When professors Anil Puri and Mira Farka of the Cal State Fullerton Woods Center for Economic Analysis and Forecasting presented their annual report in October, they realized it was ticklish, complicated and in some ways unknowable. Issues such as inflation, supply chains, material costs, rising interest rates, pandemic aftereffects and the price of oil, which at the time had been steadily trending up for 18 months, all added to the difficulty.

At best it was a tricky forecast, with all kinds of potential economic headwinds and shoals that could knock the national and local economies off course.

What they couldn’t figure into their projections was a ruinous, wreckless and devastating decision by Russian President Vladimir Putin to invade Ukraine.

In the wake of the invasion, Puri and Farka will present their midyear spring forecast at 10:30 a.m. April 22 at Meng Hall.

While economic impacts pale to the horror of death, destruction and displacement, they are inextricably linked.

As Puri, director of the center and former dean of the College of Business and Economics put it, “It’s not only a war of armaments, but of economies, and that leads to great uncertainty.”

The Russian invasion of Ukraine has thrown shade over even the brightest forecasts of October.

While the United States remains somewhat insulated, it is far from immune. Russia’s bold aggression could send ripples through the American economy that will be felt for years.

“As the days go by, I see a bleaker picture,” said Farka, co-director of the Woods Center.

Even if the war reaches a rapid end, she says, a prolonged insurgency in Ukraine will also dampen economic outlooks.

Puri’s outlook is not so stark.

Forecasting is “more complicated for sure,” he said, but was less willing to predict  a recession or worse.

Even though neither Russia nor Ukraine have the kind of global clout that could directly imperil the U.S. economy, the ripple effects on the European economy have already crossed the Atlantic.

“Europe is in a pickle,” Farka said.

Pump pain

Energy prices, particularly at the pump, and inflation are the immediate concerns of everyday citizens in the U.S. Interlaced with those concerns are sanctions against Russia and how those will affect daily life.

For residents of the Southland, the most obvious bellwether of the economy is always the price of gas, which was on everyone’s mind even before the Feb. 24 invasion of Ukraine. Since then, it has skyrocketed.

In Orange County, the average price of a gallon was $5.71 as of March 12. In Los Angeles County, the average price had risen for 16 straight days, up 99.7 cents to $5.78. In 32 of 34 days, gas had hit record highs, according to AAA and the Oil Price Information Service.

On March 12, the national average price for a gallon of gas was $4.326, which was actually a half-cent down from the previous day. Overall, prices are nearing $2 a gallon more than a year ago.

Across Southern California, drivers have been lining up, sometimes in blocks-long convoys, for gas that is closer to $5 than $6.

Puri and Farka both expect the high prices to last as long as the crisis continues.

“The problem is oil is traded on the global market,” Farka said, and even before the Russian war it had been trending upward for more than 18 months.

In Southern California, she says $5.90 is likely.

Then she adds, “I don’t want to say six, because that will crush people’s outlook.”

Earlier this month, President Joe Biden announced the cessation of all oil and gas products from Russia. The United Kingdom followed suit.

Farka said the U.S. can easily backfill any loss in Russian imports with domestic production increases and imports from OPEC, which has slowly started releasing more oil.

Her worst fear is that if the war escalates in Ukraine, it could spur Western Europe to ramp up sanctions of energy imports, which it has resisted so far.

Unlike the U.S., the European Union relies heavily on Russian energy and has been slow to add green technology.  According to the professors, Russia provides 42% of the European Union’s natural gas imports and 26% of its oil imports.

“If Western Europe goes in that direction, it would be catastrophic for the world economy,” Farka said of tough energy sanctions. “I don’t think it will go that far. They want to hurt the Russian economy without hurting their own.”

Puri agreed saying, “If the EU follows (the U.S. and U.K.) it’s going to have a severe effect.”

Inflation concerns

The price of gas only exacerbates the already concerning issues of inflation that predated the Russian war.

“We were already more concerned about inflation when most (economists) thought it was only transitory,” Puri said, referring to the October outlook.

Consumers are also feeling the pinch at the grocery store.

Russia and Ukraine are among the largest producers of wheat and corn in the world. As a result, grain futures are at all-time highs, as the war has closed exports from the Black Sea.

Coupled with drought in the U.S. and poor farming conditions in China, the world may see a global food-price crisis, surpassing the high costs that helped contribute to the Arab Spring a decade ago, according to Bloomberg News.

“Unfortunately, the ramp up of inflation comes at the worst time in 41 years,” Farka said.

With inflation come hikes in interest rates by the Federal Reserve, which leads to a rise in the price of borrowing money.

“There isn’t much they can do,” Farka said of the Fed, which responds to inflation and stock markets.

In the October forecast, CSUF predicted inflation would slacken, though at a less optimistic rate than other economists. Now, even that grim outlook has worsened and Farka sees no let up.

“I see (inflation) ending the year at 7.5 percent,” although she said there might be a slight dip in the fall.

Shaky market

Also of concern is the equity market, a term for the many stock exchanges around the world.

Farka predicts a market correction is looming or already underway that will “wipe out trillions” and further affect consumer spending.

“Consumers will be more prudent,” Farka said. “That will slow the economy, and you can see why we forecast slower growth.”

The bright spot she sees is the labor market and high employment rate.

But even that news is tempered by recent reports of corporations conspiring to hold down wages.

Farka said in the midst of the inflation and hikes, the Federal Reserve is doing its best to “engineer a soft landing.”

However, she notes in the past the government has not done a particularly good job at it.

“It’s a very big unknown,” Farka said. “We’re praying for the best.”

“I think the risks of a recession are higher,” Farka said. “Historically, every time the Fed has raised rates, recession follows within 20 to 30 months.”

Puri said his numbers say different. Since World War II, he said recessions follow 60% of the time.

In either case, the likelihood of a recession is higher than it was.

“I think Europe is heading closer to heading into a recession,” Farka said.

The sanctions implemented over the past few days will have a crippling effect on the Russian economy, especially the disconnect from the SWIFT banking system and, more important, freezing of the Russian Central Bank’s $630 billion in foreign exchange reserves.

Even so, Farka notes there are holes in the sanctions, particularly in exports of nickel, steel and aluminum. Particularly worrisome to some, she said, would be a loss of nickel needed for batteries of electrical cars, and “the inventory of electrical vehicles could bottom out.”

“Again, it couldn’t come at a worse time.” she said. “Supply constraints are worsening, even compared to last year.”

The freezing of the assets of Russian oligarchs and the highly publicized seizure of their superyachts has no wide economic impact and is symbolic and political, according to Farka.

However, even with the incomplete sanctions, Puri says, “the Russian economy is being devastated.”

Dark side

Despite the gloom, Puri says the U.S. is better positioned than other countries to weather economic uncertainty.

“The U.S. has the most dominant economy in the world and the most open economy,” Puri said, which ironically makes it an exposed economy as well.

The U.S. gross domestic product, predicted at about $20.89 trillion in 2022, is still larger than China and Japan, Nos. 2 and 3, combined.

Both economists say whether outlooks are dark or bright, they try to find the most accurate models.

As Farka says, trying to separate the “short-term, knee-jerk reactions from long-term trends is the hard part.”

Although Puri is less given to dour predictions than his partner, preferring to deal in “unpredictabilities,” Farka said he may be coming over to her way of thinking.

Puri downplays Farka’s alarm with some amusement.

“I’m older than she is, I’ve seen more,” he says, noting that economic trends and tumult come and go.

“We have different views of dynamics and we have our own slants.”

However, Farka thinks she is slowly bringing her elder over to her side.

“Earlier he was more hopeful. I’ve drawn him to the dark side.”

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