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CSUF Economists Say Recession No Longer Imminent, But Stagflationary Environment Likely and SoCal in a Slowdown

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It’s been an unprecedented and uncertain run for the U.S. and world economies so far this decade, with a once-in-a-lifetime pandemic, major wars in the Middle East and Europe, epic supply chain disruptions, inflation and the rise of AI.

Usually, economists don’t predict recessions. They catch the business world unawares.

But over the past two and a half years, the consensus among economists – including Cal State Fullerton College of Business and Economics experts Anil Puri and Mira Farka – has been for a recession to follow the vicious bout of inflation that followed the post-pandemic recovery.

At the Economic and International Trade Forecast on April 30, Puri and Farka told Orange County business leaders, academics and policymakers that they no longer anticipate a recession. But a stagflationary-like environment of rising prices and sluggish growth seems to be in the long-term future. Their term for this: Stallflation, which means stalled growth coupled with persistent inflation.

“In the short-run, over the next six to eight months, we are more enthusiastic than the consensus,” they reported. “Continued growth is more likely to accelerate than downshift, given the tailwinds propelling it: immediate rate cuts, strong balance sheets, excess savings, fiscal support, and a buoyant stock market. But the outlook is more cautious longer term, not in the least because the very strength – and resiliency – of the U.S. economy coupled with expectations of rate cuts will likely sow the seeds of imbalances that may come to haunt us down the line.”

Inflation, which has declined sharply from a more than 9% peak in 2022, might stick around, albeit likely not at such red-hot numbers.

That leaves either a recession or a stagflationary-like environment in the cards. And given the two possibilities, Puri and Farka see stagflation.

“The most likely scenario in our view is a stagflationary-like environment where growth slows to below 2% and inflation remains range-bound between 3% and 4%.”

The threat of a downturn in the medium-term can’t be ruled out if premature interest rate cuts breathes new life into inflation, forcing rates to go up again instead of down.

An Uncertain World But a Resilient U.S. Economy

A year ago, concerns were rife about a crisis in the banking sector. The situation is much less dire in 2024. Still, banks have become less likely to lend. And that has consequences for consumers.

And internationally, Iran’s unprecedented attack on Israel and the Israeli response, attacks by Houthi rebels on Red Sea shipping, a major drought in Central America impacting the Panama Canal, geopolitical tensions in East Asia and a major earthquake in Taiwan, coupled with the collapse of the Francis Scott Key Bridge in Baltimore Harbor here in the U.S., point to continued worries with global supply chains.

“None of this means that the world is headed for another bout of supply chain bottlenecks similar to the post-pandemic snarls that prevailed in 2021 and in early 2022,” explained Puri and Farka. “But it does add strain to fragile supply lines and reverses some of the disinflationary gains which were a direct result of supply chain normalizations.”

Add to this rising oil prices which are now in the $90 per barrel range.

No commodity has seen such a powerful upswing as cocoa, due to unfavorable weather in West Africa. And that has led to skyrocketing prices for chocolate around the world.

With the global economy showing signs of weakness, what is keeping the U.S. economy afloat? And why the optimism that recession will be avoided?

Puri and Farka point to three trends: the AI boom (and boom in productivity), excess savings, but most importantly continued government spending in the form of muscular industrial policy. “Will America’s remarkable strength persist? Will this outstanding performance have a sequel? The answer from the consensus seems to be a resounding yes,” the Titan economists explain.

Discrepancies, however, abound. And that clouds the outlook.

For instance, unemployment rates are historically low. But most of the newly-created jobs are part-time jobs. Full-time jobs actually declined by 250,000 in the first quarter of 2024, but part-time employment is up by 838,000.

High interest rates have not hurt the high earners much because their own assets yield high interest, and their mortgages are pegged at lower rates. The lower income tiers are hurt by high rates because they don’t own assets and also rent, thus making homeownership further out of reach. Many have also accumulated higher debt through credit card usage.

“Undoubtedly this is a tale of two economies and winter has come for the less well off,” Puri and Farka reported.

The Orange County View

If the national economic situation is decidedly more positive than was anticipated just months ago, Southern California and Orange County stand in contrast with lackluster growth across many metrics.

“The state is grappling with a myriad of pressing issues: slower employment growth, tech layoffs, a housing crisis, a homeless crisis, and eye-watering budget deficits. The overall health for the regional economies of Southern California, which includes Orange County, Los Angeles County, Ventura County and the Inland Empire, was rather mixed last year,” Puri and Farka reported. “In some ways, rather ironically, our previous forecasts of slowing growth came closer to being correct for California and the Southern California region than for the national economy.”

California had the highest unemployment rate in the nation as of the most recent available data in February 2024, at 5.3%. Household employment growth has turned negative in the last three months. Healthcare, education and government jobs are the main bright spots in the local vocational picture.

The Golden State’s reputation for being an expensive and difficult state to do business in was solidified with a $20 per hour minimum wage for fast food workers beginning on April 1, the highest in the nation. Higher prices for fast food are already being reported and there are concerns that the move will decrease employment in the long run.

After an initial downturn in 2022, home prices are back up to record highs in many parts of the Southland. And that makes the affordable housing and homelessness crises worse.

Another major factor is mental health concerns and substance abuse.

California voters approved a $6.4 billion bond measure on the primary election ballot last month to try to address the mental health and drug abuse aspects of homelessness.

“After spending billions of dollars, California is nowhere close to making an appreciable dent in the number of homeless or finding a coherent strategy to solve the problem,” Puri and Farka reported. “Judging by the close vote of Proposition 1, the public seems reluctant but willing to take a chance, reflecting our own views on the matter. Let’s hope this initiative will be more successful than the myriads of programs that preceded it.”

Trade Forecast Looks at Global Export Trends

For the first time, the spring forecast was coupled with an in-depth discussion on international trade, sponsored by the Orange County/Inland Empire chapter of the Small Business Development Center.

Farka and Economics Professor Adrian Fleissig noted that the world is in a pullback from the hyper-globalization of recent decades, which began with Brexit and U.S.-China trade wars late in the 2010s, and then accelerated during the COVID-19 pandemic and the recent geopolitical crises in the Middle East and Europe.

“The fracturing of the consensus on globalization is ushering in a new system, one where the traditional vision of global interconnectedness is being replaced by a world of cliques and walls,” explained Farka and Fleissig. “Trade and business relations are further strengthened between countries in the same clique – or club – via harmonization of regulatory systems, further integration, and trade ties. Walls are erected to do exactly the opposite, creating trade barriers and fewer trade relations among countries belonging to other clubs.”

While alarming to many, Farka and Fleissig hope this new system may result in a more sustainable interconnectedness in the decades ahead as trade among friends replaces the across-the-board global village touted after the Cold War.

Global trade will rise but will be different, foreign direct investment will continue to struggle, industrial policy will make a strong comeback amidst renewed protectionism, and supply chains will reorient to the new reality.

“The great decoupling between the U.S. and China will continue, but this does not spell doom for world trade. On the contrary, the rest of the world will benefit from this break-up. Likewise, energy links between the EU and Russia will remain severed, but countries and firms will reorient and adapt. In short, rather than mourning the loss of the old global system, here’s to hoping that a more resilient and sustainable system rises from the ashes of hyper globalization.”

For More on Economic Forecasts

Cal State Fullerton’s Woods Center for Economic Analysis and Forecasting is the regional leader in producing regularly-updated analysis of economic trends for the business community, policymakers, academics and the general public.

Read the entire spring 2024 report on the Woods Center website.

Daniel Coats