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Chapman, UCLA economists see clouds ahead in Trump’s policies

December 13, 2024

Economists at two Southern California universities see new reasons to worry ahead, namely policies from the nation’s next president.

They warn in new forecasts released this week that the economy may stumble in 2025 because of controversial policies promised by President-elect Donald Trump.

Economist James Doti, president emeritus at Chapman University, said the economy “still appears to be strong,” even though a long period of declining inflation could reverse course under Trump.

A year ago, Doti’s reading of the tea leaves showed “very slow growth” and no recession in 2024.

Today, he’s sticking to a similar tale of “slow growth” that now extends through 2025. New to the mix is “some upward pressure” on inflation due to proposed tariffs and mass deportations Trump has vowed to launch after his inauguration in January.

Jerry Nickelsburg, director of the UCLA Economic Forecast, says in his school's quarterly report released on Wednesday, Dec. 11, 2024, that he sees some inflation coming in 2025 as a result of new policies of U.S. President-elect Donald Trump. (Courtesy of George Lee, UCLA Economic Forecast) — Jerry Nickelsburg, director of the UCLA Economic Forecast, says in his school’s quarterly report released on Wednesday, Dec. 11, 2024, that he sees some inflation coming in 2025 as a result of new policies of U.S. President-elect Donald Trump. (Courtesy of George Lee, UCLA Economic Forecast)

Economist Jerry Nickelsburg at UCLA agreed with Doti’s analysis.

“The underlying fundamentals of the economy are strong. They have been for some time, which is why we did not say that we were going to have a recession in 2023 or 2022,” said the director of the UCLA Anderson Forecast. “Now, that doesn’t mean that geopolitical events or different policies from Washington that are not in our forecast couldn’t generate a recession. It’s just not in the data right now.”

Both economists said Trump is inheriting a strong economy that will grow more slowly than previously forecast while it adjusts to new national economic policies.

Cloudy times

The clarity of post-presidential election forecasts at Chapman and UCLA are clouded by Trump’s plans to implement several economic policies promised during his 2024 campaign.

Among the most controversial policies are new or increased tariffs on the nation’s largest trading partners – including Canada, China and Mexico. Policies also include mass deportations, tax cuts and deregulation.

Doti believes Trump’s vow to deport of 500,000 to 1 million undocumented immigrants and 10%-25% tariffs on imported goods could push inflation closer to 3% than the Fed’s desired 2% level.

How these policies manifest is not necessarily clear, considering practical, legal and political constraints on implementation, according to Nickelsburg.

The UCLA professor of economics said this month’s forecast was one of the most difficult ones he’s ever written, with the exception of a recession prediction four years ago as the COVID-19 pandemic began.

“When we did our March forecast in 2020, we had no idea how the pandemic was going to play out, and so there was a great deal of uncertainty then as well as now,” he said. “Economic policy in Washington is changing in a pretty fundamental way, so that increases uncertainty until we get some clarity as to what policies are going to be implemented.”

Meanwhile, UCLA predicts a slowdown in interest rate cuts as the federal government grapples with those new policies. Nickelsburg sees the Federal Reserve cutting interest rates by 25 basis points at its board of governors meeting Dec. 18. He expects a pause on cuts until 2026 when the economy has absorbed the impacts of tariffs.

The Fed could end up with interest rates hovering between 4% and 4.25% in 2026, he said.

Doti has a different take, saying the Fed won’t cut rates in December and will instead take a wait-and-see approach. He expects the central bank will make only two, 25 basis-point cuts in 2025.

“The reason we don’t think there’ll be a cut in rates next week is because we still have high inflation (2.7% for the year ended in November 2024), and it’s above the Fed’s target range of 2%, and GDP growth is at 2.8%, and job growth has still been very strong,” Doti said. “Given the Fed’s cautious approach, it’ll hold back on making further cuts.”

Growth in gross domestic product, used to measure the nation’s economic health, is expected to fall to 1.4% by the end of 2025 from 2.8% in the 2024’s third quarter, he said.

Tough housing market

Both economists said the state of housing in California is showing financial strain.

On the construction front, residential permits in California are forecast to rise by 12.9% in 2025, despite continuing high mortgage rates, Doti said.

He argued that high mortgage rates may indirectly spur new construction.

“There is a paucity of resale homes on the market because homeowners don’t want to sell and lose their sweetheart locked-in mortgages,” he said. “That has led to a sharp drop in resale home sales. The dearth of resale homes on the market is buttressing demand for new homes, often available for sale at heavily subsidized financing rates.”

Nickelsburg said normalization is slowly returning to the California housing market, but potential construction cost increases due to tariffs and labor shortages could slow that process.

“Builders should be responding with new development given existing homes sales are at depression levels,” said Nickelsburg.

Tightening job market

Both forecasts raised concerns about the jobs picture.

Doti sees economic growth in California hampered by population losses, which he blames on the state’s regulatory and tax burdens, which have led people and businesses to leave for cheaper states like Florida and Texas.

California’s job growth is forecast to rise 4.6% to 18.2 million in 2025, up from 17.4 million in 2019, but trailing U.S. job growth of 5.9% over the same period.

The flight of people from the state also has lowered retail sales tax revenue, prompting some cities to raise sales tax rates in order to replenish budgets left with financial gaps.

Data from Chapman showed fewer people are shopping, which translates to less tax revenue for cities. For the year-period that ended June 30, 2024, retail sales fell 4% in Orange County, 2.3% in Los Angeles County, 1.2% in the Inland Empire and 0.8% in San Diego County.

For Nickelsburg, the big unknown on jobs will be the mass deportation and tariff policies of the incoming president, and their impact on a wide of industries including agriculture, construction, leisure and hospitality, retail trade and transportation and warehousing industries.

Taken together, the deportations and tariffs will raise the prices for many goods and services, and potentially cause product shortages and higher labor costs as jobs go unfilled, he argued.

“The uncertainty regarding the future path of unemployment is more elevated than usual because the impact of mass deportations on unemployment is not well understood due to limited empirical research on the subject,” according to Nickelsburg.

Economist James Doti, the President Emeritus and Rick Muth Family Chair in Economics at Chapman University, delivers his annual economic forecast, using various graphs and charts to explain his predictions and projections, at the Musco Center for the Arts at Chapman University on Thursday, Dec. 12, 2024. (Photo by Jeff Antenore, Contributing Photographer)