From Beacon Economics
September 21, 2023—LOS ANGELES, CALIFORNIA — After more than a year of relentless predictions that an economic recession would hit the United States in 2022, and then 2023, the forecasting world has at last started to reverse itself… and with good reason, according to Beacon Economics‘ latest outlook for the United States and California. Indeed, the U.S. economy is not only far from a downturn, it’s actually stronger today than it was a year ago, says the new outlook.
That strength is showing in GDP growth, which has been lifted by robust consumer spending, slowing inflation, continued job expansion, industrial production that is near record-high levels, rising profits and wages, and U.S. debt markets that are showing little sign of stress. Moreover, according to the outlook, the economy’s vigor is moving into the second half of the year with the Atlanta Fed estimating GDP growth in the third quarter to come in between 5% and 6%.
Beacon Economics never bought into the recession hyperbole, and for more than a year has been one of the few professional forecasts to consistently (and accurately) argue that there would be no near-term recession. Of the 60 trained forecasters who contributed to the October 2022 Wall Street Journal Economic Forecasting Survey, Beacon Economics was one of two that never raised its recession probability above 20%. Almost one-third said there was a 75% or greater chance of a recession occurring by October 2023, while 4 out of 5 said there was a greater than even chance. Overall, the average recession probability in the Journal’s survey has been above 50% for a year.
Ironically, as the broader forecasting world turns more optimistic, the firm that stood against the tide is today less sanguine about the economy than it was one year ago. According to Beacon Economics’ new outlook, the U.S. economy has weathered rising interest rates so well over the past year largely because of the imbalances that were created by the Fed’s excessive $5 trillion in quantitative easing in 2020, and the 40% jump in the money supply that resulted. Those imbalances – massive government deficits and overly exuberant asset markets – have kept spending elevated but also imply that inflationary pressures are still with us, which means more Fed tightening ahead.
“To be clear, the U.S. economy is in good shape with plenty of momentum and we’re far from calling for a near-term recession,” said Christopher Thornberg, Founding Partner of Beacon Economics and one ofthe forecast authors. “However, with inflationary stresses still in the mix, we’re worried that the Fed will continue its quixotic efforts to stem inflation, despite the fact that it’s fading on its own.” The net result, says Thornberg, will be significantly higher longer term interest rates and a tightening of credit availability. The impact on asset markets and the Federal deficit could be profound depending on how far the Fed pushes it, according to the new outlook.
In California, a large outflow of domestic migrants led to population declines in 2020 and 2021. In 2021 and 2022 alone, the state saw a net outflow of more than 750,000 domestic migrants, according to the new outlook. While the California exodus might seem like an encouraging first step toward reducing the state’s chronic housing shortage, the shortage is likely too deep: the pace of residential building would need to be accelerated and sustained over a decade or longer to make an appreciable dent. What’s more, the California Department of Finance projection for flat population growth over the next several decades would need to hold.
Then there’s this: “One of the confounding aspects of California’s population decline is that it has coincided with an increase in household formation,” said Sean Windle, Economic and Revenue Forecasting Manager at Beacon Economics and one of the forecast authors. From 2020 to 2023, California lost roughly 600,000 people but it added about 263,000 new households, and the number of people per household fell from 2.86 to 2.77. “We have fewer people living in more households, pushing up housing prices and rents, and further exacerbating the state’s housing crisis,” said Windle.
Moving forward, the state’s housing situation will hinge on a tug of war between competing demographic and economic factors. A strong labor market could spur even more household formation, and Millennials, as a cohort, are still in the age range when household formation grows. On the other hand, high housing costs pose a clear constraint to new household formation.
