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Economy

Pent Up Consumer Demand to Drive Rapid Economic Recovery in Inland Empire

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Vaccine Rollout, Easing of Public Health Mandates Boosts Local Economic Outlook

After more than a year of pandemic-driven business closures and restrictions on activity, the fundamentals that drive long-term economic growth are alive and well in the Inland Empire, according to an analysis released by the UC Riverside School of Business Center for Economic Forecasting and Development. The region’s labor market, where the pandemic’s greatest damage was unleashed, continues to steadily recover while other parts of the economy, such as the housing market and overall taxable sales, have expanded and even flourished. 

As of the latest numbers, the Inland Empire’s labor market has added back 145,100 jobs since it hit bottom in April 2020. While it still has some distance to go to fully return to pre-pandemic levels (total nonfarm employment in the region currently sits -4.9% below its February 2020 peak), significant consumer demand should drive a rapid recovery, according to the analysis.

“Consumer demand has pent up over the past year and even industries that suffered the worst losses, such as Leisure and Hospitality, should experience significant job gains as companies ramp up to meet surging demand,” said Taner Osman, Research Manager at the UCR Center for Forecasting. “This was a recession driven by the pandemic, not by anything fundamentally wrong or off-balance in the economy, so when the virus recedes, there is really nothing to hold back a quick recovery.”

Once businesses fully reopen and COVID-19 health concerns wane, the regional labor market should recover all the jobs it lost throughout the pandemic this year, or come close, according to the analysis.

Key Findings

  • Industry Impacts: Like elsewhere, throughout the pandemic, the largest job losses in the Inland Empire have been concentrated in the Leisure and Hospitality sector where there are -44,600 fewer workers today compared to February 2020 (a -25.3% decline). Other significant job losses occurred in Government, Manufacturing, Other Services (a sector that includes hair and nail salons), Administrative Support, and Education/Health Care.
  • Wage Growth: One unintuitive effect of the pandemic has been wage growth. From the 3rd quarter of 2019 to the 3rd quarter of 2020, wages in the Inland Empire jumped 5.7%. This trails the 6.7% pace of growth in California overall and, notably, some of it must be attributed to the loss of more low paying jobs during the pandemic.
  • All Not Equal In Consumer Spending: Overall, taxable sales in the Inland Empire expanded by 5.5% from the 4th quarter of 2019 to the 4th quarter of 2020. But while consumers were spending throughout the crisis, their consumption was not evenly spread. Spending in E-commerce (County and State Pool) soared 46.5%, Building and Construction spending jumped 15.5%, and purchases as Food and Drug Stores rose 12.6%. On the other hand, Fuel and Service Station spending plummeted -25.4% and Restaurants and Hotels suffered a -16.4% drop. 
  • Hot Housing Market: The median single-family home price in the Inland Empire rose 16.3% from the 4th quarter of 2019 to 4th quarter of 2020. Robust price growth in the IE and elsewhere has been driven by the fact that homebuyers are typically higher income and have been less affected by the pandemic, by low mortgage rates, and by historically low inventories.
  • Rising Rent: Asking rents in the Inland Empire grew 2.5% over the past year to $1,467 per-unit per month. Despite the growth, rent in the region is still more affordable than in Los Angeles ($1,973), San Diego ($1,860), and Orange ($1,954) Counties.
  • Retail Under Pressure: Unsurprisingly, demand for retail space in the Inland Empire fell over the last year with the vacancy rate rising to 10.0% in the 4th quarter of 2020. Asking rents also fell by -2.9% to an annual rate of $22.59 per square foot. In contrast, demand for warehouse, office, and flex/R&D properties increased over the year.

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 are recovering from the COVID-19 pandemic and their outlook for the remainder of the year. View the full analysis here.

Economy

Storm Clouds Forming: Chance of Recession High… It’s Coming, But Not Quite Yet

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Federal Reserve Moves Are Too Little Too Late And Unlikely To Avert A Hard Landing; Labor Force Squeeze Acute In California

The overheated U.S. economy is edging ever closer to a serious contraction, which would bring to an end the over decade-long expansionary period that began after the 2008-09 Great Recession, according to Beacon Economics‘ latest outlook for the United States and California. The $12 trillion injected into the U.S. economy over a two-year period during the pandemic caused wealth in the nation to surge, which drove spending and investment to unsustainable levels. That over stimulus is coming home to roost, we just don’t know when.

“The trillion-dollar questions are when will a recession likely begin and how bad will it be; timing wise, certainly not yet,” said Christopher Thornberg, Founding Partner of Beacon Economics and one of the forecast authors. “Near-term, the economy’s expansion still has momentum, driven by historically high household savings, low private sector debt levels, and the fact that policymakers have yet to truly withdraw stimulus funding.”

The new forecast argues that although U.S. output contracted in the first quarter of the year, it was not driven by weak spending—in fact, final demand in the nation grew at its fastest clip in three quarters. Rather, the contraction was driven by the recent and enormous surge in imports that replaced domestic production—another sign of an overheated economy, not a contracting one.

To date, the tightening actions taken by the Federal Reserve have been tantamount to baby steps and will have minimal impact on demand, and therefore inflation, according to the outlook. “The Fed must do far more, and quickly, before inflation becomes an even more endemic problem,” says Thornberg. “They need to get serious about shrinking their balance sheet, and Congress needs to focus on balancing the U.S. budget. Unfortunately, this is unlikely on both fronts because public sentiment suggests we are on the edge of a cliff—and no policymaker wants to be the pusher.”

Indeed, the surge in public panic over the economy is liable to prevent the Fed and Congress from doing what they need to do to cool things off, meaning the problems associated with an overheating economy will grow worse, and when a recession does arrive it will be more severe than if the issue had been tackled quickly and assertively, according to the forecast.

Key Findings:

  • Despite some headlines, the pandemic-driven recession is undoubtedly over. With a 3.6% unemployment rate, record low inventories, and the highest pace of industrial production ever it’s clearly evident that the U.S economy is currently operating at full capacity.
  • The nation’s unit money supply (M2 relative to the size of the nominal economy) has never been higher, which suggests the United States will see even more inflation unless something is done to shrink the money supply back to size.
  • Net worth among the bottom 50% of earners increased 90% in the last two years, although wealth inequality in the nation remains far too high. At the same time, Americans paid off a great deal of debt or refinanced mortgages at ultra-low rates. The debt burden on U.S. households is much lower than it’s ever been – a good thing when a recession hits.
  • Supply chain problems are showing in the form of labor shortages. The great retirement that occurred over the course of the pandemic saw almost 3 million U.S. workers drop out of the labor force. Now there are a record 11 million job openings and demand for workers is causing wages to rise at their fastest pace in 30 years.
  • One of the most worrisome trends is the U.S. trade deficit, which, as of the first quarter of this year, is running at 5% of GDP, another way of saying the nation is consuming 5% more than it is producing. The United States “borrowed” a net $300 billion from the rest of the world in the first quarter alone to fuel this excess consumption.
  • Many of California’s regions now have lower unemployment rates than they did pre-pandemic. This includes all of the state’s major employment centers across southern, northern, and inland California.
  • California’s labor market recovery has been stronger in the inland parts of the state, due in large part to the heavy presence of the Logistics sector. Employment in this sector is now 18% higher than pre-pandemic, fueled by the continued and accelerated transition to online consumption.
  • California’s labor force – defined as the number of people either employed or seeking employment – is still 1.5% below pre-pandemic levels. But the squeeze is tighter in some regions: The Inland Empire, Sacramento, San Diego, and San Jose have completely recovered, while Ventura, Los Angeles, and San Francisco have the largest workforce deficits. “As is clear to anyone who visits a restaurant or retail store in many parts of California, where “now hiring” signs are abundant, the state is currently experiencing an acute labor shortage,” said Taner Osman, Research Manager at Beacon Economics and one of the forecast authors.
  • In the first quarter of 2022, home prices in California averaged $685,000, an increase of 13% on a year-over-year basis. That price is close to double the median price in the nation (note that price growth is cooling).

View the new The Beacon Outlook here. This press release is available digitally here.

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Economy

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

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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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Economy

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

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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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