids) reduces price (Econ 101), and therefore we should see prices for homes in California decline. But then we should become excited about a lower demand for housing resulting in more affordable housing. Well, no, the confetti needs to stay in the wrapper. The lower demand did not come from people leaving the State nor from balmy California weather going out of style. It would come because the cost of housing to the potential buyer went up. Were the tax proposals above to become law, housing would be less, not more affordable. How can this be? It is what economists call the incidence of the tax. When prices adjust in response to tax increases, part of the increase can be passed on to others. Where it falls is the incidence. Let s take the potential homeowner, a millennial software engineer looking for their first house. Prior to the tax change, they deducted state taxes from Federal taxes and their disposable income allowed them to pay a mortgage for one of those very nice California bungalow homes in the San Gabriel Valley. When they are not able to deduct their state taxes, adjusted gross income is higher and the Federal tax bill is higher. This is the idea of getting rid of the deduction; a higher revenue for the Feds to pay for tax cuts elsewhere. But our millennial has lower after tax income and now the bungalow is out of reach. This is the reduction in housing Chart 6 California New Residential Permits (3 Mo. Moving Average, No. of Units) 25,000 20,000 15,000 10,000 5, Source: U.S. Department of Census 52 California UCLA Anderson Forecast, December 2017

51 A DOWNSHIFT IN GROWTH FORETOLD Chart 7 California New Residential Permits Per Household -- S.A Source: U.S. Department of Census, demand. With fewer people in the market to buy homes, and those in the market having less income, home prices must drop if they are to sell. But it is not lower prices that make the homes more affordable, it is lower disposable income that makes them less affordable. So the effective mortgage payment (principal + interest tax deduction) goes up with a reduction in the tax deduction. At any given home price, the cost to the buyer increased. For homeowners the news is not good either. They will be less wealthy as the price at which they can sell their home will decrease. This capital loss will induce some to stay in their homes rather than take their equity and move to Sunny Acres in the Valley of The Sun. And for some others, being able to sell their home to move up, thereby freeing up homes all the way down the line, will be more difficult. So part of the incidence of higher Federal taxes will be borne by a capital loss on the part of homeowners, and part by everyone who pays State taxes on their income. The implication for building is that with lower prices to the builder, less will be built. As a result, we have shaded, slightly, the new home construction forecast from 125,000 units to 121,000 units in This is not a huge change and there is risk on both the upside and the downside to the forecast. The State, for example, may take counter-measures that might offset the tax changes or their consequence for home building. Domestic Trade Indicators The final piece of evidence that the slowdown is real comes from cargo shipments through California s main regional airports; Lindberg Field, Ontario International, Oakland International, San Jose Mineta, Sacramento International and Mather Field. One might ask, why are we leaving out the two largest airports in the State, LAX and SFO? The reason lies in the UCLA Anderson Forecast, December 2017 California 53

52 A DOWNSHIFT IN GROWTH FORETOLD fact that these airports process a lot of cargo for international uses and for trans-shipments to other parts of the country. It is difficult to sort through that data and ascertain how it relates to the California economy. Having said that, we do look at these airports for tourist flows and for exports from California manufacturers. But here, we want to look more broadly at the State economy. These airports were chosen because they turn out to be the preferred airports by package carriers for the transport of package goods in and out of the State. As such they are also a good indicator of overall economic activity. Chart 8 plots cargo shipments in tons through these airports. In each case there has been growth since the recession and both San Diego Lindberg and Ontario International traffic today exceed the pre-recession tonnage. However, a closer look (Chart 9) reveals that the last 12 months are a bit different. In each case the growth in tonnage has ground to a halt. It might be possible, with squinting, to see some growth early in the year in the Northern California airports due to growth in the Sacramento region, but that dissipated in the latter part of the year. An acceleration of online purchases this holiday season could boost all of these, but that would be at the expense of brick and mortar retail. Thus, the data are not showing continued robust growth in the State in the coming year. The Forecast Our current forecast for California differs from the previous one in two ways. First, the aforementioned modest dampening of housing due to the new tax bill, assumed to pass in some form in our national forecast, reduces economic growth in the State. Second, the investment incentive, in particular the bringing forward of investment due to expensing, increases our forecast growth rate for employment and income in 2018, though reduces it slightly by the end of The most likely outcome of these two opposite economic forces is for California s unemployment rate to fall to 4.6% by the end of the forecast period (2019). Our forecast for 2017, 2018 and 2019 total employment growth is 1.2%, 1.5% and 1.1%, respectively. Payrolls will grow at about the same rate over the forecast horizon. Real personal income growth is forecast to be 1.6%, 3.1% and 3.6% in 2017, 2018 and 2019, respectively. Homebuilding will reach about 121,400 units per year at the end of the forecast horizon. Chart 8 Thousands California Regional Airport Freight Traffic (Monthly, S.A., Tons of cargo) No. CA Ontario San Deigo Source: UCLA Anderson Forecast, Traffic reports for each airport 54 California UCLA Anderson Forecast, December 2017

53 A DOWNSHIFT IN GROWTH FORETOLD Chart 9 California Regional Airport Freight Traffic (Monthly, S.A., Tons of cargo) Thousands Source: UCLA Anderson Forecast, Traffic reports for each airport No. CA Ontario San Deigo UCLA Anderson Forecast, December 2017 California 55

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55 CITY GROWTH, COST OF LIVING AND HUMAN CAPITAL City Growth, Cost of Living, and Human Capital William Yu Economist, UCLA Anderson Forecast December 2017 Ten years ago, the U.S. economy hit its business cycle peak and then slumped to troughs of the financial crisis and the Great Recession. Ever since, the economy has been slowly recovering at a 2% rate. Have our major cities and metros been growing at a similar pace? The answer is no. In fact, we will show that the economy is growing unequally across the nation. A prosperous city is naturally related to higher earnings and higher cost of living for residents. So the question is: are residents better off living in a thriving city in terms of their real purchasing power? To answer this question, we present a City Cost of Living Index by measuring the differential of cost of living across metros focused on their rental price differential. In 2012, we launched the City Human Capital Index, which measures the average educational attainment for adult residents. We emphasize that the key to long-term prosperity for a city in the 21st century is based on its human capital. 1 This report will show the updated data of human capital across the country. The relationship between human capital and real earnings across the nation will be presented. Uneven Employment Growth Across the Country The total U.S. payroll growth is 5.7% from 2006 to But if we look at the employment growth for the 40 major metros, we find that job growth among these 40 metros are very uneven. Figure 1 displays the nonfarm payroll growth from 2006 to 2016 for the 40 largest metros. Austin is number one with a stunning 36% payroll growth in the past decade, (3.1% growth a year), followed by San Antonio s 24%, Nashville s 21%, Houston s 21%, Dallas s 20%, San Jose s 19%, Denver s 18%, Charlotte s 16%, San Francisco s 15%, and Seattle s 14%. New York s 9% is in the middle as is Washington DC s 8%. Los Angeles s 4% and Chicago s 3% are on the slower-growing end among these 40 metros. Three metros have negative job growth in the period: Providence, Detroit, and Cleveland. Now let s compare the job growth between these 40 metros and the rest of the country (smaller metros, towns, and rural area). We find another uneven pace of growth. These 40 metros account for 57% of total payroll jobs in the U.S. in The total job growth for these 40 metros is 9.2% from 2006 to In contrast, the total job growth for the rest of the country is only 1.5% at the same period. There are two possible reasons for this growth dichotomy between the major metros and the rest. First, the conglomerate of large metros could increase productivity, innovation, and quality of life as suggested by prominent urban economist Edward Glaeser in his book: Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier (2012). Second, many manufacturers which used to be the economic center in small towns had left the country in the globalized economy. Many manufacturing jobs were also lost to automation. Brick and mortar retailers have also left small cities as a result of competition from e-commercers. It is worth more discussion on whether this dichotomy is good for the U.S. 1. For example, see William Yu s Human Capital: The Key to Los Angeles Long-Term Prosperity, UCLA Anderson Forecast Report March 2013; Growing Apart in Los Angeles, UCLA Anderson Forecast Report December 2013; Problems and Solutions for Los Angeles Economy: Human Capital, Public Education and Migration, UCLA Anderson Forecast Report March UCLA Anderson Forecast, December 2017 California 57

56 CITY GROWTH, COST OF LIVING, AND HUMAN CAPITAL Figure 1 Payroll Employment Growth, 40 Major Metros in the U.S., Austin San Antonio Nashville Houston Dallas San Jose Denver Charlotte San Francisco Seattle Orlando Columbus Portland Indianapolis Atlanta Boston Riverside New York San Diego Washington DC Kansas City Miami Jacksonville Baltimore Minneapolis Tampa Phoenix Cincinnati Los Angeles Sacramento Las Vegas Chicago Philadelphia Pittsburgh St. Louis Milwaukee Virginia Beach Providence Detroit Cleveland -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: Bureau of Labor Statistics Demand, Supply and Home Prices As shown in Figure 1, we have seen a disparity of job growth across the country s 40 largest metros. How does the job growth differential explain the home price growth in the past decade? The answer is job growth can explain a lot for the difference in home price growth among these 40 metros from 2006 to 2016, the period of housing price bust and recovery. Figure 2 illuminates this common-sense relationship. As a metro creates more jobs and attracts more people, the population and household formation rise and therefore, demand for housing increases. For better or for worse, home prices rise accordingly. Metros like Denver, Dallas, Nashville, Austin, Houston and San Antonio have high home price growth while metros like Las Vegas, Cleveland, and Detroit still have negative home price growth during this period. In addition to the demand side, housing supply could also contribute to the differential of home price appreciations among metros. Figure 3 shows the correlation between housing unit supply growth from 2000 to 2016 and home price growth 2006 to The chart doesn t show a clear correlation. But if we treat Austin, Dallas, Nashville, Houston, Denver, San Antonio as a group for high job growth and the rest of the metros as a group for medium or low job 58 California UCLA Anderson Forecast, December 2017

57 CITY GROWTH, COST OF LIVING AND HUMAN CAPITAL Figure 2 Correlation Between Payroll Employment Growth and Home Price Growth, Figure 3 Correlation Between Housing Supply Growth, and Home Price Growth, % 50% Denver Median Home Price Growth % 30% 20% 10% 0% -10% Cleveland Pittsburgh L.A. Denver Dallas San Jose Nashville Seattle N.Y. S.F. Houston San Antonio Austin -20% Detroit Orlando -30% Las Vegas -40% -10% 0% 10% 20% 30% 40% Median Home Price Grow th % San Jose Dallas 30% Nashville Austin Pittsburgh Houston 20% S.F. San Antonio 10% Boston Seattle Charlotte 0% L.A. D.C. Atlanta -10% N.Y. -20% Phoenix -30% Orlando Las Vegas -40% 0% 10% 20% 30% 40% 50% 60% 70% Payroll Employment Growth Housing Supply Growth Sources: Bureau of Labor Statistics and Zillow Sources: American Community Survey and Zillow growth, we can get two negative correlations. That means high housing supply is related to low home price growth. By putting these two variables together, the following simple regression demonstrate how both job growth (2006 to 2016) and housing units supply growth (2000 to 2016) 2 could predict home price growth from 2006 to Both coefficients of job growth and housing supply growth are statistically significant. High job growth leads to high home price growth while high housing supply growth leads to low home price growth. This is a confirmation of basic economics 101. It is worth noting that our simple regression could only demonstrate correlation not causality. The relationship could go from home price growth to job growth and housing supply growth as well. So we should take these coefficients with a grain of salt. Nevertheless, our result is consistent with the main literature which has documented plenty of evidence that housing supply impacts home prices. For instance, Glaeser, Gyourko, and Saiz (2008) 3 suggested that places with more elastic housing supply have smaller price increases following a fundamental increase in housing demand. Grimes and Aitken (2010) 4 suggested that higher housing supply elasticities help contain price spikes following demand shocks. Glaeser and Ward (2009) 5 argued that U.S. cities have seen increases Home price growth = X Job growth X House unit growth (t-stat) (-1.5) (7.4) (-3.5) Adj. R squared = 0.58 Observations = Data is from American Community Survey where they only show the housing units built between , , and 2013 to We cannot break it down to 2006 to Edward Glaeser, Joseph Gyourko, Saiz (2008), Housing Supply and Housing Bubbles, Journal of Urban Economics, 64:2, Arther Grimes and Andrew Aitken (2010), Housing Supply, Land Costs and Price Adjustment, Real Estate Economics, 38:2, Ed Glaeser, Bryce Ward (2008), The Causes and Consequences of Land Use Regulation: Evidence from Greater Boston, Journal of Urban Economics, 65, UCLA Anderson Forecast, December 2017 California 59

58 CITY GROWTH, COST OF LIVING, AND HUMAN CAPITAL in housing prices and decreases in new construction. And land use regulations are associated with reduction in the housing supply. Caldera and Johansson (2013) 6 suggested that in the long run, a more flexible supply of housing is desirable as it allows a better match of housing construction to changes in housing demand. Hsieh and Moretti (2017) 7 pointed out that high productivity cities in the U.S. have adopted stringent restrictions to new housing supply. As a result, misallocation arises because these high productive cities limits the entrance of workers with high productivity from other part of the country. City Cost of Living Index (CCLI) and Real Earnings In the previous section, we discussed that demand and supply factors of the housing markets will drive differentials of home price growth across metros. It will eventually cause wide differences in home price, rents, and cost of living across metros. Given the availability of transportation, e-commerce, and mobility in the country, we believe there is little difference in costs for most tradable goods and services across metros. We suspect that a major cause of cost of living differences among metros is the rental price/home Figure 4 City Cost of Living Index (Based on Rents), 2016 San Jose San Francisco Washington DC San Diego Los Angeles Boston New York Seattle Denver Miami Riverside Baltimore Austin Sacramento Portland Orlando Virginia Beach Philadelphia Atlanta Chicago Phoenix Las Vegas Tampa Dallas Houston Jacksonville Minneapolis Nashville San Antonio Charlotte Providence Detroit Kansas City Columbus St. Louis Milwaukee Indianapolis Cincinnati Cleveland Pittsburgh Source: American Community Survey and author s calculation 6. Aida Caldera and Asa Johansson (2013), The Price Responsiveness of Housing Supply in OECD Countries, Journal of Housing Economics, 22:3, Chang-Tai Hsieh and Enrico Moretti (2017), Housing Constraints and Spatial Misallocation, Working paper. 60 California UCLA Anderson Forecast, December 2017

59 CITY GROWTH, COST OF LIVING AND HUMAN CAPITAL price (mortgage payment). In the future, we will develop a more complete index to incorporate more components in addition to rents. We assume that rental prices and home prices (mortgage payments) are highly correlated, thus we only use rental prices for a metro to calculate its City Cost of Living Index (CCLI). We use the data of median rents for 511 metros from the American Community Survey in which the average of these 511 median rents ($847) is the base index of 1. We adopt the same weight (30%) of rents calculated in Consumer Price Index by Bureau of Labor Statistics. Let s use Los Angeles as an example. Los Angeles median rent is $1,403 in So we compute the CCLI for L.A. by 0.3*(1, )/847+1 = 1.2. The number means that cost of living in Los Angeles is 20% higher than the national metro average because of its high rent. Figure 4 lists the CCLI in 2016 for 40 major metros. San Jose is the most expensive metro with CCLI of 1.42, followed by San Francisco s 1.32, Washington DC s 1.26, San Diego s 1.23, and Los Angeles s The CCLI is similar to the regional price parity developed by Bureau of Economic Analysis 8 and State Cost of Living Index developed by Missouri Economic Research and Information Center. 9 With CCLI at hand, we can now answer the question: Are residents, in general, better off living in a thriving city with soaring housing cost in terms of their real purchasing power? We calculate the real earn- Figure 5 Real Earnings Adjusted for City Cost of Living Index, 2016 Washington DC Minneapolis Baltimore Boston San Jose Cincinnati Seattle Pittsburgh Providence Milwaukee St. Louis Philadelphia San Francisco Kansas City Cleveland Columbus Indianapolis Detroit Chicago New York Houston Dallas Denver Austin Atlanta Charlotte Sacramento Portland Nashville Virginia Beach Phoenix Jacksonville San Antonio Tampa San Diego Las Vegas Riverside Los Angeles Orlando Miami {$} Source: American Community Survey and author s calculation UCLA Anderson Forecast, December 2017 California 61

60 CITY GROWTH, COST OF LIVING, AND HUMAN CAPITAL ings across metros by adjusting the nominal earnings with CCLI. For instance, Los Angeles nominal earning in 2016 is $36,696. After adjusting, the real earning becomes $30,659 (36,696/1.2). Figure 5 presents the real earnings (CCLI adjusted) for 40 major metros. The richest metro in terms of purchasing power is Washington DC ($43,846), followed by Minneapolis $43,597, Baltimore s $43,199, and Boston s $43,127. Los Angeles is ranked at the bottom number 3 with a real earning of $30,700 for a median earner, followed by Orlando s $29,500 and Miami s $28,000. City Human Capital Index (CHCI) How can we explain the dispersion of real earnings (adjusted for CCLI) across these 40 metros? One simple explanation is human capital. In our previous reports, we have documented the methodology of calculating the City Human Capital Index (CHCI). In general, we calculate the average schooling years of local adult residents and use it as a proxy for human capital. For instance, a resident without a high school degree is counted as having 5 schooling years, a resident with a high school degree is counted with 12 years, an Associate s degree is 14 years, a Bachelor s degree is 16 years, and a Master s degree or higher is 19 years. The index is then multiplied by 10 for a simple reading. That said, we can interpret that one-tenth of CHCI is about the average schooling year of local residents. Figure 6 presents the CHCI in 2006 (yellow bar) and in 2016 (blue bar) for the 40 largest metros. By and large, we can see across-the-board enhancement of CHCI. This could be due to migration, and more investment and better out- Figure 6 City Human Capital Index, 40 Largest Metros, 2006 and 2016 Washington Boston San Jose San Francisco Seattle Denver Minneapolis Austin Baltimore Portland Kansas City Atlanta Pittsburgh Columbus St. Louis Philadelphia New York Chicago Milwaukee San Diego Indianapolis Cincinnati Nashville Charlotte Virginia Beach Cleveland Sacramento Jacksonville Detroit Providence Orlando Dallas Phoenix Tampa Houston Miami CHCI 2006 CHCI 2016 Los Angeles San Antonio Las Vegas Riverside Source: American Community Survey 62 California UCLA Anderson Forecast, December 2017

61 CITY GROWTH, COST OF LIVING AND HUMAN CAPITAL Figure 7 Correlation Between CHCI and Median Real Earning (CCLI adjusted), 40 Largest Metros, 2016 is from human capital to productivity/real earnings, not the other way around. Median Real Earnings 2016 (CCLI Adj.) 50,000 ($) 45,000 40,000 35,000 30,000 Las Vegas Riverside L.A. Orlando Miami 25, CHCI 2006 Minneapolis Boston DC San Jose Seattle N.Y. S.F. Source: American Community Survey and author s calculation comes in education. The four most educated metros in 2006 are still in the same leading position in 2016: Washington DC is first, at 164 (16.4 schooling years), followed by Boston s 160, San Jose s 160, and San Francisco s 160. On the other hand, the four least educated metros in 2006 are still in the same order in Riverside (Inland Empire) is at 133, Las Vegas at 137, San Antonio at 140 and Los Angeles at 142. Figures 7 shows the correlation between human capital (CHCI) and real earnings for 40 major metros. We can see a clear correlation between human capital and real median earning of a metro. Note that we use the CHCI in 2006 at the horizontal axis to illuminate that the likely relationship Our simple regression result tells us that one more schooling year is associated with $4,500 more earnings in these 40 metros. That is equivalent to 12% over the average real earnings in these 40 metros. The estimate is similar to the literature evidence. For instance, a seminal paper, Estimates of the Economic Return to Schooling from a New Sample of Twins 10 by Ashenfelter and Krueger (1994) indicated that an additional year of schooling increases wages by 12 to 16 %. Despite the non-linear returns of education, a private return to a schooling year was estimated ranging from 7% to 13% after controlling all other possible factors in the literature. 11 Inequality Within Los Angeles Figure 8 shows the unequal human capital and real earnings across the major metros. We find that the inequality also exists within a metro. Figure 8 depicts the CHCI by zip code in the Los Angeles metro, in which red represents zip codes with high human capital while blue represents areas with low human capital. The darker the red, the higher the human capital for the region. The darker the blue, the lower the human capital. Figure 8 demonstrates the inequality of human capital in the L.A. It shows a distinct contrast, for example, between West L.A. and South L.A. The average CHCI in West L.A. is above 160 (16 schooling years; beyond bachelor s degree) while the average CHCI in South L.A. is below 100 (below high school diploma). It is not surprising to find that there is a strong correlation between CHCI and earning by zip code within a metro as we have seen in Figure 7. That said, to have a shared prosperity for a city, it is imperative to focus on investment in education and enhancing human capital for all the children in our city, especially for those disadvantaged children in South L.A. 10. Orley Ashenfelter and Alan Krueger, American Economic Review, 84:5, George Psacharopoulos & Harry Patrinos, Returns to investment in education: a further update, Education Economics, (2004), 12:2, UCLA Anderson Forecast, December 2017 California 63

62 CITY GROWTH, COST OF LIVING, AND HUMAN CAPITAL Figure 8 City Human Capital Index by Zip Code in L.A. Metro, 2013 Source: American Community Survey, 5-Year (2011 to 2015) Conclusions The takeaways of the report are as follows: There was a wide disparity of economic growth among 40 major metros from 2006 to 2016, ranging from Austin s total 36% of job growth to Cleveland s -2%. The major 40 metros had a total job growth of 9.2% as opposed to only 1.5% for the rest of the country. We find that two variables which could partly explain the differential of home price growth for 40 major metros: job growth and housing supply growth. We develop the City Cost of Living Index (CCLI) by calculating the differential of median rents across the metros. Residents in metros with high human capital earn high real wages, such as Washington DC, Minneapolis, Boston, and San Jose. Metros with low human capital, on the other hand, earn low real wages, such as in Riverside and Las Vegas. To achieve long-term shared prosperity, Los Angeles could focus on two things: (1) enhance education and human capital, especially for disadvantaged children. (2) increase housing supply elasticity thus housing supply could be more flexible to meet the demand. By doing so, we could slow down the pace of rising cost of living in L.A. in the future. 64 California UCLA Anderson Forecast, December 2017

63 THE UCLA ANDERSON FORECAST FOR CALIFORNIA DECEMBER 2017 REPORT Charts

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65 CHARTS RECENT EVIDENCE California Employment (6-mo. moving avg.) Jan to Oct (Thous.) (Percent) California Unemployment Rate Jan to Oct Wage & Salary Emp. (Left) HH Survey Emp. (Right) (Bil. $) 700 Taxable Sales in California 2003:1Q to 2016:4Q Indexes of Consumer Attitudes--Pacific Area Jan to Oct Indexed 1985 = Consumer Confidence Present Expectations Source: Conference Board UCLA Anderson Forecast, December 2017 California 67

66 CHARTS RECENT EVIDENCE (Mil.) 2.5 California New Car Registrations Jan to Sept (Thous. $) 600 California Existing-Home Prices 1989:Q1 to 2017Q3 2.0 (3-mo. moving avg.) Source: California Association of Realtors 17 (Thous.) California Existing-Home Sales Jan to October 2017 (Thous.) 400 New One-Family Houses Sold Western Region Jan to Sept (3-mo. moving average) Source: California Association of Realtors California UCLA Anderson Forecast, December 2017

67 CHARTS RECENT EVIDENCE (Thous.) 250 New Residential Units Through California Building Permits Jan to Sept (Mil. $) Building Permit Valuations Total Nonresidential Jan to Sept mo. moving avg Single-Unit Multi-Unit (Thous.) California Construction Employment Jan to Oct (Thous.) California Employment by Sector Jan to Oct Goods Producing (Left) Services (Right) (Thous.) UCLA Anderson Forecast, December 2017 California 69

68 CHARTS FORECAST (% Change Year Ago) Real Personal Income California versus U.S California U.S. Nonfarm Employment California versus U.S. (% Change Year Ago) California U.S (Percent) Rates of Unemployment California versus U.S California U.S. (3-Yr. % Ch.) California Employment versus Real Personal Income Nonfarm Emp. Real Personal Income 70 California UCLA Anderson Forecast, December 2017

69 CHARTS FORECAST Real California Taxable Sales (% Change Year Ago) California Consumer Price Inflation (4-Qtr Percent Change) California U.S. (Percent) California Share of U.S. Employment and Population Emp Population (Thous) California Nonfarm Employment History & Forecast Vs. 2.3% Trend from 2007:4 2.9 Million Jobs Below Trend by Year History & Forecast 2.3% Trend Line UCLA Anderson Forecast, December 2017 California 71

70 CHARTS FORECAST Growth in Population (4-Qtr Percent Change) California Net Natural Increase and Net Inmigration (Thous.) Immigration Natural Increase Population of California vs. U.S. (Ca. Mil.; U.S. 10 Mil.) California U.S. (Percent) Gross Labor Force Participation Rate Labor Force/Total Population California U.S California UCLA Anderson Forecast, December 2017

71 CHARTS FORECAST U.S. Median Price of Single-Family Homes (Thous. $) (Thous. Units) New Residential Units Through California Building Permits Single-Unit 1989 Multi-Unit (Bil $) 40 Real Value of Nonresidential Construction in California (Thous.) 1000 California Employment in Construction UCLA Anderson Forecast, December 2017 California 73

72 CHARTS FORECAST (Thous.) California Employment in Education and Health Services (Thous.) California Employment in Manufacturing (Thous.) 600 California Employment in Information (Thous.) 2500 California Employment in Trade California UCLA Anderson Forecast, December 2017

73 CHARTS FORECAST (Thous.) California Employment in Financial Activities (Thous.) California Employment in State and Local Government (Thous.) California Employment in Professional & Business Services (Thous.) California Employment in Federal Government UCLA Anderson Forecast, December 2017 California 75

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75 THE UCLA ANDERSON FORECAST FOR CALIFORNIA DECEMBER 2017 REPORT Tables

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77 FORECAST TABLES - SUMMARY Table 1. Summary of the UCLA Forecast for California Personal Income, Taxable Sales, and Price Inflation (%Change) Personal Income (Bil.$) Calif. (% Ch) U.S.(% Ch) Pers. Income (Bil. 2009$) Calif. (% Ch) U.S. (% Ch) Taxable Sales (Bil.$) (% Ch) (Bil. 2009$) (% Ch) Consumer Prices (% Ch) Employment and Labor Force (Household Survey, % Change) Employment Labor Force Unemployment Rate (%) U.S Total Nonfarm Nonfarm Employment (Payroll Survey, % Change) Calif U.S Construction Manufacturing Nondurable Goods Durable Goods Trans. Warehousing & Util Trade Information Financial Activities Professional Busi. Serv Edu. & Health Serv Leisure & Hospitality Other Services Federal Gov t State & Local Gov t Nonfarm Employment (Payroll Survey, Thous.) Total Nonfarm Construction Manufacturing Nondurable Goods Durable Goods Trans. Warehousing & Util Trade Information Financial Activities Professional Busi. Serv Edu. & Health Serv Leisure & Hospitality Other Services Federal Gov t State & Local Gov t Population and Migration Net Inmigration(Thous) Population (Thous) (% Ch) Construction Activity Residential Building Permits (Thous. Un.) Nonres.Permits (Mil. 09$) UCLA Anderson Forecast, December 2017 California 79

78 FORECAST TABLES - SUMMARY Table 2. Quarterly Summary of the UCLA Forecast for California 2017:2 2017:3 2017:4 2018:1 2018:2 2018:3 2018:4 2019:1 2019:2 2019:3 2019:4 Personal Income, Taxable Sales, and Price Inflation (%Change) Personal Income (Bil.$) Calif.(% Ch) U.S. (% Ch) Pers. Income (Bil. 2009$) Calif.(% Ch) U.S. (% Ch) Taxable Sales (Bil. $) (% Ch) (Bil. 2009$) (%Ch) Consumer Prices (% Ch) Employment and Labor Force (Household Survey, % Change) Employment Labor Force Unemployment Rate (%) U.S Total Nonfarm Nonfarm Employment (Payroll Survey, % Change) Calif U.S Construction Manufacturing Nondurable Goods Durable Goods Trans. Warehousing & Util Trade Information Financial Activities Professional Busi. Serv Edu. & Health Serv Leisure & Hospitality Other Services Federal Gov t State and Local Gov t Nonfarm Employment (Payroll Survey, Thous.) Total Nonfarm Construction Manufacturing Nondurable Goods Durable Goods Trans. Warehousing & Util Trade Information Financial Activities Professional Busi. Serv Edu. & Health Serv Leisure & Hospitality Other Services Federal Gov t State and Local Gov t Population and Migration Net Inmigration(Thous) Population (Thous) (% Ch) Construction Activity Residential Building Permits (Thous. Units) Nonres.Permits (Mil. 09$) California UCLA Anderson Forecast, December 2017

79 FORECAST TABLES - DETAILED Table 3. Personal Income, Taxable Sales, Construction and Population in California Aggregates (Bil $) Personal Income Disposable Income (Bil 2009$) Personal Income Disposable Income (Nominal %Ch) Personal Income Disposable Income (Real %Ch) Personal Income Disposable Income Components of Personal Income (Bil $) Personal Income Wages & Salaries Other Labor Income Farm Other Income Transfer Payments Social Insurance Taxable Sales Nominal Level (Bil $) %Ch Real Level (Bil. 2009$) %Ch New Automobile Sales (Mil Un.) New Registrations U.S. Sales Construction Activity Residential Building Permits (Thous.) Total Single-Family Multi-family Nonresidential Permit Valuation Nominal (Mil. $) %Ch Real (Mil. 2009$) %Ch Population (Thous.) Net Inmigration Net Natural Increase Population UCLA Anderson Forecast, December 2017 California 81

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81 REGIONAL MODELING GROUP The Los Angeles Department of Water and Power (DWP), established at the beginning of the century is the largest municipally-owned utility in the nation. It exists under and by virtue of the Charter of the City of Los Angeles enacted in With a work force in excess of 9,000, the DWP provides water and electricity to some 3.5 million residents and businesses in a 464-square-mile area. DWP s operations are financed solely by the sale of water and electric services. Capital funds are raised through the sale of bonds. No tax support is received. A five-member Board of Water and Power Commissioners establishes policy for the DWP. The Board members are appointed by the Mayor and confirmed by the City Council for five-year terms. UCLA Anderson Forecast, December 2017 Regional Modeling Group 83

82 REGIONAL MODELING GROUP The Los Angeles County Metropolitan Transportation Authority (Metro) is unique among the nation s transportation agencies. It serves as transportation planner and coordinator, designer, builder and operator for one of the country s largest, most populous counties. More than 9 million people one-third of California s residents live, work, and play within its 1,433-square-mile service area. Besides operating over 2,000 coaches in the Metro Bus fleet, Metro also designed, built and now operates over 73 miles of Metro Rail service. The Metro Rail system currently consists of 62 stations and several more are in the planning and/or design stage. In addition to operating its own services Metro funds 16 municipal bus operators and funds a wide array of transportation projects including bikeways and pedestrian facilities, local road and highway improvements, goods movement, and the popular Freeway Patrol and Call Boxes. Recognizing that no one form of transit can solve urban congestion problems, Metro s multimodal approach uses a variety of transportation alternatives to meet the needs of the highly diverse population in the region. Metro s Mission is to insure the continuous improvement of an efficient and effective transportation system for Los Angeles County. In support of this mission, our team members provide expertise and leadership based on their distinct roles: operating transit system elements for which the agency has delivery responsibility, planning the countywide transportation system in cooperation with other agencies, managing the construction and engineering of transportation system components and delivering timely support services to the Metro organization. Metro was created in the state legislature by Assembly Bill 152 in May This bill merged the Los Angeles County Transportation Commission (LACTC) and the Southern California Rapid Transit District (RTD) to become the Los Angeles County Metropolitan Transportation Authority. The merger became effective on April 1, Metro is governed by a 13-member Board of Directors comprised of: the five Los Angeles County Supervisors, the Mayor of Los Angeles, three Los Angeles mayor-appointed members, four city council members representing the other 87 cities in Los Angeles County and one non-voting member is appointed by the Governor of California. 84 Regional Modeling Group UCLA Anderson Forecast, December 2017

83 REGIONAL MODELING GROUP Inland Empire Center for Economics and Public Policy Mission Statement The mission of the Inland Empire Center for Economics and Public Policy (IEC) at Claremont McKenna College is to provide Inland Empire leaders with expert analysis of the region s unique political and economic landscape. Background The IEC was founded in 2010 as a collaborative effort by the Rose Institute of State and Local Government and the Lowe Institute for Political Economy, both based at Claremont McKenna College. While the Inland Empire is one of California s fast growing areas, there was little political and economic analysis specific to the region. Recognizing this void and the increasing importance of the area to California s economy, the two research institutes saw the need for an organization that could deliver analysis on current issues impacting the Inland Empire. The Rose Institute and the Lowe Institute were uniquely positioned to create the IEC because their staffs both specialized in political and economic analysis and were familiar with the Inland Empire. The IEC brings together experts from both founding institutions. Marc Weidenmier, Ph.D., director of the Lowe Institute, is a Research Associate of the National Bureau of Economic Research and a member of the Editorial Board of the Journal of Economic History. Andrew Busch, Ph.D., director of the Rose Institute, is an expert in American government and politics. Manfred Keil, Ph.D., an expert in comparative economics, has extensive knowledge on economic conditions in the Inland Empire. Kenneth P. Miller, J.D., Ph.D., is an expert in California politics and policy who studies political developments in the Inland Empire. The primary ways that the IEC presents its analysis is through publications and conferences. The Inland Empire Outlook, which provides analysis on the Inland Empire s political and economic developments, is the IEC s predominant recurring publication. Its inaugural issue was published in Winter Besides publications, the IEC also hosts conferences throughout the Inland Empire. The conferences bring together panels of experts and business and political leaders in the Inland Empire to address current topics affecting the region. The annual economic forecast conference held at the Citizens Business Bank Arena in Ontario is in cooperation with the UCLA Anderson Forecast. UCLA Anderson Forecast, December 2017 Regional Modeling Group 85

84 SEMINAR MEMBERS The nonpartisan Legislative Analyst's Office (LAO) has been providing fiscal and policy advice to the California Legislature for more than 65 years. It is particularly well known for its fiscal and programmatic expertise and nonpartisan analyses relating to the state budget, including making recommendations for operating programs in the most effective and cost-efficient manner possible. Its responsibilities also include making economic and demographic forecasts for California, and fiscal forecasts for state government revenues and expenditures. It also prepares fiscal analyses for all propositions that appear on the California statewide ballot, including bond measures. As the state's primary energy policy and planning agency, the California Energy Commission is committed to reducing energy costs and environmental impacts of energy use - such as greenhouse gas emissions - while ensuring a safe, resilient, and reliable supply of energy. For more information about the LAO, please visit our website at or call us at Seminar Members UCLA Anderson Forecast, December 2017

85 SEMINAR MEMBERS City of Hermosa Beach The Los Angeles Magazine has named Hermosa an "outstanding coastal town" praising many of our businesses and shops. From traditional Surf and Turf to more exotic cuisines, from Comedy to Jazz, Hermosa Beach has many fine dining and entertainment places from which to choose. Our hotel and lodging facilities offer breath taking ocean views and all the comforts of home which are surrounded by a Mecca of restaurants, upscale shops and tourist delights. Come to Hermosa Beach, relax and enjoy the warmth of our hospitality. The State of California s Department of Finance is responsible for submitting to the State s fiscal year budget to the Governor in January of each year. The Department is part of the State s Executive Branch and part of the Governor s Administration. The Director of Finance is appointed by the Governor and is his chief fiscal advisor. The Director sits as a member of the Governor s cabinet and senior staff. Principal functions include: Establish appropriate fiscal policies to carry out the Administration s Programs. Prepare, enact and administer the State s Annual Financial Plan. Analyze legislation which has a fiscal impact. Develop and maintain the California State Accounting and Reporting System (CALSTARS). Monitor/audit expenditures by State departments to ensure compliance with approved standards and policies. Develop economic forecasts and revenue estimates. Develop population and enrollment estimates and projections. Review expenditures on data processing activities of departments. In addition, the Department of Finance interacts with the Legislature through various reporting requirements, by presenting and defending the Governor s Budget and in the legislature. The Department interacts with other State departments on a daily basis on terms of administering the budget, reviewing fiscal proposals, establishing accounting systems, auditing department expenditures and communicating the Governor s fiscal policy to departments. UCLA Anderson Forecast, December 2017 Seminar Members 87

86 SEMINAR MEMBERS The energy industry is changing rapidly and dramatically. As global competition transforms the way companies do business, energy issues are no longer simply local, or even national. At the same time, its clear that the importance of providing reliable local service has never been more important. Our heritage at Southern California Edison is based on reliability. For more than 100 years we have provided high-quality, reliable electric service to more than 4.2 million business and residential customers over a 50,000 square mile service area in coastal, central, and southern California. Of course, recent changes in the California s electric industry have affected us as well. In 1997, as part of the restructuring of the electric industry in our state, SCE sold its 12 fossil fuel generating stations and overhauled nearly every aspect of its business to prepare for the changing environment. While we still own and operate hydro and nuclear power facilities that serve our area, our main role is that of power transmission and distribution. The power needed for our customers is largely purchased from the California Power Exchange and provided by SCE to our customers without a price markup. At SCE we want you to know that even in times of change, we retain our proven commitment to service, reliability, innovation, and the community. The Labor Market Information Division (LMID) of the Employment Development Department is the official source for California's labor market information. The LMID promotes California's economic health by providing information to help people understand California's economy and make informed labor market choices. We collect, analyze, and publish statistical data and reports on California's labor force, industries, occupations, employment projections, wages, and other important labor market and economic data. California s vast labor market includes over 1.5 million employers covered by Unemployment Insurance and over 19 million people in its civilian labor force. For more information, visit our website at labormarketinfo.edd.ca.gov/ or call Seminar Members UCLA Anderson Forecast, December 2017

87 SEMINAR MEMBERS At MBK Real Estate, our corporate philosophy is based upon results. In all aspects, our business thrives due to our vast capital resources, our extensive relationships within our business environment, and the dedication of our highly skilled management teams. Our depth of expertise is enhanced by decades of creatively driven talent, vision and success. We are a company of diverse thinkers. From senior housing to shopping centers to residential communities, we bring an entrepreneurial spirit and a sense of inventiveness to every square foot of real estate we develop. Our diversity and innovation are the foundation of our business success. MBK Real Estate is an industry leader in real estate development. Through our three companies, MBK Homes, MBK Senior Living and MBK Retail we are renowned for building award-winning new home neighborhoods; for our expertise in senior housing ; and for our proven skill and knowledge in developing and revitalizing shopping centers. We have earned the recognition and admiration of both the real estate industry and consumers for our forward thinking business practices and unparalleled commitment to customer service. Having received numerous awards for customer satisfaction, community development and product design MBK is recognized as a leader in all of our businesses. MBK Real Estate is supported by the vast financial strength and resources of its parent company, Mitsui & Co., Ltd, one the world's largest companies with over 400 subsidiaries and associated companies worldwide. Irvine Company is a privately held real-estate investment company and master-planner, highly respected for its stewardship and master planning of The Irvine Ranch in Orange County, Calif. Donald Bren, Chairman of the Board of Irvine Company, has been deeply involved in California real estate as a master planner, master builder, and long-term investor for 50 years. With diversified operations throughout coastal California, Irvine Company plans and brings to life balanced, sustainable communities with a full range of housing, job and retail centers, schools, recreation, and permanently preserved open space. Irvine Company is committed to long-term ownership of a highquality portfolio, the breadth and quality of which are unmatched in the industry. With each property positioned at the top of its class, the company s holdings include more than 500 office buildings, nearly 160 apartment communities, 43 retail centers, five marinas, three hotels and two golf clubs. These investment properties primarily lie in Orange County, with about a third of them in San Diego, West Los Angeles, Silicon Valley, Chicago and New York. Irvine Company also maintains a long tradition of philanthropy and environmental stewardship, including its dedication of more than 57,000 acres approximately 60% of the historic Irvine Ranch for permanently preserved open space. The company traces its roots to the 1860s with the formation of The Irvine Ranch from Mexican and Spanish land grants. UCLA Anderson Forecast, December 2017 Seminar Members 89

88 SEMINAR MEMBERS From its Los Angeles base, Allen Matkins has conquered California, opening up offices in San Francisco, San Diego, Century City, and Irvine. With approximately 200 lawyers, the firm is known as a top real estate practice in the Golden State. Grown in the City of Angels Allen Matkins has built its empire in the state where residents elect bodybuilders and shrug off earthquakes. Founded in Los Angeles in 1977, Allen Matkins has achieved notable success in corporate and hospitality work, as well as in the securities, employment, bankruptcy, and tax arenas. The firm has earned accolades from west coast publications like the Los Angeles Business Journal and the San Diego Business Journal. Its real strengths lie, however, in its real estate and litigation practices. The firm's litigation department has focuses in real estate, commercial, financial services, construction, environmental, and labor and employment litigation. The firm has not only worked with local clients-like representing a public-private partnership to modernize the Los Angeles Air Force Base-but has also secured nationally known clients including Wells Fargo Bank, Sares-Regis Group, AT&T, Black & Decker, Met Life, The Home Depot, Blackstone Real Estate Advisors, and Capmark Finance. Buying and Selling Up the California Coast Real estate is where the firm shines-allen Matkins has ranked the No. 1 real estate law firm in California for a decade, according to Chambers & Partners. California Real Estate Journal has also placed Allen Matkins on the top of its real estate firm list, which was based on the number of real estate attorneys in each outfit. The firm's real estate practice handles all aspects of the real estate world, including litigation over construction, land use, landlord tenant, and condemnation issues. And handling the real estate transactions of the present is not enough for the firm; Allen Matkins seeks to predict the future. The firm has developed a partnership with UCLA Anderson Forecast, an organization of economists who attempt to posit unbiased forecasts for California's economy and the nation's. Allen Matkins and the Anderson Forecast put out commercial real estate forecasts, covering rental and vacancy rates. The office of California State Treasurer has broad responsibilities and authority in the areas of investment and finance. The Treasurer is elected statewide every four years. In addition to being the State's lead asset manager, banker and financier, the Treasurer serves as chairperson or a member of numerous State authorities, boards and commissions. Below are some of the Treasurer's key responsibilities: The Treasurer's Office manages the State's Pooled Money Investment Account, which invests monies on behalf of state government and local jurisdictions to help them manage their fiscal affairs. The Treasurer serves on the boards of the Public Employees' Retirement System (CalPERS) and State Teachers' Retirement System (CalSTRS). CalPERS and CalSTRS are significant investors/stockholders in the American and global economies. The pension funds provide for the retirement of their members and also perform a variety of other services for them. As an example, CalPERS is the second largest purchaser of health care services in the country. The Treasurer's Office finances a variety of important public works needed for the State's future, including schools and higher education facilities, transportation projects, parks, and environmental projects. The Treasurer chairs authorities that finance a wide range of significant projects, including pollution clean-up, small businesses and health care facilities. The Treasurer chairs the State commission that awards low-cost, tax-exempt financing for various purposes such as housing, economic development, and student loans. The Treasurer plays a key role in statewide housing finance as Chair of the Tax Credit Allocation Committee that awards hundreds of millions of dollars in tax credits for affordable housing and as a member of the Board of the California Housing Finance Agency, which finances affordable housing. The Treasurer oversees the ScholarShare Investment Board (SIB), which administers the State's tax-advantaged college tuition savings plan. 90 Seminar Members UCLA Anderson Forecast, December 2017

89 SEMINAR MEMBERS State Controller Betty T. Yee was elected in November 2014, following two terms of service on the Board of Equalization. As Controller, she continues to serve the Board as its fifth voting member. The State Controller is the Chief Fiscal Officer of California, the sixth largest economy in the world. She helps administer two of the largest public pension funds in the nation and serves on 78 state boards and commissions. These are charged with duties ranging from protecting our coastline to helping build hospitals. The Controller is the state s independent fiscal watchdog, providing sound fiscal control over more than $100 billion in receipts and disbursements of public funds a year, offering fiscal guidance to local governments, and uncovering fraud and abuse of taxpayer dollars. The State Controller's Functions Account for and control disbursement of all state funds. Determine legality and accuracy of every claim against the State. Issue warrants in payment of the State s bills including lottery prizes. Administer the Uniform State Payroll System. Audit and process all personnel and payroll transactions for state civil service employees, exempt employees and California State University employees. Responsible for auditing various state and local government programs. Inform the public of the State s financial condition. Administer the Unclaimed Property Law. Inform the public of financial transactions of city, county and district governments. UCLA Anderson Forecast, December 2017 Seminar Members 91

90 92-Sponsors UCLA Anderson Forecast, December 2017

91 MEMBERS Corporate 6 California Energy Commission Corporate 4 ADP City National Bank - Coscia City of Los Angeles HomeStreet Bank IS Associates MedPOINT Management, Inc. Southern California Association of Governments Corporate 3 Ameron International Citizens Business Bank City of Santa Monica Five Point Hanmi Bank Los Angeles Police Federal Credit Union Manufacturers Bank McMaster-Carr Metropolitan Water District Pacific Western Bank Pepperdine University RPA State Bank of India California Supervalu, Inc. University Credit Union WCIRB Individual Member ALG Inc. Alliance Bernstein Austrian Trade Commission Bank of Hope Board of Equalization Brand Management Inc Cal Recycle California Air Resources Board California Association Of Realtors California Department of Transportation California Public Utilities Commission California State Polytechnic University, Pomona California State University, Sacramento California Steel Industries, Inc Cathay Bank Chartwell Capital Solutions Chicago Title Chu & Waters, LLP City of Carlsbad City of Garden Grove City of San Diego City of San Jose City of Torrance Consulate General of Japan County of San Diego Desmond, Marcello & Amster East West Bank FDIC Godshalk Granite Rock Company Harold Davidson & Associates Inc. Heritage Bank of Commerce HR and A Advisors, Inc. KPMG LLP Lehigh Southwest Cement Company Lloyd Management Corporation Los Angeles Public Library - Business Economics Dept Maynard Consulting Services Mitsubishi Cement Corp. Newland Real Estate Group Northern California Power Agency Orange County Executive Office - Budget Orange County Transportation Authority 2 Preferred Employers Insurance Company San Diego Gas & Electric Co. SANDAG School Services of California Inc. Shorenstein Properties SMUD Stanford University State of Hawaii - Department of Taxation TC Metal Co. The Aerospace Corporation The Olson Company U.S. Court of Appeals - 9th Circuit United Methodist F.C.U. University of California Library, Berkeley University of California San Diego University of Cincinnati University of Richmond USS-POSCO Industries Vulcan Materials Warland Investments Wells Fargo Securities York University Libraries UCLA Anderson Forecast, December 2017 Members - 93

92 SPEAKERS Jerry Nickelsburg Director Jerry Nickelsburg joined the UCLA s Anderson School of Management and The Anderson Forecast in Since 2017 he has been the Director of The Anderson Forecast. He teaches economics in the MBA program with a focus on Asian economies. As the Director of The Anderson Forecast he plays a key role in the economic modeling and forecasting of the National, and California economies. He has conducted research in the areas of labor economics, industrial organization, statistics, and international monetary economics, focusing on the development of new data and the application of economic theory and statistical methods to policy issues. His current academic research is on specific skills, structural unemployment, and on energy efficiency in transportation. He is a regular presenter at Economic Conferences and is cited in the national media including the Financial Times, Wall Street Journal, New York Times, Los Angeles Times, and Reuters. He received his Ph.D. in economics from the University of Minnesota in 1980 specializing in monetary economics and econometrics. He was formerly a professor of Economics at the University of Southern California and has held executive positions with McDonnell Douglas, FlightSafety International, and FlightSafety Boeing during a fifteen-year span in the aviation business. He also held a position with the Federal Reserve Board of Governors developing forecasting tools, and has advised banks, investors and financial institutions. From 2000 to 2006, he was the Managing Principal of Deep Blue Economics, a consulting firm he founded. He has been the recipient of the Korda Fellowship, USC Outstanding Teacher, India Chamber of Commerce Jubilee Lecturer, and he is a Fulbright Scholar. He has published over 100 scholarly and popular articles on monetary economics, economic forecasting and analysis, labor economics, and industrial organization and he is the author of two books on monetary economics and exchange rates. David Shulman Senior Economist David Shulman is Distinguished Visiting Professor and a Managing Director at the Financial Leadership Program at Baruch College where he mentors students seeking front-office careers on Wall Street, and a Visiting Scholar/Senior Economist at the UCLA Anderson Forecast where he is responsible for U.S. Macro. In addition, he is currently Managing Member of his LLC where he is engaged in investment and litigation consulting. He comments on his blog, In March 2005, he retired from Lehman Brothers where he was Managing Director and Head REIT analyst. From he was voted on the Institutional Investor All Star Teams including First Team in Prior to joining Lehman Brothers in 2000 he was a Member and Senior Vice President at Ulysses Management LLC ( ) an investment manager of a private investment partnership and an offshore corporation whose total investment capital approximated $1 billion at the end of From , Mr. Shulman was employed by Salomon Brothers Inc in various capacities. He was Director of Real Estate Research from and Chief Equity Strategist from In the latter capacity he was responsible for developing the Firm s overall equity market view and maintaining the Firm s list of recommended stocks. Mr. Shulman was widely quoted in the print and electronic media and he coined the terms Goldilocks Economy and New Paradigm Economy. In 1991, he was named a Managing Director and in 1990 he won the first annual Graaskamp Award for Excellence in Real Estate Research from the Pension Real Estate Association. Prior to joining Salomon Brothers Inc., he was Vice President and Director of Research Planning at TCW Realty Advisors in Los Angeles. Earlier in his career Mr. Shulman was an academic. He was an Associate Professor of Management and Economics at the University of California at Riverside and Financial Economist at the UCLA Business Forecasting Project. In 2017, the David Shulman Endowed Excellence in Teaching Award Fund was established by a former student of his. A graduate of Baruch College (1964), Mr. Shulman received his Ph.D. (1975) with a specialization in Finance and a M.B.A. (1966) from the UCLA Graduate School of Management. He is married and has three grown children. 94 Speakers UCLA Anderson Forecast, December 2017

93 SPEAKERS William Yu Economist William Yu joined the UCLA Anderson Forecast in 2011 as an economist. At Forecast he focuses on the economic modeling and forecasting of Los Angeles and other regional economies in California. He also conducts research and forecast on Asian emerging economies, especially China, and their impacts on the US economy. His research interests include a wide range of economic and financial issues, such as time series econometrics, stock, bond and commodity price dynamics, public health, human capital, higher education, and economic sustainability. He has published over a dozen research articles in Journal of Forecasting, International Journal of Forecasting, Journal of International Money and Finance, Journal of Health Care Finance, Journal of Education Finance, Economic Affairs, and Global Economic Review, etc. He has also served as a reviewer for various journals, such as Journal of Money, Credit, and Banking, Journal of Banking and Finance, Japan and the World Economy, and Energy Journal, etc. He received his bachelor s degree in finance from National Taiwan University in 1995 and was an analyst in Fubon Financial Holding in Taipei from 1997 to In 2006, he received his Ph.D. degree in economics from the University of Washington where he was also an economics instructor and won two distinguished teaching awards. In 2006, he worked for the Frank Russell Investment Group for Treasury and corporate yields modeling and forecasting. From 2006 to 2011, he served as an assistant and an associate professor of economics at Winona State University where he taught courses including international economics, forecasting methods, intermediate macroeconomics, introductory macroeconomics, money and banking, and Asian economies. UCLA Anderson Forecast, December 2017 Speakers 95

94 SPEAKERS Christopher Harvey Head of Equity Strategy, Wells Fargo Securities Christopher Schwarz Associate Professor, Finance, UCI Paul Merage School of Business Ivo Welch Distinguished Professor of Finance, J. Fred Weston Chair in Finance, UCLA Anderson School Harlan B. Spinner Senior Vice President, UBS Private Wealth Management 96 Speakers UCLA Anderson Forecast, December 2017