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.

Mark Schniepp
May 6, 2024

“Businesses remain especially upbeat regarding their payrolls. Almost no businesses say they are laying off workers. Businesses understand that they will have a perennial problem filling open job positions as baby boomers age out of the workforce and foreign immigration is diminished. It is also encouraging that businesses’ equipment and software investment intentions are holding up well.”

— April 29, 2024 Economic Roundup by Moody’s Analytics

The labor markets remain in a full employment condition. But the rate of new hiring has now fallen below the pre-coronavirus levels of 2018 and 2019. Hasn’t Moody’s been watching the surge of migrants at the southern borders of the United States on TV?  The inflow of migrants will eventually lead to a softening labor market, rather than a perennial problem filling job positions. In the most recent JOLTs report (job openings and labor turnover survey), the number of openings is shrinking and the rate of hiring as slowed.

Investment in equipment and software has been stellar the last two quarters. And consumer spending has not slowed down. But even stronger growth in spending has occurred by the federal government. And this spending spree has continued to drive up the federal debt, and is hindering progress on extinguishing inflation.

Moody’s continued to report the following day that

“… businesses remain cautious about their sales and pricing. Financing conditions are also tight. They have much to worry about, including the Russian war in Ukraine, high global inflation and aggressive monetary tightening by global central banks, the U.S. banking crisis earlier last year, and the ongoing political drama in Washington DC. The recent geopolitical events in the Middle East and the volatility in long-term interest rates around the world aren’t helping either.”

I don’t know how many businesses other than the industrial war complex that are worrying about the Ukraine war, other than hoping it won’t end. The two schools of thought on this are (1) the war is largely a border dispute which Russia is determined to settle by acquisition of eastern provinces, and (2) Russia considers Ukraine as the first conquest in an inevitable strike on other counties within their sphere of influence.

If you side with the latter, you are more likely to support the Congressional appropriations to Ukraine. I’m not aligned with this opinion, and more aid to Ukraine is simply expanding federal debt, increasing expectations of higher rates of inflation, and losing the support and confidence of Americans. In the most recent April 2024 poll, Gallup reported:

“The majority of Americans, 65%, continue to think the war in Ukraine is at a stalemate, and are more likely now (23%) than they were in October of 2023 (14%) to say Russia is winning.”[1]

In a February 2024 survey by The Harris Poll, more than two-thirds of Americans support urgent U.S. diplomacy to end the Ukraine war.[2]

Inflation is a worry for not only businesses but consumers. And the largest concerns are in the banking system, especially regional banks holding commercial real estate debt.  The ongoing political drama in Washington DC is not merely drama. It is a fight by the Freedom Caucus to limit runaway government spending and stabilize the dollar principally to reverse its vulnerable displacement as the world’s reserve currency.

What the mainstream economic news does not mention enough is the rapidly increasing federal debt, how it is interfering with the Fed’s fight against inflation, and how this is jeopardizing confidence in the U.S. dollar. This is why we have the BRICs  alliance today along with the threat of transacting oil in other currencies, and generally undermining the global status of the dollar.

“In April, the Conference Board’s consumer confidence index fell to its lowest level since July 2022, dipping below the long-run average of 100. Deterioration in consumers’ expectations for future economic conditions led the decline in sentiment as the component retreated further below 80 . . .”

— Moody’s Economic Roundup, April 30, 2024

Written comments in the Conference Board’s survey also indicated that consumers are worrying more about politics and geopolitics, and this includes the prolonging of the Ukraine War and the Middle East conflict between Israel and Gaza, and now Iran.

However, Americans are more concerned with the southern border, with inflation, with the general economy, and mostly with U.S. government leadership, according to the monthly Gallup polls, including the most recent edition conducted in March.[3]

The slide in consumer confidence has not manifested into any noticeable pullback by consumers yet, but clearly they are growing pessimistic again due to the lack of new progress regarding immigration, inflation, and poor government leadership. Congress needs to start becoming more serious about the federal deficit by messaging they are resolute in shrinking it. To date, they are not.

[1] https://news.gallup.com/poll/643601/americans-say-not-helping-ukraine- enough.aspx#:~:text=As%20has%20been%20the%20case,quick%20end%20to%20the%20war.

Both Republicans (62%) and independents (44%) increasingly see the U.S. as doing too much to support Ukraine compared with when Gallup began asking this question in August 2022. Democrats are at 14 percent.

[2] https://quincyinst.org/2024/02/16/new-poll-more-than-two-thirds-of-americans-support-urgent-u-s-diplomacy-to-end-ukraine-war/

[3] https://news.gallup.com/poll/1675/most-important-problem.aspx

Mark Schniepp
April 2024

The U.S. Economy             

Inflation has receded meaningfully in the U.S. without the corresponding increase in joblessness historically observed when restrictive policy is needed to extinguish inflation. The progress on inflation over the last year has led policymakers within the Federal Reserve to become more upbeat that their interest rate tightening has worked, and the target of 2.0 percent will be met this year.

Furthermore however, the urgency to cut interest rates this year—up to 3 cuts proclaimed by the Fed last December—is unlikely in view of recent reports of higher-than-expected inflation.

The fully anticipated recession of 2023 never manifested, and the Fed and economists in general are now more upbeat about a soft landing than they were last fall.  The “soft landing” refers to the continuous growth of the economy—with no recession—despite sharp interest rate hikes over the last 24 months.

Incoming data for the nation have generally been positive. The key reports indicate that consumers are feeling more optimistic about this year’s economy, homebuilding jumped higher in February, and homebuilders are becoming more optimistic about sales this year. Stock market prices are at record highs, industrial production ticked higher in February, and the index of leading indicators also moved higher in February for the first time since February 2022.

The labor market remains surprisingly strong evidenced by a low 3.8 percent unemployment rate, low numbers of unemployment insurance claim filings, historically high levels of job openings, and general wage increases. The latter threatens to stall progress on inflation this year if the rate of unemployment continues to remain under 4.0 percent, which it has for the last 26 consecutive months.

We believe that the election year combined with not-so-consistent progress on lowering overall headline inflation will not necessarily induce further rate hikes, but will postpone any rate cuts during much of 2024.

A meaningful part of the inflation problem rests with the housing component of the local CPI.  The improvement in housing inflation has been only marginal, and the increase in housing prices and rents generally eclipsed headline inflation through much of 2023.

The Housing Market                              

There remains a strong disincentive for homeowners to sell because they have locked in low mortgage rates on the homes they live in now.

With little supply in the market or waiting on the sidelines, home prices are rising again, and moved nearly 6 percent higher in February 2024 than a year ago. In California, because the paltry inventory of for-sale homes is so much more severe, prices are rising in all major metro markets of the state.

The forecast for inflation is for slower improvement in 2024, with more progress occurring in 2025.

The UCLA Anderson GDP forecast for 2024 was revised upward from 2.1 percent to 2.5 percent. Subsequently, UCLA predicts 2.5 percent growth for 2025 and 2026, and lower rates of unemployment than previously forecast back in December.

The California Economy              

Labor markets have been strong since the economic recovery began after the pandemic. Total jobs increased by 5.6 percent in 2022, 0.7 percent in 2023, and 1.5 percent growth is expected in 2024. The fact that 2023 is lower is more a function of running out of workers than an absence of jobs.

The slowdown in job creation suggests that out-migration and a reliance on hard-hit industries including technology and information are responsible factors.  Population in California has been in decline now since 2019, and this has negatively impacted the growth of the labor force, defined as people wanting to work in California.

Recent revisions in the employment data by the State show that California struggled with job creation from late 2022 through May of 2023, the period when layoffs within the tech and retail sectors were the most prolific. Job creation now appears to have stabilized, averaging 28,000 new jobs filled per month.

In the Southern California region, the growth of employment over the last 18 months has been similar across counties.  Riverside, Ventura, and Orange Counties have all now converged at 1.5 percent year over year growth in February 2024.

Construction employment in California reached a record high in 2023 due to the volume of new construction projects—both residential and non-residential—continues to expand.

Except for last year—2022—the total of new housing starts in 2023 was the highest volume since 2006. Expansions in Southern California, Sacramento Valley and the Central Valley led the state in homebuilding.

California’s seaports are now returning to normal again. International exports are no longer in decline. Cargo volumes are recovering at the principal ports in the state—Los Angeles, Long Beach, and Oakland—where the dockworker’s strike interrupted significant container activity for approximate 14 months. The labor dispute ended in August 2023.

But the slowdown in China, Germany, and elsewhere in the Pacific suggests that a complete rebound to 2021 or even 2020 levels of cargo is still a year or more away.

Nevertheless, with higher volumes of goods now arriving into California’s west coast ports, the growing need for warehouse and distribution space, along with conveyance systems will increase moderately in 2024, accelerating in 2025.

The 2024 Outlook for California                           

The expectation of California economic growth exceeding the U.S. remains probable this year, because of

• The positive outlook for technology, especially AI development in the Bay Area
• More venture capital investment coming into San Francisco and Los Angeles
• The potential for expanded trade flows due to East Coast Port labor disputes and bottlenecks at the Panama Canal
• Positive homebuilder sentiment and continued homebuilding exceeding normal levels over the last 10 years
• The return of production in the TV, Movie and Sound Recording industries.

Real incomes are expected to rise in 2024, due to the containment of inflation. Consumer spending is forecast to slow but still contribute positively to the growth of gross state product over the year.

The unemployment rate will rise as open job positions fill and more workers are expected to enter the labor force, especially from the record college senior graduating class this June.

Mark Schniepp
March 2024

The Fed Controls the Federal Funds Rate

The federal funds rate has been at the 5.25% to 5.50% range since July 2023, the highest level since 2007. This is the interest rate that banks can charge each other and it’s the principal monetary policy instrument that the Fed controls.

After raising the funds rate 11 times in 15 months, the Fed forecasted as recent as December 2023 that it would make quarter point cuts—up to 3—by the end of this year, lowering the benchmark rate to 4.6 percent, or in a direction that has a more neutral impact on the economy.

Lowering the federal funds rate will also push down shorter term treasury bill and bond rates but not necessarily longer term bond yields like the 10 year which directly influences mortgage rates and vehicle loan rates.  However the actual act of cutting rates will likely rally the stock and bond markets, the latter which will push long bond rates lower.

Can We Expect Cuts Soon ?

The Fed indicated it needs to see more ”positive data” before pulling the interest rate lever. There are seven “Open Market Committee” opportunities for the Fed to cut rates this year, with the first one coming up this month on March 20.

What I believe this year is that the data won’t demonstrate compelling enough news for the  Fed to cut rates anytime soon, and (1) at least not until mid-year and (2) probably not until the end of the year. But whatever I think, it’s not going to be a factor.

A justification for the lowering of rates now is the progress made on the personal consumption and the headline inflation front. Even the core rate has improved considerably and it receives no help from lower prices for energy which have been in a general decline over the last year. Moreover, the Fed preferred personal consumption expenditure price deflator has now declined to 2.0 percent which is line with the Fed’s target.

And don’t forget it’s an election year so despite data that don’t comply, there will be pressure put on the Fed to lower rates to help the economy and stock market look good under the current administration.

In January, the Fed indicated a rate cut or more this year was still possible but said that cuts were not imminent.  This is because incoming data on the economy directly influences their decisions about monetary policy: quantitative easing and interest rate moves.

Incoming Data

GDP growth is still pretty expansive, running at 3.2 percent last quarter and currently estimated by GDPNOW at 2.2 percent for the current quarter of 2024.

That kind of growth really doesn’t need a boost from a drop in rates. If GDP growth slows in March and through the Spring, then the likelihood of a rate cut rises.  But with better economic conditions than expected being reported daily, growth is not slowing down.

Headline inflation has fallen to 3.2 percent. This is a big improvement over a year ago but progress in lowering consumer price inflation has stalled. Headline inflation has moved little since July 2023.  Food prices rose sharply between December and January, the highest monthly rate of increase in a year. Core inflation is still too high at 3.9 percent. We seem to be stuck in an inflation rut.

Unless progress on inflation resumes, and core inflation falls faster, the Fed might be reluctant to touch rates.  However, since their goal is a 2.0 percent inflation rate, which has now been met by their preferred Personal Consumption Expenditure Price Deflator, they are now becoming satisfied that enough progress on the inflation front has been made.  I’m not convinced of that yet. We need to see what happens in February and March.

There is wage inflation that is now exceeding general price inflation, a condition that adds upward pressure on the 2 percent inflation target.  But with rising productivity of workers, higher wages are in line with higher levels of output and add that results in less pressure on the price level. Furthermore, the share of labor in the economy has declined to levels lower than at any time over the last 20 years. This means that firms have higher profits than normal and as the labor share climbs back, the profit rate will return to normal as wages climb. Under this condition. Inflation pressures subside.

There is also the federal deficit which has soared to $34.5 trillion of which $1 trillion per year represents interest payments. This type of spending by Congress—now with sharply rising debt financing adding to the burden—is an automatic spending boost on the economy. How the Fed weighs this factor is unknown, and they will likely ignore it in an election year.

The evidence is mixed on what the Fed will do and when. I believe data needs to be more convincing; otherwise, we face a rapid increase in private spending to go along with Federal spending. That combination leads to growing pressures on the inflation rate.

Mark Schniepp
February 2024

Yes, we’ve started 2024 being happier than at any time during 2023.

The sentiment and confidence indexes that measure how consumers feel about the economy both today and in 6 months hence have improved in recent months.

The latest measure shows consumer feelings about the economy at a 2 year high.

The economy in the survey is defined by inflation, job prospects, and interest rates. The improvement in January was the third straight month of upward movement and the highest since December 2021 when the pandemic was generally abating.

January’s increase in consumer confidence likely reflected slower inflation, anticipation of lower interest rates ahead, and generally favorable employment conditions. The gain in sentiment was largest for people age 55 and over, but improved for all age groups.

Meanwhile expectations for inflation fell to a three year low and expectations of a recession this year also declined. Inflation expectations dropped to under 3.0 percent in January, which is down sharply from 4.5 percent in November.

The personal consumption expenditures price index, the preferred measure of inflation by the Federal Reserve, rose 2 percent for the month of December, following a 0.3 percent increase in October and a 0.8 decline in November. A year ago, this inflation measure was at 6.7 percent.

Conditions on the inflation front are clearly improving. These conditions, together with an all time high in the stock market, a tight labor market, and falling interest rates, are all responsible for the rising moods of consumers in early 2024.

The January jobs report was strong: employers hired about twice the number of people than economists had expected. The unemployment rate is also now at 3.7 percent —- still extremely low by anyone’s measure.

The strong economic reports in November, December and now January, have led to rising estimates of growth for the end of 2023 and the beginning of 2024.

The Con to Strong Growth

It was looking like the Fed was growing eager to initiate interest rate cuts this year in view of the progress on inflation. But wage inflation is still running at a 4.5 percent clip and that is too high the target rate—2.0 percent—-to be reached, probably not until the 2^nd half of 2024.

Postpone therefore, the housing market rally in 2024 because it’s unlikely that mortgage rates are going to retreat much anytime soon.

Rigged Improvement through 2024?

The sentiment and confidence indices had been at levels consistent with recession through much of 2023, but with nothing but improvement in recent months, those signals are now retreating.

The vulnerability of the economy that pervaded much of last year is no longer evident now. And if the inflation reports continue to improve, the Fed just may be persuaded to begin cutting rates by mid-year.

Remember, 2024 is an election year so policymakers may make decisions that try to influence voters and this may be more likely as the year progresses into November. The Biden Administration would benefit from the semblance of a strengthening economy.

Mark Schniepp
January 5, 2024

We have been hearing about the “Forever” labor shortage and that we have to evaluate our hiring strategies from now on.

A principal reason for this is due to a demographic shift of the generations that can be demonstrated with some simple numbers:

                                                                        2010                          2020

                                                                         ——— percent ———-

Population age 65 and over                      12.8                            16.8

Population age 25 and younger                34.3                           31.5

Today, 65 and older populations now represent 17.4 percent.  This age cohort is increasing at an accelerating rate.

Today there are 16 million more people that are 65 or older than there were in 2010. So technically speaking, we are witnessing the slow departure of 16 million people from the labor force over time, and lately, that rate of departure has been hastened because the peak year for boomers was 1958, exactly 65 years ago.

A growing labor shortage is a critical concern affecting both workers and employers. As the baby boomer generation retires, workforce participation faces downward pressure due to an aging population.

Millennials, born between 1981 and 1997, comprise around 56 million workers. However, they won’t be enough to compensate for the skills gap left by retiring baby boomers. We have warned that this could result in a shortage of highly educated talent in the future, making it challenging for organizations to find skilled or experienced employees. And certainly enough, this condition is prevailing now.

After a meaningful decline from 2002 to 2012, participation rates in the labor force leveled off from 2012 to 2022. Now they are falling again.

In California, the growth of the labor force was consistently positive up until the pandemic. The labor force started coming back in 2021 but not entirely, and now it’s falling again.

The expectation is that less of the population under age 55 will be in the labor force by 2032. The only cohort that will participate more than now is age 65 and over, especially 75 and over. This is consistent with the Baby Boomer work ethic.

Today, boomers are 60 to 78 years old and many are still in the labor force. In 2032, they will be 68 to 86, and largely out of the labor force.

We need more workers now, but we’re not going to get them. If anything, we may see an accelerated rate of boomer retirement, especially if the stock market and home prices continues to rise.

So while we all fear becoming obsolete due to automation and the rapid onset of AI, we are safe at the moment because the labor market is at full employment and firms can’t really fill all their job openings.

Despite the slowdown I’ve been writing about these last few months regarding the 2024 economy, the labor market is going to be largely immune to the slower growth economy, particularly as long as job openings exceed workers.

Employers are going to need a strong and strategic workforce plan to replace retiring boomers. Gen X, the post-boomer generation, was smaller in total numbers and there will not be enough of them. Millennials lack essential work experience. Gen Z represent entry level age workers and many are still in school. Furthermore, they are not entering the labor force as past generations their age have. In 2002, 63.3 percent of 16 to 24 year olds were in the labor force. Today, 55.6 percent of the same age cohort is working. This is projected to decline to 51.3 percent by 2032.

The floods of immigrants coming over the border today may sound like a solution except that many of them entering into the U.S. from Mexico, other Latin American countries, China, Africa, Eastern Europe, and the Persian Gulf do not have the necessary skills.

The growing labor “shortage” is significant now and will only intensify going forward.

Demographic experts indicate this is not a temporary condition, but rather a permanent one. Longer term, these trends are reversible if Gen Z has more kids, but (1) that’s not yet the case, and (2) we can’t rely on it.

Mark Schniepp
December 13, 2023

So the Nation and the State averted recession in 2023. Growth was above expectations for the year, the labor markets remained at full employment, wages continued to rise, people spent their earned incomes along with their savings, and nearly all the labor strikes got settled.

As we launch into 2024, here is why we don’t see any immediate vulnerability in the economy yet:

Black Friday apparently did not disappoint this year. Anecdotal accounts from major retailers allege a 7.5 percent increase in sales from last year.

Personal spending by consumers has been slowing as of late, but it’s still running ahead of inflation which to date has softened to 3.1 percent nationally, and 2.8 percent in California.

Employment for November rose by 199,000 jobs and the unemployment rate fell to 3.7 percent. Both of these economic measures were a surprise to the upside.  The rate of layoffs remains very low though we are seeing a short spurt here in December. The rate of workers filing for unemployment insurance remains very low.  Wage increases remain slightly ahead of expectations.

Despite the never-ending war in Ukraine, the new war in the Gaza Strip, the divisiveness in Congress, the divisiveness regarding university protests in favor of Hamas, consumer sentiment survey results from the University of Michigan showed a pronounced reversal in the persistent pessimism by consumers.

A rise in the index indicates optimism. The early December index rose  to it’ highest level since July. Expectations regarding inflation improved dramatically. Attitudes
regarding current economic conditions also rose sharply.

California

The visitor industry has continued to generate vibrant activity in recreation, entertainment and leisure services all year. Whereas taxable sales of goods is lower this year in California compared to 2022, expenditures at restaurants, bars, and entertainment venues is higher in 2023.

Most sectors of the economy remain in some form of positive growth or are stable. The big contributor to the job market has been healthcare along with recreation and leisure services. In Southern California, professional services including technology services has also accounted for significant hiring, despite the layoff surge that dominated the news cycle earlier in 2023.

In fact, it’s been Southern California that has done the heavy lifting of the state’s economy during most of the year. The level of new housing and new commercial and industrial development has been impressive in view of current interest rates and inflation.

However, the state government has imitated the federal government and has been reluctant to rein in spending.

The California Legislative Analyst’s Office reported that the fiscal deficit for California will rise to a record $68 billion in 2024-2025, the second straight year of massive deficits for the state. California needs to cut spending and use the rainy-day funds to bring next year’s budget into balance.

Income tax collections which are the principal source of revenue for the California State Government fell 25 percent in 2022-23.  They are projected to rise only marginally from those levels in the current year. State Government spending needs some restraint, but without it, look for policy makers to find some way to increase revenues.

Looking Forward

The long awaited recession that never came in 2023 is not necessarily postponed to 2024. There is no recession forecast, but much slower growth will characterize the economy along with a softening job market. The cooling off of labor market tightness is necessary for inflation to normalize to under 3 percent. Then the Fed will relax its restrictive policy and bond yields should ease some, helping out consumers.

This is what the stock market has presumed, and sure enough, the year is ending happy with all the major indexes at 2023 highs. This has boosted optimism and household perceptions of their wealth positions.

• With inflation falling, the Fed will keep rates steady with perhaps even a rate cut towards the end of 2024.
• That said, current mortgage rates and car loan rates will remain the same for much of next year. Housing inventory will remain low. Affordability of housing will remain low.
• A presidential election has the potential to create a lot of flux in the markets.
• International travel will remain strong, especially with a Summer Olympics in Paris. 89 percent of travel insurance purchases for trips, January 1 to December 31, 2024, are for trips abroad.
• Taylor Swift concert prices will continue to defy gravity. The lowest price for a single ticket to her Eras Tour through Japan in February is $782 on Stub Hub.

Mark Schniepp
November 15, 2023

The Labor Market

2023 was the year of labor disputes. SAG-AFTRA, Writers, Longshore workers, and hotel workers.

The Screen Actors Guild just resolved their 118 day labor dispute with studios in early November, in the wake of the Writers Guild resolution in September. Thousands of SAG-AFTRA members will now be back to work; 20,000 should return to wage and salary jobs in Los Angeles County alone.

The Longshore Workers were without a contract for 13 months, but their strike was resolved in June and union-ratified in August. The LA Hotel workers strike is still unsettled.  The union contract for some 15,000 workers–housekeepers, cooks, front desk agents–at about 60 hotels expired at the end of June. Since then, their union has been fighting for pay raises of more than $10 an hour.

With many of the strikes now over, more jobs needing bodies will be filled. But California still has a million unfilled job openings. So while the end to strikes will bring workers back, the labor market remains too tight.  Hence the leverage that workers on strike have had in their negotiations.

The layoff surge that alarmed the California labor market in late 2022 and early 2023 has subsided. Jobs in tech and retail were jettisoned the fastest, but since March, which represented the peak month, the layoff rate has returned to normal.  And jobs in the sectors that principally provide tech services, are rising again.

Summary: Pillars of the state’s economy—entertainment, technology, and the Ports—now have workers back on the job, but the California labor market simply needs more willing participants.

Inflation

The progress on the inflation front has now stalled. October inflation at the national level came in at 3.2 percent, and 4.0 percent for core inflation.  The downward trajectory was interrupted in July and has moved laterally since.   In California however, local inflation is deflating faster, demonstrating continued progress. The rate for October was 2.4 percent in the greater Los Angeles metro area, and 2.7 percent for the core rate.

Sticky U.S. core inflation remaining at or about 4.0 percent is not going to appease the Fed and their mission to dampen down the rate to 2.0 percent.  Now, the biggest risk to the U.S. economy is that more rate hikes may be on the horizon.

Summary: General consumer price inflation at the national level has stalled, and core inflation remains too high, while regional inflation is making clear progress. Nevertheless, the potential continuation of restrictive monetary policy could tip over the economy in 2024.

State Budget

Income tax receipts to the state have floundered this year, leaving the state budget in a serious $32 billion general fund deficit before the current budget was adopted in July.

Spending cuts should eliminate about $8 billion of that deficit, but the remaining $24 billion is being reduced with gimmicks that delay spending to future years, and borrow money.  Stagnant revenue growth is the forecast from the Department of Finance and the Legislative Analyst’s Office, together with years of projected and meaningful deficits through fiscal 2027.  The principal problem with the state of the budget is the high level of spending that has never retreated from the exaggerated spending that characterized the 2020-2021 COVID -19 years.

Drawing on some of the $38 billion that sits in reserves would help the budget this year and next, but the Governor is reluctant to use those funds unless a bona fide recession hits.

Summary: The state budget today and in the next few years will run deficits, even if spending does not increase. We may see more bond issuance to pay for all the spending that has not been downsized to align with projected revenue growth.

The Prospect of Recession

The unemployment rate has risen, threatening to trigger a negative feedback loop of further unemployment that leads to a recession. When workers lose paychecks, they cut back on spending, and as businesses lose customers, they need fewer workers, and that leads to layoffs and higher unemployment, and on it goes . . . .

The signals however are inconsistent.

Hiring continues though it has softened.

The rate of layoffs is low

The rate of labor force growth is low and incomplete.

Consumer spending remains strong even after accounting for inflation.

So for now, not to worry.

Summary: not much evidence of recession yet.  And we remain on a vigilant watch.

Mark Schniepp
October 10, 2023

General Condition Today

The economy continues to grow at a modest pace in 2023, though the third quarter that just ended will show accelerated growth of 4+ percent.

You as consumers are carrying the economy forward with your spending which is the key role in the growth of the economy this year

Despite high interest rates and persistent inflation, the outlook for recession has been cancelled for 2023. The labor markets remain too strong, but a change is coming.

There is still uncertainty whether the recession has merely been delayed or averted entirely.

Good News is Bad News

The September employment report indicated that twice as many new jobs were created than had been forecast by economists.  In numbers, it was 336,000.

And this occurred in the wake of the 25,000 participants in the United Auto Workers strike.  The unemployment rate remained at 3.8 percent.  In California, the unemployment rate for the latest month—August—is at 4.6 percent.

The news is that the labor market remains strong. Typically that is good news. But good news about the labor market in the current environment is bad news for the Federal Reserve as its main goal now is to bring down inflation.

The growth in wages—-or simply put: wage inflation—was not that strong in September, and that is good news.  Wage growth has now slowed to 4 percent for the last 12 months. We need to see growth slow further if general price inflation is going to be reduced to the Fed’s target of 2.0 percent.  The Fed is most focused on wage growth and how it affects overall inflation.

Therefore, unless there is clear progress of inflation approaching the 2.0 percent target, continued aggressive monetary policy in the form of interest rate hikes are probable.

Slowdown in the Cards

Higher interest rates will ultimately take their toll on more than just the housing and new car sales markets.

Over the next 6 months, the labor market is very likely to show more pronounced slowdowns in job creation and job turnover, which is people quitting and switching jobs.

1. Consumers are reeling in their spending
2. Using credit to consume is less attractive with high interest rates
3. Higher rates also discourage business investment, which slowed in May, June and July
4. Fewer goods can be purchased with the same expenditure level, due to inflation
5. Fewer goods sold mean less sales, lower earnings of corporations, and lower stock prices.

And though inflation is forecast to decelerate on a path towards the 2.0 percent target, stronger labor markets lengthen the time period for inflation to align with this target.

What You Can Expect

The UCLA Anderson School forecast has growth slowing to less than one percent by mid-2024.

Consumers are the reason due to inflation adjusted income and spending recording no or very low growth in 2024.

A bona fide recession is avoided but the economy grows so slightly that a tipping point is not unlikely, and a mild recession lasting two quarters is within the forecast error.

Corporate earnings will suffer with the decline in demand, and stock market corrections will be more likely in 2024.

Headline Inflation remains persistently in the 3.0 to 3.3 percent range.

Mortgage rates stay high throughout 2024 and begin to contract in 2025.

The labor market does not suffer much though wage pressures will largely though not entirely be diffused.  Core inflation remains higher than 3.0 percent in 2024 and 2025.