Federal Reserve Policies Are The Real Pain Point; California’s Population Declines

Despite an economy that is showing strength and resilience across key measures, belief that the United States is on the cusp of a recession continues to reverberate in both professional forecasts and public confidence indexes. According to Beacon Economics‘ latest outlook for the United States and California, that shadowy downturn has yet to show up and there is no indication that it will any time soon.

“The U.S. economy is alive and well,” said Christopher Thornberg, Founding Partner of Beacon Economics and one of the forecast authors. “This ‘miserabilist’ narrative that has gripped our nation’s confidence so tightly runs absolutely counter to the data… yet is has amazing staying power.” Google searches for the term “recession” have been running at levels reminiscent of actually being in a recession, he notes in the new outlook.

According to the forecast, the U.S. economy has continued to expand and recent data suggests that growth so far in 2023 looks better than it did in 2022. Some of these data points are: real growth in final demand has recently expanded at the fastest pace since the first half of 2021, consumer spending jumped to a record-high level in April as the savings rate also rose, U.S unemployment remains well below 4%, real income numbers are strong, industrial production has been close to all-time highs in recent months, and the stock market has been rising steadily since last October.

“The fact that consumer spending has escalated undermines the idea that inflation has broadly been a detriment to household finance, particularly since the recent record-high spending figure comes hand-in-hand with a rising savings rate,” said Thornberg.

The new outlook acknowledges that the good news could turn bad… not because of any fundamental issue in the macroeconomy, but because of the ‘quixotic’ efforts by the Federal Reserve to slow inflation to a 2% rate. According to the outlook, if the Fed continues to aggressively pursue a 2% rate, it could harm the economy by restricting access to credit and leading to a surge in longer term interest rates. “If they do manage to set off a recession, it will likely be mild, but pointless, nevertheless,” said Thornberg.

In California, the latest employment figures show that the state has continued to add jobs, and employers are trying to add more, but are being constrained by a diminished labor force. As of April 2023, there were 1.05 million job openings in California, but only about 867,000 unemployed workers.

“The state’s underwhelming jobs growth is not due to any unwillingness on the part of employers,” said Sean Windle, Economic and Revenue Forecasting Manager at Beacon Economics and one of the forecast authors. “There is a glut of job openings and not enough workers to meet the demand primarily because California’s labor force contracted during the pandemic.” There are about 161,000 fewer workers in the state’s labor force than there were prior to the COVID crisis, which equates to a 0.8% decline. In contrast, the national labor force grew by 1.5% over the same period.

Perhaps the most concerning recent development for the state are updated estimates that show California’s population declined in 2021 and 2022. Previous estimates had indicated an increase in both years. “Both our population and labor force declines are assuredly linked to the state’s chronic housing shortage, which has made California among the most expensive markets in the nation,” said Windle. “The pandemic also drove a surge in housing prices, which pushed more would-be homebuyers out of the state and toward more affordable areas. While home prices have come down recently from that pandemic surge, they are still up about 29% over pre-pandemic levels.”

View the new The Beacon Outlook, including full forecast tables, here.