New Uncertainties Underlie Near-Future Economy as New Administration Implements Policies

• Despite uncertainties, the U.S. national economy is forecasted to outshine global peers, though GDP growth is expected to fall below 2% on a seasonally adjusted annual rate
• California's economy will grow more slowly than previously forecast while it adjusts to new national economic policies

LOS ANGELES, Dec. 11, 2024 /PRNewswire/ -- In January 2025, U.S. President-Elect Donald Trump returns to the White House with plans to implement several economic policies he promised during the 2024 campaign. Among these policies are new or increased tariffs on the United States' largest trading partners (China, Mexico and Canada), mass deportations, tax cuts and deregulation. How these policies ultimately manifest is not necessarily clear, considering practical, legal and political constraints on implementation.

These uncertainties create forecast challenges. In its winter 2024 quarterly economic forecast, UCLA Anderson Forecast economists attempt to minimize speculation by considering only policies that have been publicly discussed and are likeliest, but not certain, to occur. These policies include imposing 25% tariffs on all goods from Mexico and Canada, and raising the tariffs on China by 10 percentage points — all expected to be announced early in 2025 and in effect by the end of the year. Policies also include deporting up to one million undocumented immigrants annually and making permanent the Tax Cuts and Jobs Act of 2017. While these are the assumptions in the forecast, reality could be much different. The Trump administration might impose lower tariffs on Mexico and Canada, but higher tariffs on China, which the president-elect has discussed. The assumptions are also more moderate than some of the proposals that have been publicly discussed, including 20% across-the-board tariffs (with a 60% tariff on China), the deportation of 11 million immigrants and even the abolition of federal income taxes.

While the details are uncertain, they all, according to the Forecast, point in one direction: the impact on the cost of living. Tariffs will raise price levels on many goods and services. Deportation will create labor shortages in agriculture, nondurable goods manufacturing, construction, and leisure and hospitality services. Additional tax cuts may further increase consumption demand and, therefore, prices in a labor-constrained economy.

The national forecast

According to the UCLA Anderson Forecast, tariffs will be passed on for the most part in the form of higher prices, temporarily raising inflation in 2025 to just above 3%, and will raise consumer prices by 0.9%. In 2026, inflation is forecast to be well above 2%, with headline inflation going higher than core inflation (which excludes food and energy prices).

One of the main results of mass deportations will be a rise in wages. The deportations will exacerbate the existing labor shortages, as construction and the food industry are hit particularly hard. With the U.S. economy already supporting near full-employment, and a dearth of legal residents who are willing to take on certain jobs, wages will need to rise to entice workers into accepting such positions.

With real GDP growth expected to be above 2%, the national economy continues to outshine its global peers. The incoming tariff and deportation policies will put upward pressure on costs and downward pressure on consumption, leading to lower GDP growth, dipping below 2% (SAAR) in the second half of 2025. The Forecast anticipates GDP growth to partially recover by the end of 2026 as the economy adjusts to the tariffs and the changing composition and size of the labor force.

The California forecast

The shadow of uncertainty is cast over the California economy and the winter 2024 UCLA Anderson Forecast for California reflects the unknowns. As in the national forecast, tariffs, immigration policy, regulatory policy and tax policy figure heavily in the California forecast.

Immigration policy will likely have two effects on California. The first is a withdrawal of millions of undocumented workers from the U.S. labor force, either through the deportation process or because they have voluntarily stopped working in the face of high risk of deportation. The second concerns H1B visas to work in the tech industry. The emphasis the new administration is expected to place on growth in technology suggests that H1B visas will benefit California's tech industry.

With respect to taxes and regulation, the Forecast assumes that, to the extent that they happen, they will have only minor impact and will take time to be felt. In the U.S. forecast, the 2017 Tax Cuts and Jobs Act cuts that expire in 2025 are expected to be renewed, as are some smaller tax cuts through the next two years. Assumptions about Trump administration policies is based on the Forecast economists' guesses and not on any data other than pronouncements Trump made during the presidential campaign, and his recent appointments of key personnel for the incoming administration. It is important to keep in mind that political exigencies can radically alter promised policy.

With these assumptions in place, the California forecast expects the state's economy to grow at about the same rate as the country's in 2025 and 2026.

The unemployment rate for the fourth quarter of 2024 is expected to average 5.3%, while the averages for 2025 and 2026 are expected to be 5.5% and 5.0%, respectively. The UCLA Anderson forecast expects the 2025 and 2026 total employment growth rates to be -0.7% and 1.6%. At the same time, non-farm payroll jobs are expected to grow at rates of 1.5% and 1.3% during the same two years. Real personal income is forecast to grow by 2.3% in 2025 and 2.6% in 2026.

Despite higher interest rates, the continued demand for a limited housing stock, coupled with state policies inducing new home building, should result in the beginning of a recovery this year in that housing sector, followed by slow but solid growth in new home production thereafter. The forecast anticipates new units to grow to 143,000 by the end of 2026. Based on this level of home building, the private sector's prospect of building out of the housing affordability problem over the next three years is nil.

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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SOURCE UCLA Anderson Forecast