California will continue to outpace the nation’s growth over the next two years, but the world’s sixth-largest economy faces unique risks under the incoming Trump administration, according to recent reports from California economists.
The state’s job growth is slowing from 2.5% in 2016 to 2.1% next year, but will remain ahead of the national employment growth rate, which will remain steady at 1.8%, according to a report from the A. Gary Anderson Center for Economic Research at Chapman University in Orange, Calif.
A report from the UCLA Anderson School of Management forecasts the state’s 5.3% unemployment rate will essentially remain the same through late 2018.
“California will benefit less from any possible stimulus under a new president than states in the Midwest and Northeast,” the UCLA report says. “The state is basically at full employment—and where the state will find people to fill new jobs remains to be seen as the new presidential administration is expected to oppose an expansion of the skilled worker visa program.”
California’s gross state product grew 4.1% to $2.46 trillion in 2015, surpassing France, thanks to a strong, diverse economy from technology in Silicon Valley’s to entertainment in Hollywood. The nation’s most populous state outpaced U.S. gross domestic product growth of 2.4% in 2015 and continued on that track in 2016.
“The state’s economy will continue growing at a modest rate and faster than the United States in 2017 and 2018, although this gap will keep narrowing,” according to a report from the Center for Economic Research and Forecasting at California Lutheran University in Thousand Oaks.
The California Lutheran report said the incoming Trump administration presents “some downside risks unique to California.” For example, it said the state’s budget could be damaged by repeal of even part of the Affordable Care Act, and changes to federal energy, international trade and immigration policies would also disproportionately hurt the state.
Chapman report forecast a benefit to California if the dollar remains strong, allowing “a pickup in imports flowing through California from China, Mexico, Japan and Canada barring any changes in trade pacts and tariffs induced by a new presidential administration.”
The UCLA report noted that despite California’s large congressional contingent, it is a “sanctuary” state with many sanctuary cities for illegal or undocumented immigrants. “Trump has said his incoming administration will block funds to sanctuary cities, so the amount of funding headed to the state remains to be seen.”
If Trump carries through on his promise of illegal immigrant deportations, it will have an impact on agriculture production, the UCLA report said. “It’s estimated up to half of California’s farm workers are illegal/undocumented. If these workers are deported, California’s farmers will have trouble harvesting their crops while paying much higher wages to documented farm workers.”
On the other hand, the UCLA report said Trump’s proposed increase in defense spending “will be disproportionately directed to California as sophisticated airplanes, weaponry, missiles and ships require technology produced in the state. Expect a positive impact in San Diego, coastal Southern California, and the Bay Area.”
The Congressional Budget Office is forecasting $500 billion annual deficits in five of the next six years. “The era of ultra-high federal budget deficits will continue, the California Lutheran report said. “Trump is unlikely to make a dent in these deficits.”
The Chapman report forecast a 50 basis point increase in both short- and long-term interest rates by the end of 2017.
“With possible tax cuts and increased spending looming under a new presidential administration, the Federal Reserve is likely to be more resolute than ever about raising the federal funds rate, which would probably push up other short-term interest rates,” the Chapman report said.
