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The Expansion is Dead, Long Live the Expansion



April 30, 2020 | By Christopher Thornberg, PhD

As Beacon Economics has written in our published outlooks over the past six weeks, a true understanding of what is currently happening in the economy is limited given the delay in receiving relevant data, as well as the total lack of recent historical examples illustrating how pandemics impact economies. As such, any prediction of how the COVID-19 crisis will affect the economy over the next year should be presented with the utmost humility—advice that the vast majority of forecasters seem to be ignoring in their increasingly hyperbolic predictions of economic collapse.

It simply isn’t that clear. While we appreciate that the numbers on jobs and economic activity are grim, they are not being driven by true, structural economic problems, but rather public health mandates. Once the mandates are lifted, there is no reason to assume that things won’t quickly get back to normal. The depth and degree of the economic damage will be determined by the five questions detailed in our recent outlook. We believe that true, long-term damage will be minimal, and we anticipate a strong rebound in the second half of the year (a “V” type business cycle).

This week, the first estimate for first quarter GDP growth was released—and it isn’t pretty. The economy contracted at a 4.8% pace, driven by a very sharp decline in real consumer spending. This is not as bad as it sounds, since (as always) growth is presented in annualized form. In real terms, it means that economic activity contracted by about 1.2% from the fourth quarter of 2019 to first quarter of 2020, driven by a less than 2% decline in spending. But it still represents the third worst showing for the economy in over three decades and worse than what Beacon Economics anticipated. This means, almost assuredly, that the record long economic expansion that began way back in July of 2009 will be officially declared over as of February of this year—whenever the National Bureau of Economic Research gets around to officially dating the cycle.

It’s easy to look at the first quarter GDP number and assume it confirms much of the negative rhetoric that has been dominating headlines. But digging into the data actually suggests a more positive story. As such, Beacon Economics is sticking with our outlook for the post-virus U.S. economy: a sharp downturn where the record negative number we will surely see in the second quarter (the estimate will be released in late July) is followed by a record positive number in the third quarter as the economy surges towards a more normal level of output.

One bit of good news comes from the sources of contraction in the first quarter. We correctly predited that the decline in spending would negatively impact the travel, food, recreation, and auto industries, but these hits were not large enough to explain the full pullback in consumer spending last quarter. Digging more deeply into the spending data, it’s evident that the largest pullback in the economy—one that explains nearly half the decline in first quarter economic output—is, paradoxically, health care.

The recent decline in spending is being driven largely by the industry’s decision to put all but medically necessary procedures on hold, both to create capacity for the expected surge in virus-related demand as well as to avoid the close mixing of patients with COVID-19 and those seeking other sorts of medical assistance. We had anticipated that accelerated health care spending driven by the need to care for those who contracted and became ill from COVID-19 would offset this decline. It clearly didn’t.

The decline in health care spending, however, is actually good news for two reasons. First, it presents clear evidence that the health mandates are working. Outside of New York and Seattle, there have been almost no hospitals that have struggled with excessive demand from those needing medical care due to complications from COVID-19. And with the number of new cases declining, for now it appears that the industry will not have to worry about the ability to manage demand.

The second reason the decline in spending is positive news is related to the intentional decision to defer non-emergency care. The sharp pullback in health care spending is truly unique. This sector has been growing consistently for decades and has largely been immune to the business cycle; there were no declines in health care spending throughout the Great Recession.  Much of the industry is funded only indirectly through consumers with other payments and funding coming through insurance or the government. Medical procedures are not something most people skip altogether or permanently. All those delayed teeth cleanings, eye appointments, and other health procedures will happen, just later in the year. This supports the “V” outlook, with a surge in health spending as people catch up on basic needs. It is also worth noting that the easing of restrictions in California is beginning with health services, which will help second quarter numbers.

Another bit of good news comes from the income numbers. Many workers and business owners are suffering from lost income—losses that will constrain their ability to spend after the health mandates are lifted (one reason those predicting a “U” are calling for a slow, delayed recovery). But many other workers are not experiencing the same degree of income impairment and are instead being denied the ability to spend their income due to the shutdowns. This will lead to increased savings among these households and pent up demand. If the second effect is greater than the first, on net, it will generate excess spending in the second half of the year.

The March savings rate—when the restrictions went into place—leaped to 13.1%, the highest in decades. At least for now, pent up demand in the form of unspent income is clearly greater than lost income among those who have been economically affected, again supporting the “V” recovery theory. April numbers, however, may be more telling because the income hit may be lagging. Clearly, there is still a long way to go and a lot of uncertainty related to the overall path of the virus and the mandates that are causing harm to the economy, but Beacon Economics continues to believe that as far as recessions go, this will be a dramatic but short lived one.



Christopher Thornberg founded Beacon Economics LLC in 2006. Under his leadership the firm has become one of the most respected research organizations in California serving public and private sector clients across the United States. In 2015, Dr. Thornberg also became Director of the UC Riverside School of Business Center for Economic Forecasting and Development and an Adjunct Professor at the School. An expert in economic and revenue forecasting, regional economics, economic policy, and labor and real estate markets, Dr. Thornberg has consulted for private industry, cities, counties, and public agencies. He became nationally known for forecasting the subprime mortgage market crash that began in 2007, and was one of the few economists on record to predict the global economic recession that followed. Dr. Thornberg holds a Ph.D in Business Economics from The Anderson School at UCLA, and a B.S. degree in Business Administration from the State University of New York at Buffalo.


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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