This is how our economy can survive the pandemic
Economist Gloria González-Rivera offers insight on how to limit damage
Thursday, April 23rd, 2020 | 11:12 am
With the Covid-19 pandemic wreaking havoc on the economy, we’re all hoping for a quick recovery.
But it might take a while, explains Gloria González-Rivera, a professor of economics at the University of California, Riverside. González-Rivera received her doctorate from the University of California, San Diego, where she wrote her dissertation under the supervision of 2003 Nobel Laureate Professor Robert F. Engle.
Her research focuses on the development of econometric and forecasting methodology with applications to financial markets, volatility forecasting, risk management, and agricultural markets. One area of particular interest is predicting and limiting the economic damage of rare natural and human-caused events. Here, she offers insight on how we might find our way out of the current crisis.
According to the New York Times, the International Monetary Fund issued a warning that “the world is facing its worst downturn since the Great Depression.” What is your reaction to this?
These predictions assume mitigation measures will work, the virus will be contained to some extent, and we will not face another relapse.
The economic models on which these predictions are based also do not account for the psychology and fear of people, which will certainly affect their behavior.
For example, the unemployment numbers are staggering. In the U.S., 22 million jobless claims in four weeks is unprecedented in the postwar years. These are numbers similar to those of the 1929 Great Depression. It is especially hard for younger generations coming out of college and looking for their first job.
For the American economy, where two-thirds of gross domestic product is consumption, consumers are key to recovery. If consumption does not come back to pre-crisis levels, the economy will be in recession for a long time. Stimulus measures like the $2 trillion package approved by Congress are geared to provide some income to consumers and small businesses, so they keep on consuming and operating. However, how and when consumers decide to spend their income is the key to cushion the drop in output growth.
Fear is a powerful decision-maker, but decisions are not always in the right direction. People will become more conservative with their money. Those who can will save more and consume less. More savings and less consumption now will lead to a deeper recession in the months ahead.
Which sectors of California’s economy are most at risk?
The economic landscape of California is a mix of critical and not-so-critical sectors, but in either case, it is highly dependent on the migrant population and supply chains located overseas. The largest economic engines are technology/biotechnology, agriculture, entertainment/tourism, construction, and logistics, plus all the services generated by these activities. Technology and agriculture provide essential goods and services, and either by federal and state policies or by human ingenuity, will be necessarily open.
The sectors at risk now are tourism and the hospitality industry because they depend on the discretionary income of households. Consumers, even after the pandemic is over, will be reluctant to spend as they did in the pre-pandemic months.
What are some things the federal government can do to limit the damage to our national economy?
The federal government and the Federal Reserve are providing massive aid to the economy. We have a combination of fiscal and monetary policy that has worked in previous crises, and it is working now. The $2 trillion stimulus package approved by Congress provides relief to individuals, small businesses, some industries, and state governments. The Federal Reserve provides liquidity by buying the debt — Treasury bonds and government-backed mortgage bonds — that will finance the stimulus package. Basically it is pumping cash into the economy through the financial system.
An open question now is whether the $2 trillion package will be sufficient, or will we need another round of stimulus. It is very likely we will need a second round of stimulus providing additional funding to small businesses to restart their activities and an extension of unemployment benefits.
What can our state government do to limit the damage to California’s economy?
Most importantly, in the short term, the state can guarantee the health of our population by making sure we have enough protective gear, managing hospital capacity, and providing widespread testing. It is also very important that for the unemployed, either self-employed or employees, the state government provides access to all benefits offered by federal programs, not only to traditional unemployment benefits but also to the program known as Pandemic Unemployment Assistance. For small businesses to survive, it is also necessary to provide access to loans and lines of credit.
Our government should follow the advice of the experts, public health officials, and economists, for a gradual opening of the economy, and offer legal protection for those undocumented populations who are vital to the agricultural sector and in other services.
How do you envision the path to long-term recovery?
It will depend on the evolution of the virus. If we were to have therapeutics and a vaccine in place early, the recovery would be relatively fast. The sooner we open the economy, the less damage to the economy. But as we are told by the health experts, the vaccine will take more than a year. The strategy is to achieve a balance between protecting the health of the population and reactivating gradually the economic engine. Thus, the recovery will be slow by design.
The government has a key role in supporting the short and long terms. This crisis has made evident the cracks in our health system and revamping this sector will help to sustain long-term recovery. More long-term investments, big projects sponsored by the government, could provide further stimulus over the long haul.
This pandemic has shown how intimately the world’s economies interconnect, and the devastating consequences of economic destabilization. How can we prepare for future pandemics?
This pandemic is questioning the meaning of “globalization,” and the organization of the world economy could be very different after the pandemic subsides. We may think of relocating some strategic supply networks to the U.S., so we become less dependent on other nations. We may think of designing strategic and resilient long-term plans for firms, so they are able to face any future crisis. This “looking inward” behavior will surely affect global trade, likely making some goods more expensive for consumers. But it will be a relatively small price to pay if, in the long run, the economy is more robust to these horrific shocks.
Do you see opportunities for positive changes?
I am sure technical and medical innovations will save the day, but given the human toll of this pandemic, we should not forget social innovation. How do we want to organize ourselves as a society? What are the strategic sectors for the survival of a nation? What values should we bring to our organizations and employees? What principles should we instill on our youngest?
Slow Growth Forecasted for California’s Major Metros…But No Recession; Consumer Spending Expected to Keep Local Economies Humming
Modest Price Declines Expected In State’s Famously Expensive Housing Markets
California’s major metropolitan regions will weather any national headwinds caused by the recent banking crisis and are all expected to see employment grow and consumer spending continue for the rest of the year, according to new regional outlooks released today by Beacon Economics. Almost without exception, consumer and business sales tax receipts have grown significantly compared to pre-pandemic levels in the state’s largest urban areas.
“We expect consumer and business spending to carry the day in the near term for these local economies,” said Taner Osman, Research Manager at Beacon Economics and one of the outlook authors. “Despite bearish headlines about bank runs and tech industry layoffs, spending continues to trend above pre-pandemic levels in California’s metro areas.”
Since the 1st quarter of 2020, sales tax receipts have jumped in San Diego (+32.3%), the South Bay (+29% in San Benito County, +17.6% in Santa Clara County), the East Bay (+26.1% in Alameda County, 23.6% in Contra Costa County), and Los Angeles (+25.1%). Statewide, receipts have increased nearly 30%. Only San Francisco has seen a decline (-1.5%) in its business and consumer spending, albeit a minimal one. The new outlooks note that the fall off in San Francisco aligns with weak tourism and air travel data, which indicate that passenger counts through San Francisco International are down nearly 30% from pre-pandemic levels.
The ongoing spending spree across the state’s metros is being driven and bolstered by steady gains in payrolls, according to the new outlook. Indeed, in each of the five regions analyzed, the local unemployment rate has fallen back to a low pre-pandemic level and employment is inching towards an all-time high. Moreover, the forecast has job growth increasing by between 1% and 2.5% in all five metros throughout the remainder of 2023. “Overall, we’re expecting to see slow but steady employment growth across the state’s metros this year… and no recession,” said Osman.
In other findings, the new outlooks are forecasting only modest price declines in the housing markets of California’s major metropolitan areas over the rest of this year. While rising interest rates have taken a toll on the local markets, making mortgages more expensive and sidelining would-be homeowners, there has been little relief in terms of badly needed housing production. “The extremely limited inventory of homes for sale restricts how much prices will fall, with some areas only seeing a deceleration in price growth, not actual drops,” said Osman.
As of February 2023, on an annual basis, only in exorbitantly high-priced San Francisco did the median home price fall markedly, by 10.7%. In the other Bay Area metros, price decreases were more moderate, including a 3.5% decrease in the East Bay and a 0.3% and 5% decrease in the two counties of the South Bay. In Los Angeles and San Diego, price growth decelerated but prices continued to rise year-over-year (+1.8% in San Diego, +0.8% in Los Angeles).
This edition of The Regional Outlook was authored by Osman and Senior Research Associate Justin Niakamal.
View full outlooks for the East Bay, Los Angeles, San Diego, San Francisco, and South Bay.
Banking & Financial Services
All Eyes On The Fed… But Will It Change The US Forecast?
Federal Reserve Policies At The Root Of Recent Bank Collapses; California: A Better Recovery Than We Thought!
The recession forecasted by so many still hasn’t shown up and is looking less and less likely to anytime soon, according to Beacon Economics‘ latest outlook for the United States and California. Moreover, the recent bank failures that have been capturing headlines are being ‘wrongly viewed’ as heralding a coming downturn, something that misses the actual drivers behind the collapses and that key economic data refutes.
“These bank failures are not a reflection of an unhealthy U.S. economy, they are all about Federal Reserve policy,” said Christopher Thornberg, Founding Partner of Beacon Economics and one of the forecast authors. “Sad by true; the body that is supposed to be the wise shepherd of the nation’s banking system is largely responsible for creating the very stressors that caused Silicon Valley Bank to fail, and the run on others to begin.”
According to the outlook, the U.S. banking system, overall, is the victim of quixotic and rapid changes in Fed policy over the last three years as they have tried to maintain both full employment and price stability – which can be mutually exclusive. “In their existential panic over full employment during the pandemic, the Fed destabilized prices by injecting historic amounts of cash into the economy; in their existential panic over price instability, they destabilized the banking system through interest rate increases,” said Thornberg.
The new outlook acknowledges that the sudden crosscurrents from the bank failures have made the forecast fuzzier because stress in the banking system will eventually show up in the broader economy in the form of tightening credit. However, the new forecast does not believe those stressors, on their own, will rise to the level of a recession. “Cash is still king in the U.S. economy,” said Thornberg. “But if the Fed decides to continue raising interest rates in its quest to slow inflation, it will do more damage to the bank credit industry and that will trigger negative consequences for the overall economy.”
Assuming the Fed slows their roll, which they’ve shown some signs of doing, Beacon Economics is expecting slow growth and no recession in the near-term future. The forecast has real U.S. GDP growth in the first quarter coming in between 1% and 2%, although the margin of error has increased given the policy uncertainty.
In terms of the macro economy, the new outlook points to copious evidence of its health: unemployment in the nation remains rock bottom, consumer spending continues despite inflation, earnings growth is still running above 6% for the median worker, U.S. household net worth remains 30% ($30 trillion) higher than it was pre-pandemic, banks are not experiencing an increase in problem loans, and interest rates have started to stabilize causing asset markets to do the same.
In California, the news grew rosier this month after the state released its annual employment revisions, although a declining workforce continues to hamper economic growth. The revision shows that California recovered more and faster from the pandemic’s job losses than previously estimated: There are 197,000 more people employed in the state today than there were pre-pandemic. The original estimates had the gain at a mere 70,000.
However, in terms of the percentage increase, California’s job growth has been about five times slower than states such as Florida and Texas. “The underperformance we’ve seen is certainly not due to any unwillingness on the part of the state’s employers to hire workers,” said Taner Osman, Research Manager at Beacon Economics and one of the forecast authors. “Rather, California’s labor force contracted during the pandemic and there are well over 300,000 fewer workers in the state today than there were before COVID hit; there are simply not enough workers to fill the number of job openings.”
Deeply linked to its declining workforce is California’s famously expensive housing market, where prices surged an astounding 41% during the early days of the pandemic. Today, higher interest rates have led to a collapse in demand and home sales have returned to their pre-pandemic trough. However, home prices remain 27% above where they were pre-pandemic and the new forecast only expects them to fall by 6.3% in 2023. “Given California’s acute long-term housing shortage, it’s not surprising that price drops will be limited,” said Osman. “And this isn’t anything like the Great Recession because consumer balance sheets are so much stronger today and unemployment rates are at all-time lows.”
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%).
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