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UCLA Anderson Forecast: National Economy Growing

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UCLA Anderson Forecast: National Economy Growing

GDP growth expected to be about 3% for the next two years.

UCLA Anderson Forecast's third quarterly report of 2014 indicates that the real Gross Domestic Product for the United States will grow at about 3% over the next two years, following a decline of 2.1% in the first quarter of this year and a rebound of 4.2% growth in the second.

On an annual basis, GDP growth will rebound a full percentage point in 2015 to 3.1% and to 3.4% in 2016. Payroll job growth should average 230,000 per month; by the end of 2016 the unemployment rate will drop to 5.3%.

"Inflation at 2% or higher over the next two years, driven primarily by rising residential rents and increasing health care costs." 

Highlights of the September forecast include an expected rise in inflation, as measured by the headline and core consumer price indices. UCLA Anderson Senior Economist David Shulman forecasts inflation at 2% or higher over the next two years, driven primarily by rising residential rents and increasing health care costs. The Federal Reserve Board could raise rates by March 2015, in response to declining unemployment and rising inflation. The sectors expected to fuel the nation's economic growth include housing, nonresidential construction and investment in equipment and software.

"Despite the housing recovery being slower than we anticipated, we forecast that housing starts will rise from this year's estimated 1.025 million units to 1.32 million and 1.47 million units in 2015 and 2016, respectively," Shulman writes. "Because of continuing investment in energy production and a revival in commercial construction, nonresidential construction will start to increase rapidly in mid-2015. In 2016, investment in nonresidential construction is forecast to expand at a robust 8.2%. Continued strength in equipment and software spending will continue to buoy the economy."

There is a major change from prior forecasts stemming from anticipation that defense spending will increase, rather than decline. Citing the rise of Islamic State of Iraq and the Levant (ISIL) in the Middle East, and the presence of Russian troops in Ukraine, Shulman writes that there will be a "rethinking" of the U.S.'s defense posture. The forecast models in an additional $24 billion per year in defense spending by 2016.

"For those with a long memory, we would note that the Reagan defense build-up started under President Carter in 1979 after the Iranian Revolution and the Soviet invasion of Afghanistan," Shulman writes.

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