Housing Remains Greatest Immediate and Longer Term Challenge; Despite Some Trade War Impacts and Yield Curve Consternation, Neither Will Lead To A Downturn in 2020
November 6, 2019— RIVERSIDE, Calif. (www.ucr.edu) — Operating at ‘full employment’ and with an unemployment rate that is trending lower than its record low, the Inland Empire’s economy will continue to grow through 2020, although at a slower pace than in the recent past, according to a new economic forecast released today by the UC Riverside School of Business Center for Economic Forecasting and Development at the 10th annual Inland Empire Economic Forecast Conference.
Driving much of the region’s ongoing jobs growth are the local health care and logistics sectors, while significant growth at the Ontario International Airport is showcasing the Inland Empire’s increasingly strong economic presence among Southern California’s powerhouse economies.
“The IE economy has been gaining momentum in recent years and although there has been a slowdown, based on everything we see happening today, all the handwringing over a coming recession is just that – nothing on the foreseeable horizon would have a big enough or rapid enough impact to knock the region, or the nation, into a downturn,” said Christopher Thornberg, Director of the UC Riverside School of Business Center for Economic Forecasting and one of the forecast authors. “Although there is always the potential for some yet unseen impact on the global or national level, and there are certainly long term threats that stem from California’s statewide housing shortage, which is helping to drive labor shortages, slower growth is expected to continue.”
The new forecast calls out a lack of housing supply and weak rates of homebuilding, particularly within the single-family market, as the most urgent challenge to economic growth in the Inland Empire. Even though local housing stock falls seriously short of demand, residential building permits in the region (both single-family and multifamily) declined by 8.2% in the first half of 2019 compared to the same period one year ago.
This is not unique in Southern California where Los Angeles saw residential permits fall by a much higher 27.9% and San Diego experienced a whopping 46.6% decline. Indeed, construction has pulled back statewide with residential permits down 17.4% across California compared to last year. The Inland Empire’s multifamily building activity has been stronger and that is likely what has moderated the region’s relatively lower level of decline in residential permits.
“The consequence of high demand and low supply is, of course, upward pressure on home prices and rental costs,” said Thornberg. “Both have increased substantially in the Inland Empire over the past year as the number of home sales has declined. This is a problem today and unless we add housing stock, is going to be even more of a problem tomorrow.”
The new forecast delivers current outlooks for the U.S., California and Inland Empire economies.
Select Key Findings:
- Of all the industrial and business development in the Inland Empire, rapid expansion occurring at the Ontario International Airport is a stand out in Southern California. Year-over-year growth in passenger traffic at the airport has jumped by 9.6% compared to 0.3% growth at LAX and a 3.4% contraction at John Wayne Airport in Orange County.
- Due to the multiple ways that employment is measured by the U.S. Bureau of Labor Statistics and the California EDD, and due to a lag in some of the data, the new forecast finds that current monthly figures may be underestimating the Inland Empire’s true jobs growth trends. There is a good chance that growth levels will be revised upward when the annual benchmarking occurs in March 2020.
- Despite the trade war that has been underway with some of California’s most key trading partners since March of 2018, the Inland Empire’s logistics sector has continued to grow at a robust pace with 3% job expansion from August 2018 to August 2019.
- As of the second quarter of 2019, average rent in the Inland Empire reached $1,390/month, a 3.8% year-over-year increase. Notably, rents are most expensive in submarkets closest to Los Angeles County where vacancy rates are also the lowest, indicating higher demand, likely from commuters who drive to the coast for work.
- Sales of existing single-family homes in the Inland Empire were down 6.4% in the first half of 2019 while they fell 7.2% statewide. The pull back can partially be traced to last year’s sharp rise in interest rates and limits on mortgage deductibility that resulted from the Federal ‘Tax Cuts and Jobs Act’. The good news is that 2018’s surge in interest rates has largely been erased and today’s lower rates should stimulate the market in coming quarters.
- Yield curve, schmield curve: The strong correlation in this data to the onset of a recession is traditionally driven by the Fed raising short-term interest rates to cool an overheating economy. The inverted yield curve is like the skid marks left behind after trying to avoid going over a cliff. But in this case, the United States is not facing a cliff. The national economy is stable and the expansion will continue.
The 10th annual Inland Empire Economic Forecast Conference is being held on November 6th at the Riverside Convention Center in Riverside, CA. In addition to forecasts for the nation, state, and region, the event includes a drilled down discussion with renowned housing policy experts Dr. Paavo Monkkonen and Steve PonTell about California’s intensifying home affordability crisis and possible policy prescriptions to address the state’s lack of home building.
The UC Riverside School of Business Center for Economic Forecasting and Development is the first major university forecasting center in Inland Southern California. The Center produces economic forecasting and policy research focused on the region, state, and nation. Learn more at UCREconomicForecast.org.
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.
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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