Pandemic Recession was Deepest and Shortest in U.S. History as Output Jumps to Pre-Covid Levels; Near Term Forecast Strong but Long Run Instabilities Loom
In the 2nd quarter of 2021, real economic output in the United States pushed higher than pre-pandemic levels, making the COVID-induced recession the shortest in the nation’s history. According to Beacon Economics’ latest outlook for the U.S. and California, although the recession ‘officially’ ended in May 2020 (peak to trough), it will take another quarter or so for output to return to its sustainable, long-run trend. The new analysis finds that output would have already recovered to trend but for supply chain issues and labor shortages that are preventing it from catching up with demand.
While aggregate U.S. output has recovered, other parts of the economy, including the all-important labor market, are still lagging their pre-pandemic levels. In the case of the labor market, however, this is due to structural changes that have occurred throughout the crisis.
“This is not the same economy it was a year and a half ago, structurally, financially, or demographically,” said Christopher Thornberg, Founding Partner of Beacon Economics and one of the forecast authors. “The labor market has probably rebounded as much as it can given today’s labor supply.”
Although there are still 6.75 million (or 4.5%) fewer jobs in the nation than there were prior to the pandemic, the problem is one of labor supply, not demand. For the last two months, there have been 9.2 million job openings in the United States, 20% more than the highest-ever reading back in 2018. “We’ve had a big decline in the number of people in the active labor force as many workers have left or retired voluntarily,” said Thornberg. “This supply problem is at the heart of the labor market’s slow recovery and indicates that workers are not only doing better than they did in the aftermath of the Great Recession but in some ways, are doing better today than they did in the months prior to the pandemic.”
Like the nation, many parts of California’s economy have also returned to pre-pandemic levels, and in some cases, have recovered to their former trend. “It’s safe to say that California’s economy is now producing as much output as it did before the pandemic hit,” said Taner Osman, Research Manager at Beacon Economics and one of the forecast authors. “And we’re doing it with over a million fewer workers.”
According to the outlook, in addition to the supply-side dynamics occurring across the nation, productivity gains have replaced thousands of jobs in California. While this may appear to be a negative development for workers, labor demand remains high in the state. “Although productivity gains can replace jobs in the short term, productivity growth is the lifeblood of economic expansion over time,” said Osman.
As for the biggest threat to the economy, both in the U.S. and California, the new outlook points to a looming, but longer-term, hazard: the massive amount of monetary and fiscal stimulus the Federal government hosed out across the economy throughout the crisis. While the stimulus very likely hastened the recovery, the huge injection of money comes at a serious cost and could introduce dangerous instabilities into the next expansion. These include inflation and asset bubbles, a deepening of the nation’s long-run fiscal budget challenges, and possibly laying the seeds for the next downturn. “The Federal Reserve has consistently suggested the current run-up in prices is largely transitory,” said Thornberg. “While this may be true, it does not mean that longer-run systemic inflation is not a serious risk.”
According to the new outlook, the near-term economic forecast boils down to a strong run over the next couple of years (with labor supply being the biggest constraint), but with long-term storm clouds on the horizon. U.S. GDP is expected to grow by 6.7% in the 3rd quarter, falling to a more sustainable 4.9% in the 4th.
Additional Key Findings:
- Housing inventory in California has fallen to unprecedented levels. Currently, there is a mere 1.8 months’ worth of home supply available on the market (a balanced market has about 6 months of supply).
- Vaccination rates in the state have surpassed national levels, and while the trajectory of California’s economy could be influenced by the coronavirus in the very short-term, it would amount to a slight slowing of growth rather than an economic contraction.
- The pandemic-driven Federal stimulus has created an excess in household savings across the United States to the tune of $2 trillion – cash that has been used to pay debt, invested, or saved.
- Due to booming home prices and a stock market bubble, aggregate household net worth has grown 23% in the United States, its most rapid year-over-year pace – ever.
View the newly designed The Beacon Outlook here.
Demographic Dilemma: Slowing Population Growth, Not Pandemic, At The Root Of U.S. Worker Shortage
Ability To Meet Current, Future Demand Challenged; Problem Magnified In California Due To Housing Scarcity
Supply chain struggles have been widely blamed for the inability to meet consumer and business demand throughout the pandemic. While fixing the supply chain should be a top priority, it is worker scarcity, driven by the lack of basic, long-term population growth that is the true underlying cause—and a critical future challenge for the economies of the United States, and particularly California, according to a new analysis released today by the UCR School of Business Center for Economic Forecasting and Development.
“For several decades there has been a substantial slowdown in the growth of Americans in their prime working years,” said Christopher Thornberg, Director of the Center for Economic Forecasting and the report’s author. “Whether it’s the missing factory worker, delivery truck driver, or salesclerk, the scarcity of workers is hindering the ability to connect demand to supply and is slowing economic growth.”
According to the analysis, long-run population growth of people between the ages of 25 and 54 accelerated dramatically in the U.S. in the 1970s, peaked in the mid 1980s at over 2% growth per year, and then collapsed just as fast, driven by sharp declines in birthrates. International migration into the United States jumped in the 1990s, offsetting some of this baby bust, but that too slowed sharply after the turn of the century. Today, the population growth rate of prime working age people in the nation is 0.2%, one-tenth of what it was 40 years ago.
Thornberg notes that these population trends have been observed in the data for many years, but because it’s the kind of thing that happens gradually, the issue simply hasn’t been a primary focus for policymakers or business leaders.
The mass wave of retirements that occurred during the pandemic both accelerated and exacerbated today’s worker shortage, but it is not the root cause. “This is a long-term demographic problem, not a short-term cyclical one,” said Thornberg. “It is not going to disappear as the COVID crisis fades.”
As bad as the labor shortage is nationally, it is worse in California, especially Southern California, according to the analysis. The state’s lack of housing acts as a functional cap on population and labor force growth, degrading affordability and driving workers and businesses to other locations. Moreover, the state’s demographic forecasts do not paint an optimistic outlook for future trends.
According to the analysis, all of this means government agencies and policymakers need to concentrate on increasing labor supply and helping employers adapt to a new world where workers are a scarce resource. In the immediate term, there is a relatively passive way leaders can help: they can relax labor market regulations to allow employers maximum flexibility in how they hire their workforce.
Specifically, the analysis calls out the following:
- Restrictions on gig work and flexible work schedules should be reduced, not heightened as California is currently doing.
- Older employees who wish to remain active in the labor market should be encouraged and supported by reducing or eliminating potential reductions to existing retirement benefits.
- Regulation should shift to allow employers to offer a variety of wage/benefit/training packages depending on worker desires rather than being based on preset publicly mandated minimums.
- Policymakers should relax licensing requirements and staffing rules.
In the longer-term, elected and regulatory officials can make a difference in numerous ways:
- At the national level, Congress can address broken immigration policies and work to allow more people to legally move to the United States.
- State and local leaders in California can expand housing supply, particularly multifamily housing, to slow out-migration.
- Policymakers can increase earned income tax credits to support workers in moving off public assistance into lower-wage, lower-skill jobs.
- Government leaders can subsidize employer-based worker training programs to allow and encourage lower-skilled workers to enter higher skilled career paths.
- Policymakers can invest in Pre-K education and publicly subsidized childcare facilities to help workers (particularly women) remain on their chosen career path as they build families.
- Government can provide grants and training to assist small businesses in adopting labor saving technology.
View the report, The Big Shortage: California’s Worker Scarcity and Economic Growth, here.
Inland Empire Business Activity Still Going Strong; Region’s Performance Starkly Contrasts Economic Slump At National Level
Investors Buying Up More Housing Stock Than Ever Before
Business activity in the Inland Empire has continued to grow, and in the context of today’s increasingly uncertain economic environment, stands in stark contrast to growth trends in the nation, according to the new Inland Empire Business Activity Index released today by the UCR School of Business Center for Economic Forecasting and Development. The region’s economy officially transitioned from recovery to expansion in the fourth quarter of 2021 and growth is forecast to continue throughout 2022.
In the first quarter of 2022 (the latest data available), business activity in the Inland Empire expanded by 4.7% compared to 6.4% in the fourth quarter of 2021. Although regional growth has slowed somewhat, it unambiguously outperformed U.S. GDP, which declined by 1.5% in the first quarter. Moreover, the regional slowdown is to be expected as the local economy has reached and surpassed pre-pandemic conditions. Over this year, the Inland Empire’s business activity is forecast to rise between 2.5% and 3.5%.
“Despite greater instability in the macroeconomy today, there are still very few, if any, signs of weakness in the Inland Empire’s economic activity,” said Taner Osman, Research Manager at the Center for Economic Forecasting and one of the Index authors. “Employment has continued to expand and the workforce in the region is now larger than it was before the pandemic, something that is not true for the state as a whole.” Osman cautions, however, that while momentum still exists, the Inland Empire will eventually share in the effects of the broader economic contraction, but not likely in 2022.
The new report also calls out the hot, inventory-constrained local housing market. According to the analysis, it would take 2 to 3 times current inventory levels to move the region out of the seller’s market it’s currently in. The Inland Empire’s high home prices are being driven by a number of other factors as well, including an increase in investor appetite for real estate in the face of a shaken stock market. Investors purchased 17.2% of the homes sold in the Inland Empire in the first quarter of this year, up from 15% one year ago.
“Today, across the entire nation, investors are buying up a larger share of homes than ever before,” said Osman. “Rising mortgage rates should help temper the double-digit price appreciation we’ve seen in the Inland Empire, but at this point we don’t foresee a scenario where home prices will decline, due largely to limited inventory.”
The analysis was authored by Taner Osman and Senior Research Associate Justin Niakamal.
View the new Inland Empire Business Activity Index here.
Affordable Inland Empire? Fewer Than One-Third Of IE Households Can Afford To Buy A Home In One Of Southern California’s ‘Most Affordable’ Housing Markets
Despite Recessionary Fears, IE Labor Market Continues To Show Strength; Demand For Warehouse Space Surges As E-Commerce Spending Continues
Throughout the pandemic, the Inland Empire’s relatively affordable housing market has been a bright spot in the local economy and home price growth has outpaced more expensive neighboring areas. That affordability, however, has diminished in the face of today’s higher mortgage rates and in the context of elevated demand and extraordinarily high-priced markets across the state, according to an analysis released today by the UCR School of Business Center for Economic Forecasting and Development.
Today, only 31% of local households can afford to purchase a median-priced home in the Inland Empire, a decrease from a relatively low 39% in the first quarter of 2021. Still, the region remains one of the most affordable in all of Southern California and is more affordable than the state as a whole where just 24% of households can afford a median-priced home.
“Honestly, this is what affordability looks like in California,” said Taner Osman, Research Manager at the UCR Center for Economic Forecasting and one of the report’s authors. “Housing prices are at the crux of the state’s famously high cost of living and are out of reach to the majority of the population as lack of supply enduringly and severely lags demand.” The contrast with the nation overall, where 45% of households can afford median-priced homes, is stark.
As of April 2022, there were only 1.7 months of housing supply available for purchase in Riverside County and 2.2 months in San Bernardino County. A balanced market typically has 6 to 7 months of supply. Moreover, homebuyer demand, which intensified due to the pandemic-driven economic stimulus, remains high as home sales decrease in the face of limited inventory.
Key Findings Include:
- No Labor Market Slowdown Yet: Despite growing recessionary fears, the short-term economic forecast for the Inland Empire is strong. The labor market continues to show vigor with an unemployment rate (3.7%) that is lower than it was pre-pandemic (4.1%). More than 280,000 jobs have been added in the region since April 2020, surpassing the 228,000 that were lost due to pandemic-related shutdowns.
- Inflation Chips Away At Wage Growth: Local wage growth has been strongest in Riverside County where wages increased 3% from the third quarter of 2020 to the third quarter of 2021 (the latest data available). Wages in San Bernardino County have grown 1.7%. Despite the upturn, real wages decreased during the year due to high inflation.
- Consumer Demand, Fuel Prices Send Taxable Sales Soaring: Taxable sales receipts in the Inland Empire jumped a hefty 23.8% in the latest annual data. The surge has been primarily driven by high fuel prices and more spending in the Business and Industry category where receipts swelled 57%. Fuel and Service Station receipts expanded almost as much (56%).
- E-Commerce Trends Keep Warehouse Space Red Hot: In the last edition of this report, the vacancy rate among warehouse properties in the Inland Empire was an already low 3.6%. As of the first quarter of 2022 (the latest data available), the vacancy rate has fallen to 3.2% despite a whopping 34.6 million square feet of new space coming online. Driven by strong consumer spending in E-Commerce, warehouse space has become increasingly scarce and asking rents in the Inland Empire grew 6.3% in the latest data. But the region is still more affordable than Los Angeles, San Diego, or Orange Counties.
- Rental Market Surges: Demand for apartments continued to intensify in the Inland Empire over the last year with the vacancy rate falling to 3% and asking rents expanding by more than 21% to reach an average of $1,807 per month per unit. But even with the increase, rent in the region is significantly more affordable then in Los Angeles ($2,236), Orange ($2,335), and San Diego ($2,226) Counties.
The new Inland Empire Regional Intelligence Report was authored by Osman and Senior Research Associate Brian Vanderplas. The analysis examines how the Inland Empire’s labor market, real estate markets, and other areas of the economy have recovered from the COVID-19 pandemic and their outlook for the remainder of the year.
The complete analysis is available here.
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