UCLA Anderson Forecast’s downside scenario is a mild, brief recession

Even if the country enters a recession in 2023, the UCLA Anderson Forecast predicts it will be comparatively mild and brief.

Its economists presented two scenarios Wednesday, one in which there was no recession, and another in which a mild recession occurs.

“The trajectory of the economy is sufficiently uncertain that we feel it would be a disservice to present an average of two divergent possibilities,” economists said in a 110-page forecast report released in tandem with a presentation held Wednesday at the UCLA Anderson School of Management in Los Angeles.

“The reason why we are uncertain about the Federal Reserve policy is that the Federal Reserve itself seems uncertain,” said Senior Economist Leo Feler. “While the Fed suggests it will moderate the pace of rate increases, it also reaffirms its stance on restoring price stability and maintaining policy at restrictive levels.”

Whether or not 2023 brings a recession “depends on inflation stickiness and the reaction of Federal Reserve policy through increases to the benchmark Federal Funds rate,” economists wrote in the new forecast.

The Anderson Forecast’s prediction that if recession comes, it would be mild, is in line with what other economists, including S&P Global Ratings, are forecasting.

The difference in outlook seems to be a matter of timing.

While Anderson Forecast economists say it could hit in third quarter, S&P Global Ratings analysts said in a Dec. 6 report a “shallow recession,” could come as soon as first half 2023.

“The Fed will keep monetary policy tight despite economic damage, until inflation begins to moderate in late 2023,” S&P analysts wrote.

S&P expects state and local governments to do well, but health care, transit systems and colleges and universities to be challenged by factors relative to those sectors. Supply chain issues leading to increases for project costs and chemicals could test water and public power utilities and cooperatives’ rate making flexibility, while balancing affordability and account delinquency issues, S&P analysts wrote.

The Anderson Report’s Feler presented two scenarios and built scenarios for both no recession and recession. But even with the forecast’s recession scenario, it is prognosticating it would be relatively mild and short.

The no recession scenario assumes the Fed pauses interest rate increases after 50 basis points in December with a terminal rate of 4.25%-4.5%; inflation and supply constraints ease; unemployment increases slightly above 4%, but not enough to force a decline in consumer spending; consumer spending remains resilient and businesses continue to invest; and home construction sees no further declines.

In the recession scenario, the Fed continues to increase rates up to 5.5-5.75% in mid-2023, pauses, and then cuts rates in 2024 in response to recession; inflation eases because of tighter monetary policy and a reduction in consumer spending and business investment; unemployment peaks at 5%, enough to force a decline in consumer spending; consumers cut back on spending and businesses pull back on investment and inventory replenishment;and further declines occur in home construction as financial conditions continue to tighten, but the recession is relatively mild and short.

“In a no recession scenario, we kind of plug along, kind of flat. In a recession scenario, we hit a trough by the third quarter 2023,” Feler said.

The Anderson Forecast for California followed the same pattern as its forecast for the nation.

“Uncertainty about California’s 2023 economic outlook abounds,” Jerry Nickelsburg, UCLA Anderson Forecast director, wrote. “The most important source of this uncertainty is national economic policy.”

“In the coming months, the Federal Reserve will reach that fork in the road between continued aggressive tightening and modernization and it must decide which path to take,” Nickelsburg wrote.

“Unlike the past four slowdowns in economic growth we expect a milder impact on California’s economy, whichever path the Federal Reserve decides to take,” he wrote.

Though Nickelsburg’s forecast for unemployment indicates job gains, he said, the landscape for leisure and hospitality in the major employment centers of San Francisco and Los Angeles “remains difficult.”

“The continued flex work arrangements by California companies and the continued lack of Asian tourists arriving in the state has resulted in an incomplete recovery in both cities,” Nickelsburg said. “As neither of these factors are likely to change in the coming months the recovery going forward is expected to remain on the shallow trend.”

The gains in education have resulted from the return to in-person education, after the K-12 schools went online at the height of the pandemic.

“The number of payroll employees has now returned to pre-pandemic levels, and robust gains in 2023 are not expected,” Nickelsburg said.

The tech industry has continued to post employment gains over the last three months, Nickelsburg said. The layoffs at Twitter, Google and Salesforce “might be an indication of a contraction overall in tech, but the data do not show that yet.

“The layoffs might be happening, but in California, the state’s portion of the 100,000 jobs lost, that were cited in a New York Times article, have been replaced by new hiring.”

That doesn’t mean future contractions aren’t possible, but “only that these subsectors are not cratering as they did in 2001.”

Today, tech is imbedded in more sectors and there exists a higher probability that green tech, med tech and aerospace tech and the like will be able to absorb the layoffs, he wrote.

In either the non-recession or recession scenario, Nickelsburg said California will grow faster than the nation.