Storm Clouds Forming: Chance of Recession High… It’s Coming, But Not Quite Yet
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).
View the new The Beacon Outlook here. This press release is available digitally here.
Career & Workplace
Annual Employment Revision Changes Our Understanding of California’s Recovery From the Pandemic
State Recovery Has NOT Lagged The Nation; California Recovered More And Faster Than Originally Estimated
The annual benchmark revision released today by the California EDD has significantly changed our understanding of California’s recovery from the pandemic, according to an analysis by Beacon Economics. While employment figures from 2022 were revised downwards, 2021’s figures were revised upwards, and in total, the state added far more jobs than originally estimated.
“The revisions have painted a rosier picture of California’s labor market recovery than previous estimates suggested,” said Taner Osman, Research Manager at Beacon Economics. “Importantly, given the contraction in the state’s labor force since the start of the pandemic, the job growth that has occurred is partly due to an expansion in labor force participation.”
Overall, employment growth in the state from December 2021 to December 2022 was revised from 3.6% down to 3.1%, while growth from December 2020 to December 2021 was revised from 6.5% up to 7.7%.
Previous estimates suggested that California had only added 70,000 jobs compared to its pre-pandemic level, while the revisions reveal the state has actually added 197,000 jobs. This means that payrolls as of December 2022 are 1.1% above their pre-pandemic peak, compared to the 0.4% originally estimated. While previous estimates showed the recovery in California as lagging the nation overall, today’s revisions reveal that the state has recovered at roughly the same pace.
The revisions also mean that California recovered the nearly 2.8 million jobs it lost due to the pandemic in June 2022, rather than October 2022, as originally estimated.
Growth in the state’s 2022 labor force was also revised downwards significantly. From December 2021 to December 2022, only 128,700 workers joined the labor force in California, far fewer than the 276,800 originally estimated. This translates into a 2022 labor force growth rate of 0.7% rather than the original estimate of 1.5%. However, at the same time, 2021’s labor force growth rate (from December 2020 to December 2021) was revised from 1.5% up to 2.2%.
At the industry level, the annual benchmark revision was mixed, with growth rates in some sectors were revised upwards, while others were revised downwards. The biggest upward revisions to year-over-year growth rates (December 2021 to December 2022) were in Mining and Logging (revised from 0% to 3.6%), Real Estate (revised from 2.8% to 3.2%), Health Care (revised from 4.7% to 5.0%), and Professional, Scientific, and Technical Services (revised from 4.1% to 4.2%).
The biggest downward revisions in year-over-year growth rates were in Finance and Insurance (revised from 1.0% to -0.9%), Construction (revised from 4.6% to 2.7%), Government (revised from 1.8% to 0.4%), Transportation, Warehousing, and Utilities (revised from 3.8% to 2.9%), Wholesale Trade (revised from 2.2% to 1.3%), Education (revised from 7.0% to 6.4%), Retail Trade (revised from 0.8% to 0.2%), and Leisure and Hospitality (revised from 7.7% to 7.2%).
California’s annual benchmark revision was also mixed at the regional level, with growth rates revised up in some areas and down in others. The largest upward revisions in year-over-year growth rates were in Yuba (revised from -0.6% to 4.1%), Napa (revised from 1.8% to 5.8%), El Centro (revised from 1.8% to 4.9%), Madera (revised from 2.4 to 4.6%), San Rafael (MD) (revised from -1.0% to 1.1%), and Modesto (revised from 0.9% to 3.1%). Downward revisions occurred in Santa Barbara (revised from 4.0% to 1.0%), the Inland Empire (revised from 4.9% to 2.7%), Ventura (revised from 4.1% to 1.9%), Merced (revised from 3.3% to 1.7%), San Francisco (MD) (revised from 5.3% to 3.8%), and Chico (revised from 2.6% to 1.6%).
California’s labor market expanded in January, with total nonfarm employment in the state growing by 96,700 positions over the month. “Despite all the headline gloom about the state of the economy at present, California’s economy added more jobs in January than it has in any month since February 2021,” said Osman.
As of January 2023, California has recovered all of the jobs that were lost in March and April 2020, and there are now 293,900 more people employed in the state compared to February 2020. Total nonfarm employment has grown 1.7% over this time compared to a 1.8% increase nationally. California also increased payrolls by 3.5% from January 2022 to January 2023, outpacing the 3.3% increase nationally over the same period.
California’s unemployment rate increased by 0.1 percentage point, to 4.2% in January 2023. While this rate is near historic lows, it remains elevated relative to the 3.4% unemployment rate in the United States overall. California is continuing to struggle with its lack of labor supply, although the workforce did grow by 44,700 in January. Since February 2020, the state’s labor force has fallen by 283,600 workers, a 1.4% decline.
- While employment levels in nearly half of the sectors in California now exceed their pre-pandemic peaks, employment levels in the hardest hit sectors remain below their pre-pandemic levels.
- The Government sector led gains in January, with payrolls expanding by 46,000. However, Government payrolls are still 2.3% below their pre-pandemic peak.
- Other sectors posting strong gains during the month were Leisure and Hospitality (20,800), Retail Trade (10,200), Health Care (9,600), Professional, Scientific, and Technical Services (9,400), Transportation, Warehousing, and Utilities (6,700), and Wholesale Trade (3,000).
- Payrolls decreased in a handful of sectors in January. Construction posted the largest decline, where payrolls fell by 7,300. However, the decline in Construction payrolls was largely weather related. Other sectors with significant job losses were Information (-5,000), Real Estate (-4,600), and Administrative Support (-700).
- Regionally, job gains were led by Southern California. Los Angeles (MD) experienced the largest increase, where payrolls grew by 37,300 (0.8%) during the month. San Diego (8,700 or 0.6%), Orange County (5,300 or 0.3%), and the Inland Empire (5,300 or 0.3%) also saw their payrolls jump during the month. Over the past year, El Centro (4.4%) saw the fastest job growth in the region, followed by San Diego (4.2%), Orange County (3.5%), Los Angeles (MD) (3.4%), the Inland Empire (2.8%), and Ventura (1.6%).
- In the Bay Area, the San Francisco (MD) experienced the largest increase, with payrolls expanding by 8,900 (0.7%) positions in January. The East Bay (7,900 or 0.7%), San Jose (5,100 or 0.4%), Santa Rosa (1,100 or 0.5%), Napa (300 or 0.4%), and Vallejo (100 or 0.1%) also saw payrolls expand during the month. Over the past 12 months, Napa (5.5%) saw the fastest job growth in the region, followed by San Francisco (MD) (4.3%), San Jose (4.2%), Santa Rosa (3.6%), Vallejo (2.5%), and the East Bay (2.1%).
- In the Central Valley, Sacramento experienced the largest monthly increase as payrolls expanded by 3,900 (0.4%) positions in January. Payrolls in Merced (1,000 or 1.4%), Chico (500 or 0.6%), Fresno (500 or 0.1%), Modesto (500 or 0.3%), Stockton (400 or 0.1%), and Madera (200 or 0.5%) increased as well. Over the past year, Madera (4.5%) saw the fastest growth, followed by Yuba (4.3%), Hanford (4.2%), Fresno (4.0%), Visalia (3.6%), Stockton (3.4%), and Sacramento (3.0%).
- On California’s Central Coast, Santa Barbara added the largest number of jobs, with payrolls increasing by 2,200 (1.1%) during the month. Salinas (900 or 0.6%) and Santa Cruz (600 or 0.6%) saw payrolls decline during the month. From January 2022 to January 2023, San Luis Obispo (3.1%) added jobs at the fastest rate, followed by Santa Cruz (2.9%), Salinas (2.5%), and Santa Barbara (2.3%).
Career & Workplace
California’s Worker Shortage Struggle Continues…And Likely to Continue in 2023
Job Growth Modest In Latest Numbers; Unemployment Rate Unchanged
California’s labor market expanded modestly in the latest numbers, with total nonfarm employment in the state growing by just 16,200 positions during December, according to an analysis released jointly by Beacon Economics and the UCR School of Business Center for Economic Forecasting and Development. November’s gains were also revised down to 19,900 in the latest numbers, a 6,900 decrease from the preliminary estimate of 26,800.
Overall, California added jobs at a healthy pace in 2021 and 2022. As of December 2022, the state had recovered all of the jobs that were lost in March and April 2020 at the pandemic’s outset, and there are now 70,000 more people employed in California compared to February 2020. Over this time, total nonfarm employment in the state has grown 0.4% compared to a 0.8% increase nationally. California’s economy increased payrolls by 3.6% from December 2021 to December 2022, outpacing the 3.0% increase nationally over the same period.
“During the year, California’s employers added jobs more quickly than was the case in the national economy, but labor shortages in the state dampened job growth towards the end of the year and will continue to be a drag on job growth in 2023,” said Taner Osman, Research Manager at Beacon Economics and the Center for Economic Forecasting.
Indeed, the state’s struggle to add available workers continues. In December, the state’s labor force contracted by 26,800 workers. Since February 2020, California’s labor force has fallen by 313,600 workers, a 1.6% decline. This lack of workers made it difficult for some employers to bring on the additional staff they typically recruit during the holiday season. California’s unemployment rate held steady at 4.1% in December, unchanged from the previous month. While this figure is near historic lows, the state’s unemployment rate remains elevated relative to the 3.5% rate in the United States overall.
- Employment in nearly half of the job sectors in California now exceed their pre-pandemic levels; sectors that were hit the hardest by the pandemic have yet to recover all the jobs that were lost.
- Health Care led job gains in December, with payrolls expanding by 8,900. Health Care payrolls are now 4.4% above their pre-pandemic peak.
- Other sectors posting strong gains during the month were Construction (7,500), Government (6,000), Leisure and Hospitality (5,300), Professional, Scientific, and Technical Services (4,500), Other Services (1,300), and Real Estate (1,100).
- Retail Trade (-9,500) posted the most job losses during the month. Other sectors with significant job losses were Information (-6,100), Wholesale Trade (-2,000), and Administrative Support (-1,900).
- Regionally, job gains were led by Southern California. The Inland Empire saw the largest increase, where payrolls grew by 9,400 (0.6%) during the month. San Diego (8,600 or 0.6%), Orange County (4,300 or 0.3%), Los Angeles (MD) (2,100 or 0.0%), and Ventura (1,200 or 0.4%) also saw payrolls jump during the month. Since April 2020, the Inland Empire (140.8%) has experienced the strongest recovery in the region, followed by El Centro (115.3%), San Diego (105.1%), Orange County (100.0%), Los Angeles (MD) (94.7%), and Ventura (91.5%).
- In the Bay Area, San Francisco (MD) experienced the largest job increase, with payrolls expanding by 6,400 (0.4%) positions in December. The East Bay (3,100 or 0.3%), San Jose (1,800 or 0.2%), Santa Rosa (800 or 0.4%), San Rafael (MD) (600 or 0.6%), Vallejo (500 or 0.4%), and Napa (400 or 0.6%) also saw payrolls expand during the month. Since April 2020, San Jose (105.3%) has experienced the strongest recovery in the region, followed by San Francisco (MD) (96.1%), the East Bay (92.6%), Santa Rosa (88.3%), Napa (79.4%), Vallejo (74.3%), and San Rafael (MD) (55.5%).
- In the Central Valley, Sacramento experienced the largest monthly increase, as payrolls expanded by 2,800 (0.3%) positions in December. Payrolls in Fresno (1,400 or 0.4%), Visalia (500 or 0.4%), Chico (300 or 0.4%), Modesto (300 or 0.2%), Merced (200 or 0.3%), and Madera (100 or 0.2%) increased as well. Since April 2020, Stockton (147%) has experienced the strongest recovery in the region, followed by Visalia (135%), Madera (124%), Merced (122%), Sacramento (115.7%), Fresno (114.4%), Redding (113.9%), Hanford (110.3%), and Yuba (110%).
- On California’s Central Coast, San Luis Obispo added the largest number of jobs, with payrolls increasing by 900 (0.8%) during the month. Santa Cruz (600 or 0.6%), Santa Barbara (600 or 0.3%), and Salinas (400 or 0.3%) experienced payroll declines during the month. Since April 2020, Santa Barbara (103.6%) has enjoyed the strongest recovery in the region, followed by San Luis Obispo (100%), Santa Cruz (91.6%), and Salinas (84.3%).
Pandemic Left Behind, the Inland Empire Economy Flourished in 2022
A Driving Force: Local Transportation and Warehousing Industry Has Helped The Region Outperform Other Areas
Despite the recession drumbeat getting louder in many quarters across the nation, the Inland Empire’s economy is not only showing strength, but is outstripping California’s other major metros and the state as a whole along some very key measures, according to an analysis released today by the UC Riverside School of Business Center for Economic Forecasting and Development.
From employment to the labor force to consumer spending to wages to commercial and residential real estate, the Inland Empire has been a relative standout as the COVID-19 crisis fades further into the past. In particular, the pandemic-driven surge in e-commerce has pushed the region’s Transportation and Warehousing sector to new heights, boosting payrolls by more than 41% since February 2020, which outpaces growth in the state by a wide margin.
“This sector has long been one of the Inland Empire’s core industries and, ultimately, has been a driving force behind the region’s better and faster recovery,” said Taner Osman, Research Manager at the Center for Economic Forecasting and one of the report’s authors. “Moreover, the enduring shift towards online purchasing has intensified ongoing demand for the industry’s services, which bodes well for the Inland Empire as there is such a strong base and existing infrastructure already on the ground.”
- Labor Market Fully Recovered… And Growing: The Inland Empire has more than recovered the 228,700 jobs it lost due to the pandemic’s shutdowns. Since April of 2020, the region’s economy has added more than 316,000 jobs, outpacing both the state and the nation. Regionally, total non-farm employment has grown 5.5% since February 2020 compared to just 0.2% in California and 0.5% in the United States.
- IE Labor Force Growth A Standout: Unlike other areas of California, the Inland Empires’ labor force (individuals willing and able to work) has grown steadily. From February 2020 to October 2022, the region’s labor force rose by 75,800 workers, a 3.6% increase. California’s labor force, on the other hand, declined by -1.3%, or -256,900 workers.
- IE Wage Growth Besting Other Areas… Then There’s Inflation: From 1st quarter 2021 to 1st quarter 2022 (the latest data available), wage growth in the Inland Empire (4.6%) has significantly outpaced California overall (1%). Local wage growth was stronger in San Bernardino County (5.2%) compared to Riverside County (3.9%). However, importantly, real wages fell -2.9% over the last year due to high inflation.
- Consumers: Spend, Spend, Spend!: From 2nd quarter 2021 to 2nd quarter 2022 (the latest data available), taxable sales receipts in the Inland Empire jumped a hefty 9.5%. With fuel prices near record highs earlier in the year, and more people traveling for work and leisure, spending at Fuel and Service Stations was the region’s fastest growing taxable sales category, surging 39.2%.
- IE Warehouse Space Now More Expensive Than OC and San Diego: The trends occurring in e-commerce have caused the demand for Warehouse and Distribution space to surge in the Inland Empire. The vacancy rate among these properties fell to 1.1% in the 3rd quarter of 2022 as asking rents ballooned 92.4%. While warehouse space in the region is still more affordable than it is in Los Angeles County, it is now more expensive than in Orange and San Diego Counties.
- Housing Market Blues Not So Blue: Although today’s elevated mortgage rates are constraining demand, home prices in the Inland Empire continue to rise. From November 2021 to November 2022, the region’s median home price rose 3.5%, stronger growth relative to Los Angeles (-0.5%) yet slower compared to Orange (10.8%) and San Diego (6.3%) Counties.
- Rental Market Surges: Demand for apartments in the Inland Empire is also booming. The apartment vacancy rate fell to 2.9% in the 3rd quarter of 2022 as asking rents jumped 7.9% to $1,854 per unit, per month. But even with that increase, the Inland Empire remains a more affordable rental market than Los Angeles ($2,358), Orange ($2,499), and San Diego ($2,247) 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.
View the full analysis here.
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