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Over The Hump Or Overstimulated? Annual Inland Empire Economic Forecast Conference Finds Near Term Outlook Strong But Long Run Risks Loom Large



Labor Shortage Will Place Upward Pressure On Wages In 2022; Why Doesn’t the Inland Empire Have A Major League Downtown?

From a demand standpoint, the U.S. economy has completely recovered from the pandemic recession. And output, although not there yet, will return to its long run trend in the near-term future. That according to a new forecast released yesterday at the 12th annual Inland Empire Economic Forecast Conference, hosted by the UC Riverside School of Business.

The new outlook argues that while COVID-19 has been a human tragedy, it has never created the depression-like economic conditions predicted by so many – and fear of those conditions led to a far too vigorous stimulus-response.

According to the new forecast, the current economy has been set on fire by an overly aggressive government reaction to the pandemic, and it is that incitement that is driving today’s ballooning inflation and supply chain disruptions. “What we saw was one of the most tremendous levels of economic stimulus ever dreamed of,” said Christopher Thornberg, Director of the UC Riverside School of Business Center for Economic Forecasting and one of the forecast author. “Lots of public money created lots of private sector wealth – $29 trillion in household wealth in the United States to be exact – and that has overheated the economy.”

The effects of that wealth are showing in the form of high savings rates, excessive consumption, rapidly rising asset markets, and exploding home prices. Indeed, for every dollar lost during the pandemic, the U.S. government gave back three and a half dollars, according to the analysis.

Although the forecast is predicting a continuation of robust economic conditions in the nation, California, and the Inland Empire over the next few years, in the longer term, the excessive Federal stimulus will introduce instabilities such as long-run monetary inflation, deepen the nation’s long-run fiscal budget challenges, and possibly plant the seeds for the next downturn.

Select Key Findings:

  • In the United States, consumer spending on services including healthcare, recreation, travel, and hospitality is still 3% below where it was pre-pandemic. Business investment in non-residential structures also remains depressed, as do U.S. exports.
  • Weakness in these sectors has been more than offset by stronger than normal levels of activity in other parts of the economy, including consumer spending on goods, a booming housing market, and business investment in equipment and software.
  • Although long-run monetary inflation (increase in monetary supply) remains a significant risk, the inflation of the past few months is most likely transitory and is being driven by tight supply chains and strong consumer demand.
  • There are still 6 million fewer jobs in the United States and 1 million fewer in California than there were prior to the pandemic. However, over the last two months there have been more than 11 million job openings in the nation, 40% more than the highest-ever reading (in 2018). The U.S. is not facing a problem with labor demand, but with labor supply.
  • Notably, California is now producing pre-pandemic levels of output with nearly 1 million fewer workers.
  • California’s population growth turned negative in 2020. The primary reasons include the state’s low housing supply and extraordinarily high housing costs, as well as stringent immigration policies enacted under the Trump administration. Combined with the overall labor shortage, this population trend will place additional upward pressure on worker wages in the state.
  • Although not sustainable, home price growth in some parts of California has been truly staggering. On average, prices in the state expanded by more than 30% over the past year.
  • The Inland Empire has experienced an even stronger economic recovery than the rest of California. The region’s performance has been boosted by its central role in the state’s logistics complex and has directly benefited from the consumption that shifted online during the pandemic.
  • Overall, in the Inland Empire, 2022 will see a continuation of the trends experienced in 2021. Constrained labor supply will push wages higher for workers, and higher wages, in turn, should draw more workers into the labor market.
  • The conference’s special topic explored the idea of developing a ‘major league downtown’ in the Inland Empire, something that smaller metropolitan areas across the country, from Milwaukee to Seattle have, but that is missing from the IE.
  • A Key Takeaway: Despite being the 13th largest metropolitan area in the United States, the Inland Empire is missing a high-profile element of other major metros – it has no major league sports teams. The reason is not solely because there is no adequate stadium to put a team. Underlying that fact, the IE doesn’t have the kind of dynamic, dense, core urban area (downtown) that generally surrounds major sports stadiums and that can attract investment and interest.

The 12th annual Inland Empire Economic Forecast Conference was held virtually on November 10th.  A copy of the Conference e-Book can be downloaded in its entirety here

The Inland Empire Business Journal (IEBJ) is the official business news publication of Southern California’s Inland Empire region - covering San Bernardino & Riverside Counties.


An Uneven Expansion and Bounce Back for California’s Creative Economy



New Analysis Tracks Performance of State’s ‘Creative’ Industries Before, During, and After COVID, Revealing Longer-Term Direction

The economy that houses industries such as entertainment, media, fashion, and fine arts in California has weathered the pandemic and, as a whole, done better in its recovery from the COVID-driven recession than the overall economy, according a new analysis released today by the UCR School of Business Center for Economic Forecasting and Development.

The study, Shock and Roll: California’s Creative Economy from 2015-2021, examines trends in the state’s creative industries prior to, during, and following the pandemic recession, finding that the Creative Economy has added a total of 70,064 jobs since 2015 and appears to be bouncing back to its 2019 pre-pandemic peak. Additionally, the Creative Economy workforce in California grew 8% over the study period, significantly faster than the overall workforce.

Even more impressive has been wage growth. On average, in California’s Creative Economy, per worker wages have increased a spectacular 40% since 2015. Wages among Creative Economy workers were already relatively high in 2015 at 1.8 times the average California worker wage, but by 2021, the average worker wage in the Creative Economy was 2.35 times higher. Indeed, Creative Economy wages started higher and accelerated during the pandemic, even outstripping today’s historic inflation.

“California is a global epicenter of the Creative Economy, and its industries are an engine of growth for the state and its workers,” said Dr. Patrick Adler, Research Manager at the Center for Economic Forecasting, and one of the report’s authors. “By looking at conditions and trends that were in progress before the pandemic as well as changes since, we’re able to put the COVID shock in proper context; our main finding is that the 2020 disruption did not throw the Creative Economy off its previous gains.”

The report’s topline analysis comes with a critical caveat: Many different sectors, producing widely different kinds of products, make up the Creative Economy – and the findings indicate that both longer-term performance, and the more recent recovery from the pandemic, varies considerably from sector to sector with some soaring and others declining.

The Media sector, which includes Digital Publishing, is the true stand out the sector that keyed Creative Economy growth in the 2015-2021 period. Media currently makes up 31.2% of all Creative Economy employment in the state and accounts for over half (53.3%) of all the Creative Economy wages paid. By themselves, Digital Publishing industries have added 125,885 jobs since 2015 and, counter to macro trends, added 12,216 jobs during the pandemic period alone.

The Architecture and Related Services sector is the only other major creative sector that had more jobs in 2021 than in 2015; all the others have lost employment since 2015. Unsurprisingly, Fine Arts and Performance was hit hardest by the pandemic, given health mandated restrictions on group activity, and Fashion stands out as the one sector that has been in almost steady employment decline since 2015.

California Creative Economy Employment Change by Major Subsector: 2015-2021

The analysis is part of the Center for Economic Forecasting’s ongoing research about California’s Creative Economy, its industry sectors, and workforce. Amid the angst of the pandemic and its economic effects, Adler and his fellow authors hope that providing clear diagnostics that reach back well before the COVID-19 crisis, as well as during and after, will inform long range economic and workforce development efforts within the creative industries. “There is an important, broader context that shows us certain industries were headed one way or another before the pandemic,” says Adler. “The state’s leaders ought to be thrilled with the long-term dynamism in Digital Publishing, and more concerned by declines in Entertainment and Creative Manufacturing.”

The report is accompanied by an online appendix containing a variety of graphs, figures, and maps that provide additional, drilled-down detail.

The complete analysis is available here. The appendix is available here. 

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Job Recovery in California’s Major Metros Still Lags Other Areas; Transition from Recovery to Expansion Expected by Early 2023



Collapsing Inventories Will Keep Upward Pressure on Home Prices in State’s Notoriously Expensive Urban Housing Markets

California’s major metropolitan regions have continued to recover the jobs lost during the pandemic-driven recession although, with one exception, they are still lagging the state and nation. A new analysis released today by Beacon Economics spotlights steady job gains in five of the state’s largest metros but also illustrates the ground that these urban cores need to make up to reach pre-pandemic levels of employment.

From best performing to worst, San Diego County payrolls now stand 2.2% below their pre-recession peak, the South Bay/Silicon Valley comes in 3% below, Los Angeles 3.8%, the East Bay/Oakland 4%, and San Francisco 4.7% below peak. All of the metros except San Diego are trailing California’s statewide jobs recovery, now 2.8% below peak, and all are trailing the nation as a whole where payrolls are 1.8% lower than they were prior to the COVID-19 crisis.

“With health-mandated restrictions pretty much lifted, and with relatively high vaccination rates in the state, the major headwinds to employment growth have largely faded and we expect each of these major urban centers to reach or surpass pre-pandemic job levels by early 2023,” said Taner Osman, Research Manager at Beacon Economics and one of the report authors.

The analysis also examines the red-hot housing markets in California’s large metros, forecasting that home prices will continue rising in the near-term future even though high demand throughout the pandemic has essentially collapsed already tight housing inventories. “A lack of housing supply was a real dilemma in California long before COVID, but the changes the pandemic brought about in terms of wealth, work routines, and consumer preferences has intensified the problem,” said Osman.

According to the analysis, increasing mortgage interest rates, as well as limits on affordability, will cool price growth from the historic double-digit surges that have been occurring in the state’s major metros over the past several years, but none of the five areas studied will see price declines any time soon.

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Excessive Stimulus ‘Dangerously’ Overheating the U.S. Economy; Near Term Forecast Still Strong But Long Run Instabilities Loom



Home Price Surge Intensifying California’s Workforce Shortage

The 3rd quarter’s real U.S. GDP growth rate disappointed many observers and set off calls to continue various Federal government stimulus programs, or at least slow their reduction. However, a well-regarded economic forecast argues that there is nothing intrinsically worrisome about the 2.1% GDP growth rate (in the nine years leading up to the pandemic, the U.S. economy grew at this same pace or slower for 16 out of 36 quarters) and that over stimulus is now the real threat to the economy.

According to Beacon Economics latest outlook for the United States and California, the U.S. economy has recovered from the pandemic recession, which ‘officially’ ended in May 2020 (peak to trough), and is now becoming dangerously overheated as a result of excessive stimulus – triggering today’s hyperinflation, labor shortages, and severe supply chain disruptions.

“In a normal year, this rate would be applauded as a solid growth trend, but because job numbers and real economic output are still lower than they would have been had the pandemic not happened, we’re hitting the panic button,” said Christopher Thornberg, Founding Partner of Beacon Economics and one of the forecast authors. “Numerous metrics combine to constitute an economic recovery and so many are currently at red hot growth levels that continuing to pump stimulus into the economy in an effort to chase down raw job counts and domestic output will do more harm than good.”

According to the new analysis, job and output numbers are not the sole, and sometimes not even the most important, metrics in terms of economic recovery after a recession. The outlook points to a host of key indicators that are overheated or flourishing including consumer spending, government spending on public services, business investment, real estate markets, personal wealth and earnings… and job opportunities. While there are 4 million fewer payroll jobs in the United States today (2.6% less than pre-pandemic), there are 10 million job openings – a result of record high retirements and quitting. The nation’s unemployment rate has also fallen to 4.2%, just 0.7 percentage points higher than its pre-pandemic low, which was itself one of the lowest in U.S. history.

“The real problem in today’s jobs market is the 3-million-person decrease that has hit the U.S. labor force; it isn’t normal,” said Thornberg. “We’ve been facing a looming labor shortage for years, driven by basic demographics, but the excessive stimulus has hastened the process and we need to step off the accelerator.”

Many parts of California’s economy have also returned to pre-pandemic levels, but like the nation, the state is challenged by a diminished labor force which has led to a severe shortage of workers. According to the outlook, California’s labor force has 414,700 fewer workers than it did pre-pandemic.

“The state’s shrunken workforce has emerged as the biggest constraint on future employment expansion,” said Taner Osman, Research Manager at Beacon Economics and one of the forecast authors. “Although Governor Newsom has just reinstated a statewide indoor mask mandate, restrictions on business activity have been removed for months and are not the main driver of California’s labor market issues – worker supply is.”

There are still 5% (900,000) fewer jobs in California than there were prior to the pandemic, compared to 2.8% fewer jobs nationally. In some other states, the number of jobs has exceeded pre-pandemic levels.

The underlying issue that is most exacerbating California’s struggle to attract and retain the workforce it needs, is the price of housing. In the third quarter of 2021, California’s median home price surged to $651,383, compared to the national median of $404,700. “That kind of price disparity is bound to have a major impact on where workers choose to live, most especially lower-income workers who are impossibly strained in California’s housing environment,” said Osman. The new outlook is forecasting home prices in the state to steadily climb throughout 2022.

Overall, the near-term economic forecast in both the United States and California 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 forecast to grow by 5.3% in the 4th quarter, falling to a more sustainable 3.7% in the 1st quarter of 2022.

View The Beacon Outlook here.

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