Connect with us


U.S. and California Economies Remain at a Crossroads as Fed Continues to Combat Inflation

U.S. and California Economies Remain at a Crossroads as Fed Continues to Combat Inflation
PR Newswire
LOS ANGELES, March 15, 2023

Relative strength of the state’s economy is owing to strong construction sector, sufficient rainy-day fund and increas…



U.S. and California Economies Remain at a Crossroads as Fed Continues to Combat Inflation

PR Newswire

Relative strength of the state's economy is owing to strong construction sector, sufficient rainy-day fund and increasing demand for defense goods, software

LOS ANGELES, March 15, 2023 /PRNewswire/ -- As 2022 drew to a close, the UCLA Anderson Forecast's final report of the year described an economy at a crossroads. The Federal Reserve was contemplating different inflation-fighting strategies that might slow but not stall inflation or, depending on how aggressively the Fed acted, trigger a mild recession.

To simplify an admittedly complicated set of actions, the more aggressively the Fed raises interest rates to combat inflation, the likelier a recession becomes.

Now, approaching the second quarter of 2023, the UCLA Anderson Forecast again presents a two-scenario approach for the national economy. One scenario is no recession: Economic growth slows but remains positive, inflation ebbs, labor markets remain robust and the Federal Reserve takes a less aggressive approach to monetary policy tightening.

The second scenario is a recession that occurs toward the end of the year because the Federal Reserve took aggressive inflation-fighting actions. In the latter scenario, the Fed forces a mild recession and accepts an economic contraction and higher unemployment to combat inflation.

The difference between the two scenarios is how the Federal Reserve sets monetary policy. The Fed has said it will be data-dependent. If data show that the labor market remains robust but inflation remains persistent, the Fed will likely err on the side of tightening monetary policy more aggressively.

Three months ago, UCLA Anderson's forecast for California also featured two scenarios because of a lack of clarity regarding the vagaries of national economic policies. For the current forecast, national economic policy is again the source of uncertainty about California's economic outlook, so the Forecast again presents two scenarios.

In the coming months, the Fed will choose between continued aggressive monetary tightening and moderation, and that choice will affect the California economy. The good news is that unlike during the past four economic slowdowns, the Forecast calls for a milder impact on California's economy no matter which path the Fed decides to take.

The national forecast

According to the UCLA Anderson Forecast report, the trajectory of the economy is too uncertain simply to present an average of two divergent possibilities. It notes that the economy continued expanding in the fourth quarter of last year, even though many economists thought a recession would already have begun, given the aggressive pace of monetary tightening.

According to the March report, the majority of U.S. consumers believed the country was in a recession throughout most of 2022, even though the economy continued to grow and add jobs, and even though consumers themselves continued to spend. The report notes that even the rapper Cardi B tweeted on June 5, 2022, "When y'all think they going to announce we going into a recession?"

Regarding the presence of a recession, the March report is emphatic: "We are not currently in a recession, and if any recession does occur, it will only begin toward the end of 2023, with the important caveat that the U.S. economy might avoid a recession altogether throughout our forecast horizon." The current Forecast extends through the end of 2025.

As in the last quarterly forecast, the reason the Forecast is uncertain about Federal Reserve policy is that the Fed itself seems uncertain. Financial markets are now pricing in a 50-basis-point increase at the next Federal Open Market Committee meeting. In the course of just over one month, Anderson economists have gone from thinking that inflation was slowing and the Fed was close to reaching its terminal rate to realizing that faster tightening may be warranted and we may need a higher terminal rate than previously anticipated. (The terminal federal funds rate is the final interest rate that the Federal Reserve aims to achieve at the end of a monetary policy cycle of loosening or tightening.)

"While the economy has so far remained resilient to higher interest rates outside of some moderate softening in construction, that resiliency is what might lead to the recession scenario path," the report's authors write. "The more consumers continue to spend despite higher prices and higher interest rates, the more gradually demand-induced inflation will come down, and the more the Federal Reserve might be expected to tighten monetary policy to combat inflation. The 'might' here could well be mitigated by falling commodity prices and new rental lease contracts."

In both scenarios, the Forecast expects continued GDP growth in the first quarter of 2023 at a seasonally adjusted annual rate (SAAR) of 2.3%, driven by consumption and business investment. The scenarios then diverge.

In the no-recession scenario, quarterly GDP growth would slow to 1.8% SAAR in the second quarter of 2023. It would remain below 1.0% in the third and fourth quarters of 2023 and then pick up in 2024 and 2025.

In the recession scenario, the economy would contract beginning in the third quarter of 2023; the contraction would deepen in the fourth quarter of 2023 and the first quarter of 2024, and then the economy would begin to rebound.

In both scenarios, inflation would remain elevated throughout 2023, but it would be more persistent in the recession scenario, requiring tighter monetary policy to achieve disinflation. In the no-recession scenario, the Forecast assumes that supply chain pressures would ease more rapidly and therefore inflation would come down more quickly on its own, creating the rationale for a more moderate monetary policy.

In the recession scenario, the assumption is that a greater proportion of the observed inflation would be demand-driven — related to tight labor markets — and therefore inflation would continue for longer. In neither scenario do the Forecast authors expect a return to the Fed's 2.0% inflation target by the end of the forecast horizon.

The California forecast

In the event that the economy navigates a softer landing and avoids a recession, the California economy will grow faster than the national economy, according to the Forecast. Among the factors buoying the state's economy are a strong construction sector, a sufficient rainy-day fund at the state government's disposal, and an increasing demand for defense goods, labor-saving equipment and software.

In this scenario, the unemployment rate averages for 2023, 2024 and 2025 are expected to be 4.0%, 3.9% and 3.6%, respectively. Non-farm payroll jobs are expected to grow by 2.3%, 1.2% and 1.4% during the same three years. Real personal income is forecast to dip by 0.2% in 2023, and then grow by 1.7% in 2024 and 2.1% in 2025.

In spite of higher mortgage interest rates, the continued demand for a limited housing stock, coupled with new laws permitting accessory dwelling units to be built in neighborhoods zoned for single family homes, leads to a forecast of increased homebuilding through 2025. The Forecast projects that the number of housing permits will grow to 150,000 in 2025.

In the recession scenario, the California economy would decline, but by less proportionally than that of the nation. In this scenario, the unemployment rates for 2023, 2024 and 2025 are expected to be 4.3%, 4.8% and 3.7%, respectively. Non-farm payroll jobs are expected to grow by 1.1% in 2023, contract by 1.2% in 2024 and grow by 0.9% in 2025. Real personal income is forecast to decline by 0.4% in 2023, then rise by 1.3% in 2024 and by 2.5% in 2025. The economists forecast 92,000 net new housing units to be permitted in 2023, growing to 152,000 permits in 2025.

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.

About UCLA Anderson School of Management

UCLA Anderson School of Management is among the leading business schools in the world, with faculty members globally renowned for their teaching excellence and research in advancing management thinking. Located in Los Angeles, gateway to the growing economies of Latin America and Asia and a city that personifies innovation in a diverse range of endeavors, UCLA Anderson's MBA, Fully Employed MBA, Executive MBA, UCLA-NUS Executive MBA, Master of Financial Engineering, Master of Science in Business Analytics, doctoral and executive education programs embody the school's Think in the Next ethos. Annually, some 1,800 students are trained to be global leaders seeking the business models and community solutions of tomorrow.

Follow Us

Media Contacts:

UCLA Anderson

Paul Feinberg
(310) 794-1215

Rebecca Trounson
(310) 825-1348

View original content to download multimedia:

SOURCE UCLA Anderson Forecast

Read More

Continue Reading


Fed, central banks enhance ‘swap lines’ to combat banking crisis

Currency swap lines have been used during times of crisis in the past, such as the 2008 global financial crisis and the 2020 coronavirus pandemic.



Currency swap lines have been used during times of crisis in the past, such as the 2008 global financial crisis and the 2020 coronavirus pandemic.

The United States Federal Reserve has announced a coordinated effort with five other central banks aimed at keeping the U.S. dollar flowing amid a series of banking blowups in the U.S. and in Europe.

The March 19 announcement from the U.S. Fed comes only a few hours after Swiss-based bank Credit Suisse was bought out by UBS for nearly $2 billion as part of an emergency plan led by Swiss authorities to preserve the country's financial stability.

According to the Federal Reserve Board, a plan to shore up liquidity conditions will be carried out through “swap lines” — an agreement between two central banks to exchange currencies.

Swap lines previously served as an emergency-like action for the Federal Reserve in the 2007-2008 global financial crisis and the 2020 response to the COVID-19 pandemic. Federal Reserve-initiated swap lines are designed to improve liquidity in dollar funding markets during tough economic conditions.

"To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of seven-day maturity operations from weekly to daily," the Fed said in a statement.

The swap line network will include the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and the Swiss National Bank. It will start on March 20 and continue at least until April 30.

The move also comes amid a negative outlook for the U.S. banking system, with Silvergate Bank and Silicon Valley Bank (SVB) collapsing and the New York District of Financial Services (NYDFS) takeover of Signature Bank.

The Federal Reserve however made no direct reference to the recent banking crisis in its statement. Instead, it explained that they implemented the swap line agreement to strengthen the supply of credit to households and businesses:

“The network of swap lines among these central banks is a set of available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses.”

The latest announcement from the Fed has sparked a debate about whether the arrangement constitutes quantitative easing.

U.S. economist Danielle DiMartino Booth argued however that the arrangements are unrelated to quantitative easing or inflation and that it does not "loosen" financial conditions:

The Federal Reserve has been working to prevent an escalation of the banking crisis.

Related: Banking crisis: What does it mean for crypto?

Last week, the Federal Reserve set up a $25 billion funding program to ensure banks have sufficient liquidity to cover customer needs amid tough market conditions.

A recent analysis by several economists on the SVB collapse found that up to 186 U.S. banks are at risk of insolvency:

“Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk.”

Cointelegraph reached out to the Federal Reserve for comment but did not receive an immediate response.

Read More

Continue Reading


MGM Shares Surprising Las Vegas Strip News

Two of the resort casino operator’s executives spoke at a recent event where they talked about Las Vegas’s covid comeback.



Two of the resort casino operator's executives spoke at a recent event where they talked about Las Vegas's covid comeback.

The Las Vegas Strip suffered during the covid pandemic when lights on the iconic 4.2-mile stretch of road literally went dark due to a government-mandated closure. Recovery, however, has been not exactly a straight line because the lingering impact of the pandemic has been a drag on some key business areas.

The two biggest players on the Strip -- Caesars Entertainment (CZR) - Get Free Report and MGM Resorts International (MGM) - Get Free Report -- have both had to make decisions without being able to use the past as a guide. In most years, for example, you could make a reasonable guess as to how many people might visit the city during a major convention based on how many attendees that show had the past year.

DON'T MISS: Las Vegas Strip Faces a New Post-Pandemic Reality

Covid, however, changed that equation. Some companies have realized that maybe they don't need to spend the money on exhibiting or attending shows while others may have employees reticent to be in crowded spaces.

In addition, some major events -- like CES in 2022 -- saw attendance plummet at the last minute due to a spike in covid numbers. Add in that international travelers and some more-vulnerable populations have continued to be wary of travel and it makes planning a challenge for Caesars and MGM.

All of this has led to low prices for tourists and business travelers -- especially those who booked far in advance. That has been slowly changing, especially for major non-business tourist events like March Madness, the NFL Draft, and November's Formula 1 race (a weekend where Caesars, MGM, and the other Strip operators may break pricing records).

Rising prices and a rebounding convention business don't mean the end of Las Vegas as a value destination for tourists, according to MGM COO Corey Sanders, who spoke at the recent J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum in Las Vegas. 


MGM Expects a Convention Comeback (Just Not Yet)

Although Las Vegas has largely returned to normal after its covid disruptions, room rates at many Caesars and MGM properties remain below historic norms. That's at least partially because the convention business remained soft in 2022 and not having those huge blocks of rooms booked led to the casino operators generally keeping prices low.

That's expected to continue through 2023, according to Sanders, reported.

"With regards to convention, in particular with MGM, we’re going to be down a little bit this year. Some of it is strategic. We have made a decision that on weekends, we’ll put less convention business in our buildings,” he shared.

Fewer rooms booked for conventions generally means lower rates across the Strip.

Sanders said he expected 2023 to be a "decent" year for MGM's Strip convention business, but he believes that 2024 and 2025 will be stronger.

MGM Sees the Value of an Affordable Las Vegas

A convention business bounceback, however, does not mean an end to affordable Las Vegas Strip hotel rooms, according to MGM Senior Vice President Sarah Rogers, who joined Sanders onstage. She made it clear that MGM understands that the Las Vegas Strip must maintain its status as an affordable vacation destination.

“We still offer a relative value. That gap has tightened a little bit,” said Rogers. “Some of those drivers that have allowed us to sustain that are things like continued programming, improved product, and the suite offering that we have. So we’re comfortable that we still offer relative value.”

Sanders also pointed out that "much of the increase in traffic at Harry Reid International Airport in Las Vegas is attributable to economy carriers, meaning the travel costs to get to the U.S. casino hub are, broadly speaking, tolerable for a broad swath of customers,"'s Todd Shriber wrote. 


Read More

Continue Reading


The Growing Auto Loan Problem Facing Young Americans

The Growing Auto Loan Problem Facing Young Americans

Since the COVID-19 pandemic, Americans have taken on significantly more debt to buy vehicles….



The Growing Auto Loan Problem Facing Young Americans

Since the COVID-19 pandemic, Americans have taken on significantly more debt to buy vehicles. This is especially true for Gen Z and Millennials, who the Federal Reserve believes may have borrowed beyond their means.

In this infographic, Visual Capitalist's Marcu Lu visualizes data from the Fed’s most recent consumer debt update.

Aggressive Borrowing

The first chart in this graphic shows the growth in outstanding car loans between Q2 2020 (start of the pandemic) to Q4 2022 (latest available).

We can see that Americans under the age of 40 have grown their vehicle-related debt the most. It’s natural for Gen Z (ages 11-26) to have higher growth figures because many of them are buying their first car, but 31% is quite high relatively speaking.

Part of this can be attributed to today’s inflationary environment, which has pushed used car prices to new highs. Supply chain issues have also resulted in over 30% of new cars being sold above MSRP.

Because of these rising prices, the Fed reports that the average auto loan is now $24,000, up 41% from 2019’s value of $17,000.

Spiking Delinquencies

Interest rates on auto loans are typically fixed, meaning many young Americans were able to take advantage of the low rates seen during the pandemic.

Despite this, one in five Gen Zs say that their car payments account for over 20% of their after-tax income.

Shown in the second chart of this infographic, the amount of auto debt transitioning into serious delinquency is much higher for Gen Z and Millennials. Throughout 2022, these generations saw $20 billion in auto debt fall 90+ days behind.

The outlook for these struggling borrowers is bleak. First there’s inflation, which has pushed up the prices of most consumer goods. This eats into their ability to make car payments.

Second is rising interest rates, which make credit card debt—another pain point for young borrowers—even more costly. Finally, there’s student loans, which are expected to resume in summer 2023. Payments on student debt have been suspended since the beginning of the COVID-19 pandemic.

Tyler Durden Sat, 03/18/2023 - 14:30

Read More

Continue Reading