Mark Schniepp
March 2025

With the nation now amid an age of uncertainty, I hope the “age” lasts just a month or two. Markets loathe uncertainty, especially the capital markets.

The uncertainty comes from the post haste implementation of policies of the new administration.  The uncertainty is supporting investor ambivalence in the stock market, consumer ambivalence regarding present and future opportunities for jobs, income and spending, and employer worry regarding the availability of an adequate labor force.

Policies

The principal policies of the new administration are as follows:

• Identify and terminate wasteful spending in government.

• Enforce immigration laws at the northern and southern borders, and deport illegal migrants who have entered the country over the last 4 years.

• Restructure international trade policy to focus on “America First” principles, prioritizing trade agreements that are advantageous to the U.S. This includes imposing tariffs on countries with unfair trade practices towards the United States.

DOGE has identified what it believes as obvious government waste in the form of bloated or nonsensical spending. Thousands of federal workers have been fired or asked to quit with a generous severance.

Border policies have now been enforced. Immigration has been reduced by over 90 percent. And deportations are well underway.

Tariffs were imposed on Canada, Mexico, and China. The tariff rate is 25 percent for the our neighbors and 10 percent on all Chinese imports.  On March 6 however, tariffs were paused on imports from Canada and Mexico until April 2, prolonging uncertainty further.

While many people believe that these measures are both necessary and noble, and support the America First principals
that the Trump candidacy espoused throughout the campaign, they will also disrupt the status quo and create economic impacts that will result in some short term pain.  That pain can manifest in the form of higher prices, perhaps leading to a spurt of inflation in coming months.  Inflation might be impacted by higher prices for imported goods coming from tariffed countries.  It might also be impacted by higher wages that must be paid to attract new and legal workers into those labor markets that employed illegal migrants who are now at risk of deportation. GDP growth in 2025 could also be impacted.

C + I + G + X – M                             

This is the equation for GDP, equal to the sum of consumption expenditures by consumers, investment spending by businesses, government spending, and export value minus import value.

G is on the chopping block, and even if you believe that many of the programs getting terminated and many federal employees being laid off are indeed wasteful and not in the best interest of Americans, reduced government spending will lower GDP this year, if the change is not offset by increased C, I, or X.

Trade policy will be characterized by reducing trade deficits, defined as X – M where M is greater than X.  Policies using tariffs will try to boost X and reduce M, this policy would increase GDP providing there is no reduction in C or I as a result of the imposition of tariffs.

But C and I may ultimately be negatively impacted by higher prices on imported goods due to tariffs.

Unknown Economic Impacts = Uncertainty

Border policy and enforcing U.S. immigration policy will reduce migration into the U.S. and the labor force of potential workers needed to fill positions in leisure and hospitality, healthcare, and construction.

Consequently, the uncertainty today is due to changes in the status quo that will likely impact the economy, but that are largely unknown.  Just how high and for how long will tariffs will be implemented, and will there be adequate and affordable substitution effects for consumers as alternatives to tariffed goods.

Moreover, the uncertainty today will also persist regarding how many deportations will occur that would meaningfully impact the workforce, increasing labor costs for employers. How many federal government employees will be laid off, which would raise the unemployment rate in D.C. and Virginia if replacement jobs are not found in a timely manner. Jobless claims will be critical to watch in the coming weeks to determine the magnitude of potential labor market disruption.

Ending wasteful government programs and reducing the federal government workforce would reduce overall government expenditures which would shrink the federal budget deficit providing Congress acts to cut programs permanently out of the FY25 and FY26 appropriations.  Successful budget cutting would rally the bond market, reducing longer term interest rates, which by itself, would increas consumption and investment.

The unknowns are generally unnerving to consumers, businesses and investors. And to date, consumer and business sentiment have declined, home builder confidence has declined, and stock prices are moving lower. In the aggregate their change since the beginning of the year is negative.

The next 3 months

Course correction is possible if current policies being pursued by the new administration lead to an erosion in economic growth, rising unemployment, or accelerating inflation. I don’t believe the economic impacts will be severe. Tariff policy may be short lived. Deportations may not be substantial enough this year to meaningfully affect the labor force and wage inflation. And large government expenditure reductions may not be embraced by a bold enough Congress willing to cut them out of this year’s budget, and the FY26 budget.

Over time, a reduction in government spending is imperative if federal debt is to be reckoned with, which is necessary to lower longer term interest rates.  Hopefully current policies are a signal that the new administration is serious in finding redress for government programs or directions that appear disconnected to an American First agenda.

Our forecast is for the unemployment rate to rise slightly to 4.1 percent after dropping to 4 percent in January.  We also predict that the threat of tariffs on Canada and Mexico are likely  to be reduced or never implemented if concessions from the two countries are made to help secure the northern and southern borders.

While the current environment is chaotic, I believe it presents a significant long-term opportunity, based primarily on U.S. market’s ability to adapt to change. Just as certain policy developments in the 1980s and 1990s ultimately sparked an era of growth, the changes to the status quo that we are witnessing today could have a similar transformative effect.

Mark Schniepp
February 2025

What the Indicators are Saying

GDP rose 2.3 percent in the fourth quarter of 2024, and 2.5 percent for the calendar year. GDP growth in the first quarter to date is estimated at 2.9 percent (February 7) by the Atlanta Federal Reserve’s GDPNOW model.

Manufacturing has now turned around and is expanding in the U.S. again

The Institute of Supply Management Purchasing Index pushed above 50, indicating positive growth in manufacturing orders during January.

Incomes are rising as expected. There is continued growth in wages. The outlook is bright for income growth looking forward, as the labor market remains on solid footing.

The Job Openings and Labor Turnover Survey remains steady regarding hiring, quits and layoffs in the labor market.  In December, hiring and separations through quits or layoffs both increased. Though still at a modest level, the slower pace of layoffs (which remain historically soft) continue to ensure job growth. The unemployment rate for January slipped further, to 4.0 percent.

Spending growth by consumers finished 2024 on a high note, rising as much as wages and contributing to a solid 4.1 percent year-over-year growth in retail sales during December.

New home sales were higher in December. As homebuyers contend with an increasingly limited supply of existing homes for sale, many are turning to the new-home market.

I expect a rate cut by the Fed in the first or second quarter, and perhaps a second cut in late summer.  Lower rates will reduce builders’ costs of loans for capital and land development, reducing the cost of construction.  This assumes no extraordinary increases in material costs. Over the last 9 months, construction cost
inflation has been unusually tame, averaging 1.9 percent in California.

Policy and the Economy in 2025

Fed cuts to the funds rate are unlikely to push mortgage rates down, but the progress being made toward balancing the federal budget by Elon Musk and DOGE would result in lower 10 year treasury bond yields and lower mortgage rates.

The Fed will remain concerned about rising inflation due to elevated wage growth. Consequently, after 100 basis points of federal funds rate reductions in 2024, the timing of further Fed cuts has become less certain, indicating a more gradual, data-driven approach in 2025.

Despite the volatility and seemingly lateral movement in prices since early December, the 3 major indices of the U.S. stock market are all higher to date in 2025.

The market is holding together relatively well despite the uncertainty that investors feel regarding tariff policy, the federal deficit, and interest rates.  Whereas DOGE can and is identifying where government spending appears to be wasteful, it is up to Congress to do something about it.  And there is nothing out of the House yet that would signal they are serious about cutting spending in a meaningful way.

Furthermore, any larger than expected government spending cuts would pose a downside risk to U.S. growth. But at the same time, this would likely push long term rates lower, offsetting less federal spending with higher levels of private investment and consumer spending.

The administration’s plan to renew the 2017 tax cuts and augment them with no taxes on tips, overtime, and social security would enhance growth prospects this year. Consequently, there is significant potential for higher-than-expected growth in 2025, providing the unknowns don’t slow the current momentum in the economy, which is now running at an above average pace. We are predicting that the economy will progress at a healthy clip near term, but the pace of growth will moderate.

Mark Schniepp
January 2025

The big three campaign issues of the new administration that allegedly resonated with the electorate were:

• Improving the economy and restoring low inflation
• Securing the southern (and northern) border of the country
• Resolving the Ukraine-Russia conflict and restoring peace in general

Paying off federal debt                              

A meaningful reduction in government spending recommended by DOGE and sanctioned by Congress could actually balance the annual federal budget and make inroads on debt reduction. This would be the first time since the 1990s. However, we all know there are inefficiencies in government program spending. Identifying them and pressuring the House to develop appropriation bills to nix federal programs, grants, transfers, and general spending is needed to reduce the debt.

Debt reduction would help to keep interest rates lower and spending limitations would help to keep inflation at bay.

Expand Oil Drilling                                     

Oil production is already at record levels but is still subject to high royalty rates when conducted on federal lands.
Also, there are significant regulatory obstacles including local discretionary approvals that could be eliminated to enable expanded drilling, lower operating costs and incentivize more production in the Permian basin (Texas and New Mexico), the Williston Basin (North Dakota), and the Gulf of Mexico.

More domestic energy production would increase world supply providing OPEC does not restrain member production in response. Crude oil prices would decline.

Taming Inflation                                         

Inflation is already moving in the direction of being tamed, meaning that the rate of general price increases is returning to the inflation environment that prevailed during the Trump 1.0 years. However, rate cuts by the Fed are an economic growth stimulus that we don’t need. According to GDPNOW, fourth quarter growth was 3.1 percent, a level that could compromise continuing progress on inflation.

Furthermore, inflation reduction will be more likely (1) at lower levels of government spending, (2) with progress on the Federal debt, and (3) enabling expansive energy production from all sources.

Extend the tax cuts                                    

The tax cuts are already in place from 2017. They expire on December 31, 2025. This gives Congress a sufficient window of opportunity to reconsider how to structure tax policies to balance so that spending does not exceed revenue. If Congress chooses not to extend the 2017 Tax Cuts and Jobs Act, an effective and meaningful tax hike will occur.  The tax hike will impact middle and higher income American families. The corporate tax rate of 21 percent does not expire, but it could be raised back to 35 percent if lawmakers choose to reopen the tax code.  Maximum tax rates will revert back to 39.6 percent (from 37 percent now). The standard deductions which usually impacts lower income households will be cut in half, and child tax credits will deflate from $2,000 per child to $1,000. Households with $400,000 in income would realize diminishing value of the mortgage interest deduction and charitable deductions.

Sole Proprietorships and S corporations will no longer be able to deduct up to 20 percent of business income when calculating annual taxes.  Consequently, small businesses and gig employees will face a stiffer tax burden.

Gift and Estate taxes will revert back to the $5 million exemption level, from $13.6 million under the Trump tax cuts that have been in place since 2017.

By extending the tax act of 2017, Trump also wants to eliminate taxes on tipped wages, overtime, and Social Security payments. These programs would increase disposable income for lower wage earners and for seniors which would enable more household spending and in theory, accelerated growth of the economy.

Tariffs on China and other countries     

The initial round of tariffs imposed in 2018 and 2019 are still in effect on China and were even increased under the Biden administration last spring. Tariffs may result in marginally higher costs to consumers but not much impact was detected as a result of the first round of tariffs.[1]  It appears that much of the tariff burden was eaten by Chinese manufacturers and not passed on in the form of higher prices to American consumers.

What the new administration is thinking regarding actual implementation of tariffs has not been articulated. Only general saber-rattling statements by Trump, probably in the spirit of preparing for negotiations with our key trading partners, has been reported.

For Mexico and Canada, their hope appears to be that Trump’s threats are mere negotiation ploys to which concessions can be made even before he takes office. The threat of tariffs against Mexico has already cajoled Mexican President Claudia Sheinbaum to agree to stem illegal migration across the border into the U.S.

While tariffs would increase federal revenues, the totality of collections would unlikely be meaningful.  Furthermore, we don’t believe a new round of tariffs in 2025 will be either substantial or pervasive because this could counter Trumps bigger pledge to reduce inflation and increase economic growth.

End the Ukraine Russia war                     

Concessions will have to be made by Ukraine to end the conflict with Russia, but ending the war will result in substantial economic benefits for the European economy.  It will free up and enable expanded Ukrainian agricultural production—especially corn and wheat—which is highly coveted by China, Spain, Turkey, Italy, the Netherlands, and Egypt.  Ukraine is the world’s top producer of Sunflower oil, much of it exported to EU countries first, China second, and India third.

The Russian economy has been significantly impacted, largely by the exit of 1,200 major multinational firms that fled the country in protest. This resulted in a major shutdown of the economy. Some sectors are off 60 to 90 percent in total production. Energy exports have been cut in half, especially natural gas which lost a major delivery pipeline (the Nord Stream) into Germany when a series of underwater explosions rendered it inoperable in 2022.

Ending the war would remove any need by Congress to continue financing it, and therefore reduce one large area of government spending.

Trumponomics 2.0 Summary

The principal parts of the new plan are to reassert the Trump 1.0 tax cuts, extend them further, significantly cut government spending, impound previously appropriated Congressional funding, onshore more U.S. company production, deport illegal aliens, and threaten tariffs on, and the withdrawal of economic aid, to countries whose behavior unequivocally harms U.S. interests and/or policies.

The reaction of the stock market and the broader economy will represent a real check on Trump trade policies. Progress on inflation poses a further check.

This is why there is rising probability that inflation could remain a problem in 2025 and stay above the Fed’s 2 percent target. As of November, the core measures of CPI and the Personal Consumption Expenditure Price Deflator together averaged 3.0 percent. The hope that inflation will come down in 2025 will remain an issue and depend on trade strategies and getting control of federal spending.

¹ Associated Press, “Trump’s tariffs did little to alter the economy, but this time could be different,” November 28, 2024,

https://apnews.com/article/trump-tariffs-china-mexico-canada-fentanyl-inflation-cf905e75e863511baef959a80ee2eea2

Mark Schniepp
December 2, 2024

Far from great, 2024 was a good year

This year—2024—was a much better year than economists predicted.  A year ago, there was more talk of a looming recession, or very slow growth predicted for 2024.  The labor markets however, remained strong, consumers continued to spend, investor buying extended the bull market into its third year, and businesses generated profits.

Moreover, consumer spending levels along with the stock market raced to all-time record highs and business investment also peaked in 2024.

But 2024 was also unsettled by wars in Ukraine and the Middle East, by assassination attempts, by unbridled immigration across the southern border, by high interest rates and the ongoing weakness in the housing market, high costs for healthcare, and record levels of U.S. debt.

Inflation fell below 3.0 percent for the first time since March 2021.

Mortgage rates sharply declined 100 basis points between early May and mid-September, but they rebounded in the fall and at their current level, 6.8 percent, they cannot rescue the housing market.

Federal debt is now over $36 trillion and it’s rising at a rate of nearly $2 trillion per year. These high debt levels will prevent interest rates from retracing the lows that prevailed before the pandemic.

Real wages are rising again with inflation in remission.  The unemployment rate remains low at just 4.1 percent. The rate in California is higher, due in large part to the surge of international immigration diverted into the state this year.

The office market remains weak, but the trauma has not yet put banks collectively in trouble.

Though inflation is being contained, the leftover high prices have frustrated consumers. Furthermore, the high rates of interest are a drag on spending, especially lower-income consumers.  This is why the confidence and sentiment indices are not reporting more convincing optimism about the current economy or its near-term outlook.

The GDPNOW estimate for the fourth quarter is running at 3.2 percent. And in view of actual growth for the first three quarters of the year, annual growth of the economy in 2024 will be above the historical trend.

California

In California, the technology sector was coming off a year in which thousands of layoffs occurred, principally in the Bay Area but also impacting the Los Angeles metro area.  The layoff surge did not carry into 2024.

Though tech employment remained stable, tech companies reported strong earnings which pushed their stock valuations to record levels.

The dockworker strike that impacted Westcoast ports and longshoremen jobs in 2023 caused cargo ships with goods from Asia bound for the U.S. to divert through the Panama Canal.

In 2024, shippers came back to Los Angeles, Long Beach and Oakland and seaport container traffic soared.  The logistics sector is no longer hemorrhaging jobs.

There was more stability in the labor markets this year, with the exception of TV, film, and sound recording. The labor disputes affecting actors and writers that were fully resolved by November 2023 have had lasting consequences for Hollywood jobs in California this year.  The 40,000 jobs that were shed in 2023 have not yet been restored. Furthermore, most of the job creation is limited to the healthcare and public sectors.

A glaring issue for 2024 has been the immigration surge.  Until this year, we did not actually know the extent of the immigration wave that has flowed through the southern border crossings into the U.S. CBO reports immigrant encounters at nearly 10 million since 2021.

The flow of immigrants is a principal reason for rising unemployment and declining job openings, especially in California where a disproportionate share have been diverted to.

Tourism remained a steady engine of growth for the California economy in 2024. Even with the opening of thousands of new hotel rooms, the rate of transient lodging utilization remained high, indicating increased overnight visitors throughout the state. Furthermore, the number of airline passengers continued to increase at all principal airports in the state, and amusement park attendance will rival 2023 crowd counts which nearly eclipsed pre-pandemic levels. At Universal Studios Hollywood, attendance hit record levels thanks to Super Mario World.

New homebuilding has hung on despite unfriendly mortgage rates for all of 2024. The new home market has supplemented the existing home market where for-sale inventory dropped to all-time record lows.

Momentum carrying into 2025

Inflation reports that continue to move in the direction of the Fed target, together with modest growth that is not pushed higher by more FED interest rate cuts, will translate into lower long-term rates, including mortgage rates.  A Congress that can present fiscally sound appropriation bills in 2025 will also rally the bond market, dropping yields lower.

The weight of the recent evidence, the momentum of tourism in California, and of commodity imports into the Los Angeles, Long Beach and Oakland seaports, will dominate the weakness in local Film and TV production.

The continuing rebound of Chinese visitors into California will add meaningfully to international travel here.  Plan your Disneyland trip in January and February when crowd counts are the lowest.

The implementation of AI, new technologies in autonomous systems, and medical devices will advantage the California economy where much of the innovation in these resources areas is occurring. This includes the Bay Area, Los Angeles and Orange Counties.

Southern California labor markets include a significant presence of workers in advanced manufacturing. Advanced manufacturing includes computer, semi-conductor and electronic components, medical devices and apparatus, and aerospace components and parts. These industries are expected to expand output to meet a growing worldwide demand.

Finally, new development of infrastructure, entertainment venues, medical center and healthcare facilities, and warehouse and distribution centers will remain a principal engine of growth in the region, keeping the construction workforce at peak levels.

Mark Schniepp
November 8, 2024

Long Term Rates Have Moved Higher

The 30 year fixed rate mortgage yield plunged 100 basis point between May and September 2024. The Fed cut short term rates in September, and again on Thursday November 6.

Paradoxically, longer-term interest rates have moved upward since, driving up mortgage rates and other consumer and business borrowing costs.

The 10-year U.S. Treasury yield reached a recent low of 3.64 percent on September 17, the day before the Fed announced its first rate cut. As of November 8, that rate was up to 4.32 percent, an increase of 70 basis points.

So we’re seeing a reversal in longer term rates. Why?

Growth

A vibrant economy that is generally firing on all cylinders will generate inflation. The investor belief is that there is significant confidence in the economy, soon to be impacted by Trump policies which were friendly the last time around. This is pushing the 10 and 30 year treasury bond yields higher as substitution from bonds to stocks continues.

Stock prices like a vibrant economy, and so the markets spiked the day after the election believing a conservative administration will ease government regulations which kneecap the private business sector.

I have long maintained that the ebullience in financial markets over the last couple of months manifesting the day after the election, signals to the Fed that it doesn’t need to cut rates that much more.  The quarter point easing on Thursday, November 7 was not likely necessary. We risk igniting inflation with easing monetary policy.

Record stock prices reflect high expectations for the economy which already has increased household wealth and now makes the corporate borrowing environment more favorable. Hence our outlook for 2025 is one of steady growth and low unemployment.

Government Debt a Factor

I’ve shown you over the last year how Federal debt has risen sharply, due to the inability of Congress to restrain itself from massive spending. The level of federal spending has never returned to the pre-pandemic trajectory. Here it is again, now at $35.9 trillion.

Government debt is financed through issuance of U.S. Treasury bills, notes and bonds. The U.S. Department of the Treasury has been required to issue increasing amounts of debt to fund government operations. The last 2 years of high interest rates means the cost of financing government debt is more expensive.  The average interest rate paid today is more than double what it was in 2020.

One factor that is affecting Treasury bond yields (and therefore higher rates to you) going forward is the expectation of more government bonds coming to market, entirely due to the high federal government debt, the annual government deficit and the higher interest costs associated with today’s elevated interest rates. The supply of debt is therefore increasing, rapidly.

Consequences

Government Debt

The demand for debt is weakening. The demand for 10 year treasury bonds remains low due to the expectation that more bond auctions will be coming. This increases the yield on all treasury term rates to entice buyers.

Higher interest costs, in turn, contribute to the growth of federal spending — continuing a vicious cycle of borrowing, interest, and higher debt. Currently, 22 percent of annual federal expenditures are debt payments. The 2024 payment will be $1.1 trillion. The federal government is on a path to spend more on interest costs than its combined spending on education, research, and infrastructure.

Housing

Higher long term treasury bond rates move mortgage rates in lockstep.  Higher mortgage rates will not rescue the housing market from the recession it’s been in for the last 2 years.  We don’t see a meaningful contribution by housing to overall economic growth in 2025, but it’s not likely to become a drag on growth either.  Higher rates mean less inventory as would be sellers avoid having to finance their next home at current rates. Less inventory means no relief on the rise in selling values, because existing home supply will remain limited.

Delinquency rates

The average personal loan interest rate is 12.4 percent. American consumers owe $249 billion in personal loan debt, through quarter 3 of 2024.  This is up $4 billion from quarter 1. 24 million Americans have a personal loan. The 60-day delinquency rate for personal loans is 3.4 percent, the highest rate since 2012.

Added to personal loan debt, Americans owe $1.14 trillion in credit card debt. The delinquency rate has moved to 3.3 percent, the highest rate since
2011.

While consumer debt is still not that high relative to consumer personal income, it is a rising concern because of (1) its current direction, and (2) the current trajectory of interest rates.

Mark Schniepp
October 2024

The Immigration Surge

The immigration issue has now jumped to the most important problem cited by Americans, surpassing inflation and the general economy.[1]  If you’ve watched any TV in the last 2 years, you’ve seen hordes of people from all over the world massed at southern border ports of entry.

The volume of immigrants coming through these ports of entry was originally dismissed simply as pent-up immigration from pandemic closed borders. The official Census record did not report much change in the flow of immigration over the last 3 years. However, in January of this year, the Congressional Budget Office reported revised numbers of immigrants for calendar years 2021, 2022, and 2023. The total is 7.1 million. The current estimate for 2024 will be lower than 2023 at 2.8 million “encounters” that will bring total 2021 to 2024 immigration to 10 million.[2] The revised numbers which represent an immigration surge is the largest volume of immigrants per year in the history of the U.S.

And this does not include the 530,000 immigrants that have flown into the U.S. since January 2023 as part of the Cuban-Haitian-Nicaraguan Parole Process, a program where DHS receives immigrants on charter flights from these three countries into 50 different international airport destinations in the U.S.[3] The House Committee on Homeland Security has deemed this an unlawful process of alien admission to the U.S.[4]

Moreover, the Department of Homeland Security unofficially estimated “got-aways” at 600,000 in FY 2022, with likelihood that the number is higher in FY2023.  Anyway you slice up the data, it appears that a total volume approaching twelve million migrants have entered the U.S. since 2021.

The changes in U.S. immigration policy under the Biden administration have meaningfully modified procedures on how migrants are encountered and either admitted or denied at border crossings.

Who are the Recent Migrants ?

More information about these migrants has surfaced this year in scholarly papers.[5]  While immigrants wait for their asylum court dates, they enter the labor force and work because most of them are working age between 18 and 64. Their median age is 28. Compared to the native born population, 78 percent of migrants are in the labor force whereas only 60 percent of the native born population are of working age or want to work. The median age of the native born population is 37.

The surge in potential workers from immigration would naturally push the unemployment rate higher as they entered
the labor force more rapidly than they became employed. Sure enough, Immigrants who have arrived since early 2020 face higher jobless rates than the broader population. Unemployment for recent immigrants averaged 8.2 percent over the May-June-July 2024 period, versus 4.2 percent for American-born workers and 3.5 percent for earlier immigrant cohorts. Overall unemployment has crept up over the last 18 months, from 3.6 percent in March 2023, to 4.2 percent in August of this year, largely due to the swelling numbers of immigrants looking for jobs.

It is true that these workers have alleviated the severe staffing shortages in particular industries in the post pandemic period. They have contributed significantly to the decline in job openings, which have fallen sharply in California. However, the rate of unemployment in California has gradually moved higher since 2022, and among all 50 states, is
the highest with the exception of Nevada.  The rising unemployment rate is not necessarily due to a softening of the labor market. It is due to a surge in the labor force that can be linked directly to the recent influx of immigrants.

An outsize share of post-2020 immigrants are working in low-paying jobs. The most-common occupations, according to the census data: construction laborers, maids and housecleaners, and cooks.

Furthermore, the influx of immigrant workers that has helped fill job openings also dampened wage growth across the affected industries in the state.  Because of the tight labor markets in 2022, wage growth averaged 6-7 percent. Now it has moderated to between 3 and 4 percent, falling sharply in migrant-intensive industries which include construction and leisure & hospitality.

A meaningful data revision is likely coming

Population growth in California which has been reported as negative by Census, has more than likely been positive since 2021, as more net migrants from the southern border have and are being diverted into California. Census has simply not caught up with the migrant surge at the border. The wage and salary data appear to confirm this.  The Wall Street Journal reported that new migrants are living in counties that rely on farm workers, construction services, food and hospitality, and helpers in healthcare (home health aids). This includes Los Angeles County, the Inland Empire, and the Central Valley counties, along with San Diego, Orange, and Ventura Counties.

Unemployment rates are likely higher in these areas with increased population and labor forces than is being reported because the most recent immigrants from 2021 to present cannot be contacted by survey which is the principal mechanism for recording economic data on the resident labor force, workforce, and the number of unemployed.

Is the migration surge a cost or a benefit ?

Many government analysts laud the immigration numbers warning that if rates of entry into the U.S. return to the pre-2021 normal, future economic growth in the U.S. will be insufficient to sustain our current standard of livings. The retirement of the baby boomers and overall aging of the workforce, as well as low and falling birth rates mean population growth will become entirely dependent on immigration by 2040, as deaths of U.S.-born residents will outpace births.

However, what is missing here is a thorough analysis of the costs existing U.S. residents bear as a result of massive immigration and the type of immigration that is being enabled today. While immigrants fill jobs, mostly lower-paying, they also use social services that are often more costly than the payroll and sales taxes that they generate, by working and spending. This includes K-14 education, Medi-Cal, and assistance payments including Calfresh for low income individuals and families.  Furthermore, migrants that ultimately find private housing are and will continue to exacerbate the housing crisis in California.

A recent paper by the Center for Immigration Studies prepared for the House Judiciary Committee concluded that:

Illegal immigrants are a net fiscal drain, meaning they receive more in government services
than they pay in taxes. This result is not due to laziness or fraud. Illegal immigrants actually
have high rates of work, and they do pay some taxes, including income and payroll taxes. The
fundamental reason that illegal immigrants are a net drain is that they have a low average
education level, which results in low average earnings and tax payments. It also means
a large share qualify for welfare programs, often receiving benefits on behalf of their U.S.-
born children. Like their less-educated and low-income U.S.-born counterparts, the tax
payments of illegal immigrants do not come close to covering the cost they create.[6]

The issue regarding the alleged need for more immigration to sustain U.S. GDP growth may be entirely refuted by the coming era of AI that is just ahead of us. With more automation in both the workplace and in the thinkspace, will we actually need more workers?  Robots are already replacing maids at hotels. iPads have replaced waiters at restaurants. It is likely that the size of the workforce will ultimately shrink as more mundane and repetitive jobs are mechanized, and more AI tools can substitute for jobs in education, professional services, customer services, manufacturing, warehousing, transportation, and retail trade.

A bigger fear may be how we actually find jobs for lower skilled workers. Immigration has been the backbone of the U.S. labor force for more than 100 years. However, we need to consider a more discerning immigration policy that will admit newcomers who will pay their way and fill jobs that will be necessary in the evolving economy of today.

¹Gallup, Most Important Problem, monthly survey of Americans, https://news.gallup.com/poll/1675/most-important-problem.aspx
²An “encounter,” previously known as an apprehension, includes all people who are either stopped by the Border Patrol or who turn themselves in. Most migrants simply approach the Border and indicate they intend to seek asylum.
³U.S. Customs and Border Protection, “CBP releases August 2024 Monthly Update,” September 16, 2024, https://www.cbp.gov/newsroom/national-media-release/cbp-releases-june-2024-monthly-update
⁴https://homeland.house.gov/2024/04/30/new-documents-reveal-airports-used-by-secretary-mayorkas-to-fly-hundreds-of-thousands-of-inadmissible-aliens-into-u-s-via-chnv-mass-parole-scheme/
⁵Brookings, Who are the New Immigrants?” Tara Watson and Simon Hodson, September 11, 2024, https://www.pewresearch.org/short-reads/2024/09/27/key-findings-about-us-immigrants/
Pew Research Center, “What the data say about Immigrants to the U.S., by Mohamad Moslimani and Jeffrey Passel, September 27, 2024, https://www.pewresearch.org/short-reads/2024/09/27/key-findings-about-us-immigrants/
Wall Street Journal, “How Immigration Remade the U.S. Labor Force,” by Paul Kieman, September 4, 2024.
⁶Center for Immigration Studies, “The Cost of Illegal Immigration to Taxpayers,” by Steven Camarota, Director of Research, January 2024, page 1

Mark Schniepp
September 2, 2024

The U.S. Economic Expansion Remains Modest                                 

The economy remains in an expansion through growth has moderated this year. It has been 52 months since the last recession and there is low probability that another one is in the forecast anytime soon.  Some lingering issues still remain from the last recession amidst new issues that have emerged.

Most of the serious imbalances in the economy caused by the trauma of either totally or partially shutting down businesses from March 2020 to May 2021 have been resolved.  However, we are not entirely back to normal yet. Impacts directly the result of the pandemic still haunt the economy today and remain unsettling.  This includes inflation, the labor market and the office market.

Inflation

The supply chain interruptions followed by the massive government spending bills were the causes of the highest surge of inflation in 40 years, peaking in the summer of 2022. Progress on inflation has been steady since, though with hiccups. This has led to a pessimistic American consumer kneecapped by general prices for goods and services that are 21 percent higher today then in early 2021.

Tight labor markets

Closed schools and coronavirus infections generated a meaningful defection from the labor force by men but mostly women to care for children and the sick. This included accelerated retirements by the eldest baby boomer members of the work force. The net effect was a meaningful decline in the labor force. It took 2 full years for it to be restored to pre-pandemic levels. Growth of the labor force today is less than one percent—well below the trajectory of growth indicative of 2018 and 2019.  In California the labor force has still not returned to pre-pandemic levels.

Consequently, with general economic growth largely normalized in 2022, 2023 and 2024, tight labor markets have persisted. This has driven up wages and caused perceived “shortages” of workers in many industries, including construction, healthcare, and leisure & hospitality.  Inflation has been harder to extinguish due to soaring wages in these sectors.

Though labor markets are now softening with unemployment rising, unfilled job openings are still higher than they were than before the pandemic.  And labor markets were tight at that time.

A normalizing labor market will result in lower wage inflation, fewer job openings, and the return of workers to the office. We don’t expect this normalization until well into 2025, or later.

The Office Market

The social risks during the heat of the pandemic surge generated widespread adoption of work from home arrangements, particularly from office using companies who could virtually connect remote employees together for meetings and collaboration as a surrogate for in-office work.

When pandemic restrictions were entirely lifted in the spring of 2021, workers were hesitant to return to the office insisting on remote or at least hybrid arrangements. The prevailing tight labor market enabled employees to make demands they otherwise could not for fear of being replaced. Those replacements were now absent.  Employers consented. Thirty to forty percent of office workers were remote in 2022 and 2023. Though work from home arrangements are now moving back toward in-office requirements, hybrid arrangements are still pervasive. Furthermore, companies found they could operate with less space with remote and/or hybrid workers. When leases required renewal, companies chose to downsize their space. More office space became available. Vacancy rates soared. This scenario persists today.

With high rates of vacancy, the value of office buildings has plunged 20 to 40 percent. Leveraged office building owners faced with renewing mature loans, now face higher financing costs, reduced loan values, and a less cash flow from fewer tenants. If lenders stop modifying loans and push towards remaking them, a potentially seismic foreclosure issue could ensue.

The office market will ultimately return to pre-pandemic status, but the timing is uncertain, and at least some carnage is inevitable.

New Issues  

Spending behavior largely rests on the how consumers perceive economic conditions; how these conditions will impact their job opportunities, their incomes, housing, and prices of goods and services. General perceptions of the economy that are pessimistic or uncertain usually weigh down spending. Sentiment indices of the American consumer have been weak, due to consumer uncertainty.

General consumer sentiment reflects the unsettled post pandemic economy and newer issues including massive immigration at the southern border, low housing affordability and political uncertainties. Consumers’ assessments of the current labor situation, while still positive, have weakened, and assessments of the labor market going forward are more pessimistic. This has occurred in tandem with the rising rate of unemployment.

Consumers are also concerned about federal debt. Fifty-three percent of Americans view the debt as a very big problem.[1]  They are right because its growth is a root cause—runaway government spending—of current inflation.

GDP

The growth of GDP has been positive all year, and for this quarter (July to September), the rate of growth is running at 2.5 percent. This follows on the heels of 3.0 percent growth in quarter 2.

The Federal Reserve now has the difficult task of driving inflation lower, while preventing the labor market from weakening further.  Up to now, rate hikes have been largely successful. But in recent months, the rising unemployment rate has persuaded the Fed to begin cutting rates in September and very likely in November. In fact, these cuts are now presumed and embedded in stock and bond valuations today. The federal funds rate cuts should improve sentiment among home builders, financial market investors, and consumers seeking home and car loans.  But it could stall recent progress made on inflation.

For the rest of the year, we see inflation remaining stubborn to tame, and GDP growth running at below trend.

Downside and Upside Risks                                    

Though recession is the largest risk, the likelihood of a contraction in growth is low. The next biggest risk is rising unemployment because that will certainly lower growth but also inflation. The Fed’s forecast for inflation in June was 2.6 percent for 2024, and 2.3 percent in 2025.  This forecast is possible providing spending by consumers subsides.

The odds of recession are less likely than they were a year ago, but not completely off the table, especially with unemployment rising, along with stock market volatility.

We are now less worried about escalating war in Ukraine, but other geo-political tensions, such as between Israel and Iran, or China and Taiwan or even the U.S. and China are or could become bigger threats, and any stress in these tensions could lead to an economic tipping point.

The upside risk is that (1) inflation is snuffed out this year, (2) unemployment rises but modestly enough to keep spending as an engine of positive economic growth, and (3) world economic growth resumes- –in Europe especially—which would maintain U.S. productive capacity and export growth.

[1] Pew Research Center, Top Problems facing the U.S. May 23, 2024

Mark Schniepp
August 10, 2024

In the August 2023 newsletter, I wrote about the tight labor market. Unemployment at that time was below 4 percent, Unfilled job openings exceeded ten million and workers quitting their jobs (for a better job elsewhere) was still quite high.

A year has passed and the data show a clear change in the labor market.

The unemployment rate has jumped to 4.3 percent.  Job openings have declined 20 percent. New hires are now less than they were before the pandemic.  How quickly the winds have changed.

The weaker July labor market data arrived just after the Federal Reserve voted to hold interest rates steady, the same level that was in place a year ago. There is some fear among investors that the Fed is waiting too long to make the long anticipated rate cuts in view of the stock market correction in recent weeks. The worry with the rising unemployment rate is that once it starts upward, it tends to keep rising.

However, GDPNOW, the Atlanta Fed’s real time estimate of economic growth has third quarter 3 GDP now running at a 2.9 percent clip. Furthermore, a 4.3 percent unemployment rate is still quite low, and it was caused in large part by rising labor force growth rather than a decline in employment.

Rising labor force growth is likely due to the massive immigration surge that we’ve observed through the southern boarder over the last 3 years. Migrants have added significantly to the U.S. labor force and are taking jobs in the construction, healthcare, and leisure/food services industries.  It is these sectors along with the public sector in California that is creating the lion’s share of all jobs now.

The growth of foreign born workers is now dominating total workforce growth. Foreign born workers which include undocumented immigrants have recently jumped to an all time record high in numbers. Over the last three years or since July of 2021, native born employment has increased 2.9 percent while employees of foreign born status have soared 18.3 percent.   Foreign born employment has risen by 5.1 million workers during this time frame, and 1.2 million over the last year. Meanwhile, native born employment has declined by 1.2 million workers since July 2023.

The surge in potential workers from immigration would naturally push the unemployment rate higher as they entered the labor force more rapidly than they became employed. These workers have alleviated the severe staffing shortages in particular industries in the post pandemic period. They have contributed significantly to the decline in job openings, which have fallen sharply in California.

However, the same influx of immigrant workers that helped fill job openings also dampened wage growth across the affected industries in the state.  Because of the tight labor markets in 2022,  wage growth averaged 6-7 percent. Now it has moderated to between 3 and 4 percent.

In  summary, the labor market then is simply not as weak as the a rising unemployment rate might imply.  However, some concern has been heightened this year regarding the lack of broad based job creation in the California job market.  Healthcare, the state and local public sector, and leisure and hospitality are responsible for creating most of the net jobs in the state during 2024, with little contribution from other sectors. And the technology sector which peaked in 2022 has not yet rebounded from the spat of layoffs that occurred from late 2022 to mid 2023.

A rate of unemployment in the state is 5.2 percent, having increased by the same amount over the last year as the national rate. This would normally be of concern had the increase not been attributed to a rising labor force due largely to immigration.

Mark Schniepp
July 2, 2024

It’s mid 2024 and it appears the biggest news in the current cycle is the presidential campaign in which the first (and perhaps only) presidential candidate debate just concluded.

I’ve referred to the monthly Gallup polls in this newsletter over the years. Gallup is the longest running poll on the satisfaction of Americans with the direction of the country.

The June survey shows that 21 percent of Americans responded “Satisfied,” and 77 percent responded “Dissatisfied.” The most important issue facing the country today was the economy, with 36 percent of respondents in June citing either the economy in general including wage issues and unemployment, and inflation. This high of a response about the economy has been relatively persistent for the last 2 years.

Though inflation has subsided, it has hit a stubborn floor that remains above the threshold needed by the Federal Reserve to begin normalizing interest rates. Furthermore, previously in their lifetimes, many Americans have not experienced inflation of the scale that has pushed general prices of goods and services up 19 percent since the start of Biden’s presidency.

Consequently, inflation continues to loom large over Americans’ evaluations of the country and the economy.

According to another survey, 23 percent of U.S. adults say the economy is in excellent or good shape today, down from 28 percent in January but slightly higher than the 20 percent who rated the economy positively a year ago.

Americans see inflation as one of the top problems facing the nation, with 62 percent responding that inflation is a very big problem for the country in the latest Pew Research Center survey conducted in late May.[1] The increased borrowing costs and the resumption of rising housing costs, are still on the minds of Americans even as the headline inflation rate recedes.

Only 23 percent of Americans rate the country’s economic conditions as either good or excellent, while 36 percent say “poor” and 41 percent say “only fair.”  This is consistent with the Gallup Poll.

The share of Americans who rate their personal finances as excellent or good declined from 52 percent in 2021 to about 42 percent in 2022, and sinking to 41 percent today.  There is very little divide between Americans identifying by political party. What is more relevant however is that Americans believe their personal finances are in the weakest of conditions since the survey began in 2019.  And it’s not that they are earning less money, it’s that inflation and high interest rates have eroded the ability of those finances to acquire needed goods and services today.

The most recent ABC News/Ipsos poll found that the economy and inflation remain the most important issues for Americans when determining who they may support for president in November.[2] The economy and inflation received 88 and 85 percent responses respectively as the most important issues affecting presidential support. Nearly half of Americans said that these are the single most important issues for them.

Clearly, this poll, and the Pew Research Survey are both consistent with other surveys such as the University of Michigan Consumer sentiment study that routinely monitors how U.S. consumers rate the economy.  Sentiment in that survey has gradually ticked up since 2022 but the level of optimism is still well below expectations based on current economic data.

In summary, Americans are not happy with the current state of the U.S. economy and this typically affects elections, especially presidential elections every four years.

Consequently, other issues of concern, number 2 and number 3 by Gallup being immigration and poor government leadership may not really matter in the grand scheme of things. It’s still the economy stupid as James Carville said during the Clinton-Bush campaign back in 1992. And because he turned out to be correct, we’ve been repeating that mantra during all presidential elections since. Why would this year be any different?

[1] https://www.pewresearch.org/politics/2024/05/23/publics-positive-economic-ratings-slip-inflation-still-widely-viewed-as-major-problem/pp_2024-5-23_economy_00-01/

[2] ABC News/Ipsos Poll, May 5, 2024, https://www.ipsos.com/en-us/most-americans-say-economy-and-inflation-are-most-important-issues-determining-who-they-will-support-for-president-in-november

Mark Schniepp
June 11, 2024

A Looming Issue that Needs Resolution                                      

The 2024 economy remains in an expansion. Recession is now off the table and it appears that modest growth is the likely scenario through the end of the year. Many of the economic indicators are positive, as is the direction of most of the capital markets.

A market where conditions remain weak and are growing weaker is Commercial Real Estate, and in particular, the office market, especially in California. San Francisco has the highest rate of underutilization of office space for any metro area in the country. Not far behind is Downtown Los Angeles, San Jose, Palo Alto, and downtown San Diego.The issue for rising vacancy in the office market is typically that office using employment has contracted as part of a broader based employment decline. Consequently, companies cut back on space to cut costs and “weather the downturn”.  That’s not the case this time. We have near record levels of employment in office using sectors. The problem is that many of these workers are not using the office, and are instead working from home.

The work from home arrangement, made ubiquitous during the pandemic has materially impacted the office market today and this could lead to more serious problems later this year or next.

Vacant offices reduce cash flow for building owners. Reduced cash flow makes it difficult for owners to address their debt service, mainly the mortgage payment. Office loans that mature are at greater risk of distress and delinquency because of the difficulty of generating enough cash flow to cover debt obligations in the current environment. A substantial volume of office loans matured in 2023. Extensions on existing mortgage obligations granted by lenders in 2023 have pushed the looming problem into 2024 and/or into 2025.

This puts the bank at risk of having to foreclose on the office building owner-borrower and reduce the value of the asset on its books, possibly raising a flag for regulators. It’s a vicious circle, largely the result of pervasive work-from-home arrangements that became extended after the pandemic ended and remain in place today.

Where is the Office Market Distress?                               

The wave of office distress that has been anticipated has yet to occur. But the exposure to distress continues to broaden.

Delinquency rates are not rising that much or that fast yet because banks have chosen to extend maturing loans. Now, lenders in the office market space have adopted the mantras of “extend and pretend” and “survive until ‘25,” hoping for circumstances to improve in 2025. Those circumstances include lower interest rates and rising vacancy which would expand cash flow.

REIT commercial real estate values have not collapsed. There has been no major correction in valuations though a number of REITs are not rising in value, weighed down by the share of poorly performing office product in their portfolios.

Consequently, the indicators that would confirm a major problem is here are not signaling the true extent of the distress.

Return to the office (RTO)           

If workers willingly returned to the office, or employers mandated their workers to RTO, utilization would increase, cash flow would be restored to building owners, and the risk of delinquency would abate. Problem solved?  Well yes, but it’s not working like that.

Source: Resume Builder, August 2023. “Do you believe RTO has improved or worsened the following conditions in the office?”

More workers are fact coming back to the office, cutting their work-from-home days from 5 to 3 or even less. Mandates by many employers have brought many workers back, but this is not the first choice for managers, nor always effective since a portion of workers will not comply. Companies including Google, JP Mortgage Chase, Zoom and Amazon, that have instituted stricter in-office policies have experienced tensions. In May 2024, Amazon began requiring that staffers work out of physical offices at least three days a week. This led to a walkout of employees at its Seattle headquarters. The company has found that having most of its employees in the office more frequently has led to greater energy, connection and collaboration. Other surveys of companies that have mandated a return to the office have found that productivity, employee relationships, and company culture have improved. Meta also is sticking to its RTO policy, announced in June 2024, where people assigned to an office are expected to be there three days a week.

Generally, because we are still in a tight labor market, employers are afraid of losing their best workers, or want to provide their employers the opportunity of choosing work from home at least in a partial or “hybrid” fashion. Many jobs can be performed remotely from the workplace, and these workers will likely never return to the office. Companies that take a hard stance on returning to the office understand that it may not work for everyone, and it’s a chance they are willing to take because of the strategic value being placed on in-office collaboration.

The decision to require workers to RTO only part of the time, shows us today that there will be limits on how many workdays employees will be on-site in the office. Rather than return to a traditional work-in-the-office schedule, many white-collar employers have settled into a mix of both in-office and remote work.

It appears that even if fully remote working employees are converted to hybrid experiences, there will still be 10 percent of the office workforce that will participate in hybrid arrangements of 1 to 2 days at home, and 3 days in the office. Even this arrangement where more employees have returned to the office will enable employers to reduce their workplace space, and/or modify it so that it will more efficiently accommodate a hybrid arrangement.

The Office is Not Dead                         

Over time, we believe that even hybrid working arrangements will be reduced for the majority of workers, though not all, especially senior workers that do not manage employees day to day or other occupations or functions where there is less interaction with employees.

That said, office vacancy is expected to increase as many workers return and employment grows over time. A gradual resolution of the office dilemma is expected with vacancies beginning to turn around probably by next year.