Author: californiaforecast

Mark Schniepp
February 7, 2023

Arguably, the current U.S. labor market is the tightest it has ever been. The rate of unemployment has been under 4.0 for the last 12 months, and it continues to drift lower. It’s now at a 54 year low.

We had a notion that the labor market might be slowing, and that job openings were starting to abate. Instead, they are rising again. There are nearly two unfilled positions for every person unemployed.

The number of job openings remains a problem for employers trying to fill positions and provide a seamless flow of goods and services. So far into 2023, there is nothing seamless about that flow. Project shortages abound, and we are all annoyed while trying to get accustomed to waiting longer for services.

The lack of available workers is the issue. We thought by now the labor market would soften and job openings would largely fill or be withdrawn as a result of a slowing economy.

Six months ago, in the August 2022 newsletter, I wrote:

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

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

Today, I’m not so sure that recession is virtually certain. That checklist is still valid, and we still don’t see any evidence of (A) or (B), or (D).  We do see evidence of (C) and a broad-based weakening of the economy is the subject of everyday debate, because, well, the signals are quite mixed.

The Ugly

While household debt is still low, rising credit card balances are growing more worrisome, which could ultimately strain household budgets that don’t have much room for error. The personal savings rate has plummeted to the 2^nd lowest level in 50 years.

Everyone is working, but everyone seems to be spending the same or more, due principally to the inflated prices we all face today.

Considerable weakness can be seen in the ISM Manufacturer’s Index which monitors the demand for U.S. manufacturing products. It has generally been in decline for the last 14 months. The recent movement below 50 indicates contraction and trouble for the industry.

Consumer sentiment remains pessimistic, and is not getting much better. Most Americans believe the direction of the country is abysmal. The index of leading indicators has recorded 10 consecutive months of decline.

And of course, the housing market is already in a recession.

On The Other Hand

The XRT index has soared year-to-date, the inflation reports are showing improvement, the Nasdaq composite index is up 15 percent year-to-date, the non-manufacturing index rebounded sharply in January as new orders surged.

The XRT fund tracks the performance of the S&P Retail Select Industry Index. From January 1, 2023 to February 3, 2023, the fund is up 21.7 percent.

The certainty of recession is fading because the labor markets are not weakening, and consumers continue to spend despite a decline in their real incomes. Their savings are depleted but their debt levels while rising on revolving credit cards, are not increasing much otherwise, largely because their mortgage payments are contained by low fixed rate loans they refinanced into over the last decade. Though revolving credit is elevated and rising, it is not raising any major red flags by itself.

Stock Market

Is what we are seeing from the stock market year-to-date a dead cat bounce?  We can’t say. The Nasdaq lost 33 percent last year, the S&P was off 19 percent, and bond prices tumbled 17 percent, generating one of the worst years for investors on record.

History does tend to show that stock market rebounds follow big stock market drops. Investors may be anticipating this until the earnings reports suggest otherwise. Earnings rise when profits rise. Profits rise with economic growth. It’s the growth issue that we are debating here. Sorry, but we don’t know yet because, well, the signals are all mixed up.

Verdict: Recession in 2023?

Recession in quarter 2 is what we had anticipated. Because of the strong labor market, a weakening there will probably not occur until the 2^nd half of 2023, delaying the likelihood of recession to later in the year. There is also a rising probability that the nation might skirt past a bona fide recession this year, depending largely on what happens in Europe and China.

The projection for economic growth in 2023 is still weak, but recession is less certain because of improvements on the inflation front, and the recent decline in mortgage rates despite the FED’s stance that further interest rate hikes this year are appropriate.

I will keep you posted every month on how conditions are changing, for good or bad. So stay tuned.

By Mark Schniepp
January 6, 2023

No Surprise

It’s not much news to anyone to declare that housing is in a recession. In fact, it’s been widely reported as a fact, even though there is no bona fide arbiter of such a call. You know a recession when you see it or feel it.  Prices still remain high, but sales of existing homes in California are off 35 percent since July. And selling values are now following though they are unlikely to decline proportionately.

Despite (1) recent decreases in mortgage rates and (2) falling home prices, pending home sales are falling rapidly. Monthly mortgage payments remain high relative to incomes. This is keeping buyers, especially first-time home buyers, on the sidelines. Furthermore, homeowners  who had intentions to sell, are reluctant to list their homes for sale after having locked in record-low interest rates during the pandemic.

The stalemate between buyers and sellers will continue as long as the Federal Reserve keeps monetary policy tight and the prospects for a general recession remain uncomfortably high.

New Homes and the Sentiment of Builders

The Housing Market Index, a closely watched industry metric that gauges the outlook for home sales, declined to 33 in November on a hundred-point scale, the lowest level in a decade (excluding the April-May 2020 lockdown period). The higher the index, the more optimistic builders are regarding housing market conditions, and conversely.

The NAHB/Wells Fargo Housing Market Index is based on a monthly survey of National Association of Home Builder members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.

Sales, housing starts, inventory, and the direction of prices all point to additional stress for the first half of 2023, though there is some glimmer of hope regarding the movement in mortgage rates. The interest rate on a 30-year fixed rate mortgage fell to 6.3 percent during the week of December 20^th, after peaking at 7.1 percent in October.  It is currently hovering around 6.5 percent.

Mortgage Rates

The next Federal Reserve Open Market Committee meeting (where interest rate policy is enacted) is more than a month away. More evidence on how inflation is being tamed will be out next week. Will the Fed hike the fed funds rate 50 basis points or just 25 at the next meeting? It will depend on the December CPI report due out next week and other indicators that directly or tangentially contribute to inflation.

Either way, there is no doubt that the economy is slowing and a recession is likely.

A more general recession would intensify the housing downturn. This is because household incomes frequently decline in a recession, and adjusted for inflation, they are declining now.

Demand Impact of Higher Interest Rates

The Fed initially starting raising interest rates, in part, to seed a “correction” in an overheated housing market. Home prices rose more than 40 percent from the beginning of 2020 to June 2022.

At a 5.8 percent interest rate, a prospective buyer with a $2,500 monthly budget could afford a $406,250 home. At a 6.5 percent rate, the same buyer could spend only $383,750. Just a year ago, with a 3 percent rate, the buyer could spend $517,000.

The Case-Shiller Housing Price Index adjusts for the mix of housing that is selling. Higher end homes tend to sell less frequently and are subject to a larger price adjustment. Affordable home prices will adjust less because they are in greater demand. Home prices are clearly in decline and have been since the spring of 2022. All housing price measures are demonstrating contraction, including the Case-Shiller index.

Real Estate Related Employment

 Surprisingly, despite the precipitous fall in home sales, the real estate recession does not appear to be affecting direct real estate sales employment in California. Well, at least not yet. Now it’s true that real estate brokers and agents are largely self-employed and do not show up in the W-2 employee counts. But the number of agents still tend to move in tandem with W-2 employees within broker offices, and the evidence does not indicate any contraction there. That’s not to say however that the current level of residential real estate business has not impacted many sales agents in real estate.

Where there is clear contraction is in the mortgage lending sector, because lending has all but dried up. Job counts have been in decline since April of 2021,  though they are curiously still higher than at anytime during 2019.

The predicted trajectory of real estate for the next 6 months is a continuation of the last 6 months. The first half of 2023 will be a difficult period, but not just for real estate.  There is now evidence that employment in manufacturing has turned down.  I can’t see any other significant weakness however.  In general, labor markets are unequivocally strong at the start of the new year.

By Mark Schniepp
December 3, 2022

Understanding the Current Environment

The first step in updating your business plans for 2023 is understanding the current and likely direction of the economic environment.  Know where you stand currently and where the business is likely to be by say, June of next year.

Are your clients exporters?  Are you an exporter?

Exports are forecast to slow way down due to clearly slowing global demand.

Are your clients domestic consumers? 

Higher prices for goods and services will slow down the pace at which consumers will buy goods and services, along with a pullback in spending due to uncertainty and a lower valued stock market.

Is your client the government?

State and local governments will remain fairly autonomous and in a position to maintain their fiscal budgets which generally end on June 30, 2022. Austerity will likely set in during fiscal 2024.  The GOP led House of Representatives is likely to fiscally restrain the federal government starting January 3, 2023.

Is your client age-dependent?

Millennials are working and will likely stay employed and demanding the kinds of goods and services that they buy. Gen Z is part of the entry level workforce or graduating from colleges and universities. They will be vulnerable to layoffs and some might struggle to find employment.

Boomers are retiring in a rapidly growing wave that started in 2020. In 2023 and 2024, we will see the largest waves of Boomers turn 65. An estimated 36 percent will not retire and elect to remain in the workforce. Nevertheless, expect many of the senior people in your workforce to retire and require replacements.  This will lighten your healthcare expenses but could increase your recruiting expenses.

Today’s Environment

The current estimate for how GDP is tracking in the 4^th quarter ranges from 2.2 to 2.8 percent growth, annualized. Consequently, providing the November and December data don’t significantly deteriorate, calendar 2022 will wind up with both positive and meaningful growth over the last 6 months.

For many businesses including retailers, “adequate” revenue growth will likely finish out the year despite significant talk of recession and struggle.

Job growth, nominal income growth and a rise in real inflation adjusted consumer buying has powered the economy forward during 2022.  But conditions are changing.

Headwinds into 2023

High profile layoff announcements are starting to pile up though you don’t see any evidence of that yet in the unemployment rate.  But layoffs are coming, and the record number of job openings present in the economy will shrink from 11 million to 6 million over the next four to six months.

Manufacturing is now facing significant challenges as 2023 approaches. High producer prices, rising interest rates, and supply-chain issues are the headwinds here. Deteriorating business confidence is another key concern. Expectations can turn on a dime, but the increasingly pessimistic outlook among businesses does not bode well for the near-term prospects.

So far, manufacturing reports have managed to stay positive.  New orders however are contracting.  And expectations gleaned from surveys indicate a significant drop in both current and future expenditures on product inventories.

And this is occurring as manufacturers monitor potential consumer demand for, in particular, larger durable manufactured goods, including furniture, appliances, vehicles, and electronics.

The housing market has cooled off, needless to say.  Both existing home sales and new home sales are below their pre-pandemic levels now.  If your business relies on real estate, 2023 will be tough because mortgage rates will remain high and the risk of declining real incomes is high.

The interest on the 30-year fixed mortgage rate has backed off a bit from its peak of more than 7 percent, but the rate has effectively doubled since the start of the year. Buyers are priced out of the market and will have to delay their jump into homeownership.

However, many buyers will still be looking for ways to buy homes so creative financing arrangements should work to sell homes in 2023.

Real estate will look better on the back end of 2023, or after the traditional buying season is over. Why? Because the business cycle bottom may be occurring at that point. Perceived bottoms are the start of stock market rallies, and there will be bargain-hunting buyers for all assets. So be prepared for when the darkest hours approach.

Pessimism among Consumers

Consumer sentiment from surveys is currently at levels that are consistent with a bona fide recessionary environment. The American consumer is clearly frustrated with high gasoline prices, the steep decline in stock values, and on-again off-again shortages of goods.  The high levels of inflation are leaving real household incomes lower than were they were a year ago.

Compared to last year, consumers will spend as much this Christmas but receive less. That means businesses will sell less product, while facing higher costs. Consequently, there is a greater likelihood of a lower net income holiday season for retailers that disproportionately rely on the holiday season.

January and February will also remain slow because U.S. export markets will be impacted by recessions in Europe and in China.

The most encouraging component of business confidence surveys are the responses about the company’s hiring intentions. Few businesses are laying off. Businesses realize that they will have a perennial problem filling open job positions as baby boomers age out of the workforce, and not enough of generation Z will enter the labor force.

That said, intentions by businesses to invest in further equipment and software remain favorable in preparation for the potential inability to fill all job positions.

Planning

Inflation has peaked though it remains uncomfortably high at nearly 8 percent.  Households would be spending on average, $433 more per month if they were to buy the same goods and services as they did in 2021.  However, they aren’t doing this because they can substitute into lower priced items or postpone buying them for now.  This means lower demand in general for products and services. This this could very well be your product or service.

Therefore, be ready for a year in which you anticipate and can therefore plan for lower demand. Unlike the last two recessions (in 2008 and 2020) in which businesses were largely ambushed, you now have lead warning that conditions will weaken into 2023.

You can expect to need fewer workers which is usually the largest business cost you incur.  If you’ve invested wisely in 2022, your automated functions are running efficiently and you can probably delay filing job vacancies.

Watch the monthly labor market reports for early clues on the direction of the economy. Unemployment is currently 3.7 percent. Job creation is around 250,000 per month. An upward trajectory in the former and/or a downward trajectory in the latter represents the weakening that we are forecasting.

Watch the bond market. The inverted yield curve would have righted itself and the spreads between short and longer term yields will be widening, suggesting the end of contraction.

Watch the stock market. A sharp upward movement lasting more than a few weeks would be an indication that the bear market has reversed and the market is projecting rising growth 6 months hence.

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.

Gasoline

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.

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.

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.

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.

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.

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

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 2^nd 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.

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

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.

Determination

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.