The Economic Forecast for 2014

 

Graniterock CFO Steve Snodgrass reports on the 2014 UCLA Anderson Economic Forecast 

Last year, UCLA described the 2013 US economy as “The Muddle Through Economy.”  Growth was forecast to remain sluggish at about 2%.  For 2014, Senior Economist David Shulman of UCLA describes the economy as a “Return to Normalcy, Sort Of.”  He predicts growth to resume to more normal levels of 3%, an increase over the 2% growth experienced since the end of the Great Recession, but not quite a return to the economy we saw prior to the recession.

U.S. Forecast

Significant macro events that can have an adverse impact on economic growth in 2014 are further government dysfunction related to the budget and debt ceiling, a reduction of quantitative easing and the ongoing implementation of the Affordable Health Care Act.  The possibility of another government shutdown will continue to cause uncertainty in the stock market.  The “tapering” of quantitative easing will have the impact of driving up long term borrowing rates.  A certain expectation has already been priced into rates, but as the long-term rates rise, mortgage interest rates will rise commensurately, thereby reducing the affordability of homes and depressing housing sales. 

Interestingly enough, the UCLA survey is taking the position that short- term rates will also rise in 2014.  UCLA is forecasting the increase in rates due to an expectation that inflation will actually begin to rise as part of the implementation of the Affordable Health Care Act as well as due to rising housing rents.  The impact of rising short- term rates will be to negatively impact businesses’ ability to borrow to cover accounts receivable and inventory financing. 

California

While Shulman predicts a steady rise in the national employment rate, his colleague Jerry Nickelsburg focuses on California employment gains which have helped lead the recovery. Leisure and Hospitality industries have grown significantly but their lower-wage, less- skilled jobs “do not provide a near substitute to factory closings”. Manufacturing, construction and government work are employing fewer people than they did in the past, and the California economy reflects a bifurcated economy depending on industry and geography.  Coastal communities with jobs in technology, health care and education are faring the best. In other words, the California outlook depends on where you live and what skills you have.

Construction

The strength of the economy from the construction industry perspective is that technology is a significant driver.  2013 growth was positively impacted by the technology industry, and there is little evidence that this growth will decline in 2014. The Peninsula from San Jose north to San Francisco continues to reflect significant economic activity.  An outgrowth of this phenomenon should have a carryover effect to some of these markets as housing becomes less affordable in tech centric areas.  However, there are counter forces operating in Santa Cruz and Monterey Counties, home to significant low or no growth movements.  Development of Fort Ord is opposed by many diverse groups, and significant construction activity in this area will be challenging.  Further, both counties have water issues that could be exacerbated should a drought occur in 2014

Proposition 1B CalTrans funds will have been expended in 2014. Hybrid and electric vehicles and improving fuel economy challenge the current California gas tax revenue model.  The impact of this challenge is that CalTrans projects will be reduced and become more competitive as contractors seek to increase their backlogs. 

City and county projects will reflect the character of their localities. Urban counties such as San Mateo and Santa Clara and the City and County of San Francisco will more closely reflect the economic activity and increased housing and commercial activities of the region. There should be a fair amount of projects let in these communities, but rural counties such as Santa Cruz, San Benito and Monterey and many of the cities in these counties will have limited funds to expend for public works. 

The good news is that “factors which have driven California employment and income growth to higher rates than the U.S. are still in play.”  As the world economy improves, the Golden State will benefit. “Our expectation is for this to occur in 2014 and to accelerate in 2015.”

Summary

The overall US economy will improve with a return to more normal levels of growth, yet remain uncertain. Long term interest rates are likely to increase.  While the Fed has stated short term rates will not increase until certain employment targets are attained, UCLA cites increased inflation risks and is forecasting a 2014 rate increase.  California remains a bifurcated economy, principally based on geography and industry sector, with good news for those who have a significant market presence in growth areas.