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.
- 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).
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.
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.
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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