2020 Elections: A Good Night for Biden and the Democrats, a Bad Night for Trump

 

At last the election is just two days away. The way it looks to me, consistent with the recent polling data, is that Joe Biden will win the popular vote by a margin of 52-45-3 percent and it now looks like he will decisively win the battle for the electoral college by a margin of 350-188. I have Biden winning all the Clinton states of 2016 and adding Arizona, Florida, Georgia (yes), North Carolina, Pennsylvania, Michigan, Wisconsin and Nebraska’s 2^nd congressional district. His majority will be based on the votes of suburban women with the biggest gender gap ever, Blacks, seniors and the young. In House races, the Democrats are likely to pick up a net of between 8-10 seats. This will largely replicate the strength in the suburbs that occurred 2018 with a few seats coming from North Carolina’s redistricting.

 

The call for the Senate is much trickier. Put bluntly there are way too many extremely close races that can go either way. My best guess is that will pick up a net gain of five seats bringing their majority to 52-47 with one seat awaiting a Georgia runoff in January. I have the Democrats losing the Jones seat in Alabama while picking up Cunningham in North Carolina, Kelly in Arizona, Ossoff in Georgia, Bullock in Montana (an upset), Hickenlooper in Colorado and Gideon in Maine. In case of Gideon we probably will not know until next week to allow for Maine’s ranked choice voting tabulation.

 

HEALTH WARNING: The Senate races will be really close and as result there will be a high margin of error. If I am roughly right on the presidential race and if the Republicans do much better than I have predicted my explanation would be that enough Republican crossover voters and independents voted Republican fearing that a Democratic Senate would lead to packing the Supreme Court and runaway liberal legislation.

Biden vs. Trump: Round 1

 Although it was not quite "The Thrilla in Manila" or "The Rumble in the Jungle," the debate had many of the aspects of the prize fights of yore. Trump came out wildly swinging and breaking every debate rule in the book, while Biden tried to maintain a modicum of composure. Although Biden's performance will not put him the presidential debate hall of fame, he held his own and that was enough for him to walk away as the winner. Proof of that came the next day when Trump moved toward Pelosi's position on a large stimulus package. He can't afford the economy and the stock market to weaken in October.

Simply put Trump is running scared and unlike 2016, he now has much to lose. In fact it is not out of the question to see him in an orange jump suit in 2021. Trump's refusal to condemn the racism of the Proud Boys and his green lighting of post-election violence on their part with his "stand back and stand by" comments was chilling.

To me Trump's out of control on stage behavior likely turned off nearly every woman viewer of the debate. The vision of an out of control man is hardly reassuring. Thus the the gender gap this year will be a mile wide.

To those who fear that Trump will not accept defeat in November I would express my faith in America's military where there is a duty NOT to obey an unlawful order.

As to Biden he separated himself from the looney left of his party by standing clear of the Green New Deal, Medicare for All and defunding the police. He should have been firmer on "law and order," but he will have more than a few opportunities to make his views known. 

Finally if Amy Coney Barrett is confirmed, the evangelical right could treat Trump the way he treats them. They are now free to toss him overboard now that they have gotten the Supreme Court they wanted.

What the 2020 Election is all About

To hear the Democrats on the campaign trail you would think that the 2020 election is about Medicare for All, the Green New Deal and seemingly open borders. It is nothing of the sort. The 2020 election is not about remaking America, but rather it is about healing America.

What the next president has to do is to restore the idea of America as the land of the free and the home of the brave, not a witch’s brew of hostile identity groups. It means an America that lives up to E. Pluribus Unum, out of many one. It means forsaking the identity politics of both the Right and the Left to seek common ground. I know that will be a difficult task, but it has to be done.

The election will also be about restoring America’s position in the world where allies once again trust us. Who would ever thought that the U.S. president would have shouting match with Denmark, yet here we are. It also means that if we are going to have a trade dispute with China, we had better do it with allies. I would also note that most of the paragons of the global trading system we benefited from over the past 70 years were Democrats, namely Truman, Kennedy and Clinton. If only one Democratic candidate returned to those roots.

In 1920 after suffering from the disruption of World War I, the influenza epidemic, a rash of labor strikes and a “red scare” under the auspices of a Democratic president, Republican Warren Harding was elected on the slogan of “a return to normalcy.” Now 100 years later the Democratic nominee could do no worse than adopting a similar slogan after dealing with the chaos of Trump’s presidency.

After Action Report on the 2016 Election

WOW! Confounding all of the pollsters and the experts Donald Trump has become the President Elect. He relied on the voters willingness to "stick it to the man" (the global elite), the emergence of a bloc of white voters who acted as an "oppressed" minority, and he did much better than expected with suburban and Hispanic voters. Simply put nationalism is back. For whatever reason the Trump campaign sensed an opportunity in the upper Midwest and pounced. If anything this election represented a big loss for high-priced political consultants.

Shulmaven's forecast was pretty close we had Clinton winning on the electoral college by 288-250. We had Michigan going for Trump, but Florida going for Clinton. That was are big mistake because with Florida Trump in our model would have ended up with 279 electoral votes. It now looks like he will get around 300. We had Clinton winning the popular vote by 3 points; she will end up winning it by 1 point.

We were very close to the mark with the House and Senate races. We had the Republicans ending up with 51 seats; it now looks like they will have 52 or 53 seats. In the House we had the Republicans losing 12 seats which is about double the 6 or 7 seats they will end up losing. Not bad.

Where we are most surprised we thought there would be a major stock market sell-off. We got that overnight, but as of 11AM Eastern Time, stocks are off modestly with the bond substitutes, hospitals and auto parts suppliers bearing the brunt of the selling while defense, infrastructure and pharmaceutical stocks are soaring. I guess the market believes that Trump's reckless fiscal policy will be pro-growth and his barks on trade and immigration are just that with no follow through.

We will have more comments later in the week.

Election Forecast: Clinton Wins, Republicans Hold Senate and House

It is going to be a long night. My best guess is that Clinton will beat Trump in the popular vote by 3 points, 48.5 - 45.5 with Johnson and Stein getting 4% and 2%, respectively. The electoral college could very well end up being a squeaker with Clinton beating Trump 288-250. Why so close? If I am right about Clinton's 3 point margin, which is somewhat above the polling averages, then California will account for the entire margin of victory. Using simple math with Clinton carrying California by 20 points and California accounting for about 15% of the popular vote; then by simple multiplication you get 3 points. That means the rest of the country will be tied.

How I get to 288 for Clinton is that I give her Nevada and Florida, but I give Trump Ohio, North Carolina and in two upsets I give him New Hampshire and Michigan. Question: why are Obama, Hillary and Bill visiting Michigan tomorrow? Trust me, it is not for the mid-Fall weather.

As far as the Senate goes, with Trump not collapsing the GOP has a real chance to hold on. There are going to be more than a half dozen very tight races so the margin for error is large. My central tendency is for the Republicans to hold the Senate by a razor thin 51-49 majority. The only sure loser the Republicans have is Mark Kirk in Illinois. Now if Clinton wins by 5 points, the Democrats will take the Senate by something like 52-48. 

As far as the House goes it now looks like my fears of a few weeks ago that the Democrats would take the House were unwarranted. Again assuming a 3 point victory for Clinton, the Republicans figure to lose about a dozen seats ending up with a 234-201 majority. And because the Republicans are the "stupid" party they will immediately squander their victory by having a leadership fight. A fitting coda for the ongoing collapse of a party that had victory on a plate and it nominated the only candidate that could lose to Clinton.

Correction and Addendum

California accounts for 10% of the vote not 15% as stated above. Thus with Clinton carry California by 20 points her margin of victory in the rest of the country would be 1 point. Not zero, but very close. In 2012 President Obama beat Romney by 5 points with 2 of those points coming from California. Thus if his margin of victory was only by three points with California being roughly unchained, we might now be witnessing Mitt Romney's reelection campaign.  

Stocks too Complacent about Politics

The stock market has become way too complacent about the November election in assuming that Hillary Clinton will be elected and that the Republicans would end up controlling the House of Representatives. Today's WSJ/NBC snap poll has Hillary ahead by 11 points. If that holds through November the House will likely go Democratic and with that the market is nowhere near prepared for a wave tax and regulatory policies that a Clinton presidency will bring with it.

That is why House Speaker Paul Ryan "broke the glass" today in declaring that he would no longer defend Trump. He told his caucus members that they were on their own. A week ago I thought the Republicans had an even chance of holding the Senate and would only face modest losses in the House. Today the Senate is gone and the House is at risk. Gerrymandering or not, if Republicans don't show up to vote, the ball game is over. Consider yourself warned.

Promises, Promises.., UCLA Anderson Forecast, September 2016

Presidential candidates Hillary Clinton and Donald
Trump are making all kinds of promises which they believe
will improve the economy for the average person.2 In
very simplified terms Trump wants to substantially reduce
taxes on businesses (including 100% expensing of capital
outlays) and individuals, increase tariffs, deport at least five
million people, increase spending on immigration control,
infrastructure and defense. Needless to say, the federal
deficit would explode should all of his ideas be enacted. In
contrast, Hillary Clinton wants to increase taxes on high
income earners and use the proceeds to enable free tuition
at public colleges for most students, expand social security,
increase healthcare spending, refinance/forgive student debt
and increase spending on infrastructure. Her plan would
modestly increase the deficit, but it is silent on its potential
to make economic growth even slower than it is now. Of
course, whether any or all of these proposals get through
Congress remains an open question.

The problem is that in order to be effective, any economic
plan has to be able to jump start productivity growth
that has been extraordinarily weak for more than a decade.
As our colleague Ed Leamer noted last quarter, it will be
extremely difficult for the U.S. economy to return to a 3% a
year growth path without productivity growth moving from
near zero to about 2%.3 Put bluntly, the growth in real GDP
is a function of the growth in labor hours and the increase in
the output per hour or productivity. Presented below is the
long-trend in the growth in output per hour. (See Figure 1)

Figure 1 Productivity Growth, Output/Hour Worked
Sources: U.S. Department of Commerce, UCLA Anderson Forecast

By simple arithmetic if we posit that the labor force
is growing at around 1% or less per year and if we assume
that the average person is not going to step up the number
of hours worked, then with 1% productivity growth the
steady state growth for real GDP is about 2% a year. This
is, in fact, the history of recent years. Thus the question
before the candidates is how are they going to improve the
outlook for productivity? And note the mass deportation
of workers would reduce hours worked in the short-run.

The answer to this question is not simple. There is no
magic wand and improvements in productivity take time
to implement and are largely dependent on technological
innovation. To economist Robert Gordon, the growth in
productivity experienced by the United States between
1870- 1970 was based on a series of one-off events based
on the internal combustion engine, the harnessing of electromagnetic
energy, indoor plumbing and improvements in
public health. 4. To him our fascination with the computer/
communications technology of today pales in comparison
to the arrival of electricity and the automobile. Perhaps he
is too pessimistic, but the burden of proof is on the technoenthusiasts.

Nevertheless, even if you are a techno-enthusiast, productivity
improvements don’t take place over night. It takes
time for technology to diffuse into the broader economy,
workers have to be educated and trained and new infrastructure
has to be built. Thus, the policies that both Clinton
and Trump are talking about potentially would only have a
limited impact in the short-run. Over a longer time period
an improved infrastructure, a more efficient tax structure
and a better educated workforce will help, but again, in the
fullness of time.

In any event, with both Clinton and Trump calling for
more spending and with tax increases difficult to pass, the
path of the federal deficit will be decidedly higher thereby
reversing the trend of lower deficits in recent years. (See
Figure 2) In the meantime we have modeled in increased
federal spending on infrastructure, a program both candidates
agree on.

The Forecast

Although the inventory correction has taken longer
than what we had previously anticipated, the economy
appears to be rebounding from the 1% growth recorded in
the first half to about 2.7% in the second half. (See Figure
3) Thereafter the growth in real GDP is forecast to run at a
2%- 2.5% clip for the years, 2017 and 2018, respectively.
In other words, it will not be much different from the past
seven years. And to be very explicit, we are assuming
that Hillary Clinton will be elected in November with at
least one house of Congress remaining Republican, the
conventional wisdom as of this writing.

Figure 2 Federal Surplus/Deficit, FY 2000 - FY 2018F
Sources: Office of Management and Budget and UCLA Anderson Forecast

Figure 3 Real GDP Growth
Sources: U.S. Department of Commerce, UCLA Anderson Forecast

With the economy approaching full employment,
employment growth will inevitably slow. After consistently
averaging about 200,000 job gains a month since 2011, employment
growth will slow to about 150,000 jobs a month
in 2017 and 125,000 jobs a month in 2018. Remember
the closer an economy is to full employment the more the
demographics of the work force takes hold. (See Figure 4)
The unemployment rate is forecast to be in a very tight 4.8%
-5.0% range for most of the forecast period as the labor force
participation rate rises modestly.

The modest growth we are forecasting will come from
continued gains in the consumer and housing sectors along
with a rebound in capital spending. Although real consumption
expenditures will not approach the 3.2% increase of
2015, there will be solid gains of 2%+ over the next two
and half years. (See Figure 5) The drop off will largely be
due to a peaking in the automobile market with light vehicle

sales running at about a 17.5 million unit rate. (See Figure 6)


Similarly, housing activity continues to grind higher.
Rising wages, low interest rates and higher rents are underpinning
housing demand with the last factor beginning to
trigger a shift away from rentals towards ownership units.
Although well off peak production, we forecast that housing
starts will increase to 1.19 million units this year and to 1.38
million units and 1.41 million units, in 2017 and 2018, respectively,
up from 1.11 million units in 2015. (See Figure 7)

Figure 4 Unemployment Rate
Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 5 Real Consumption Expenditures
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 6 Light Vehicle Sales
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 7 Housing Starts
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

With respect to business fixed investment we expect
the declines in both equipment and structures in 2016 to
reverse next year. (See Figures 8 and 9) This reversal of
fortune will largely be due to the end of the collapse in oil
and gas drilling investment and the beginnings of a modest
recovery in that sector. Similarly, the hesitancy in overall
corporate investment experienced in the first half appears
to be waning.

The real wild card for the next few years involves the
export sector. The dollar has been strong, foreign economies
generally weak and there has been an obvious increase in
protectionist sentiment worldwide. As a result, global trade
has not been a source of growth in recent years. We are
assuming that there will be a modest increase in export volumes
over the next few years after two years of essentially
zero growth. If there is a risk to our forecast you can do no
worse than starting here.

Figure 8 Real Investment in Equipment
Sources: U.S. Department of Commerce, UCLA Anderson Forecast

Figure 9 Real Investment in Nonresidential Structures
Sources: U.S. Department of Commerce, UCLA Anderson Forecast

Figure 10 Real Exports
Sources: U.S. Department of Commerce, UCLA Anderson Forecast
Inflation on the Rise

Although the Fed is reluctant to admit it, the era of
very low inflation is behind us. On a year-over-year basis,
core inflation is already running well above a 2% annual
rate. (See Figure 11) By next year the headline consumer
price increase will approximate 3% as service sector inflation
combines with modestly higher oil prices. And even
the Fed’s preferred gauge for inflation, the chain weighted
deflator for personal consumption expenditures will exceed
2% in both 2017 and 2018.

The rebound in inflation is being fueled by higher
energy prices, coupled with large increases in service prices
especially residential rent and higher wages. The average
worker is in the process of getting a raise as private sector
wage compensation will be increasing at a 4% rate over the
next two years. Simply put, there are growing spot shortages
of labor appearing in many parts of the country and the
July JOLTS data indicated a record amount of job openings.

After years of experimenting with zero interest rates,
quantitative easing, and forward guidance and internationally
with negative interest rates and corporate bond buying,
it now appears that monetary policy is at the end of its rope.
Despite it all, globally, inflation is not budging. There isn’t
much more monetary policy can do except for the central
banks to directly fund government spending by printing
money through the purchase of zero coupon perpetual bonds.
It may come to that and perhaps a field trip to Caracas,
Venezuela is in order where a former bus driver is on the
road to generating quadruple digit inflation. Of course that
would mean the end of central bank independence. Thus,
the answer lies in fiscal policy and that is something that
both Ms. Clinton and Mr. Trump are advocating in their
own unique ways.

As for long-term interest rates, we expect them to
rise in tandem with short rates and the higher inflation we
expect to see. In order for this to happen both Europe and
Japan will have to leave negative interest rates behind and
we are beginning to see the first signs of this. Put bluntly
the Central Banks have run out of bonds to buy and there is
growing recognition that the sustained period of very low
long-term interest rates is creating systemic risk in the form
of bankrupting pension plans and life insurance companies.
This problem is more acute in Europe than the U.S., but the
state and local pension plans of the U.S. are in dire straits
and it is getting worse with each passing day.
Figure 11 Consumer Price Index vs. Core CPI
Sources: U.S. Bureau of Labor Statistics, UCLA Anderson Forecast

Figure 12 Employee Compensation/Hour
Sources: U.S. Bureau of Labor Statistics, UCLA Anderson Forecast

The Fed Begins to Move….Slowly

This was supposed to be the year of three or four
increases in the Fed Funds rate. Instead, the ever data
dependent Fed will likely raise rates only once this year.
However, as transitory worries fade (i.e. Brexit) and the
economy demonstrates its ability to grow at a 2%+ clip, we
anticipate that 2017 could very well bring with it three 25
basis point rate hikes taking the funds rate by yearend to
around 1.5%. (See Figure 13)

Figure 13 Federal Funds Rate vs. 10-Year U.S. Treasury Bond
Yields
Sources: Federal Reserve Board, UCLA Anderson Forecast

Conclusion

The economy having survived a first half slowdown
is on track for 2%+ growth over the next few years. Don’t
expect much help from the political system because we
will not see a meaningful improvement in growth unless productivity picks up. Public policy in this regard can be
successful, but it will take time. Meantime, inflation will
pick up modestly in a roughly full employment economy
causing the Fed to gradually raise interest rates.  

Endnotes
1. With apologies to Neil Simon.
2. In the interests of full disclosure I wrote an Op-Ed in support of Hillary Clinton and in opposition to Donald Trump. See Shulman, David, “I’m a
Republican and I Don’t Like Hillary Clinton – but I’m Voting for her.” Los Angeles Times, Op-Ed, August 8, 2016.
3. Leamer, Ed, “It’s not 9.8 Meters per Second Squared Anymore,” UCLA Anderson Forecast, June 2016.
4. See Gordon, Robert J., “The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War,” Princeton: Princeton University

I'm a Republican and I don't like Hillary Clinton - but I'm Voting for her - Los Angeles Times Op-Ed, Aug. 8. 2016

This is the Los Angeles Times version of my prior blog.

http://www.latimes.com/opinion/op-ed/la-oe-shulman-republican-clinton-voter-20160808-snap-story.html

Why This Republican is Voting for Hillary Clinton

I will vote for Hillary Clinton in November. I will do this knowing full well that Hillary Clinton has more baggage than United Airlines and that she would nominate Supreme Court justices that would do violence to the First, Second and Fifth Amendments to the United States Constitution. She flat out lied about her home brew server and was careless with the classified information on it; thereby imperiling national security.  I recognize that she is owned in fee-simple by one of the most reactionary groups in America, the public employee unions. Further I assume that the SVR, the foreign intelligence service of the Russian Federation, will cause to be released documents showing a very unsavory connection between Hillary Clinton’s actions as Secretary of State and the Clinton Foundation.

Had Trump not been nominated, I would have proudly voted for Marco Rubio, John Kasich or Jeb Bush and would have supported Scott Walker, Chris Christie and yes, Mike Pence. But compared to these candidates Donald Trump lives on another planet. Simply put he is not a Republican or a conservative as we have known those terms to be defined.

So you might rightly ask, why will I vote for her? The reason is simple. Hillary Clinton, as cynical as she sometimes can be, believes in America and its values. Trump does not by wanting to establish religious tests for immigration and ethnic tests for judges. She is open to the world; Trump is not. Donald Trump believes in only himself. As Khizr Kahn, the Muslim father of a slain U.S. Army captain noted at the Democratic Convention of Trump: “You have sacrificed nothing.”   And hopefully we will soon know the contents of Trump’s tax returns which will demonstrate that he is not as rich as he says he is, has given only pittance to charity and has played the tax code like an aria by paying a minimal amount of taxes. The media should think about not covering him until he releases his tax returns, like every modern candidate for the presidency. Why do they let him get away with it?

Trump represents a steak of authoritarianism that goes back to the proto-fascist America First movement of the early 1940s championed by Charles Lindbergh. He doesn’t have a clue about foreign policy and has no advisers of stature, military or diplomatic. This is evidenced by his “bromance” with Putin and his playing fast and loose with our commitments to NATO. In contrast Hillary Clinton is a tough minded foreign policy realist who understands the dangers we face with Putinism and ISIS.

As I wrote in two prior blog posts (http://shulmaven.blogspot.com/2014/05/reliving-1930s.html and http://shulmaven.blogspot.com/2014/08/reliving-1930s-part-2.html )  we are in the process of reliving the 1930s where Russian expansionism in the Ukraine is analogous to Hitler’s moves in central Europe and the rise of antisemitism in Europe today has a parallel to that dark era. Similar to the 1930s, Trump wants to close America off from the rest of the world. He doesn’t realize that we benefit from trade and immigration. To be sure there are losers in the process and we as a society have to do much better for them going forward.

Further, if you think Hillary has a problem with the truth, she doesn’t hold a candle to The Donald’s prevarications. Simply put, as the old adage goes, “How can you tell when Trump is lying? Answer: When he is moving his lips.”  You really can’t tell from one day to the next what he will say and whether or not he will say the same thing again the following day. He is an unstable egomaniac who is unfit for public office, any office. That is why I will be voting for Hillary.

Now I will close with some internal Republican Party dynamics. We brought Trump on ourselves. The Congressional leadership, K-Street lobbyists and public policy intellectuals (save a few) only talked to themselves. They had no clue as to what was going on out in the country and became completely out of touch with the working class base of the Republican Party. Instead of the toney restaurants of D.C., I suggest they visit the fast food joints and bars of the Midwest and South. Simply put a whole lot of soul searching is ahead of us.

Hillary Bumper Sticker - Not Indicted,Vote Hillary

F.B.I. Director  James Comey walked right up to the line of recommending a charge of criminal negligence against Hillary Clinton, but he did not cross it. Instead he declared that she was "extremely careless" with the handling of Top Secret  information. There goes all of her prior denials about sending and receiving classified information. He further noted that she "should have known that an unclassified system was no place for that conversation." Indeed Comey noted how lax Hillary's State Department was with the whole process of handling classified information. Hardly the hallmark of a good manager.

Although she was not charged criminally, if she were still Secretary of State it would be grounds for impeachment. Further, if any government employee with a Top Secret clearance were so cavalier in handling such information, at minimum that employee would have had their clearance suspended, more likely would be fired.

As a result, this issue ain't going away.

Sheryl Sandberg: An Out of the Box Choice for Hillary's VEEP

Although I am not the first to mention her, I believe that Hillary Clinton would hit it out of the park if she named Facebook COO Sheryl Sandberg as her pick for vice president. In Sandberg you have an accomplished woman with a national reputation as an executive and author. Her technology cred would make her both a favorite of millennial voters and their suburban parents. She would make a very stale Hillary look fresh.

Moreover Sandberg is not without Washington experience. She served as chief of staff to Treasury Secretary Larry Summers from 1996-2001. Although she and Hillary may not be BFFs, they both know each other. Think about it in this exceptional year, does Hillary want a dull boring politician or does she want to bring some excitement to her campaign and some one who is far more familiar with emails than she is? 

In the Los Angeles Times, Big Story on the Economy, 6/6/16

http://www.latimes.com/business/la-fi-economic-expansion-20160606-snap-story.html#nt=oft12aH-1gp2

My Article on Zocalo: "The U.S. Can no Longer Remain an Island of Economic Tranquility"

http://www.zocalopublicsquare.org/2016/04/20/the-u-s-can-no-longer-remain-an-island-of-economic-tranquility/ideas/nexus/

How’s the economy?

We have so many indicators to measure, you’d think the answer to that question would be as straightforward as the answer to the question of “How’s the weather?”

It never is, of course, for a number of reasons. The “economy” in the aggregate covers many activities and sectors, some of which can be booming while others are in a rough patch. Similarly, some individuals suffer economic hardship in supposedly good times, while some people manage to thrive in down times, so one’s feelings about “the economy” don’t always correlate with the latest macro statistics and headlines.

But there is a more novel reason for the confusion surrounding how people feel about the economy: the perceived seesaw relationship between the U.S. economy and the rest of the world. For the past decade, our fortunes and those of nations beyond our shores haven’t been moving in tandem. Even more worrisome, in the political realm the two are increasingly described as being in a zero-sum, adversarial relationship.

Go to URL above for the full article.

Disturbances in the Force, UCLA Anderson Forecast, April 2016

The January to February drop in stock prices, down
13% from early December, sent shivers through the economy
engendering fears that a new recession was at hand. (See
Figure 1) The markets were disturbed by fears of a far bigger
slowdown in China, continued stagnation in Europe
and Japan, a break in oil prices to $10 below the financial
crisis levels of 2009 and that the European banking system
was on the brink of a new crisis. (See Figure 2 which uses
the share price of Deutsche Bank as an example) However,
the markets soon calmed down and wiped out much of
their earlier losses as strong data from the consumer side
of the economy indicated that retail sales were solid and
employment growth remained robust. Simply put, aside

Figure 1 S&P 500, March 2015-March 2016
Sources: Standard & Poor's via BigCharts.com

from modest declines in the industrial sector, there was no
recession in the data.

However, there are more disturbances on the horizon.
In June, the United Kingdom will vote on whether or not it
will stay in the European Union, commonly known as the
“Brexit” referendum. Whether leaving the European Union
is a wise move or not, the transition period will likely be
occasioned by increased market volatility. In the U.S. there
are two major presidential candidates who want to “blow
up” the global trading system as we have known it since the
end of World War II. Economists might not know all that
much, but trade wars usually do not lead to prosperity,
quite to the contrary.

Although we continue to believe the economy remains
on track for moderate growth, we are not as ebullient as
prior forecasts. The inventory correction we were looking
for last quarter is taking longer than we expected and though
the ramp up in single-family housing starts continues, it is
tracing a shallower path than what we previously thought.
(See Figure 3) For example, inventory accumulation added
$78 billion to real GDP in the fourth quarter of 2015; this
sector will only add $25 billion in this year’s third quarter,
a contraction of $53 billion. Thus, instead of looking for
3.3% growth in real GDP for 2016 on a fourth quarter-

Figure 2 Deutsche Bank Stock Price, March 2006-March 2016
Sources: BigCharts.com

fourth quarter basis we are now calling for a more modest
2.7% growth rate. (See Figure 4)

Despite the slower GDP growth rate, the economy
remains on track to create 2.4 million jobs this year and
1.5 million jobs next year as the economy operates at full
employment. (See Figure 5) Similarly, the unemployment
rate which stood at 4.9% in February, is on track to decline
to 4.6% by yearend. (See Figure 6) The rate of decline will
be slower than in the past few years as for the first time the
labor force participation rate is on the rise, a good thing.

Figure 3 Change in Real Inventory
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 4 Real GDP Growth
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 5 Payroll Employment
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 6 Unemployment Rate
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Monetary Policy: From ZIRP to NIRP

While the Federal Reserve left its zero interest rate
policy (ZIRP) behind last December, the European and
Japanese central banks have embarked on a negative interest
rate policy (NIRP) with unknowable consequences. Apparently
the $12.5 trillion of bond buying that the global central
banks embarked upon since 2008 hasn’t been enough to pull
both Europe and Japan out of the quagmire they now find
themselves in. In a negative rate regime instead of paying
interest the borrower receives interest and lender pays interest.
It is truly an “Alice in Wonderland” world. Reflective
of the dour outlook, negative yields are common in many
developed markets. (See Figure 7)

The obvious problem with NIRP is that it will destroy
the business models of life insurance companies and pension
plans and has the potential to do the same for the banking
system. We don’t know how much lower negative interest
rates can go and we don’t know whether it would be legal
for the Federal Reserve to undertake such a policy if it is
deemed necessary.

Meantime, the Fed appears to be ready and willing
to raise interest rates this year. Consistent with the March
Fed statement, we expect two or maybe three increases
in the Fed Funds rate this year with the first one likely
to be in June. (See Figure 8) Thereafter, we expect gradual
increases with the Fed Funds Rate ending 2017 at about 2%.
With much of the world in NIRP territory, policy rates will
be constrained in the U.S. The same holds true for longerterm
rates where we forecast the 10-Year Treasury to end
2016 at about 2.6% and end 2017 at about 3.6% compared
to a mid-March rate of 1.9%.

Figure 7 Government Bond Yields in Selected Countries,
March 18, 2016
Sources: The Wall Street Journal

Figure 8 Federal Funds vs. 10-Year U.S. Treasury Bonds
Sources: Federal Reserve Board and UCLA Anderson Forecast

Figure 9 Consumer Price Index vs. Core CPI
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Nevertheless, the Fed will be under pressure to raise
interest rates because it is about to get the inflation it has
been praying for. Specifically, as of February, the year-over-year
increase in core consumer prices was 2.3% and it is
forecast to approach 3% by 2017. (See Figure 9) Similarly,
with oil prices likely to have bottomed earlier this year, and
with the tightening labor market finally working its way
into employee compensation, headline consumer prices will
be rising at a 3% clip by the end of 2016. (See Figures 10
and 11) We would note that as of mid-March the price of
oil was tracking above our forecast and whether that trend
continues could very well depend upon an OPEC/Russia
meeting scheduled for April 17.


The U.S. Consumer is in Good Shape

Despite issues concerning the distribution of income
and debt burdens, the U.S. consumer remains in good shape
overall. Consumption will continue to be on a 3% growth
path throughout 2016 and it will be accompanied by a saving
rate in excess of 5%. (See Figures 12 and 13) Where
previously we thought that much of the consumer benefits
flowing from lower gasoline prices would be spent, a goodly
portion of it was saved. That being said, the lower gasoline
prices seem to have found their way into generating near
record automobile sales.

Housing starts continue to improve, albeit at a slower
pace than we previously thought. After reaching 1.106
million units in 2015, we forecast starts to increase to 1.24
million units and 1.43 million units in 2016 and 2017, respectively.
(See Figure 14) Our prior forecast for 2016 was
for 1.4 million units, but the forecast for 2017 is much the
same as before. Homebuilders did not ramp up single-family
production as fast as we thought and they concentrated their
activity on the higher end of the market. There is now anecdotal
evidence that the builders are shifting their emphasis
towards starter homes where there is real pent-up demand
coming from increased household formation, modest income
growth and rising rents. Our prior forecast for multi-family
starts of in excess of 400,000 units a year remains on track.

Figure 10 Oil Prices, West Texas Intermediate
Sources: Commodity Research Bureau and UCLA Anderson Forecast

Figure 11 Employee Compensation
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 12 Real Consumption Expenditures
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 13 Savings Rate
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 17 Real Private Gross Domestic Investment in
Commercial Buildings
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 16 Real Gross Private Domestic Investment in
Mines and Wells
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Capital Spending Growth Remains Tepid

With the industrial economy in a shallow recession and
oil exploration capital spending dropping below the nadir
of 2009, we should be thankful for the modest increases in
capital spending we are witnessing. Specifically, we forecast
that equipment capital spending will increase at a 4-5% pace
over the next few years, not great, but certainly not a recession.
(See Figure 15) On the other hand, investment spending
on structures is in the midst of a two-year decline triggered
by the collapse in oil exploration spending. (See Figure 16)
Specifically, real investment in mines and wells will have

Figure 14 Housing Starts
Sources: Bureau of the Census and w Anderson Forecast

Figure 15 Real Gross Private Investment in Equipment
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

declined by 60% from $137 billion in the fourth quarter
of 2014 to a forecast $56 billion in the first quarter of
2016. Most people don’t realize that construction in the oil
exploration and production sector was far larger than the
entire commercial construction sector, no more.

On the other hand, commercial construction is gaining
strength. Improved fundamentals for office and industrial
construction are driving spending in this sector that is being
fueled by an abundance of capital seeking modest yields in
a low-yield world. (See Figure 17) In contrast, spending on
retail structures is now being driven by negative fundamentals brought about by e-commerce. Major malls are seeking
to remain relevant by making huge investments in renovation
on the order of $500-$800 million per mall at the high end.

Exports Remain a Real Risk

With a strong dollar and weak economic growth in
Europe, Japan, Canada, China, Brazil and the Middle East,
the U.S. export sector remains under pressure. We are still
forecasting minimal growth this year, but the real risk is that
we can very easily have a decline. (See Figure 18) If you
want to tell a story about a U.S. recession it would have to
begin in this sector, but even with a modest decline it would
not be enough to put the U.S. into a recession.

Figure 18 Real Exports
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Government: A Modest Positive

After several years of decline, federal purchases are
once again on the rise. Whether federal spending continues
to rise over the intermediate term will largely be dependent on how this year’s election turns out. (See Figure 19) The
increase this year is due to the temporary lifting of the
sequester that has been in place since 2013. Similarly, the
much larger state and local sector has been growing since
2014, but it will once again face the twin pressures of higher
pension and Medicaid outlays as the decade ends.

Conclusion

We don’t see a recession this year or next and we do
envision inflation rising above the Fed’s 2% target. As a
result, we are forecasting slow and steady increases in the
Federal Funds rate over the next few years. And although
we have continued growth in 2018, a forecast that far out is a
conjecture. Growth will be driven by increases in consumer
spending and housing along with the end of the inventory
correction we are now going through. The risks we envision
largely come from outside of the U.S. domestic economy
where disturbances in Europe and Asia along with domestic

politics have the potential to cast a pall over the economy.