Expect a good year for L.A.’s economy in 2018 – but get ready for some challenges, too.

A check of local economists points up the general health of the marketplace, and the likelihood it will range from reasonably good to strong as the year moves forward.

Hopes for a great year seem to be held in check by two key concerns: a labor market that remains tight, with high costs for housing aggravating the condition and little relief in sight; and the potential for the Trump Administration to upend various trade agreements or impose import tariffs.

The Business Journal surveyed eight local economists to get their take on what lies ahead for the area economy in 2018. Each economist was asked two questions:

QUESTION 1:

What do you see as the biggest factor affecting the Los Angeles-area economy for this coming year?

QUESTION 2:

How do you think the local economy will perform in 2018?

Here are the responses to each of the queries:

STEVEN BANKS

Chief Economist, Los Angeles County Economic Development Corp.

1 A lot will depend on monetary and fiscal policy at the national level. The Los Angeles area economy is running at full employment. That is resulting in huge pressure on wage rates, housing costs and labor costs. These are huge inflationary factors that L.A. economy will have to absorb. There will have to be some wage adjustments: This will be the year we see substantial wage growth. Factor in that the minimum wage is going up and that will add to this pressure.

2 I see unemployment rates in L.A. remaining fairly stable. There may be slight movement downward, continuing the trend in recent months. But overall, it’s a full employment scenario. I also don’t see any major shift in corporate income growth. On the individual side, I see an increase in wage growth and personal income growth and a resulting moderate increase in consumer spending.

JERRY NICKELSBURG

Director, Anderson Forecast at Anderson School of Management, UCLA

1 U.S. economic growth is [a] key factor for the L.A. economy: increased consumer demand prompts more imports through the ports. But the Trump administration indicates they will take action on trade in 2018, either by pulling out of more trade agreements or by raising tariffs. If that happens and the administration’s actions reduce imports, that adversely affects our logistics industry here in the Southern California area.There’s also the impact on housing of the new tax bill. Limiting deductibility of property taxes and home mortgages means that demand for housing will be somewhat weaker as homes become more expensive to the buyer. Fewer people will be able to buy homes and there will be less incentive for building new homes.

2 All of the data tells us that 2018 should be a reasonably good year in terms of income growth and employment growth in Los Angeles. With the county in the neighborhood of full employment, our expectation is that unemployment rate may inch down a tenth or two of a percentage point. We see continued expansion of tech and entertainment in Los Angeles, and continued non-residential construction that you see now all around downtown. But the factors we discussed above are significant risks to this forecast.

WADE MARTIN

Professor and Director, Institute of Innovation & Entrepreneurship, California State University Long Beach

1 A major factor is political risk that will affect trade, such as revising NAFTA and the new trade agreement led by China that replaces the Transpacific Partnership. A second factor is the labor constraints due to immigration issues and housing affordability. The policies of the Federal Reserve will be important, as will the potential negative impact on expectations of the tax plan causing middle- and low-income consumers to constrain consumption. 

2 Expectations are that the local economy will perform similar to 2017. As for the unemployment rate, I believe it will remain about the same. I don’t think the change in the minimum wage will have a significant impact due to the current tightness. The impact of political uncertainty on hiring is the wild card. 

MATTHEW FIENUP

Executive Director, Center for Economic Research & Forecasting​​​, California Lutheran University

DAN HAMILTON

Director of Economics, Center for Economic Research and Forecasting, California Lutheran University

1 The largest single factor is the tax reform package recently passed in Washington. Corporate tax reform will have a significant positive impact on economic growth in the LA region: it decreases the cost of doing business and helps offset the still crushing regulatory burden on the business sector. We believe that investment activity will respond quickly. At the national level, we expect growth rates at least 3 percentage points greater; we expect these increases to be muted somewhat in California and in the L.A. region on account of high state and local taxes and a relatively unfavorable business climate.

2 We expect that economic growth in 2018 will outperform 2017; the only question is by how much. We also expect job creation to outperform growth in the labor force, so it is possible that the unemployment rate could tick down a tenth or two (of a percentage point).

DAVID SMITH

Associate Professor of Economics, Graziadio School of Business and Management, Pepperdine University

1 I am concerned about a tightening labor supply, and lack of workers to fill open jobs. Years of slow and steady growth has taken the slack out of the labor market; nonfarm employment in Los Angeles County has been under 1 percent annual growth. Also, affordable housing in L.A. continues to be a concern, with tightening housing supply mirroring conditions in the labor market. Another factor is the tax package. There will be a short-term boost to the national economy from the tax cut. Housing prices in L.A. are likely to moderate over the coming years due to the new rules related to SALT (state and local tax) deductions. But the new tax bill does tend to penalize coastal states, which will make it harder for employers to attract talent to California.

2 Favorable macroeconomic conditions will continue to support slow and steady growth in 2018. I expect we will see the national economic growth at about 2.5 percent, with Los Angeles slightly underperforming this number, due to a tightening labor market. Within this environment, wages will likely rise more, relative to 2017, which will put a drag on business profits. We are getting near to a floor on the unemployment rate, which means new jobs will have to be supported by increases in the labor force. That suggests employment growth will be about 1 percent, or less, in 2018. 

RICHARD GREEN

Director, Lusk Center for Real Estate, USC

1 The Los Angeles area has become a central focus of content creation for media. With intellectual talent as concentrated in the L.A. area as it has ever been, there’s no reason for that to stop. The other major factor is the logistics sector. As the economy becomes less retail-oriented and more distribution-oriented with online purchases, L.A.’s economy stands to benefit because we are the major distribution hub for the online economy. On the negative side, the new tax law is not favorable to California, though I believe that relative to the size of the national and local economies, that impact will be less than advertised What I worry about more is if the president does act upon (his) hostility to foreign trade and imposes more tariffs. That is specifically bad for the L.A. economy which is so reliant on international trade. That’s a big wild card for the local economy.

2 Don’t expect to see a lot more job growth here: we’re running out of people. There may be a slight improvement in the unemployment rate, but don’t expect it to go down below 4 percent. I do have a concern on this front: We are seeing people move out of California; if that continues, the labor force won’t keep up with new job creation.

ROBERT KLEINHENZ

Economist and Executive Director of Research Beacon Economics

1 The biggest factor affecting the local economy is the tight labor market, which in turn is affected by the housing market. There are not enough qualified workers to meet the needs of employers. Housing costs once again have made it difficult for many, especially younger workers, to live and work in L.A. The county chronically lags in producing sufficient housing to meet the needs of a growing labor force in a growing economy.

2 Overall, the local economy will advance in 2018. Job growth may match but is unlikely to exceed last year’s pace. The unemployment rate will remain low and continue to brush up against new records. With a tight labor market, wage gains will continue. That will mean that consumer-facing sectors of the local economy will fare well. More generally, we should expect most of the major industries in the local economy to add to existing gains in 2018.

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