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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.

Gloria González-Rivera

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?

The Inland Empire Business Journal (IEBJ) is the official business news publication of Southern California’s Inland Empire region - covering San Bernardino & Riverside Counties.


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.

Key Findings:

  • 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.

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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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