When are Gasoline Prices Returning to Normal?

By Mark Schniepp
November 4, 2022

A note on general inflation

Inflation remains the biggest concern for Americans now. This is why the Fed is raising interest rates so aggressively and why the business cycle is therefore on the eve of destruction—I mean recession.

The Fed needs to restore price stability. That is their principal objective, along with promoting a goal of full employment.  Right now, full employment is present, though rising unemployment is a natural consequence of an economic slowdown. We’ve not yet observed that yet.  For the time being, the Fed is on a single mission.

The only way to reduce rising prices of goods and services is to reduce spending.

Rising interest rates will (and have) effectively dampened demand for housing and for consumer and business loans.

An increase in the supply of many goods will also have a depressing effect on prices, since “shortages” in some goods have resulted in rising prices of these goods.  However, consumers, facing an economy on the verge of recession, will still have to demand these goods in order for producers to ramp up their supply.


One of these goods is gasoline. The supply of gasoline would expand by increasing the production of oil in the world.  And since there are few substitutes for oil and gasoline, producers don’t have to worry too much about having their increased production consumed.

Increases in the production of oil in the world can occur by convincing OPEC to produce more. Clearly, the current Administration failed to do that when President Biden visited Saudi Arabia during the summer with that goal in mind. OPEC originally agreed to produce more, but they changed their minds and in October, decided to reduce oil production by 2 million barrels per day starting this month.

What would be best for the current economy is for the U.S—the largest producer of oil in the world—to ramp up production to the same level as in 2019 which represented the peak in U.S. oil output.  We have the resources, the capacity, and the technology to do so.

When the pandemic hit in 2020, demand was severely dampened as business and travel was shuttered or severely restricted worldwide. Consequently, production was curtailed, both by the U.S. and OPEC+. Coming off 2020 to the return of most economic activity, production responded to rising crude oil prices with higher volumes but only marginally. Because current U.S. energy policy now in place since the start of 2021 has become more restrictive on oil producers, the 2019 level of production has not been forthcoming. Steady or increased demand together with curtailed supply equals higher oil prices.

Current Energy Policy

Both futures and spot prices of oil have climbed sharply in anticipation of current and future restrictive supply due to cancelation of the Keystone pipeline, the suspension of leases in the Artic Refuge of Alaska, and the cancellation of oil and gas lease sales in Alaska and the Gulf of Mexico.

The President had entirely suspended new leasing on federal lands and waters just a week after taking office, but a Louisiana judge ordered sales to resume in the Spring of 2022. So the administration increased royalty rates by 50 percent on all new federal leases beginning in April of this year.

When a good has few substitutes, it only takes small declines in output to meaningfully influence the price.  With the onset of sharply lower production, the price of oil has soared, from $50 in January 2021 to $122 in early June. It has retreated to $92 today bit the U.S. Energy Administration forecasts an oil price of $95 in 2023. Oil and gasoline prices will go even higher next year if demand remains strong because supply is not forecast to expand.

Even if gasoline prices stabilized at current levels and inflation rates fell sharply, we are still stuck with historically high prices unless current U.S. energy policy changes or production from OPEC countries materially expands.

But unfortunately, both of these scenarios is unlikely anytime soon.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Can the Vibrant Development Environment Save California from a Recession? Part 2

By Mark Schniepp
October 5, 2022

Continued from last month . . . .

Residential development this year is occurring at a pace that will generate the largest volume of homes started since 2006.  The value of commercial and industrial structures started in 2022 is the highest on record.

Why?  Many of the units that have been authorized through the permitting process of municipalities are ADUs, or accessory dwelling units. We call these granny flats, because they are akin to the old 1,200 square foot back yard cottage that grandma used to stay in.

The surge in granny flat development has come about principally due to a bill in the California assembly that was signed into law a year ago. It enabled ADUs to go forward anywhere in California without much red tape.1

Non-residential construction is sharply higher due to new industrial product, new parking, retail, hospital and hotel projects, and a boom in infrastructure projects.

Development is occurring in all major regions throughout the state, and in particular, the dense metro areas of Los Angeles, Oakland, San Francisco, Sacramento, the Inland Empire, and the Central Valley.

Last month, I presented a summary of some of the highest profile projects in Southern California. This month, I’m directing attention to the Bay Area, the Central Valley, and the Sacramento Valley.

Prominent Development Projects

Bay Area

The Oakland Athletics are currently proposing a brand new ballpark and adjacent mixed-use development. The new park would house 35,000 spectators and the surrounding development would include 1.8 million square feet 3,000 residential units and a 400-room hotel.  The city desperately wants this project after having lost the Raiders to Las Vegas.

SF Candlestick and Hunters (12,000 and 2.5 million commercial square feet)

The redevelopment of Candlestick Point, once home to the San Francisco Giants and 49ers, will include 7,218 homes along with 750,000 square feet of office and research space, 300,000 square feet of retail space, a hotel, and a film and arts center. The first phase of the project — 1,600 — units is approved along with office and retail space.

The Hunters Point Shipyard project is adjacent to Candlestick Point.  The two projects are integrated and designed for a total of 12,000 residential units, 2.5 million square feet of commercial space, and 1 million square feet of retail/entertainment space.

Phase 1 and 2 of Kilroy Oyster Point

Kilroy Oyster Point is a large non-residential development up for lease and under construction in South San Francisco. The development includes 50 acres, 1 Waterfront Campus, 3 million square feet, and 12 buildings.

The project consists of 4 phases with phase 1 now completed and 100% leased. Phase 2 is currently up for lease. Phase 3 and 4 are scheduled to be completed in 2028.

San Jose approved the largest development project in its history last year. The project was proposed by Google and encompasses 80 acres near Diridon Station in downtown San Jose. The project is commonly called Google’s Downtown West project.

The plans for Google’s Downtown West project involve 7.3 million square feet of office space, 4,000 residential units, 15 acres of parks, 500,000 square feet of active use, and 100,000 square feet of event space and hotel use. 25 percent of the 4,000 housing units are planned to be affordable housing.

Construction is planned to start in 2023 and the project will be completed in phases with full development finished in 2032.

Central Valley

Proposed projects are abundant in the region. Developers are anticipating the completion of the bullet train by 2030 with large housing projects that will accommodate the expected surge in population growth.

The approved 2022-2023 California state budget directs $4.2 billion in bond funding to the High Speed Rail project, specifically the Bakersfield-to-Merced segment.  The San Jose-to-Merced leg was approved by the High Speed Rail Authority in April. The latter is not expected to be completed until 2031.

Right now, the Bakersfield-to-Merced segment is fully underway, and the San Jose-to-Merced leg is in planning. The bullet train project employs approximately 1,000 workers daily in Madera, Fresno, and Bakersfield Counties.

In early 2022, plans to develop the southeast area of Fresno through 2050 were formally submitted.  An Environmental Impact Report will soon be in preparation. The 9,000 acre area can accommodate 45,000 homes and create 37,000 jobs.

UC Merced has plans to double its student enrollment to 15,000 by 2030. University Vista located in the City of Merced’s Sphere of Influence is a mixed use project to build 4,200 units (including student housing), and 788,000 square feet of stores, entertainment, hotels, restaurants, office and R&D space.

The residential largest project in California is located in Madera County called Rio Mesa. This is a massive development near Highway 41 and the Fresno County border.

The Project contains 33,000 homes and can potentially accommodate 120,000 residents. The two biggest projects underway at the project site are Tesoro Viejo and Riverstone. Full buildout is not expected for approximately 30 years.

Near Edwards AFB in Eastern Kern County, the largest Solar battery storage project in the world is underway. The project will power 158,000 homes when completed. In the last 3 years, several large solar farm projects located in Eastern Kern County have commenced operation, with the capacity to power over one million homes.

The Grapevine project will begin construction this year in Southern Kern County. The mixed use development has 12,000 homes and 5 million square feet of office, industrial and retail space.

Sacramento Valley

This region is right behind the Central Valley in the extent of housing units that are planned. And substantial construction is currently underway in Sacramento, Placer, and El Dorado Counties.

The Richards Boulevard Office Complex in Sacramento’s River District is a $1 billion 1.25 million square foot ongoing project with four high-performance, collaborative, and interconnected office buildings. The Complex began construction in 2020 and is scheduled to be finished in March 2024.

The downtown Sacramento development scene is especially active. There are currently 26 development projects under construction and even more proposed.  Much of the development underway or proposed is apartments.  Even a world-class 15,000 seat Major League Soccer Stadium has been announced as part of the new vision for the area

Greenbriar is a proposed project currently seeking approval that will develop 3,000 homes , schools, a light rail station, and commercial buildings near the Sacramento Airport. Phase 1 (1,350 homes) is approved and is about to commence, and Phase 2 is awaiting approval.

A picture containing outdoor, marketplace, produce, resortDescription automatically generated

Proposed outside sports area in Sacramento

Placer Vineyards is located in the southwestern most portion of Placer County. The specific plan calls for the development of 14,132 homes.  Phase 1 is under construction with up to 5,266 housing units.

Just northeast of Placer Vineyards is the Sierra Vista Specific Plan that was annexed into the City of Roseville. The plan includes 8,700 single family homes and apartments that are expected to accommodate a new population of 20,045 residents.

Just over 5,200 residential units and over 7 million square feet of commercial development  called the Bridge District is now envisioned along the West Sacramento side of the Sacramento River.

In El Dorado County, there are five very large specific plan projects in planning that propose the development of 7,000 homes.


1 AB345. The law passed on September 28, 2021 authorizes local agencies to allow ADUs to be developed in single family or multi-family residential neighborhoods with only ministerial approval.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Can the Vibrant Development Environment Save California From a Recession? Part 1

Mark Schniepp
September 17, 2022

The California economy has effectively, recovered from the pandemic recession of 2020. A faster return to normalcy has been evident from the economic reports that monitor business activity in the regions, including the labor markets, spending trends by consumers, tourism, the housing sector and new development.

Last month, I presented evidence showing that the California economy is anything but weak. Through August, there is very little trauma visible to date in the state.

But the impending recession now haunting the nation threatens to slow down California in 2023.  And that particular topic has been the general subject of these monthly newsletters all during 2022.

Amid pressing economic problems that have emerged in the form of product shortages, higher energy and food prices (and broader inflation in general), labor and capital resources are still being utilized near capacity. Real estate asset valuations remain at or near record levels, and don’t yet appear to be impacted by the higher interest rate environment.

New development of commercial, industrial, and residential structures has always been a key sector of growth for particular regions of California. And while the pandemic interrupted much of this flow in 2020, development activity was fully restored by mid-2021.  This year, the development momentum has surged in California with much of it is due to the insatiable demand for rental housing and industrial facilities.

Furthermore, because of the Federal Infrastructure bill passed last November, Federal grants to all the states, the fat California budget surplus, and SB 1 funding, billions of dollars have been allocated to infrastructure this year and over the next 5 years.1

Residential development this year is occurring at a pace that will generate the largest volume of homes started since 2006.  The value of commercial and industrial structures started in 2022 is the highest on record.

The surge in private and public sector development will persist into next year, and help minimize the trauma of recession.  If we are lucky, there’s a chance that the state might entirely elude recession.

Development is occurring in all major regions throughout the state, and in particular, the dense metro areas, the Inland Empire, and the Central Valley.

The degree of ongoing development underway and proposed development in California has significant implications for population growth in many regions, and/or substantial economic stimulus in others.

In light of current demand, the need for facilities is going to persist, and the massive development of started projects can well be immediately utilized upon delivery. Tens of thousands of new job opportunities during the current decade are practically guaranteed in the state.

A summary of some of the highest profile projects are presented here, which illustrates the type, scope and location of real estate development in California today.

Prominent Development Projects

Orange County

The largest state highway project, the $2.1-billion widening of Interstate 405 through Orange County, has an estimated expenditure of about $1 million per day with 1,000 union jobs on site. Completion is expected in 2023.

Nine hotels totaling 2,000 rooms opened in 2021. The county has 70 hotels totaling 12,204 rooms currently in planning. Disney is conceptually planning to broadly expand both Anaheim parks as part of a grand project called DisneylandForward.

Rancho Mission Viejo, the mega development in Southern Orange County, is one of the largest residential projects in all of Southern California. Several of the project’s neighborhoods are already built and occupied, but the entire project will contain 14,000 homes.

San Diego County

The principal region for new housing development is Chula Vista and the surrounding unincorporated area. Residential development in the Otay community planning area and the Otay Ranch in Chula Vista is entitled for 20,428 housing units. Building has just gotten underway.

Inland Empire

The affordability of the region, its relative proximity to the Ports of LA and Long Beach, and available land underlies the reason for soaring levels of investment in land, warehouses, offices, hotels, and solar farms in the Inland Empire.

The massive 15,663 home Tapestry development broke ground in 2021. The project also includes 700,000 square feet of retail and commercial space. The project will accommodate an additional population of 40,000 people in the City of Hesperia.

Massive Tapestry Project in Hesperia Approved - VVNG.com - Victor Valley News Group

The Riverside City Council approved a housing plan to augment the housing stock by 21,000 homes by 2030.

Newmark estimates that 33.3 million square feet of industrial space is under construction across the Inland Empire in 2022.

Massive solar projects are either underway or in planning. The 650 MW Daggett Solar facility will be the largest in California and power 200,000 homes.

The Coachella Valley is now the most sought after location in the Inland Empire for new development and in particular, projects supporting the expansion of tourism. There are more than ten thousand homes approved or in planning in La Quinta, Palm Springs, Palm Desert, and Rancho Mirage.

Los Angeles County

The $5.5 billion automated people mover train system, transportation hub and new car rental facility at Los Angeles International Airport is being built in four years, resulting in a burn rate of $4 million per day. It employs 3,450 workers today, and will be completed in 2023.

The largest mixed use development project in California is underway in downtown Los Angeles. Named “The Grand,” The $1 billion development is scheduled to open in 2023 with 176,000 square feet of creative retail space, 436 apartments, a 309 room hotel, parking for 1,000 vehicles, and a movie theatre complex spanning a full city block on Grand Avenue.

The largest residential project under construction in California is FivePoint Valencia (previously known as Newhall Ranch). Developed by FivePoint Communities, the total project includes 21,242 homes and 11.5 million square feet of office, retail, industrial, recreational, school, and public space. The 4,055 unit Mission Village is the first of the 5 communities that is now underway.

Centennial, the Tejon Ranch development at the northernmost boundary of Los Angeles County and Kern County is approved for 19,300 homes. The project has been delayed for decades by environmental and climate concern lawsuits. Eighteen percent of the homes will be affordable, and all will be zero-emission. Centennial is estimated to accommodate a population of 57,000 residents.

Centennial Project, Northwest Los Angeles County just east of Interstate 5

To be continued next month: Bay Area, Sacramento Valley, Central Valley, and Central Coast

1$4.9 billion is in the current year’s state budget general fund. SB 1 provides $5 billion in transportation funding annually that is shared equally between state and local agencies for road projects,  The 5 year Infrastructure Plan proposes $44 billion in new transportation investment over the 2022 to 2027 period, averaging approximately $9 billion per year.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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No Recession in California yet

By Mark Schniepp

August 2, 2022

As a result of the Fed’s aggressive policy stance on hiking rates and selling securities, the U.S. economy will be in a bona fide recession either next year or no later than the beginning of 2024.

The stock market was actually telling us the recession would occur sooner, perhaps by year’s end or early in 2023, but its downward trajectory reversed in July.  Bear market bounce or investors becoming optimistic regarding inflation?  Probably both, but we don’t believe the bear market is over.

To be clear, the economy is not in a recession, but the likelihood of recession during the current business cycle is virtually certain. How severe and miserable the recession will be cannot yet be predicted, although there is no absence of opinions about this.

What Recession Usually Means

  • Substantial job losses and even mass layoffs
  • Businesses shutting down
  • Private sector activity showing considerable weakness
  • Household budgets under severe strain
  • Broad-based weakening of the economy

These series of events prevailed in 2008-2009 and again in mid-March to mid-May of 2020, plunging the economy into The Great Recession and the Pandemic Recession.

However, this profile does not exist today. In California, the evidence to date is even more austere indicating a troubled economy.

California does have its problems, and the largest is the lack of housing which has resulted in home values that have chased residents out of the state.  Population is now in decline in California and we don’t see this reversing anytime soon.  Businesses are  also leaving California but you’d never know it from the rising employment reported every month.

Regionally, there does not appear to be any clear weakening in the labor markets. Open job positions are still close to one million in the state of California according to Indeed on August 2, 2022.


The Counties with the most jobs advertised:

Los Angeles County:             236,359

San Diego County:                  95,127

Orange County:                       90,115

Santa Clara County:               82,071

Alameda County:                     52,456

San Francisco:                        50,828

Sacramento:                            48,002

Unemployment rates continue to set new record lows in nearly a third of all California counties. Taxable sales continue to increase generating record sales tax revenue to cities and counties.

Hotel-motel occupancy rates continue to improve and lodging revenues are at all time highs this summer, along with average daily room rates. Airline passengers through the major airports continue to rise.  The largest increases in airport deplanements at LAX and SFO are international visitors who, prior to November 2021, were largely banned from the United States for nearly 2 years.


Cargo through the Ports of Los Angeles, Long Beach, and Oakland are at record numbers of containers, and record valuations of goods.  Supplies of goods into and out of the U.S. are on a rapid route to normalization.

New building activity which is a principal engine of growth in the state remains at very high levels, in both housing and non-residential structures. Infrastructure projects are booming throughout the state. Employment in construction, and in particular, heavy construction, is now at all-time record highs.

The surge in new development is unlikely to change this year or next. There are particular strengths that California has an advantage in and these strengths appear to be running at full capacity today. And I haven’t even mentioned the tech world.


Consequently, it is difficult to find any glaring economic weakness in California this year.

So if you don’t feel that miserable yet about the “recession,” there’s a reason










The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Problems are growing, but no Recession

By Mark Schniepp

July 5, 2022

Not a Recession

Worries about a U.S. recession continue to mount, but it is not visible in much of the economic data, except for GDP.

Everything you read online or hear on TV more than suggests that a recession is inevitable if not already here.

New data on inflation-adjusted consumer spending during May finally showed a decline (of 0.4 percent) and estimates of 2nd quarter growth of GDP are now running negative. Because GDP fell 1.6% at an annualized rate in the first quarter, two consecutive quarters of negative GDP growth usually has everyone claiming recession. But that is not yet the case.

Much of the economic data are not consistent with an economy that is in the midst of a recession. Overall spending by consumers moved lower recently principally because Americans are having trouble buying automobiles.  Not because of demand but because of supply.

The weakness in the economy seems to be limited to GDP and it is difficult to declare that the economy is in a recession when:

  • Our nation’s factories are at a higher rate of capacity utilization than in 2019 and highest since 2009
  • The value of international exports is at an all time high
  • the unemployment rate is 3.6% and not moving higher.
  • the trend in job growth is still strong, and
  • consumers continue to spend and businesses continue to invest.

Slumping GDP growth is a technicality that economists, policymakers, and the media haggle about. What people may say is a recession is a slowdown or a change in the way their notions about the economy are working

The official arbiters of recession have not called a recession and it’s very likely they won’t until there is clear widespread malaise in economic activity, more pervasive than rising prices, rising interest rates, some product shortages, and growing dissatisfaction with policies of the current administration.

Inflation is THE Problem

Over the course of the last 6 months, we have been very clear to acknowledge that people are frustrated (if not infuriated) with gasoline prices that have doubled, and grocery bills that have risen 10 to 50 percent, which leads to the notion that the nation is in a recession.

Having inflation at 8.5 percent on a year-ago basis, compared with the 2.1 percent average growth in 2018 and 2019, is costing the average household $347 per month to purchase the same basket of goods and services as they did last year. However, the pure cost for households for having inflation running 8.5% is $460 per month.

At the same time that costs are rising, household wealth is retreating.  All three major U.S. stock market averages continue to sink to their lowest levels of the year, off 16 percent, 21 percent, and 29 percent respectively for the Dow, S&P, and Nasdaq Composite.

The collapse in the markets during June indicates that investors are pricing in another 50 point interest rate increase this year, if not two more, which will likely be in September and November following the 50 point hike presumed at the upcoming meeting on July 26.

The latest hike on June 14 pushed the key benchmark federal funds rate to a range between 1.50% to 1.75%, the highest since the pandemic began two years ago.

Rate hikes in 2022

We’ll have to wait and see about December, but the June meeting of the Fed has policymakers expecting the Fed Funds Rate to rise to 3.4 or 3.5 percent by the end of 2022, the highest rate since 2008.

A Recession

When investors, businesses, and consumers pull back on spending, a decline in aggregate demand or the total spending on goods and services (and equipment) occurs in the economy.  That pullback represents a contraction of the economy which motivates businesses to reduce their costs by laying off workers and disinvesting in inventory.

This leads directly to rising unemployment and a decline in production of goods. Then factories will be running at way less than full capacity.

If this condition is (1) significant, and (2) occurring for a meaningful duration of time, then that’s a recession.  A recession is always accompanied by rising unemployment.  The extent of that unemployment leads to further pullbacks in consumption, often foreclosures of homes, asset devaluation in general, and rising debt. We don’t have any of those conditions today and we are not even close.

Housing prices continue to rise though appreciation appears to be moderating in some regions. Rising interest rates are now starting to affect existing home sales, but not new home production.

The office market appears stable in most metro areas, and there is insatiable demand for industrial buildings and new development. Even the retail markets appear mostly fully utilized.

Conditions are nevertheless vulnerable due to that last 100 days of impetuous Fed actions.

Federal Reserve Actions

The Fed has gone from doing nothing for the first 70 days of this year to a zero tolerance policy for any more upside surprises in inflation. They fell behind and are now playing the dangerous game of catch up.

This is risky because an aggressive front-loading rate hikes makes it difficult to calibrate monetary policy in the future; the central bank won’t know that it was too aggressive until it is too late.  Usually rate hikes occur intermittently so the Fed can assess the impact on the economy. 50 to 75 basis point hikes in rapid succession make this kind of assessment virtually impossible.

Financial market conditions are the primary channel through which money flows to economic activity. Financial markets have priced in the aggressive front-loaded interest rate increases that ultimately return the federal funds rate to a more neutral rate by the end of this year.

Policy Comment

Pandemic induced supply chain issues were a principal cause of the initial uptick in inflation last year. Add to that rising crude oil prices as U.S. energy policy was changed to limit domestic oil production.

Then, add to that the current administration’s $1.9 trillion American Rescue Plan spending package in March of 2021 which overheated an economy that was already running hot, and inflation started to surge. The Fed, with easy monetary policy including quantitative easing, continued to accommodate this spending and the subsequent $1.2 trillion infrastructure plan passed by Congress 7 months later.

These policy missteps are the principal cause of today’s inflation, higher interest rates, and the death spiral in the stock market.

Then Russia invaded Ukraine and made the pre-existing condition worse.

The missteps are the principal reason why you should feel upset, let down, disappointed, and even furious with current conditions that are the result of misguided or mishandled economic policies.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Surveys and Why They Matter

By Mark Schniepp
June 1, 2022

The sentiment and/or confidence indices that track consumer attitudes are constructed from surveys conducted every month. The surveys ask a series of questions about how the individual views his or her economic prospects today and in the future.

The results of these surveys provide us with critical information needed to assess the current attitude among the population regarding business conditions or the overall economy.

Consumer attitudes are important because when consumers are pessimistic about their job prospects, their finances, or the economy in general, they tend not to spend as much.

When they don’t spend as much, the economy doesn’t grow as much, and that can spell trouble. Because when the economy slows down so do corporate revenues and earnings, and available job openings.

The stock market will immediately react to this if it hasn’t already adjusted downward in anticipation of reticent spending by consumers.  A falling stock market translates into declining wealth for most households, which only heightens consumer pessimism further.

Deteriorating consumer attitudes as reported by the surveys can be a bellwether sign of general economic malaise and even a not-too-distant recession.

Ambivalence today

The Conference Board and University of Michigan consumer attitude surveys portray a consumer that is clearly discontent with the economy.  The monthly Gallup poll which tracks the most pressing problem facing American households is reporting similar results, that is, the principal problem facing the country today is the economy. The percentage of Americans indicating this is just under 40 percent. The next most pressing problem was cited by half as many Americans at 20 percent. That was poor government leadership.

Despite the souring confidence in the economy, we are still not observing much consumer spending reticence right now.  What consumers are responding to is the attack on price stability,  the second sacred cow of the American economy. In the April Gallup poll, the largest economic sub-issue that Americans believe is problematic is inflation.1

The absence of price stability, most impactfully felt by record high prices for gasoline, represents a serious assault on consumer confidence.  The first sacred cow, job opportunities which are currently prolific, clearly maintain our ability to spend but are not enough to maintain our overall confidence in the economy.  A long enough period of extraordinary inflation will result in a spending pullback, not necessarily in dollars but in the quantity of products and services.

The surveys are simply a validation mechanism that consumers are frustrated about inflation and don’t believe conditions are improving.

The failure of the Fed, until now

The Fed has failed to act in time, “fiddling while Rome burns.” They have the tools but they’ve waited too long to deploy. The result is the highest rate of inflation since 1980. The Fed is now responding to inflation aggressively with 50 basis point hikes in the federal funds rate and a verbal commitment to stamp out inflation.

This has finally rallied the stock market. Oddly, the market would normally sell off with higher (and unexpected) interest rate movements.  But investors have been disappointed to date by the Fed’s restrained stance to confront an inflationary environment that was not “transitory,” as originally opined a full year ago.  Failure to act has resulted in a 30 percent decline in the NASDAQ.  The change in stance is now seen by investors as a foreseeable end to inflation and a return of consumer confidence.

Confidence will be restored when there is evidence that (1) the stock market sell-off has ended, and (2) price stability is being restored.

Watch the Polls

Together, the Conference Board and University of Michigan Sentiment/Confidence surveys are reported three times a month. Watch for these. Rising sentiment among consumers will represent an aggregate improvement in the issues which are currently increasing recession risks right now.

Recession is still not likely this year, unless unanticipated events ensue, such as new problems with the supply chain, or more massive spending by Congress.  And we also still have an overreaching public health community that appears fearful of new Coronavirus variants and now Monkeypox. Will natural immunity never be embraced?

Because it’s an election year, anything could occur which might result in a tipping point for the economy. But absent that, the probable outlook calls for a continuation of full employment, a subsidence in inflation, the gradual restoration of most supplies and goods now experiencing “shortages,” and a return of the labor force.

1 Most Important Problem, Gallup Poll April 2022, https://news.gallup.com/poll/1675/most-important-problem.aspx

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Determination and Walking a Tightrope

By Mark Schniepp
May 19, 2022

Mortgage rates have nearly doubled in less than 10 months, effectively disabling the refinance market and now disrupting the home purchase market.

Housing in general is a meaningful contributor to the general economy. Together with banking, insurance, and mortgage lending, it accounts for the largest sectoral share of Gross Domestic Product at 21 percent.  A contraction in housing alone has the potential of pushing the U.S. economy into a minor recession.  Remember that a major crash of housing which occurred in 2007 pushed the economy into a major recession, which to this day we call the Great Recession.

Is it likely this time again?  It is less probable right now because (1) there are more safeguards in place to prevent the kind of speculative bubble that led the descent of housing into the Great Recession, and (2) there is strong offsetting growth of the economy elsewhere:

— Manufacturing is expanding

— Consumers are still buying lots of goods and services

— For the last 18 months, business investment in equipment and software is recording its strongest growth in 21 years.

— New development is booming in many states, including California

— The labor markets are at full employment

— Wages are rising sharply, though struggling to keep up with inflation

Despite a rapidly eroding stock market along with consumer sentiment, industrial production is showing no sign of weakness this year.  The index of leading indicators also continues to rise, implying that the economic expansion will remain intact for the next 6 months. In fact, the second quarter is looking more promising that overall GDP growth will rise by an estimated 2.2 percent.

Don’t ask me about 2023 yet. I’m still weighing all the mixed evidence as it comes in.


The Federal Reserve now appears determined to extinguish inflation. Fed chair Jerome Powell said on May 17, that “what we need to see is clear and convincing evidence that inflation pressures are abating and inflation is coming down — and if we don’t see that, then we’ll have to consider moving more aggressively,”

This could very well mean that 50 basis point increases in both June AND July are not only possible, but now probable in view of the recent reports showing the persistence of consumer price inflation, and that price pressures continue to run hot.

Sharply rising 10 year treasury bond, mortgage, and auto loan rates already prevailing today are raising costs for new borrowers and increasing interest costs for many households.

The double whammy of higher interest rates and high inflation rates is meaningfully disruptive to household budgets and, ultimately, to spending patterns.

Already, the very noticeable increase in mortgage rates is cutting into the existing and new U.S. housing markets.  Housing starts declined in March and April, and existing home sales dropped sharply in March and April.

New home builders are feeling the impact of higher building material costs, but the data has yet to show declining demand for new homes. A new home is purchased well in advance of the builder completing the home, which then constitutes the sale. The indication that demand has slackened is lagged up to 6 months. But that indication is coming.

Powell’s bold stance will certainly address inflation head-on, but aggressive interest rate policy is akin to a tightrope walk or balancing act. Higher rates slow the economy; but can the economy be cooled down without tipping it into a period of contraction?  Remember that the other principal objective of the Federal Reserve is the maintenance of a fully employed economy. A contracting economy would jeopardize this goal.

Likely no recession over the next 6 months, but thereafter, the outlook is quite blurry

The second half of 2022 will be a nail biting affair to see if the Fed can pull off a more aggressive tightening policy to stave off inflation, while maintaining growth and employment in the broader macro economy.  This is known as a soft landing, and few have been engineered in periods of tightening monetary policy.

We can avert recession for most of this year, at least through the third quarter. The economic outlook is growing blurrier going into November, however.  The best of all worlds might be the acceptance that what we need and can tolerate is a mild recession caused by a pullback in consumer, and more important, government spending, which has been profligate.

If you’re fully employed and your business is growing this year, sit back and try to calmly watch the show. If your work is aligned with housing, the ride for the rest of the year is going to be bruising.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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The Joyless Economy

By Mark Schniepp
April 5, 2022

Oh, somewhere in this favored land the sun is shining bright,
The band is playing somewhere, and somewhere hearts are light;
And somewhere men are laughing, and somewhere children shout,
But there is no joy in Mudville . . . .

— Ernest Lawrence Thayer, 1888

And as you know, the poem ends with Casey striking out, sending the crowd home unhappy.

The title of this newsletter was the title of a book by Stanford Economics Professor Tibor Scitovsky back in the 1970s. The premise of the book was that economic abundance does not necessarily lead to happy consumers.

The 70s was a decade of meager economic growth, high inflation, and a crummy stock market. There was no recession between 1975 and 1980 but it was nevertheless a joyless period for the economy.

April 2022

Today, a similar scenario has arguably emerged.  Growth is stronger today than in the 70s, but there is a clear disconnect between economic growth and consumer sentiment—a relatively rare occurrence we have not experienced this century.

Economic growth was strong in 2021 and labor markets returned to their pre-pandemic status.  If the economy is not at full employment, it is a heartbeat away from it. The labor market has tightened so much that job opportunities are not only abundant but go unfilled for many months.

The national economy has transitioned from recovery to expansion as we fly through the various phases of the business cycle.

The markets for production and employment are healthy.  The consensus forecast this year, notwithstanding the Russian-Ukraine war, is for a continuation of above long-term average growth, largely due to the final abatement of the pandemic, and the strength of consumer income including pent-up spending.

However, we are also in a period of economic turmoil. The inflation we are experiencing, coupled with the current geopolitical conflict, pose substantial downside risks to the economic outlook this year.

Surveys of business leaders regarding present business conditions and expectations of the economy’s performance through midyear are notably weak, with well over half of respondents feeling that present conditions are getting worse and will be worse later this year. The global economic recovery remains fragile.

Consumers are decidedly more skeptical as measured by sentiment and confidence surveys conducted monthly.

Certainly enough, economic growth has slowed way down in the first three months of the year to probably less than 1 percent.  The Fed is on the verge of an aggressive monetary policy to interrupt inflation, planning a series of rate increases for the rest of the year and ending the asset purchase program. The stock market has been understandably in flux.

Russia’s invasion of Ukraine and the global response create an escalating uncertainty that is not good for the world economy.  Sudden higher oil, natural gas, agricultural and metal prices are conflating with already painfully high inflation caused by pandemic disruptions to supply chains and labor markets.

The U.S. economy should be largely insulated from the war unless a more aggressive policy direction is taken, or if Russia responds to U.S. imposed sanctions with cyberattacks on U.S. energy infrastructure.

Accelerating Inflation is now the largest risk, and the current level of inflation (already at a 40 year high) predated the Russian-Ukraine war.  This was the biggest concern of Americans in the March poll by Gallop.1 An end of the war will not cure inflation, nor is it likely to reverse the current stock market consolidation that is also of worry to consumers.

The supply chain problems have been severe. The rising job openings have been severe. The lack of products and workers has driven prices and wages sharply higher.

So right now, amidst all the problems which appear to be weighing heavy on our sentiment in grocery stores and at gas stations, and putting aside the 2 month pandemic recession, this is clearly not our happiest of moments.

But other than crude oil, production of goods will come back. So think about all the production that will occur to replenish needed inventories that are in steady demand. And the labor force should also return with pandemic related reasons now dissipating. The unemployment rate could increase more than the Fed anticipates as strong nominal wage growth and fading effects of the pandemic pull more workers back into the labor force.

This is why the longer term outlook for extinguishing inflation is bullish.

I mentioned the risk of stagflation in the November 2021 newsletter. The likelihood of this scenario is not high, but it is rising.

Risks this quarter

Americans appear well aware of these risks which is the compounding issue underlying our joylessness:

(1) How the war unfolds in Europe, which is now a bigger issue than

(2) subsequent potential waves of coronavirus

(3) extended supply chain delays and disruptions which push

(4) inflation even higher,

(5) a stock market vulnerable to correction due to global weakness and/or escalating war

(6) higher interest rates and uncertainty for the housing market and investment

(7) no resolution for high oil prices and therefore gasoline prices anytime soon

An upside risk is that U.S. and global production could accelerate beyond expectations if war is resolved soon, and/or workers return to the labor force more rapidly to fill job openings, generate more income, increase spending, and therefore overall economic growth.

Stay tuned for updates . . . . .

1 Most Important Problem, Gallup Poll, March 2022.  Inflation (together with oil prices) and the economy in general were by far, the principal concerns of Americans. See: https://news.gallup.com/poll/391220/inflation-dominates-americans-economic-concerns-march.aspx

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Our Economic Well-Being…in view of recent annoyances like Inflation, product shortages, a correcting stock market, and now war

By Mark Schniepp
March 7, 2022

Are you satisfied with your job ?

Are you satisfied with your financial situation ?

Are you satisfied with your economic prospects going forward ?

How do you feel about the direction of the U.S. economy ?

These are among the many questions that a flurry of pollsters routinely ask Americans every year. The most recent collection of responses have not been upbeat despite an economy which statistically is clearly improving.  And this was all measured before the onset of war.

The Strengthening Economic Numbers Were Not Enough

The problems carrying more weight on American consumers than the tight job market, offering abundant employment opportunities and rising wages, still include:

  • Pandemic restrictions and/or mandates (though these are diminishing)
  • Inflation, especially in gasoline prices
  • Product shortages
  • National policies including (1) the southern U.S. border, Afghanistan, and the Russia-Ukraine War and how that might ultimately impact our economy

Gross Domestic Product advanced 7.0 percent in the fourth quarter of 2021 and the unemployment rate fell to 3.8 percent in February – a tight labor market by any standard of measure.  Wages soared from April to November 2021. Nevertheless, Americans thought 2021 was a bad or terrible year, starting out with a wave of coronavirus infections and restrictions, which then turned into euphoric optimism with the massive vaccine program and the promise of an opened economy as the pandemic was seemingly ending.

The economy opened but the euphoria was short lived. New pandemic waves of infections–Delta and then Omicron–soured perceptions as the long-awaited return to normal was dashed, further delayed for an entire second year.  Alongside of this were the empty store shelves, a sharp increase in gasoline prices, and higher inflation for all products, which frustrated or infuriated consumers across the U.S. and in much of the world.

Nope, 2021 was not a year we wish we had back.  The Gallop poll on economic confidence shows the average Americans’ ratings of current economic conditions last December as the weakest since the Great Recession. The poll found that 79 percent of Americans were dissatisfied “with the way things are going.” In a poll from October 2021, Gallop had 56 percent of respondents saying the economy was on the wrong track while 29 percent indicated “right track.”

Forget about 2021; What about 2022 ?

Is optimism renewing as Omicron abates, no new variant is on the horizon, mask mandates are being lifted, vaccine mandates called off, and the supply chain disruption appears to be improving?

Sorry, not yet. The sentiment indices by The Conference Board and the U of Michigan are showing no improvement. Moreover, the latter measure has now hit a 10 year low.

The Fannie Mae National Housing Survey conducted in January has 83 percent of respondents indicating it’s a bad time to buy housing, and only 15 percent saying it’s a good time to buy. This “good time to buy measure” is now at an all time record low.1

The Gallop economic confidence poll updated in mid-January showed little improvement from the 2021 results. Furthermore, an NBC News poll found that only 22 percent of respondents believe “conditions are headed in the right direction.”2

The Ipsos-Forbes poll of U.S. Consumer confidence tracker conducted on February 24 has consumer expectations about the future more pessimistic today than at any other time since the pandemic lows of April 2020.3

A problem with these polls naturally involves the definition of the right direction. Political issues have become so divisive these days, there is little consensus on what the right direction actually is.  Nevertheless, the response rate of Americans to the question is consistent with other questions and other polls about the country and/or the U.S. economy.  There is a total convergence in attitudes and that convergence has unilaterally moved towards pessimism.

War and Inflation

The pandemic is clearly abating, the most egregious all-consuming socio-economic issue over the last 2 years. And this should help to lift American spirits in 2022. But now emerging in its place is a regional war we have to worry about, which we desperately hope does not escalate beyond Ukrainian borders.

The principal problems weighing heavy on consumers this year are not going to disappear quickly. Moreover, higher interest rates are coming, which will directly impact auto loans, consumer loans, and probably home mortgages.  Though Inflation is the target as the Fed prepares to push interest rates higher, its prevalence will remain for much of 2022 before any tightening policies have an impact.

While war in Eastern Europe is yet another reason for Americans to feel sour about the economy, it is unlikely to deter the Fed from raising rates this month, unless there is an unexpected escalation of the conflict to include other countries or greater involvement from NATO including the U.S.

Early polls to date (by ABC, Yahoo, Gallop) predictably have most Americans supporting sanctions on Russia, but do not believe the U.S. should be more involved. Nevertheless, the war will have further impacts on consumers, on both inflation and product shortages.

Product “shortages” or empty shelves were going to be slow to resolve in the absence of the war. Now they will be further impacted, though probably not materially. Clearly, we don’t need another geopolitical conflict interrupting global transport at a time when we’ve still not recovered from the pandemic interruptions.  But that’s what we now have.

U.S. Inflation will rise to 8 percent this month. Oil prices were already soaring before the invasion began, but have moved 20 percent higher since the Russian army aggressively pushed into Ukraine. Oil price inflation is insidious, affecting the price of so many byproducts of petroleum.

The prices of wheat and corn are also rising sharply because these global agricultural export markets from Russia-Ukraine are substantial. The two countries alone account for 70 percent of total wheat exports going to Egypt and Turkey, and 27 percent of all wheat exports to the rest of the world.

A quick end to the war is needed to clearly reduce the investor uncertainty responsible for pushing up commodity prices and escalating our already extraordinarily high rates of inflation. Put that in the column of best case scenarios. We also need the labor force to return, global production to ramp up, and the Fed to tighten more aggressively

1 https://www.fanniemae.com/research-and-insights/surveys/national-housing-survey/national-housing-survey-archive

2 https://www.nbcnews.com/politics/meet-the-press/downhill-divisive-americans-sour-nation-s-direction-new-nbc-news-n1287888

3 https://www.ipsos.com/en-us/news-polls/Ipsos-Forbes-Advisor-Tracker

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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Are We Getting Back to Normal Yet?

by Mark Schiepp
February 1, 2022

I have felt compelled to keep you up-to-date monthly on the state of the economy because the progress of recovery from the pandemic recession has recently been both fragile and slow. Rising nervousness about the stock market and inflation are contributing to this fragility. In larger part however, there is deepening concern over the pandemic’s response by state and federal governments that has interfered with the return of the economy.

Consumers have jettisoned much of their optimism about future prospects for the economy. The sentiment index continues to flounder below the pandemic low. Is Omicron creating the reticence in people, or is it the response to how Omicron is being handled by state and local governments? I think the latter is more likely.

In response to the title of this newsletter: no; we are not back to normal. And I really don’t need to spell this out. Moody’s Analytics partnered with CNN to create the Back-to-Normal Index which uses 44 indicators to ascertain whether state economies have returned to pre-pandemic levels. The Back-to-Normal Index for California as of January 26 is 87 percent. Only Illinois, New York, Pennsylvania, Oregon, Massachusetts and Vermont are lower among all 50 states. Many state economies have slipped recently, including California which has the highest unemployment rate in the nation.

Why aren’t we normal yet? It could be that we still have the following experiments underway that are not normal:

  • Massive fiscal policy
  • Continuation of massive bond buying by the Fed
  • No interest rate hikes yet to suppress ongoing and rising inflation (yes, the second derivative of the CPI is still positive through January 2022)
  • Vaccination mandates1

More fiscal policy is simply not needed for an economy that initially rebounded back sharply on its own by removing restrictions. Now it has become the root cause of current inflation and more Americans see this clearly.

While the Fed has indeed tapered, they are still massively expanding monetary policy with $60 billion of bond purchases this month and next. And though rate hikes are going to occur this year, why have they not occurred yet when we need to have inflation shut down as soon as possible?

It’s likely because of the stock market correction throughout the month of January, and the fear that a bear market may prevail if the juice for the markets is withdrawn too fast. The economy may also be wobbling some. Recent news on U.S. manufacturing shows a softening, particularly in the delivery of finished goods. The near term outlook for manufacturing is compromised by the supply chain issues which are not resolving fast enough. GDP growth was sharply higher in the 4th quarter, but much of this was due to inventories which will have a depressing impact on the first quarter 2022 GDP report.

We Need More Workers

Labor availability issues remain with little relief through December. In California, many employment sectors have fully recovered or are close to complete recovery. But the labor force has not. California is still 400,000 potential workers short of the labor force peak that prevailed just before the pandemic hit. This is one of the most abnormal issues in California that remains seriously problematic to the restoration of the workforce and delivery of normal services to consumers, especially leisure and food services. The vaccine mandates may certainly be contributing to the drag on the labor force recovery.

Logistic Issues Persist

Supply issues persist and the manifestation of this is empty store shelves, which are pervasive today.2 Green onion rationing at Trader Joes? They told me to grow my own.

The backlog of containers with furniture, clothing, electronics and other imports that were piling up at the Los Angeles and Long Beach ports last summer and fall has been dwindling.

The so-called dwell time a container sits around on average before it gets picked up has fallen by more than half since late October and there are no longer dozens of ships at anchor outside the ports waiting for weeks before they can berth and offload their cargo.

But stacks of empty containers are preventing truck drivers from leaving their own empties and swapping them for fulls to deliver to desperately needed destinations. Furthermore, more ships heading this way from Asia are on the horizon. Unless a plan is devised for empty containers hording Port space, ongoing congestion problems will persist.

What We Need Right Now

I typically hesitate to make recommendations on what needs to occur to put the state on a faster track to normalization. But clearly, the experiments underway are obstructing this path, making more people fearful and/or pessimistic, and infuriating others. We can see it in the data. Therefore, putting my hesitation aside, here’s what needs to happen, IMHO:

Reverse the experiments—all of them. They are not normal anyway and largely unnecessary.

Don’t think of passing another spending or stimulus bill in Congress. In fact, rescind the $1.2 trillion Infrastructure Bill.

We should be accelerating the tapering of the quantitative easing or bond buying program, or entirely withdrawing it. We should not be waiting until March to raise interest rates. Rates should be hiked now. We need some bold moves that we saw work wonders in the past. The last time the Fed actively put downward pressure on inflation, the policy worked. This was in 1979. Aggressive increases in the federal funds and discount rates started in August when Paul Volker became the new Fed chair. This continued through April of 1980. Inflation peaked that month, and tumbled thereafter.

The courts have spoken about vaccine mandates. We need to end these now along with the passports. We should also be following in the footsteps of the United Kingdom and declare the pandemic over. This might by itself get us further back to normal than anything else.

1 Senate Bill 871 would add the coronavirus vaccine to the list of required school vaccines (with no exemptions) on January 1, 2023. Federal, state, and local authorities are requiring certain categories of workers to be vaccinated. Vaccine proof is required in Los Angeles County. Legislation in Sacramento is being designed to require vaccines for all people in workplaces, schools, and public venues like malls, museums and restaurants.

2 In previous newsletters, I have written extensively about the global supply chain disruptions due to congestion at ports and shortages of truck drivers and service workers in previous newsletters.

The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.

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