Omicron variant obscures UCLA forecast

By SSC’s Michelle McKay Underwood

In its December 2021 forecast, the UCLA Anderson School of Management captured the moment the whole country is in—uncertain about the potential impact of the COVID-19 Omicron variant. At a glance, UCLA’s forecast is for continued strong economic growth and labor market recovery, with a lessening of supply constraints and inflation. But as we have seen since March 2020, COVID-19 continues to direct the course of the economy.

Along with the national economic fundamentals of gross domestic product (GDP) and consumption, the forecast touches on many of the questions facing districts today—how high will inflation (and the cost-of-living adjustment) go? Why can’t I hire workers? Where have all the students gone?

National Forecast

At the national level, UCLA’s first quarter estimate of 7.5% for 2021 GDP forecast was too optimistic before the Delta variant slowed economic growth nationwide. With 2021 almost complete, GDP is now expected to be 5.6% instead. On the plus side, this leaves growth on the table and UCLA increased its GDP forecast in 2022 to 4.2%.

Vividly demonstrating the difference between COVID surges and recovery periods are three successive quarters: the fourth quarter of 2021 and the first two quarters of 2022. UCLA is forecasting growth of 6.9% in the last quarter of 2021—the highest seen all year as the economy rebounds from the Delta wave. The immediate next quarter is expecting growth of 2.6% based on the assumption that Omicron might become temporarily disruptive after which in-person service consumption begins to rebound, bringing the second quarter forecasted growth to 4.5%. This cycle of bust and boom in the first half of 2022 could be smoothed if Omicron proves less disruptive than the Delta variant.

UCLA reminds us that consumption is 70% of the U.S. economy, so consumer trends and confidence matter a great deal to national GDP. Consumption is currently back to the pre-pandemic trend line, though the mix of services versus goods is different—as most Americans can attest to personally, consumption of goods is higher and services is lower. These levels are expected to return to pre-pandemic levels over the next few quarters, but again will depend heavily on the larger trajectory of the COVID-19 pandemic.

On the jobs front, UCLA expects the economy will continue to add approximately 200,000 to 400,000 jobs per month, creating downward pressure for the nation’s unemployment rate, settling in at 3.4% by the last quarter of 2022. That level of unemployment would be better than pre-pandemic levels, reflecting what economists view as “full employment,” and would put pressure on the Federal Reserve to focus more on controlling inflation than growing the jobs market. On the heels of what was seen as a very negative November jobs report, UCLA noted the difficulty in measuring actual jobs gains—several months have had subsequent upward revisions, and there have been great disparities between jobs reporting from households and jobs reporting for employment establishments.

Much attention has been paid lately to the “Great Resignation” of the national workforce and UCLA provided a few explanations for the lower labor participation rates:

  • Older Americans comfortably retiring with home equity and savings in their accounts
  • Workers no longer needing a second job because one, higher-paying job provides sufficient wages
  • A two-worker household forced to reduce to a solo income earner due to childcare or education conflicts

With lower labor force participation—there are currently 4 million fewer people among the nation’s working age population who are working than before the pandemic—employers are paying their workers higher wages. UCLA noted this is especially true when companies like Amazon bring in higher wages to a region and force other employers to match those wages to compete for fewer workers. To bridge these two economic indicators of jobs and consumption—while inflation is a concern, on average, wages have increased more than inflation.

Estimating year-over-year changes in inflation, UCLA forecasts fourth quarter changes of 5.8%, 3.4%, and 2.8% for 2021, 2022, and 2023, respectively. Circling back to COVID-19 uncertainty, an Omicron wave would keep inflation higher for longer by preventing a faster return to pre-pandemic trends of production and consumption.

California Forecast

Much of the California forecast focused on a topic of current concern to education: fewer Californians. In 2020, approximately 250,000 more people left California than came into the state. UCLA economist Jerry Nicklesburg attributes this net loss to the significant increase in housing prices during the pandemic, but noted that California is becoming relatively” more affordable since housing prices are increasing in other states as well. Over the next few years, the forecast expects net migration losses in California to slow: -154,000 in 2021; -96,000 in 2022; and -13,000 in 2023.

California’s unemployment rate is expected to drop from 7.7% in 2021 to 5.6% in 2022 to 4.4% in 2023. Education is the leading sector of pandemic job losses, with more than 350,000 jobs lost in the public and private education sector from February 2020 to September 2021. To close with some good news: education now leads job recovery in California, with approximately 110,000 education jobs gained between June and September 2021.