Author: californiaforecast

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

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

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 4^th 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.

by Mark Schniepp
January 2022

Into January 2022 we go and the pandemic continues; its future progression (or how long governments will continue to maintain a state of emergency in the name of public health) is uncertain. We generally believe the pandemic will be brought under control and that the disruptions and frictions it has caused in the labor market and to the supply chain will be resolved over time.

While inventory imbalances are now dissipating, they remain troublesome. Financial imbalances are manifesting in unwanted inflation which will precipitate more fiscal tightening in 2022.

The pandemic’s disruption on the labor market was originally catastrophic but conditions have dramatically improved, and for some regions of California the labor market is back to its pre-pandemic status. But not yet in the principal metro areas. In general however, it’s not that people can’t find a job, it’s that they don’t want to work.

The return of many workers who had left the labor market during the pandemic because of childcare or eldercare responsibilities will take place over a longer period of time than was predicted earlier in 2021. We had expected that the reopening of schools in August and September last year would bring a large influx of parents who had been unable to work back into the labor force. Other workers are staying out because of illness, concern over the virus, or excess saving built up in 2020-2021 due to stimulus checks and/or the federal unemployment bonus. Furthermore, about 2 million more workers than expected ended up retiring.

Navigating a New Normal

Though we believe the labor force will ultimately come back, for now fewer people willing to work is looking like a new normal. Also, just-in-time production, transportation and inventory schedules will be restored world-wide. But not yet. Until these conditions of the “old” normal return, we are navigating a new normal in 2022:

• Accepting substitutes for products we can’t get
• Substituting into less costly goods because of inflation
• Producing goods and services with fewer workers

To date, the pandemic has accelerated some trends that were already developing:

1. The share of online shopping and home delivery in consumer spending has surged since the pandemic began in March of 2020. There are few signs that this is abating and economists do not generally believe it will.
2. The number and share of remote workers in the workforce has expanded substantially over the course of the pandemic. More hybrid remote work has become the current norm in many industries. There is a debate as to whether this will remain.¹
3. The expansion of remote work has weakened the traditional bonds between where people live and work, causing an acceleration of out-migration of some remote workers from the urban core to the suburbs and exurbs where more housing options are available, including more affordable options. This is a trend which has led to rising rents and home prices in outlying urban areas. It has also led to more demand for goods and services in these areas.
4. It may lead to a situation where these remote workers may not be able to change jobs as quickly as they could if they had remained in the locational center of the job market, such as San Jose, Downtown San Francisco, Downtown Los Angeles or Playa Del Rey. If labor markets soften, will spatially remote workers who either become unemployed or want to switch jobs navigate into other opportunities readily?

The two principal conditions—remote shopping and remote working—are going to be with us for the long haul. The extent of remote shopping is likely to only accelerate. The extent to which remote working characterizes the workplace may well diminish over time. But we are speculating on this because right now, this is the normal rather than a new normal.

Some supervisors are uncomfortable with the out-of-sight reality of people working from home. Will companies let go of control or will they mandate at least a hybrid schedule? This may depend on how quickly the labor force returns and expands from the record numbers of new college graduates. Surveys indicate that entry level workers want to be in the office and not at home.

Are all the new variants and all of our emphasis on positive cases the new normal?

It appears so, and with this concern is the attendant impact on the economy. More than 2 million workers say concerns about getting or spreading COVID-19 are their main reason for not working.

The Omicron wave has intensified, and it (as did Delta) appears to be keeping many of these people out of the labor force. Daily positive cases have now reached an all-time record high. And it also appears to be interrupting economic growth in general:

• Credit card spending has softened in recent weeks, especially for travel
• Restaurant bookings have now moved lower
• Companies are suspending their return-to-office plans, and
• More schools are moving back to virtual instruction during the first weeks of January

Omicron will delay returning workers to the labor force and it could delay product deliveries and services. And to date, we have not seen any reason to believe that upcoming variants will elicit a different response by the media or public health officials, which in turn, panics consumers. Oh no, and now here comes the IHU variant . . . . ²

Therefore, the normal for 2022 could be a continuation of economic interruptions that hamper growth and keep it from reaching its maximum potential, given the capital and labor resources we would otherwise have available for productive utilization.

That said, we can expect variants to continue emerging, raise infection levels in the population, and then recede. We are in the fourth wave of the coronavirus. Omicron appears to be the most transmissible but the least serious. We can only hope that the seriousness of future variants continues to fade and the elusive herd immunity that we’ve been promised is forthcoming sometime this year. But for now, the variants are a daily topic of conversation that will continue to be indefinitely.

¹ “Why Working from Home Will Stick,” by Jose Barrero, Bloom, Nicholas and Davis, Steven, Working Paper January 21, 2021. 50 percent of the U.S. workforce has the ability to work from home. The authors expects 40 percent of these workers to go hybrid and 10 percent to remain fully remote.

² https://www.usatoday.com/story/news/health/2022/01/05/new-covid-variant-b-1-640-2-ihu-identified-france-what-it/9101249002/

by Mark Schniepp
December 1, 2021

1. Supply chain bottlenecks
2. Inflation
3. The labor force
4. The pandemic

These are the four biggest issues that we, as consumers and businesses are facing in 2021. Moreover, these issues will not be resolved by year’s end. An escalation of at least two of these issues is likely, given that we’ve seen very little resolution to date.

Supply Chain

Supply chain bottlenecks which have wreaked havoc on U.S. Ports and product inventories in U.S. stores appear to be modestly easing. Weekly container prices have been declining since mid-October, but the number of containerships anchored in the San Pedro Bay waiting to dock to unload cargos is still at or near record numbers.

More goods are making their way into Ports and being unloaded, but containers are still stacking up in Port yards waiting for trucking and rail transportation to distribution centers. Trucking costs for transporting freight have soared, showing no signs of reversing. How long this container backlog will persist remains uncertain.

Inflation

Congress is trying to move forward on the $1.85 trillion climate and social spending bill. The legislation has stalled amid concerns from moderate Democrats over the price tag, and the latest inflation reports will only add to the reticence by legislators to vote for more massive fiscal policy.

The current Congress has already passed $3.1 trillion in spending bills this year, creating not only a surge of federal debt, but a potential surge in government spending which is front loaded for 2022, 2023, and 2024.

Over the next 10 years, the CBO estimates the total interest cost on the federal debt will rise to $5.4 trillion, becoming the fastest growing component of the federal budget.¹

The latest report of 6.3 percent consumer price inflation was for the 12 month period ending October 2021. This is the highest rate of annualized inflation since 1990. The narrative from the FED is that current inflation is transitory, which means “not permanent.”

If not permanent, then how long before we see inflation abate? The FED has no answer because the next few months will not get any better.²  However, the bond market is not crashing, so that’s a good sign that investors are buying the transitory narrative.

Calling “transitory” the threat of record inflation is not proving to be a calming message to Americans. Higher prices today subtract more from people’s incomes. Declaring that today’s inflation is temporary does not change today’s damage. When I go to the store and buy that $15 sirloin steak that was $8 a year ago, I’m still out the $7 today, even if that steak goes’ back to $8 next September. Ditto everything else I need to buy between now and September (or whenever the FED thinks inflation is supposed to subside).

Effectively, inflation reduces my real income, and when my real income is reduced, I spend less.

A new survey indicates that 88 percent of Americans are concerned about inflation, held across all age groups, racial groups, and income levels.³ The October survey found that 48 percent of adults plan to reduce their spending on restaurant meals and takeout, 30 percent on technology, 29 percent on clothing, and 20 percent on travel.

And speaking of surveys where consumers are threatening to spend less, comes the latest sentiment survey index by the University of Michigan. The November survey results show consumer confidence hitting new pandemic-era lows as pessimism about the economy rises.

What is weighing down sentiment? Inflation (especially in food and gasoline), the pandemic that never ends, and policy mistakes by Congress and the Administration including vaccine mandates and massive spending bills.⁴

Labor Force

Finding workers to staff positions in all sectors has become a principal problem for businesses trying to meet the voracious demand for goods and services by consumers. At historically record levels, there are over 10 million job openings that remain unfilled.

The slow return of the labor force is a principal reason (if not the dominant reason) why total employment has not fully recovered yet. In California, 400,000 people who were in the labor force when the pandemic hit, are not back at work nor are they looking for work. Where are they?

Surveys conducted by the Census Bureau in mid-October indicate that most of them have become caretakers for infected patients or their kids. Many have become stay-at-home parents and/or are now homeschooling their kids. Prime age workers who are without children have fully returned to the labor force.

Consequently, either as vaccinations increase for school age children, more of the general population is vaccinated, or the pandemic naturally burns out, the labor force is predicted to gradually be restored. The problem of finding workers now is going to persist into next year and keep pressure on wages which fuels inflation.

If you are recently retired, we need you to come back to work. You’ll make yourself and everyone happier.

The Pandemic That Never Ends

The global economic recovery remains tethered to the pandemic. And another wave is coming. We are seeing it in Europe, notably Germany and Austria. In Austria, a vaccine mandate and a national lockdown have now been imposed. In Germany, daily cases are now more than twice as high as they have ever been during the course of the entire pandemic.

Now officials are worried that waning protection from the vaccines, combined with Americans spending more time indoors amid colder weather, will also send the United States into a fourth wave of spiking cases. Cases are already rising again, and we now face the onset of the new and unknown Omicron variant from South Africa. It has emerged in Europe and it is likely to become the dominant variant in the U.S. soon. However, much will depend on its speed of transmission, virulence, associated rates of hospitalization and death, and the effectiveness of vaccines and antiviral medications against it.

Public health officials including Anthony Fauci are calling for an immediate expansion of booster shots, as well as mandatory vaccine programs for children. California already became the first state to announce vaccine requirements for children in K-12 schools.

Parents that object to this are a threat to leave the labor force, while other reticent potential workers may remain out of the labor force until vaccines are mandated for all. In either case, the negative effect on a labor force that we need now is extended. Consequently, vaccine mandates could potentially impact the economy. Clearly, we desperately need the pandemic to end or an acceptance by all that the risks have largely abated and coronavirus is something we can now live with. The longer the pandemic is allowed to persist, the more lasting its impacts will be.

¹ https://www.pgpf.org/blog/2021/07/interest-costs-on-the-national-debt-projected-to-nearly-triple-over-the-next-decade

² Even as the Fed begins tapering its bond buying program by $30 billion per month, this form of monetary tightening is unlikely to have much effect on consumer price movements next year, even as bond purchases go to zero by mid-2022.

³ https://bit.ly/3lnita6

⁴ In a recent November 23, 2021 Rasmussen Reports poll of 2,500 U.S. voters, 29 percent said that the country is heading in the “right direction.” This finding is confirmed by a November 9, 2021 USA Today/Suffolk University poll, and an October 31 NBC News poll. In the former, only 20 percent of respondents think the country is going in the “right direction,” and 66 percent answered the “wrong direction.” In the latter, 71 percent of Americans believe the U.S. is on the wrong track.

by Mark Schniepp
November 5, 2021

The GDP outcome for the July to September period this year was very disappointing. And with year-to-date inflation running at 5.3 percent—the highest rate of inflation in 13 years—there are mounting concerns that the U.S. economy may be heading into a stagflationary period of the business cycle.

What is stagflation?

Stagflation is when there is both inflation and stagnant (or sluggish) growth of economic output. A period of stagflation has not occurred in the United States since the 1970s, so there is little precedent for predicting that such an outcome will belie the current economy.¹

The supply chain issues (that I wrote about at length last month) and the massive fiscal and monetary stimulus in 2020 and 2021 have contributed to current consumer price inflation, which is more than twice the rate that we experienced over the 2012 to 2020 period.

Moreover, producer price inflation has now hit 20 percent year-over-year. This is the highest rate of inflation in producer (or wholesale) prices since 1974.

The economy appeared to be in horrific condition in the Spring of 2020, prompting the administration and Congress to pass a $3 trillion spending program to restore income to businesses, organizations, and workers lost from a shutdown economy. This was just the beginning of a massive fiscal policy response to the pandemic.

Opening up in May and June of 2020, the economy bounced back sharply. Conditions were not as dire as presumed and incomes remained surprisingly resilient, helped by the CARES Act. Consumers then went on a buying binge (which has yet to materially cool) and this is the fundamental impetus for the current supply chain debacle.

Then another $900 billion stimulus program was initiated in December 2020. This included more helicopter money and PPP loan funding to keep businesses viable. Then another $1.9 trillion of spending (including more helicopter money) was approved in March 2021. The U.S. response to the pandemic is an order of magnitude larger than the response to the 2008 global financial crisis.

If the current $3 trillion in proposed spending by Congress is approved including the infrastructure bill and the Build Back Better bill, we will see much of this injected into the economy at a time in which the recovery would be better left alone.  More massive government spending will likely exacerbate inflation by further stimulating already steady demand for goods and services.

Supply shocks precipitated the stagflation of the 1970s. Currently, the post-pandemic supply bottlenecks represent a current shock because it has largely been unanticipated. So-called “shortages” are occurring where we can’t sell enough automobiles, pet food, or beef to consumers who want this stuff, reducing some production and output value. Meanwhile, the demand for labor remains extraordinary, the unemployment rate continues to decline, and general consumer demand for products does not appear to be moderating. Remember, federal stimulus money throughout 2020 and into 2021 including enhanced unemployment payments along with work from home that kept office workers and teachers employed, maintained incomes throughout the pandemic.

The persistence and/or increase in inflation would have meaningful economic and financial consequences. And I believe we are more apt to see a persistence of inflation than we are to see stagnant growth because the evidence for the latter is relatively absent today.

Growth Prospects Going Forward

The Delta variant and FDA approval of the Pfizer vaccine are encouraging more people to get vaccinated, bringing the country closer to herd immunity with 58% of Americans fully vaccinated as of November 3. Moreover, the U.S. economy has felt less impact with each wave of the virus and has generally been able to withstand the damage.

For context, the U.S. economy grew 6.7 percent in the second quarter this year, and then 2.0 percent in the third quarter. The near-term health of the U.S. economy remains strong and current GDP forecasts (as of October 2021) range from a low of 4.3 percent to a high of 6.3 percent.

Furthermore, the International Monetary Fund projects 5.9 percent growth for the global economy in 2021 and 4.9 percent in 2022.  These rates of growth are hardly stagnant if they are realized.

Risks and Scenarios for Stagnant Growth

How does the economy fall into stagnation?  Any combination of these scenarios would negatively impact growth. The disruption to the global supply chain along with new variants are perhaps the most probable in terms of potential threats to the economy in 2022.

Consider any of the following:

• The current vaccines are not effective against new variants and a new wave of cases precipitates renewed interventions, such as social distancing, school closures, and the cancelation of large events again. Stricter interventions are probably not likely.
• People cut back on services they perceive as “risky” amid new virus outbreaks.
• Financially stretched businesses fail with no new rounds of fiscal rescue.
• Current supply constraints escalate, limiting production and growth. Supply shortages also limit consumption spending.
• Overloaded supply chains drive up operating costs and prices leading to higher rates of inflation.
• Higher rates of inflation, and the exhaustion of stimulus money received by households and their savings also reduces consumption.
• The Fed raises rates sooner than expected and more than expected, causing demand for interest sensitive goods to decline. Economic growth slows below potential in 2022 and 2023.

But what’s the chance?

I put the chance of these downside risks at less than 50 percent, but higher than 10 percent. Growth this quarter and going into 2022 should remain high because households want to spend their bloated savings from the past year. They are also demanding more entertainment and are dying to travel having foregone both since March of 2020.

Business investment also continues to increase, especially in IT equipment and software. And housing demand precipitates much higher residential investment in 2022 and 2023. We don’t need Congress to pass any more spending bills for economic growth to remain solid over the next year or two.

I don’t think there will be the “stag” in stagflation, but I’m less certain about the transitory nature of the “flation” part. Inflation could accelerate and hang around into 2023. That means the damage of higher prices is being baked into the cake we plan to consume over the next two years.

¹ The stagflation of the 1970s came after the crude oil supply shocks following the Yom Kippur War in 1973 and the Iranian Revolution in 1979. Inflation soared to 11 percent in 1974 and 13.5 percent in 1980. Meanwhile GDP growth averaged 2.5 percent per year from 1974 to 1980 and was negative in three of those years. The unemployment rate over this period averaged 7.0 percent. The S&P 500 Index declined from 579 in January 1974 to 386 in December 1979.

by Mark Schniepp
October 7, 2021

Global supply disruptions continue to hamper the U.S. economy, contributing to the acceleration of inflation. It doesn’t take a rocket scientist to notice the clear evidence that supply-chain issues are creating economic costs.

Looking at this chart of new U.S. vehicles sales each month through September, you’d think that consumer demand for autos was falling like a rock. Normally that’s what tends to drive the variation in this series. This time however, it’s a supply issue, indicative of many product supply constraints today.

Usually, cars are like Doritos—they can always make more—but cars utilize semi-conductors to run most of their internal and external systems. And now there is a semiconductor supply issue from Asian producers, due to intermittent factory shutdowns because of COVID-19, limiting production.

A spate of supply “shortages” emerged when ocean carrier sailings were cancelled, manufacturing capacity was cut, and workers everywhere were displaced. Circumstances where the growth of demand for a product is outpacing the growth of supply—and this includes the scenario where the normal volume of supply has been interrupted—manifest as shortages. The latter circumstance has pushed prices higher, adding to the surge in inflation this year.

Many products that we import—including coffee and Nike shoes—are further delayed into seaports because of problems with ships and containers. The world-wide pandemic-induced demand for PPE rerouted containers and ships about the globe, or shut down ships entirely during much of 2020. These particular outcomes have interrupted shipping schedules and the normal supply of shipping containers. Factory shutdowns or dockworker quarantines due to coronavirus outbreaks further exacerbated the supply issues.

The Great Shipping Debacle

Dozens of mega-container ships are waiting off the coast of Los Angeles to dock at the Ports of LA and Long Beach. The route into San Pedro Bay accounts for about one-third of all US imports, and the backlog is causing ships to wait weeks to dock and unload. The mega-ships take much longer to unload, and they carry millions of dollars worth of furniture, auto parts, clothes, electronics, and plastics. Backlogs in most of these goods are seriously piling up.

As of late September, more than 70 container ships are anchored in the San Pedro Bay, a record number. The lack of having all of the goods unloaded at the Ports and transported to markets results in (1) shortages of products, and (2) rising prices for these goods to alleviate the shortages.

Thousands of containers are still stuck in unfamiliar routes or are stuck on ships waiting to unload. Fewer containers are in normal circulation which is causing the existing container supply to rise steeply in price as companies compete for them.¹

Container prices have quadrupled or quintupled in one year. Rising container prices increase the cost of shipping, which increases the end-product costs to consumers. Container prices will ultimately normalize but it will take time.

The largest question bankers, economists, and company CEOs can’t answer with certainty is this: Are the shortages and delays merely temporary mishaps accompanying the resumption of business, or something more insidious that could last well into next year?

Consumers who continued to consume through the pandemic exhausted inventories of goods that the idled factories and delayed ships were unable to replenish. This rate of consumption continues today. We originally assumed that factories would catch up and ships would work through the backlog in a few months.

Not so. Coronavirus-related closures of key ports in Asia, the intermittent factory shutdowns, and the delayed unloading of waiting container ships has extended the catch-up period.

Now with Christmas approaching, consumer demand for goods will accelerate, creating further competition for limited supplies carried by the crippled supply chain, which will further add pressure on prices. This is demand-pull inflation. And it is likely to persist at least into next year.

Trucking

The primary source of container transport when the cargo is unloaded is trucking. A “shortage” of drivers translates into container volume that does not get moved to its destination on time. The driver workforce has been reduced by safety concerns, care giving priorities at home, expanded unemployment benefits, and other job openings offering a better lifestyle.

Wages are rising sharply, but the process to lure (and/or train) enough workers back into the industry will be lengthy. The truck driver shortage may be the most acute of bottlenecks in the supply chain, and it does not bode well for a rapid resolution of the overall disruption.

Delta

The bite of the Delta variant on the economy is easing. New infections and hospitalizations have dropped as the worst of the current coronavirus wave is clearly receding.

But it’s likely that Delta extends the supply-chain issues, particularly for semiconductors. Though there are a significant number of shortages now, domestic production for a number of them are improving, and this should ease some price pressures soon. The Delta variant still creates some upside risk to inflation. If the highly transmissible strain prompts fewer workers to return to the labor force, it may require businesses to further bid up wages and pass on the extra labor cost to consumers. This is cost push inflation, which is difficult to address with either fiscal or monetary policy.

Consequently, we need infections to abate, the economy to remain open, and the labor force to expand to avert the vagaries of cost push inflation, which is the more pernicious form of inflation, and can lead to stagflation.

GDP estimates for the third quarter have been scaled downward, but not sharply. The annualized rates are now between 3.3 and 3.9 percent, and rising to 4.3 percent in the fourth quarter, the period we are currently in now.

¹ When the Suez Canal was blocked in March by the Ever Grand, it stranded thousands of containers and caused backlogs and delays in shipping schedules that lasted months. Vessels had to wait for the canal to open or take a much longer route around Africa. The shutdown of a key port in southern China in May and June left approximately 350,000 containers idle.

by Mark Schniepp
September 1, 2021

As long as there are variants on the horizon and health professionals recommend vaccinations, boosters, masks, and other precautions, we may be faced with at least a quasi-pandemic environment to contend with. But absent specifics, we can’t be sure how they will impact consumer demand, business revenue, or the economy in general.

In the July newsletter, I showed that the data during the first half the year clearly demonstrated a rebounding California economy with strengthening consumer desire for travel. This summer has provided compelling evidence that people are starved for pre-pandemic activities and freedoms, and it seems as though few are holding back.

All sectors of the economy are in recovery, and job restoration will occur broadly. Construction has recovered. Logistics, or the distribution and warehousing sector has more than recovered. The broad based tech sector remains one of the strongest engines of growth. Healthcare jobs and the professional services sector will have entirely recovered by year’s end or not long after.

The Economy in the Aftermath of the Pandemic

The impact on the economy of California was more significant than the rest of the nation but the recovery will progress at a faster pace, catching up to the U.S. by 2023.

However, tourism based economies will take longer to recover, so the coastal communities are certainly lagging, despite the flurry of tourism throughout the region this summer.

In the Tri-Counties, San Luis Obispo County was hit harder than Santa Barbara or Ventura and is not recovering as fast.

Any further business interruptions or capacity limitations due to future variants will be extremely detrimental to business owners, and a growing backlash sentiment is likely to ensue.

That said, a change in the environment of Sacramento may provide a new sense of optimism to Californians in view of the resentment which sparked the recall effort.

The pace of recovery is expected to hasten once pandemic related limitations are lifted and international tourism is allowed to resume in California again.

Longer term structural changes as a result of the pandemic will be fewer and much less dramatic than the hyped expectations of meaningful changes in the way we will work again, proclaimed by many sources during the pandemic.

The Great Resignation is principally due to the tightness of the labor market and is only marginally exacerbated by the work-from-home mandates that created a new lifestyle for workers during the pandemic, to which they have assimilated. The tightness of the labor market is clearly demonstrated by the record numbers of job openings that now exist.

The Workplace in the Aftermath of the Pandemic

The Great Resignation

The number of workers who quit their jobs reached an all time high this past spring. Why?

But as workers now face the possibility that their employer cannot provide all of their new demands in a post-Covid world, they are seeking alternative jobs where management offers more flexibility.

Consequently, employers now face more employee turnover and will have to make more concessions to maintain key workers. Unfilled positions may have to be tolerated for some time. Hence the dearth of workers we are now seeing in the restaurant and retail sectors.

But is the Great Resignation part of a structural change that will endure regardless of where we are in the business cycle? I don’t think so. This situation is likely to change if the labor market loosens up. This can occur as more workers return to the labor force as the pandemic fades, as generation Z college and university graduates start hitting the job market, or if economic growth were to slow. We are not forecasting a slow patch anytime soon but we do expect an expanding labor force.

Remote work and virtual meetings will continue

Virtual meetings are both time and cost saving for business. Videoconferencing during the pandemic has ushered in a new acceptance of virtual meetings. This means reduced spending on transportation, lodging, conference rooms, other meeting rooms and meals. This might also translate into smaller sized office suites. We can’t yet predict how material this might be but it’s likely to be transitory. Nevertheless these changes are going to persist through 2022.

Longer term, most workers will return to the office

Most hybrid work plans call for employees to be in the office two to three days a week, yet this is unlikely to be practical for those who moved more than 50 miles away. Employers with headquarters and offices in major cities will need to decide if they will allow employees who relocated to work remotely on a permanent basis.³ Some will and have anticipated that when hiring employees living in other states. Most however will not.

With more remote working there will be fewer opportunities to collaborate in-person

Many organizations will encourage employees to take e-learning courses to maintain training and development. E-learning and virtual training opportunities are more prevalent now for the workplace.

There will be a shift towards a more collaborative workplace as employees seek social interaction and community engagement

Whereas before the pandemic, some employees preferred to work in isolation in the office. Now, remote workers coming to the office will use their workplace to meet colleagues, brainstorm, and have social gatherings. Through these interactions, employees visiting the office will be in a work environment that fosters collaboration, creativity, and innovation.

¹ In Jaunary 2021 a majority of US workers surveyed by the US Gallup Poll said they worked remotely all or part of the time during the pandemic. https://news.gallup.com/poll/329501/majority-workers-continue-punch-virtually.aspx The majority of workers in the survey also responded that they prefer to work remotely once all restrictions are lifted.

² Surveys report that between 40 and 58 percent of employees would quit if required to return to the office. See https://www.businessinsider.com/quit-job-flexible-remote-working-from-home-return-to-office-2021-6, and https://www.fi-magazine.com/364584/survey-finds-58-of-people-working-remotely-would-quit-their-jobs-if-required-to-return-to-office

³ From the Gallup poll conducted in late January 2021, just 23 percent of workers who always or sometimes work remotely desired to continue to work remote longer term. There does appear to be an acknowledgement that the same remote work opportunity enabled today may not persist indefinitely.

by Mark Schniepp
August 9, 2021

The surge in cases began in July and continues to rise.

Cases in California are now at their highest daily count since early February.

Mask mandates have been restored in many counties, including the Bay Area, Los Angeles County and Santa Barbara County.

What businesses now fear is another round of restrictions such as closures or capacity constraints.

I don’t believe that will come, because there is more knowledge of how to address the variant spreading without having to shut down.

Furthermore, deaths are not rising much with this new variant so the public heath risk is not as great.

Consequently, limitations on business activity are unlikely from the supply side.

From the demand side however, there may be some effect.

To date however, and it may still be too early to make unequivocable conclusions, the upward summer trajectory of the recovery clearly remains intact. There is a consistent rise in travel, spending, hotel utilization, and restaurant bookings.

There are more flights leaving from/arriving at LAX and SFO, but there are proportionately more passengers flying, suggesting that load factors are much higher now.

While air passenger travel in California has recovered 66 percent, passenger travel nationwide has recovered nearly 80 percent, and the clear increase in travel has produced higher hotel-motel occupancy rates.

Data form open table shows restaurant bookings (and subsequent spending) are just about back to pre-pandemic levels (i.e., February 2020).

The surge in travel that we observe this summer is contributing meaningfully to stronger economic growth this quarter and a more rapid return to the normal we knew before the pandemic and recession of 2020.

We are still on track with the forecast for 2021, that growth this quarter will be stellar, moderating in the fourth quarter.

Job creation will rise sharply in late August and September as schools resume.

We are closely monitoring the pace of economic restoration in California so stay tuned.

by Mark Schniepp
July 8, 2021

It’s mid-year 2021 and one of the more relevant economic issues we currently face is the spate of clear and obvious price increases for many goods and services.

Nationwide, home prices have surged, and in some California markets by more than 50 percent over a year ago. Used car prices jumped 10 percent in April from March, and 21 percent from April a year ago.¹ Airline fares are 10 percent higher than year ago prices for the same flights. Car and truck rental rates in April were up 82 percent compared to April 2020, and 16 percent higher than in March.

Travel related price increases are very likely catchup from the steeply discounted prices offered a year ago when no one was traveling anywhere.

But prices for commodities like lumber and concrete are sharply higher. Lumber prices remain far above pre-pandemic levels even after a sharp decline in recent weeks. Gold and silver prices have rallied as have cryptocurrency values year-over-year. Furthermore, food prices like seafood and beef, and energy prices are all up sharply. Wages have notably risen in the last 6 months.

Why?

There are a host of contributing factors:

• Because of all the stimulus to the economy: helicopter money, bonus unemployment payments, bailouts to cities and states, and hospitals.
• Because of the Fed’s rock bottom interest rates.
• Because of the sea of consumers dying to do what they haven’t been able to do for the last year: travel to anywhere, go to a bar or the theatre, or attend a concert.

Many economists are not concerned, indicating that the current spate of price increases is transitory, and the result of supply chain interruptions which have restricted supplies of goods.

The Fed is supposed to keep inflation contained. A few months of what seems like excessive price increases, especially when they are being blamed on the pandemic, is not a large cause for concern. Unless of course, the rise in prices does not abate, especially when production largely returns to pre-pandemic levels and the current supply bottlenecks are worked out.

If the current inflation persists, the Fed will have to quickly “do something” and right now that something means increasing short term interest rates.

Citing excess capacity in the economy, the Fed is not concerned that the $5.3 trillion in federal stimulus spending during the pandemic will create a longer term problem, and though their inflation forecasts tick up this year, they retreat next year and in 2023.

Is this wishful thinking? I think it might be.

We will know more as the year progresses and if the pent-up demand pressures abate, and/or inventory levels are restored in an orderly fashion.

There has been so much stimulus and while there is so much unemployment, much of it appears to be voluntary, due to the federal stimulus monies being paid to “unemployed” workers.

Will stimulus monies result in the hasty production of goods and services that tries to catch up to surging demand? Under that scenario, firms must hire more workers and employ more resources quickly, and that has the potential to manifest into demand push cost increases for inputs and for workers.

Workers are badly needed in the economy. There are more job openings today than at any other time in a recorded history that spans the last 20 years.²

Wages are rising sharply for many occupations in which workers appear to be “scarce.” Wages are also rising for professional and technical workers. Wages will continue to rise until job openings begin to be filled and are no longer rising every month.

The end of the unemployment bonus will help return more of the unemployed to work. Vaccinations and opening up schools full time, 5 days a week will enable anyone who had to stay at home to care for their children, themselves, or their parents or other elderly, to go back to work with more confidence.

That said, the question about longer term inflation is whether stimulus dollars will boost demand persistently over the next year or two or beyond, pushing production up faster, inducing higher costs. It’s a valid concern.

The Fed or the International Monetary Fund are less concerned. They don’t believe the government spending multiplier is that large. They also believe it will be diluted by stimulus money that won’t be spent because of contingencies and because of saving.

Home Price Increases Understate Inflation

Nationally, the median home price increased 19 percent year over year in April. In California, the median selling price rose 39 percent in May versus May of 2020.

Now according to the May consumer price index, the rise in housing costs accounted for 26 percent of the overall increase in inflation. But the index also indicates that home costs are up only 2.2 percent over a year ago, and not 19 percent or anything close to that. This is because the sale of housing units is not included in the CPI. A home purchase is considered an investment and not consumption.

The cost of shelter for rental-occupied housing is rent. Rental data is only collected every 6 months so there is a lag if rents are rising quickly. For owners who occupy their home, the cost of their shelter is the implicit rent that they would have to pay if they were renting.

In an environment like now where home prices are rising rapidly, economists interpret this an increase in the price of a capital good. But to a buyer, it represents a higher cost of living.  So there is clearly a mismatch and the true cost of living when you include housing is understated.

Inventory and Prices Going Forward

Only 1.16 million homes were on the market in April, a 20 percent drop from a year ago, according to the National Association of Realtors. In California, over the last 6 months, inventory levels have declined to their lowest on record.

The continued “shortage” of homes, especially at the lower end of the market, would imply that home prices will not cool off any time soon.³ However, nationally, sales are beginning to weaken and it’s likely that prices will ultimately follow. But this usual trend may not be dependable in such a supply constrained market.

Are supplies forecast to rise? Yes, with the demise of the pandemic and the return to a pre-pandemic economy, we expect mobility to gradually increase and homeowners to increasingly be willing to sell.

Realtor.com is already reporting a meaningful increase in inventory in some markets, and especially for new homes. So some relief in home price inflation may be forthcoming, even in California.

¹ Nationally, Home prices were 13.2% higher in March, compared with March 2020, according to the S&P CoreLogic Case-Shiller National Home Price Index. The March gain is the largest since December 2005 and is one of the largest in the index’s 30-year history.

² Which raises further questions: Why are they not available or being hired? Is there really a mismatch in job skills? How come this mismatch developed over the last 15 months? Conditions in the type of jobs that are needed have not changed that much. Much of the economy is going right back to where it was pre-pandemic. We originally thought there would be significant changes but we now know there are not.

³ There really are no “shortages” in competitive markets. Price equilibrates supply with demand and markets clear. We tend to think there is a shortage when we can’t buy the same commodity for the usual price (or something close to the usual price) and therefore refuse to buy it. The price of that commodity may or may not return to our notion of what it should be priced at, depending on the forces of supply and demand.