UCLA Anderson Forecast: Sub-Par Growth for California in 2024, Followed by Banner Years for U.S. and CA GDPs

• California will experience a full year of sub-par growth in 2024, followed by two years of growth rates higher than the U.S., led by technology and aerospace
• Forecast economists expect 2025 and 2026 to be banner years for U.S. GDP growth, firmly in the high twos, driven in part by growth in residential investment

LOS ANGELES, Oct. 2, 2024 /PRNewswire/ — Because the nation’s growth rate is not expected to accelerate until after the November 2024 presidential election, the UCLA Anderson Forecast says that California will ultimately experience a full year of sub-par growth in 2024. This slower growth is the result of specific sectoral weaknesses in California, evidenced by its high unemployment rate. In 2023, California’s GDP grew at a 3.7% compound annual rate, which was faster than the nation’s and all but three states: Washington, Florida and Texas. However, the growth rate in the second quarter of 2024 was 2.8% on an annual basis, 0.2 percentage points less than the U.S. growth rate. The next two years (2025 and 2026) will be characterized by a more typical higher-than-U.S. economic growth, led by technology and aerospace.

The U.S. economy faces some headwinds going into the fourth quarter of 2024 because of potential labor actions in systemically important industries and uncertainty regarding the presidential election and its aftermath. Conditional on whether these factors are resolved smoothly by year’s end, the UCLA Anderson Forecast expects the national economy to continue its recent robust pace of GDP growth. This future growth will be driven by a rise in residential investment as the housing market is unlocked from its current state, wherein many homeowners have delayed moving to avoid giving up their previously acquired low, fixed-rate mortgages.

The California forecast in detail

The employment picture in California varies, depending on which survey one consults. The household survey metric counts the number of people employed and the enterprise survey metric counts the number of payroll jobs.

The household survey reported that the number of people employed in August 2024 was 2.1% below the number employed at the pre-pandemic peak. The decline in employment over and above the decline in the labor force led to an increase in the unemployment rate to 5.3% in August. But over the same period, California’s non-farm payroll jobs increased, and they now exceed the pre-pandemic level by 418,400 jobs. The difference between the two metrics can be partly explained by the difference in the definition of employment in the two surveys. The household survey is a measure based on the domicile of the worker. If a former San Francisco office worker were now working remotely in Phoenix, the worker would not be counted in the labor force or employment numbers for California in the household survey. This would represent a decrease in the state’s aggregate labor force. However, if the job were still being performed virtually at an enterprise in San Francisco, the worker would remain in the enterprise survey as employed in San Francisco, even though living in Phoenix. This, at least in part, explains the large decline in San Francisco’s labor force.

Notably, many of the new payroll jobs are in sectors different from those where job loss was the most acute. In the logistics, technology, construction, education, government, and health care and social services sectors, job creation makes up the bulk of the increase. The sectors with the largest decreases in employment since the pre-pandemic peak are manufacturing, information, temporary services and finance.

The pace of employment growth in California is, of course, geographically variable. Over the first eight months of 2024, slower-than-U.S. job growth has been experienced by Silicon Valley, San Francisco and San Diego. In addition, the San Joaquin Valley, hit by a second year of unusual winter weather, has lost payroll and farm jobs this year. Despite anemic job growth in August, other regions in California have seen employment growing at rates substantially higher than the U.S.

This employment picture leads to a relatively weak California forecast for 2024 and a slow return to the national unemployment rate. Much of the weakness should resolve by the end of 2025 and ought to lead to higher growth rates through the rest of the three-year forecast, though labor force constraints could be exacerbated by more restrictive immigration policies.

The housing market in California may well be on the cusp of a trend toward normalization. Lower mortgage rates and the passage of time should begin to free up the existing single-family home market. The latest data, from August 2024, reflect a market that is still at depression levels. However, those data are derived from home sales that have been under contract for one or more months. It is likely that November and December 2024 home sales will reflect the new lower mortgage rates.

The California economy is expected to grow faster than the national economy in 2025 and 2026, but not by much. The risks to the forecast are political and geopolitical, and, on the downside, the interest rates could potentially still disrupt the current expansion and, on the upside, international immigration and accelerated onshoring of technical manufacturing could increase growth.

The national forecast in detail

The COVID-19 pandemic, along with the sharp shifts in monetary policy that accompanied it, created imbalances in the national economy that persist today. These lingering imbalances are evident in the housing and automobile markets, as well as on the balance sheets of households and governments, and they signal where the economy will head over the next couple of years as they gradually unwind.

Preliminary data suggest that the third quarter of 2024 was yet another period of stellar GDP growth, which the Forecast conservatively expects to come in at 2.5% on a seasonally adjusted annual rate (SAAR). However, the Forecast anticipates a slowdown in the fourth quarter because of a convergence of disparate events, including the strike at Boeing, which is already forcing the company to cut back on business expenses. If the strike persists throughout the fourth quarter, it may reduce growth in the industrial sector by a couple of tenths of a percent.

Another strike by East Coast dockworkers is slated to commence on October 1, which could take a substantial toll on the economy, costing upward of $5 billion per day. As the report was being finalized, Hurricane Helene was on an imminent path toward the Gulf Coast of Florida. The extent of its economic damage to Florida and the Carolinas and the impact on the U.S. economy is still uncertain. Last but not least, the uncertainty surrounding the U.S. presidential election leads to more precautionary behavior by firms in their hiring and investment decisions as they adopt a “wait and see” approach. Given that the election is currently projected as a toss-up, with starkly different policy prescriptions depending on the outcome, the Forecast maintains the assumption of continued gridlock in Congress throughout the forecast period. Under this assumption, however, after a tepid fourth quarter of 1.2% SAAR GDP growth, the Forecast expects 2025 and 2026 to be banner years for GDP growth, firmly in the high twos, driven in part by growth in residential investment.

About UCLA Anderson Forecast
UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state’s rebound since 1993. The Forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun.

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About UCLA Anderson School of Management
UCLA Anderson School of Management is a world-renowned learning and research institution. As part of the nation’s No. 1 public university, its mission is to advance management thinking and prepare transformative leaders to make positive business and societal impact. Located in Los Angeles, one of the nation’s most diverse and dynamic cities and the creative capital of the world, UCLA Anderson places more MBAs on the West Coast than any other business school, and its graduates also bring an innovative and inclusive West Coast sensibility to leading organizations across the U.S. and the world. Each year, UCLA Anderson’s MBA, Fully Employed MBA, Executive MBA, UCLA-NUS Executive MBA, Master of Financial Engineering, Master of Science in Business Analytics and doctoral programs educate more than 2,000 students, while the Executive Education program trains an additional 1,800 professionals. This next generation of transformative leaders will help shape the future of both business and society.

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