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8.A. - Page 9 of 72 ECONOMIC UPDATE The economic conditions discussed below help inform the Preliminary Ten -Year General Fund Forecast. Of note is the near certainty of a recession during the Ten -Year Forecast period. However, it is unknown when this may occur, therefore, periods of slow growth have been projected in the outer years of the Preliminary Ten -Year General Fund Forecast at this time. This is slightly different than the Ten -Year General Fund Forecast presented in the FY 2019-20 Adopted Budget that contemplated an economic downturn during FY 2020-21. Staff has received information from a variety of sources, including the California Legislative Analyst's Office, Beacon Economics, and academic staff of the UCLA Anderson Economic Forecast. National In July 2019, the current economic expansion became the longest in U.S. history, exceeding the previous record of 120 months (March 1991 through March 2001). Gross Domestic Product (GDP) continued growing through the third quarter at a rate of 2.6 percent. This is especially significant considering several major events that occurred recently — the strike at General Motors and the grounding of the Boeing 737 MAX. Consumers are driving the economic expansion with robust growth in income and in spending. According to information released by the Bureau of Economics Analysis in December 2019, Personal Consumption Expenditure (PCE or consumer spending) was at $14.7 trillion as of the third quarter, while GDP was at $21.5 trillion for the same quarter. This indicates that consumer spending generated 68 percent of the GDP. More than two-thirds of this spending was on housing, health care, and other similar services. More than one-fifth was spent on non -durable goods such as food and clothing. The remainder was spent on durable goods, such as cars and furniture. According to Census Bureau data, retail sales grew by 4 percent over the same quarter last year. Since consumer spending is such a large component of GDP and since PCE is reported monthly, this can be a good indicator of that quarter's GDP. Not surprisingly, the unemployment rate in December 2019 was 3.5 percent, the lowest since December 1969. Stock prices have also been climbing. Yields on long-term government bonds, which reflect expectations for growth, are also rising. Several months ago, the yield curve had become inverted, meaning that the interest rates on 3 -month Treasury notes was higher than on 10 -year government bonds. Often, this circumstance can be a reliable predictor of a coming recession. However, the yield curve has since corrected and returned to normal. Continued GDP and labor force growth is expected to result in a further decline of the unemployment rate to 3.4 percent by the second half of 2020, where it is projected to remain for four consecutive quarters before gradually rising to above 4 percent by 2023. While there is no immediate concern that a recession will occur within the next 12 months, there are indicators that the economy's growth is slowing. According to CNN Business, analysts and investors expect the economy to continue to slow through the first part of 2020. The risks of at least one quarter of negative growth are rising; two or more consecutive quarters of negative growth signal a recession. A recent U.S. Commerce Department report discusses the slowing economy and attributes the causes to Page 9 of 26 City of Redwood City 1017 Middlefield Road, Redwood City, CA. 94063 Tel: 650-780-7000 www.redwoodcity.ore 244