UCLA Economists 'Tear Up' 2020 Forecast and Revise GDP Down Due to COVID-19

Tami Abdollah

Tami Abdollah was dot.LA's senior technology reporter. She was previously a national security and cybersecurity reporter for The Associated Press in Washington, D.C. She's been a reporter for the AP in Los Angeles, the Los Angeles Times and for L.A.'s NPR affiliate KPCC. Abdollah spent nearly a year in Iraq as a U.S. government contractor. A native Angeleno, she's traveled the world on $5 a day, taught trad climbing safety classes and is an avid mountaineer. Follow her on Twitter.

UCLA Economists 'Tear Up' 2020 Forecast and Revise GDP Down Due to COVID-19

University of California, Los Angeles economists tore up their quarterly March 2020 economic outlook as COVID-19 anxiety took hold of the American public and the novel virus spread through dozens of states.

The updated 104-page UCLA Anderson Forecast, released early Thursday, revised their earlier forecast of 2% for real GDP growth to a low 1.5% on a fourth-quarter-to-fourth-quarter basis, as they took a "midpoint between coronavirus having a very minimal effect to it causing a full-blown recession."

The economists, who clearly hedged their bets amid calls by some that the coronavirus is a black swan event, anticipated a hit to real GDP in the second and third quarters of the year with modest increases of 1.3% and 0.6%, respectively, rather than the 2%-plus growth earlier anticipated, and noted that "time will tell."

"We tore up the forecast, we did the second one, and if we had to do it again today, we'd redo it again drastically," said David Shulman, senior economist for UCLA Anderson Forecast, in a phone interview with dot.LA on Tuesday evening.


The most recent forecast was based on numbers run at the start of March, which did not include the impacts of a price war between Saudi Arabia and Russia that drove down the price of oil, Shulman said.

Courtesy of the UCLA Anderson March 2020 Economic Forecast

The impact of that battle is likely to trigger a far bigger manufacturing collapse than the forecast anticipated given that the U.S. is the largest oil producer in the world at 13 million barrels a day, Shulman said. The drop in prices will have especially dire consequences for the American southwest and North Dakota regions.

Shulman said the quarters of more modest growth that were anticipated might as well be "minus signs instead of plus signs" because of this change. "That pushes us into a recession or really close to it," he said.

The forecast had already taken an overall pessimistic view of 2020, given China's significantly greater impact on global supply chains and the economy than its impact during the SARS epidemic, which started some 17 years ago. At the time China's GDP share of the world was 4% and now it is 16%, the report states.

"We view the COVID-19 epidemic and likely pandemic to work as both a supply shock and a demand shock on the economy," the report states because both factories are shut down and the demand for travel, hotel and other services has also dropped.

The report estimated the international tourism loss to be around $4.3 billion a month to the U.S. With California accounting for 21% and Los Angeles for 12% of total international tourism revenue in the United States. But because Chinese and other Asian tourists are more likely to head to California and L.A., the economists assumed their market share to be higher -- at 42% and 24% respectively. The anticipated economic impact on California is therefore $1.8 billion a month and on Los Angeles, $1 billion a month.

China has been working hard to reopen factories but the forecast noted that a fraction of production capacity had resumed over concerns of a resurging outbreak, which has slowed the pace of resumption. That means that the U.S. could start to see a "significant supply chain disruption" in mid-March if cargo ships from Asian ports aren't sufficient for the American market and people run out of inventory, the forecast states.

That's especially problematic given how centralized global supply chains of, for example, pharmaceutical products, appear to be. Many Americans are unaware that their prescription drugs are from there, according to testimony cited in the forecast from a hearing of the the U.S.-China Economic and Security Review Commission in July 2019.

Shulman said that actions taken by the Trump Administration and the Federal Reserve are better than nothing, but "monetary policy is neither a cure nor a vaccine for COVID-19."

He wrote in the report: "It cannot reopen factories in China or Italy, and it cannot convince frightened people to travel. But it might reduce fears that something worse could happen to the economy and might alleviate the pain of stressed businesses facing supply-side shortages."

The report did have one bright spot: A revised forecast for housing starts that went up from 1.25 million units a year to 1.35 million units a year. The report chalks that up to rising income and low fixed-rate mortgages. However, the report expects 117,000 net new units to be built in 2020, and states that "the prospect for the private sector building out of the housing affordability problem over the next three years is nil."

"Rising income and the allure of 3.25% 30-year fixed rate mortgages are beginning to overcome the supply constraints caused by local zoning," the report says.

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Do you have a story that needs to be told? My DMs are open on Twitter @latams. You can also email me at tami(at)dot.la, or ask for my Signal.

tami@dot.la

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We Asked Our Readers How They’re Using AI in a Professional Setting. Here's What They Said

Decerry Donato

Decerry Donato is a reporter at dot.LA. Prior to that, she was an editorial fellow at the company. Decerry received her bachelor's degree in literary journalism from the University of California, Irvine. She continues to write stories to inform the community about issues or events that take place in the L.A. area. On the weekends, she can be found hiking in the Angeles National forest or sifting through racks at your local thrift store.

We Asked Our Readers How They’re Using AI in a Professional Setting. Here's What They Said
Evan Xie

According to Pew Research data, 27% of Americans interact with AI on a daily basis. With the launch of Open AI’s latest language model GPT-4, we asked our readers how they use AI in a professional capacity. Here’s what they told us:

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The Near Miss Apocalypse: Predictions for Post SVB Collapse

Spencer Rascoff

Spencer Rascoff serves as executive chairman of dot.LA. He is an entrepreneur and company leader who co-founded Zillow, Hotwire, dot.LA, Pacaso and Supernova, and who served as Zillow's CEO for a decade. During Spencer's time as CEO, Zillow won dozens of "best places to work" awards as it grew to over 4,500 employees, $3 billion in revenue, and $10 billion in market capitalization. Prior to Zillow, Spencer co-founded and was VP Corporate Development of Hotwire, which was sold to Expedia for $685 million in 2003. Through his startup studio and venture capital firm, 75 & Sunny, Spencer is an active angel investor in over 100 companies and is incubating several more.

The Near Miss Apocalypse: Predictions for Post SVB Collapse
Evan Xie

The historic Silicon Valley Bank collapse dominated headlines recently, and the tech and financial communities have only just started processing the aftermath. The 48-hour breakdown was both historic and a few inches away from economically catastrophic, and thanks to the swift moves of the FDIC, complete disaster was avoided.

But it’s still been disruptive. SVB was the banking partner for nearly half of U.S. venture-backed technology and healthcare companies that listed on stock markets in 2022, making it one of the biggest lenders for early-stage startups. The aftershocks of SVB’s breakdown spread just as far and fast as the main event: the close of Signature Bank just two days later, major market volatility, other banking crises at Credit Suisse, tech industry troubles, and much more.

In the days since, things have settled slightly, and the world’s fingers are crossed that depositors are comforted enough and confident enough to avoid another bank run. It’s good news, but we aren’t out of the woods yet. Now that we know the second-largest bank failure in U.S. history could be looming around any corner, how does that change the ways startups do business?

Level, Set, Go

Before we get into what could happen, it’s smart to level-set about how we got here. (And for an introductory primer, this short podcast can help.)

  • The government 100% did the right thing by assuring depositors that they will be made whole. The FDIC swooped in, steadied the ship, and made sure people had the money they needed when they needed it.
  • Some have called this a ‘bailout', but it’s not for two reasons. 1) SVB shareholders and creditors will be wiped out and 2) taxpayer money is not being used to do any bailing.
  • Remember: depositors are not creditors. When companies and people put money into their accounts at SVB, they had every reason to expect that it would be there when they needed to withdraw it. They weren’t loaning the money to SVB (as a creditor would), they were depositing money into their own account at SVB for safekeeping.
  • People who say “depositors took a risk by having more than the FDIC insured $250K limit” are, ahem, a bit misguided. (I’m being polite). The truth is that $250K is not that much money for a company, especially of the size and scale of some of SVB's major customers.

Here’s where I think we should go from here.

The Short Term

While SVB’s failure didn’t launch us over the precipice, many people are rightfully feeling very nervous being this close to the edge.

Looking out to the next few weeks, I predict we’ll see venture funding slow way down. It’s been chilly out there recently, but it’s going to be ice cold, piggybacking on the already struggling tech landscape. Writing new checks will take a backseat to checking in on existing investments. VCs will need to assess where their cash is and where their portfolio companies stand, and likewise startups are going to have to start thinking hard about what it means to be lean and extend runway. Hopefully this only lasts a few weeks and the wheels of the machine start turning again before summer.

If there is a positive take on the SVB wreckage, it’s that the Fed will likely slow down the rate of increases. I’d predict a 25, maybe even 0, basis-point increase next week, and I wouldn’t be surprised if there was a rate cut later this year.

Whither venture debt?

Prior to SVB’s failure, it was very common for a startup to have enough cash at SVB for one year of runway, plus a venture debt line for an additional another year. SVB profited from this by charging interest plus warrants and requiring banking exclusivity. It was part and parcel of how they did business, and since they’ve transitioned from success story to cautionary tale, expect to see new regulations prohibiting banks from requiring customer exclusivity in exchange for additional services.

In the immediate term, companies who had venture debt lines with SVB are trying to decide whether to put their cash back in SVB in order to access that venture debt. The whole situation is surreal, since just a few days ago these same companies were scrambling to pull their money out of SVB, and now they are considering returning. There are conflicting reports, but it appears that SVB is allowing these companies to keep a second banking relationship with another bank (so no more exclusivity), but at least half of their cash must be with SVB.

For startups choosing not to access that venture debt line, now trying to figure out how to operate without venture debt (aka less hiring, less spending, less growth), they’re in for challenging times ahead. To fill that funding gap, maybe we’ll see more private lenders step in and provide venture debt as a product. If that is the case, I suspect terms will be tougher and many VCs will recommend against it for their companies.

Another prediction: audit committees of boards will come into play much earlier than they often do now. Given the ever larger seed and Series A/B rounds, it wasn’t uncommon to see startups that had raised $100M+ and had 200+ employees before an audit committee was formed. I suspect these will now be formed upfront and have a much bigger role to play in early stages.

Silver Lining

The good news: the world isn’t ending and won’t in the near future (at least, not because of this). Yes, things will be different and it will take some time to settle into a post-SVB startup environment, but with change comes adaptation. And with adaptation comes innovation, which is what startups are all about.

https://twitter.com/spencerrascoff
https://www.linkedin.com/in/spencerrascoff/
admin@dot.la

This Week in ‘Raises’: SpectrumAI Lands $20M, Fount Grabs $12M

Decerry Donato

Decerry Donato is a reporter at dot.LA. Prior to that, she was an editorial fellow at the company. Decerry received her bachelor's degree in literary journalism from the University of California, Irvine. She continues to write stories to inform the community about issues or events that take place in the L.A. area. On the weekends, she can be found hiking in the Angeles National forest or sifting through racks at your local thrift store.

This Week in ‘Raises’: SpectrumAI Lands $20M, Fount Grabs $12M
This Week in ‘Raises’:

Local digital health company SpectrumAI raises fresh funding to accelerate the company’s applied behavior analysis (ABA) electronic health record, Twyll, and Patterns, while health and performance advisor Fount will use its new funding to advance its mission to make tailored health and performance programs more accessible.

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