COVID-19 and Recession

by Mark Schniepp
March, 2020

Up until mid February, there was little worry about the 6 month outlook for the U.S. economy. We were relatively certain that the expansion would continue at least that long because the seeds of a general slowdown were simply absent. Even today, job creation through February continues to impress, manufacturing is clawing back from the effects of the trade war, spending by consumers has continued and the stock market was making record high after record high going into the last week of February.


The emergence of the corona virus has been swift and substantial. Between January 22 and March 6, the number of cases globally has exploded, from less than 500 to just over 100,000. New case growth in China appears to be contained. That’s not yet the case in Italy, Iran or South Korea.

On January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization declared the outbreak a public health emergency of international concern. So it was at that time that we entered into the world of pandemic.1

Two weeks ago, the CDC reported that “the virus is NOT currently spreading in the community of the United States.2 ” However, more new cases emerging in the State of Washington and elsewhere suggest that the virus has been spreading for weeks.

The high profile reporting of the circumstances of the virus spreading globally into a pandemic has motivated rapid behavior on the part of many countries to contain it. But at the same time, the daily media reports on new case and death counts have created a hysteria in the world’s population.

This is a perfect prescription for a recession: a sudden and unexpected chaotic event that produces a massive crisis of confidence. In our year long search for the ultimate cause of the long awaited recession, could this be the catalyst for the event?

Perhaps, but in this case, the virus represents an “external shock” that is unrelated to an economy that may be evolving over time with imbalances. The impact of the virus on the economy has so far been to reduce supply and not demand. And that reduction in supply (of people and the goods they produce) is temporary and will seemingly be fully restored once the virus is contained.

Financial markets crashed the week of February 24 as the virus spread and the uncertainty of containment gripped investors. Even today, there is uncertainty and panic regarding the extent and direction of the virus. And that panic continues to impact the stock market.

If the market continues to sell off, households will perceive their wealth positions to have eroded. Along with the fear of contracting the virus, consumers will reign in their spending. They will stay home and avoid restaurants, bars, the movies and other venues of entertainment. Then the “external shock” evolves into a demand issue.

We are already suffering from lower demand by foreign visitors for travel to California and the U.S. Events are being cancelled and schools are temporarily closing. Supply chain problems for some U.S. companies are hampering production, and some layoffs are occurring. Both production and spending may therefore be meaningfully impacted unless COVID-19 is contained soon or the hysteria subsides.

U.S. Containment

The U.S. has so few cases at this time with nearly all having origins of contact traced to Asia. Containment efforts have been swift and ongoing. Cruise ships to and from China were suspended. Airline flights in and out of China were cancelled. Anyone having had contact with China was barred from entry or immediately quarantined. Hong Kong has also been removed from the flight schedule by the airline companies. The U.S. added South Korea and Italy to the screening list for all U.S. bound passengers from those countries. All Travel from Iran is banned.

Hypothetical Scenarios for COVID-19 and the Effect on the Economy

Many provinces (24) of China were shut down by February 1. Factories closed and workers were told to remain at home. These provinces accounted for more than 80 percent of national GDP and 90 percent of exports.3 An estimated 56 million people in Hubei province (the epicenter of the virus) were under lockdown for nearly a month. By February 5, millions more workers were ordered to stay indoors as a measure of China’s draconian containment effort. This produced a major supply disruption for the international economy because China is the world’s second largest economy. Google, Apple, and Tesla have shut down all operations in China.

A survey by the American Chamber of Commerce in China, released on February 27, provided the first initial response of how Chamber members have been impacted. Nearly one-third of respondents indicated they have faced increased costs and significant revenue reductions already. Their outlook in general has been negatively impacted regarding the U.S.-China relationship.4

Disruptions to world tourism have resulted from the spread of the virus. With flights and ships suspended from entering China, visitors to Shanghai, Beijing, and the Great Wall are currently non-existent. Chinese visitors to California are also non-existent. And Chinese tourism is responsible for an estimated $4 billion in annual expenditures in California.

In late February, China started to restore work. While the government is advising local decision makers in the affected provinces to take all measures possible to limit the spread of the virus, there are also instructions to gradually resume work schedules to meet economic growth targets for the year. The Country has effectively been closed down for the last 3 weeks. However, the biggest bottleneck is a “labor shortage” since many workers are quarantined for 2 weeks before being allowed to enter factories and offices.

It is still too early to determine how significant the long-term impact of the virus will be. Here are a few scenarios: best to worst case:

  1. By late March, the virus appears contained with no meaningful increases in infections globally. More people recover from the virus than contract it. Most of China’s factories reopen and supply chains are largely restored to businesses in China, the U.S. and elsewhere worldwide. There is a 45 to 60 day impact.
  2. COVID-19 remains active throughout March and into April, peaking by mid-month. Containment is achieved in late April. Economic production is mostly restored by mid-May. June is a more normal month. Economic growth in the U.S. is impacted for the February 15 to May 15 time period, or about 3 months.
  3. Containment is not achieved until August 1, 2020. There are 500,000 to 1 million cases of the virus. Factories in China have all reopened by July after 5 months of either complete or partial shutdowns. Quarters 1 and 2 produce negative growth for China. In the U.S. GDP growth is impacted by up to 200 basis points. Production slowdowns or suspensions due to supply and demand issues force companies to lay off workers. Depending on intrinsic slowdowns in other sectors, this likely produces overall negative growth in Quarter 2 of 2020.

At this writing, I’d opt for scenario 2, but scenario 1 can’t yet be dismissed. We will know next week if financial markets globally will break their fall. Factories in China started opening again late last week and many people that tested positive for COVID-19 over the last month have now recovered.

Recession is a possibility for the U.S. due to COVID-19 but not a foregone conclusion. It all depends on the speed at which the virus can be contained and the current hysteria defused.


1 Coronaviruses are a large family of viruses that are common in many different species of animals, including camels, cattle, cats, and bats. The SARS-CoV-2 virus is a betacoronavirus, like MERS-CoV and SARS-CoV. All three of these viruses have their origins in bats.




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


Economic Problems that No One is Concerned With Today

by Mark Schniepp
February 2020

Economic Issues Today and How We Think About Them

  • Last month in the January Newsletter I discussed the National Debt which is a long term pressing issue for the U.S. It’s not something that needs addressing immediately but the condition of growing debt and its effects will prove burdensome on American businesses and all taxpayers longer term.

Today, few people are thinking about the national debt. It tends to be a more esoteric concept and its ultimate consequences are not affecting anyone yet.

  • Education and training (or retraining) our labor force to prepare for a different world is another long standing issue that we have to remain vigilant with. The Millennials did not prepare well, but Generation Z appears to be focusing on this with the kinds of choices they are making for majors at colleges and universities today.

With everyone anticipating the coming of the robots, we are threatened with a large reduction in job opportunities because many will be eliminated by automation. Students today appear to be planning accordingly.

But again, unemployment today is at record lows, everyone that wants a job has one, and no one is immediately worried about the impending mechanical replacement for their position.

  • Inflation is always a long standing issue for economic policy to grapple with. Higher rates of inflation lead to unintended distortions, like discouraging saving. It also increases the cost of borrowing because interest rates rise with higher inflation.

But right now, inflation remains unusually low, around 2 percent. No one cares about inflation because they are not experiencing any and haven’t for the length of the current economic expansion.

  • The stock market will perpetually remain a concern of American Investors, simply because it can melt down (or melt up) in a heartbeat. Since 52 percent of families have an interest in the stock market either directly or through their IRAs, market movements can have predictable effects on household behavior. A decline in the market can impact consumer sentiment and/or confidence and cause worry or even panic.

The stock market is currently at all time record highs—all three major indexes. However, because this situation can turn on a dime, these markets will always remain issues of potential concern. Investors certainly care about the market, but they don’t seem very worried about it today. Over the last 6 years, the returns have been unprecedented for the markets, especially last year.

Given the current course of the economy, there are few issues that Americans are concerned about. In fact, economic concerns in general are less relevant today than they’ve been in the last 20 years. The most recent Gallop Poll (January 2020) of the percentage of Americans “mentioning” economic issues as the Nation’s most important problem has just declined to 10 percent. It’s never been this low since the survey has been conducted.

Gallup’s poll of American’s confidence in the U.S. economy is currently at its highest level since 2000.[1] Gallup summarized the results of their economic surveys with this statement on January 23, 2020:

Rarely in the years that Gallup has tracked public ratings of the economy, since the early 1990s, have Americans had higher confidence in the economy than they do now. Nearly six in 10 describe the economy’s current state positively, and a similar percentage say it’s only getting better.[2]

The International Monetary Fund forecasts global economic growth to rebound in 2020 to 3.4 percent. The World Bank says 2.7 percent. The downside risks to this forecast have actually moderated this year. One diminishing risk is the Trade War, with Phase 1 of the U.S. China deal now complete, and with USMCA also completed.

Furthermore, Brexit is completed, and the U.S. and the U.K. will negotiate their own free trade deal this year, probably pulling Britain closer to the U.S. in terms of relaxed economic regulations and a boost to GDP growth in the United Kingdom.

Therefore, most people are much less concerned about trade policy today than they were a year ago (if they were then).

Then what are Our Concerns?

If there is no current worry about the national debt, inflation, training for future jobs, the stock market, or international trade, then what are we concerned about?

Recent Gallup polls indicate that “The Government” and “Immigration” are higher concerns than the economy. There are others, but these are the ones that are way ahead of the economy.

If you are concerned about some worldly issue, what do you immediately do to find out more information about it? Everybody knows the answer to this. You “google” it.

What are the most pressing concerns (from a googling standpoint) of Californians today?

Well, “the economy” is not one of them, not compared to other issues. Take a look at the chart here extracted from Google Trends. Compared to “weather,” “movies,” “Facebook,” “Instagram,” or “football” (or the 49ers), the search term “economy” ranks dead last, and not just now, but every day over the last seven months. Ditto for the search term “recession.”

In the past, Americans have been generally concerned about the economy, but not today. Other issues are more pressing. And the principal economic problems that have generated substantial worry in the past are mostly unimportant today.


Concerns about the economy today are practically non-existent. The consumer sentiment and confidence indices have been recording the highest levels of positive attitudes towards the economy in the last 20 years. Ditto the Gallup poll. As we head into the 2nd and 3rd months of 2020, few things have changed from the last 6 months of 2019, and economic risks have actually lessened. At the present moment, the economy is not something to be worried about.

But stay tuned because conditions can turn on a dime.



[2] Ibid.

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The National Debt: How serious a problem and do we need to address it now?

by Mark Schniepp
January 2020

The National Debt has continued to be a significant subject of domestic controversy, especially in view of the magnitude of fiscal stimulus undertaken by Presidents Bush, Obama and Trump.

Generally, economists agree that:

  • Rent control is bad
  • Tariffs are bad
  • High minimum wages are bad
  • Wealth taxes are bad, and
  • Too much debt is bad

Actually, everybody knows that too much debt is bad, but does the United States have too much debt now? Many believe that the U.S. debt is growing at an unsustainable rate, and that if debt holders grow pessimistic and stop buying U.S. securities, a debt crisis would ensure, shackling many Americans to a poorer quality of life in the years to come.

The national debt currently stands at $23.2 trillion (December 31, 2019), and this is the highest level ever. Federal debt held by the public accounts for $17 trillion and this is the more useful debt number because the government has to pay this back to people and corporations and countries that own U.S. treasury bills, notes, and bonds. That’s how it got into debt in the first place, by selling securities to the public.

The other $6 trillion of the national debt are loans between government departments. One of these is social security which is owed billions by the federal budget for monies received over time to finance government spending. The federal budget has to pay this back as well, especially as the demands on social security rise and the department must deliver retirement benefits.

Since 2017 when Trump entered the White House, the debt has increased by $2.7 trillion.

During the Obama administration, debt rose $8.2 trillion. During Bush, debt jumped $6.4 trillion, and Clinton: $1.4 trillion.

What is the Problem With Debt?

When the federal government borrows money to finance economic expansion, it’s normally accepted by the public because both current and future generations will reap the rewards of this expenditure. In the short run, the economy benefits from deficit spending when it is directed at economic growth and stability. The federal government pays for major infrastructure projects or defense equipment, and contracts with private firms who then hire new employees. Healthcare expenditures do this as well. These new employees then spend their government-subsidized wages on gasoline, groceries, new clothes, and more, and that boosts the economy over time.

When the federal government incurs debt to increase current consumption such as Medicare, Medicaid, Veteran’s benefits, or social security payments, only the beneficiaries of these programs will receive direct payments, and often these programs are without widespread support from the public. We often question these expenditures.

It’s the same issue for households. If you go into debt to make investments that will benefit you and your family in the long run, you feel the increase in household debt is worthwhile. However, if you deficit finance your new boat or a Hummer SUV, some measure of guilt is going to haunt you, along with perhaps your spouse.

When interest rates rise, there are higher debt payments which can overwhelm the annual federal budget, just as higher mortgage, boat and car loan rates increase your monthly payments and wreck havoc on your household budget. Had you stuck with the 2011 Camry, you’d probably have much lower car payments and less overall stress.

Higher Interest Rates

In the long run, debt holders could demand larger interest rate payments to continue carrying U.S. debt, because the risk of being repaid rises with expanding debt, especially as a percentage of Gross Domestic Product. A decline in the demand for U.S. Treasuries would increase interest rates, raising debt payments for the government (and households too), and at the same time, slowing the economy.

If the demand for U.S. Treasuries was to decline, the value of the dollar would also decline relative to other currencies, and foreign governments like China would be less willing to buy U.S. debt (i.e., bonds).

The Treasury Department would then have to offer higher yields (interest rates) on newly issued Treasury bills and bonds to attract new investors and maintain the debt levels. This would create more debt due to the higher payback obligation.

Debt Crisis

Is a debt crisis coming? Well, is the demand for treasuries declining and yields (interest rates) rising? The answer so far is no. There is sufficient demand for U.S. Treasuries largely because the yield on the 10 and 30 year bonds is so much higher than for government bonds in Japan or Canada, or anywhere in Europe or Australia. In other words, it’s still one of the safest investment instruments in the world and it pays a higher return.

A crisis is unlikely any time soon. But there is a general notion that the tin can of debt cannot be continually kicked down the road forever. This is especially true when the Social Security Trust fund won’t have sufficient funds to finance the retirement benefits of the baby boom generation that is retiring now at an accelerated rate.

Congress will ultimately have to raise taxes to generate the revenues needed to finance the budget and pay the Social Security Trust fund back. Either that, or benefits will have to be curtailed, impacting younger boomers who will retire last, and the older Gen Xers who will retire first.

Do we need to pay closer attention to this now or can we continue to defer serious action towards addressing the national debt? Right now, the net interest expense represents 8.7 percent of total federal expenditures and is less than outlays on Medicare, Medicaid, Defense, and Transportation & Education. It’s rising again but it’s low compared to the 1980s and 1990s.

Clearly, debt needs to be paid back, and with tax dollars. Ever rising debt will ultimately push interest rates higher along with debt service payments, diverting the amount of direct tax revenues that could be used on other government services. The public’s quality of life is therefore diminished. The federal government would have to raise taxes to maintain existing service ratios for the public, and higher tax rates would reduce disposable income for households.

So at some point in time, we or future generations are facing higher taxes or diminished government services or both.


The national debt, when managed correctly, can be used to stimulate economic growth and future prosperity. However, rapidly increasing debt would ultimately raise the interest expense on the debt. And taxes will need to be raised to finance the debt service or government services will have to be meaningfully reduced. Both results are likely.

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

The View of 2020 from the 2019 Window

by Mark Schniepp
December 2019


It’s time to review 2019 briefly just before we move into next year. A quick evaluation of the year might provide some insights about 2020 and what we can expect.

We leave 2019 having observed the record long expansion extended for 126 consecutive months (and no material signs of recession). This means generally favorable conditions for workers and for corporations that are not facing trade war tariffs for their inputs or their outputs.

11 months are in the books for 2019. And the twelfth looks reliably predictable to me. So much that I can provide a pretty definitive summary of how the economy did and whether there is any momentum to lead us into 2020 with continued positive news.

The decade of the 2000s was the lost decade of the American economy where by 2010 there were fewer people employed than in 2000. Unemployment was 10%. Housing bubble splatter was a mess; foreclosures everywhere. Dodd-Frank Wall Street reform was signed.

The decade of the 2010s was just the opposite. There was more steady and continuous job creation during the decade than any other on record. Unemployment plunged to a 50 year low. Average salaries per worker, adjusted for inflation, reached new highs. Household debt reached new lows.

During 2019, the long anticipated recession did not come. But there were early indications that it could have. The stock market sold off sharply at the end of 2018 (down 19 percent) ending the long 3,494 day bull market, but then rebounded sharply early in the year.

The fiscal stimulus has faded—the boost provided by last year’s tax cuts has played out. Interest rate increases by the Fed tightened monetary policy, slowing growth. Since then however, the fed has cut rates three times.

The yield curve first inverted in March, and then remained inverted between May and August. The trade war intensified and many politically oriented analysts predicted impending doom as a result. Uncertainty created by the tariffs has undermined business sentiment and made businesses more cautious. Investment spending has flatlined.

But no recession. In fact, NOT EVEN CLOSE. Overall growth remains above 2 percent. Employment is full and the unemployment rate has remarkably moved lower all year. Surveys of positive confidence in the economy by American households remain near record highs. 2019 has been a huge market for investors as the stock market made several records highs and is currently at another.

And as a result, households keep spending, extending the consumption engine of growth that is largely responsible for the long expansion. Inflation adjusted spending has maintained a sturdy 2.5 percent pace this year.


I don’t see any financial crisis in the offing heading into 2020. There are no asset bubbles. Earnings appear to be holding up well, providing some foundation for the high stock valuations. Weaker trade and tepid business investment, which will likely continue into next year, are not enough to trigger a recession.

What is then? Something that causes us to pull back on our spending behavior. And with wages rising, unemployment at near record lows, and help wanted signs littering the American landscape, those are compelling reasons to expect continued spending and continued expansion into next year.

The U.S.-China trade war is expected to subside in 2020, causing growth to actually accelerate.

Finally, there’s the general notion among economists that if the impending downturn were to occur, it would be short and shallow, perhaps so short and shallow as to avoid official classification as a recession. Recession is generally defined as a period of unwanted idleness of labor and capital. We don’t have that now and it could be avoided during 2020. Currently, all labor resources are fully utilized, industrial production remains high, and capacity utilization of the nation’s factories is rebounding after the UAW strike.

We are on the watch for trouble but haven’t found it yet. So stay tuned because you’ll want to be the first to know. And happy new year.

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

Happiness is High but for How Much Longer?

by Mark Schniepp
November 2019


I’m looking at the sentiment and confidence indices that are constructed from monthly survey responses of American consumers. It is remarkable at how much and how long a time we have been optimistic about the economy.

Consumers like you and me are finding little not to like in the present environment of low unemployment, healthy job growth, low interest rates, low inflation, and a stock market that continues to make record highs this year. Consumer confidence remains high, even though it has ebbed and flowed a little these last 6 months.

Growth in the economy right now is being led by your and my assessments of current economic conditions, which are keeping us happy and keeping us spending. While we believe that the outlook has weakened, it’s only a modest change from 6 months ago, because while there is a trade war, it has had little direct effect on us. Gasoline prices would typically sour our moods if they were to jump suddenly. And they did after the drone attack in Saudi Arabia, but even that proved relatively short-lived.

The way consumers feel and perceive the economy is particularly important for the outlook at present. Often sentiment simply reflects the state of the economy and adds little additional information necessary for forecasting the economy. Nonetheless, sentiment can be an early indicator of a turning point in the business cycle, especially when pocketbook issues are driving the movements.

With manufacturing in a mild recession now and some of the economic indicators weakening, a significant slowing in consumer spending growth now could be fatal for the expansion. Inflation expectations are also important to watch. A sustained drop in inflation expectations would be a concern to the Federal Reserve and may increase the likelihood of additional rate cuts, while a major increase could heighten fears regarding the trade war and the tariffs.

Confidence is high by historical standards since there is much for consumers to be happy about. The strong job market is the primary support. With unemployment at a half-century low and wage growth healthy, there is little in the job market for consumers not to like.

Household debt is at 39 ½ year lows (or the lowest level since records have been kept). And the stock market at record highs is providing another significant boost to our economic sentiments.

If there is a problem then it is this: we know that growth is slowing and the stock market will be unlikely to post sustained gains. The value of your home, for the most part, has also stopped appreciating. Consequently, confidence has nowhere to go but down.

Business Confidence

High consumer optimism stands in contrast to businesses’ attitudes. Global businesses remain depressed, as they have been for much of the past year, since the beginning of the trade war with China and other U.S. trading partners. Business survey results have grown as bleak as they have been since the global economy was coming out of the financial crisis a decade ago. And a weakening in hiring intentions by firms in recent weeks will ultimately be a concern for consumers and their economic outlook.

The Gradually Changing Economy

The economy is slowing. So even if consumers are happy and are in a sound financial position, they are nevertheless starting to spend less and the retail sales numbers including auto sales bear this out.

Manufacturing is contracting now. The stock market is high but there is a lot more volatility indicative of nervous investors. Furthermore, the stock market has gained little ground over the last 6 months, up only 2 percent since April. And this is part of the reason why the confidence or sentiment indices have slipped from their cycle peaks.

Consumer Spending Outlook

The retail spending outlook is positive, but not enough to prevent growth from moderating. The saving rate is high, giving consumers freedom to spend increases in their income, but there seems little motivation for them to spend much more. Job growth will remain the strongest support to sales, and the tight labor market is putting upward pressure on wage rates. However, the pace of job growth has slowed and will slow further as workers are becoming less plentiful and falling profits and uncertainty drag down business sentiment, limiting the support to total income growth.

So as expected, consumer spending growth is slowing after consumers contributed powerfully to economic growth earlier this year.

Growth in spending continues to slow going forward, but it will not collapse, as important supports remain in place. Job gains are still strong, and despite the weakening in business confidence, layoffs are not much of an issue because initial jobless claims for unemployment insurance remain very low. Growth in wage rates is also strong. Hence, income growth will hold up despite slower employment growth than last year.

How long can we remain happy? For the moment, for the next several months without much doubt. And there could very well be surprises to the upside. But in general, the slowdown scenario for 2020 has a noticeable weakening in consumer spending by the summer, and this will manifest in slower sales at Target or the Toyota dealership in your neighborhood. So plan accordingly.

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

Fall 2019: We Need You in Construction

by Mark Schniepp
October 2019


October is the month for stock market corrections, Octoberfest, Halloween parties, the baseball playoffs, clarifying the NFL contenders, and for the last two years, it’s been the month of natural disasters or their immediate aftermath.

I’m referring to the October 2017 fires in Northern California, and Hurricanes Irma and Harvey a month earlier. Then last year at this time, the ashes were just cooling from the Carr fire and the winds were beginning to blow that ultimately precipitated the most destructive fire in California history—the Camp fire in early November.

For this year to date, cross your fingers because there’s been nothing much yet. Instead we are observing that the major rebuilding efforts from the past calamities are well underway. Thousands of new homes are being built in Sonoma County. Home rebuilds from the Thomas fire are fully underway in Ventura. The first 50 homes from the Camp fire started last Spring with a handful now completed. And also underway are homes in Malibu where 475 were completed destroyed in the Woolsey Fire.

Replacement building is ongoing in Shasta County and in Mendocino and Napa Counties. The economies of all these regions are being lifted by the windfall influx of insurance payouts to replace structures, automobiles, furnishings, furniture and landscaping. How much payout? $12 billion in 2017-2018 and another $12 billion in 2018-2019.

An estimated 23,992 homes were destroyed by the fires of 2017 and 2018, and another 2,181 were damaged. Research at the University of Wisconsin determined that 94 percent of buildings destroyed by California wildfires between 1970 and 1999 were rebuilt. Consequently, we are expecting most of the recent destruction to be replaced.

If you can do construction, you can get a job just about anywhere in California. Even if you know nothing, you will get hired and trained. If you’re in the Bay Area, there’s a building boom occurring in the City, in Santa Clara and in the East Bay. Fire rebuilds are now demonstrably underway in Sonoma and Napa Counties.

If you’re in Ventura, Thomas fire rebuilds are finally moving along. If you’re in Sacramento, housing projects are occurring or planned all over, and workers are in high demand. If you’re in Fresno County, the high speed rail project is still underway, employing more than 3,000 construction workers. Also, there are more housing and industrial projects ongoing throughout the Central Valley region, especially to the north in Madera and San Joaquin Counties.

In Los Angeles, the downtown area is a sea of cranes and tens of thousands of apartment units are under construction. Ditto office buildings. The development of new structures is one the most visual business activities in Los Angeles County from Santa Clarita to San Pedro.

The rebuilding efforts together with the development booms in the major metro areas of the state have resulted in a fully employed construction workforce that has benefitted from an average 4.3 percent annual wage increase since 2015. The average annual earnings for a California construction worker now exceed $70,000.

Are you having difficulty getting a contractor to bid on your bathroom remodel? If not, is it a competitive bid? It would be more competitive if the state was not flooded with construction work, from fires, to high speed rail, to building booms everywhere else.

New and replacement development is a principal engine of growth in California today and construction employment is nearing an all time record high in the state. This is also true nationwide and it’s being called a “shortage.” The National Association of Home Builders reported last year that 82 percent of its members believe that cost and availability of labor are their biggest issues. Back in 2013, only 13 percent of members worried about labor costs.

The impending recession is not likely to appreciably slow down this industry. There is too much momentum right now to build homes, complete Phase 1 of the high speed rail, and construct apartments in Los Angeles and San Francisco that are badly needed by the urban millennial workforce. Besides, much of this construction is foreign or institutional driven.

So if you’re willing to pick up a hammer, we need you now, and your position might even be insulated from the next recession.

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

These times they are a’changin: Preparing for 2020

by Mark Schniepp
September 2019

The Southern California economy hasn’t changed much so far in 2019. In fact, most California economic indicators appear unchanged for the first 8 months of the year. Unemployment is nearly invisible, your salaries and wage rates are rising. Your spending is not diminishing. The housing market is fighting back and mortgage refinancing is hot again.

But there are signs, and they are becoming clearer now. I can finally quote Bob Dylan from 55 years ago: “These times they are a’changin.”

Four more months remain in 2019. It’s September and it’s still hot and you are thirsty. So sit down, grab an ice cold beer, and contemplate your plan for 2020.

Financial Markets

The stock market is acting like an amusement park ride. The Dow dropped 767 points on August 5, 800 points on August 14, and 623 points on August 23. But it’s still very high because between those precipitous declines, it rebounded sharply. The DJIA is up 15 percent year-to-date and today’s index is less than 3 percent from it’s all time record high set on July 15.

Investors don’t like the trade war with China that has escalated recently. They do like last month’s interest rate cut. However, they don’t like the negative treasury spreads that are persisting. More on this below.

You might want to review and/or rethink your investment portfolio because changes in the economy are more likely to impact financial market valuations. Your stock market portfolio needs addressing now. I’m not suggesting a huge move into cash, but a prudent rebalancing should be strongly considered.


Consumers are still spending and represent the engine of the 2019 economy. But trade wars don’t help us consumers who buy Chinese imported goods because those goods are going to be more expensive. We can buy other goods for the time being and consumers are doing just that. Furthermore, it’s a good thing China doesn’t export any cars to the U.S, or hardly any. Car sales remain steady, giving us little indication that we’re getting tired or board of our current vehicles. August consumer confidence was strong despite the stock market’s wild ride.

You don’t need to cut back on your spending. Presumably it is the result of your rising earnings and salaries. If not, then focus on reducing your household debt and/or your company’s debt. You will want these to be in sound order if the economy weakens and you need financing to carry you through a slowdown in demand for your company’s services or products.

Interest Rates

The 10 year is now at 1.45 percent—just a hair short of it’s all time record low. This is good news if you need a lower mortgage rate, or a cheaper car loan. However, lower long bond rates are intensifying the inverted yield curve, and this is making economists and financial market analysts more and more pessimistic about the impending recession.

Therefore, refinance your home if today’s rates are lower than your current rate. Refinance your car. Refinance anything else you are in debt on. Now is the time to take advantage of another historically low interest rate environment and lower monthly payments. 2nd chances in life don’t come that often.

TD Securities said its recession model is based on the spread between 3 month Treasury bill rates and the 10 year bond yield. The model is now predicting a 55 percent chance of recession within 12 months, or by August of 2020.

I don’t yet see that myself, but conditions can change quickly, especially because the economy is more vulnerable today meaning that if something goes wrong, we are closer to a tipping point. The tariff war is impacting the industrial sector. The purchasing manager’s index released this week shows a contracting U.S. manufacturing sector, the first such occurrence in 3 years.

We are certainly on a vigilant recession watch and you should be too.

The Labor Market

More job creation occurred in July throughout the U.S. Wages keep rising. That’s good if you are a wage earner. It’s bad if you are the inflation rate. Unemployment is still remarkably low and we have all become complacent with our seemingly unwavering job security. However, as we reported a couple of months ago, the rate is gradually rising again due to a growing reluctance to hire this late in the business cycle.

What can you do to become more indispensable at work? Because if you are, you’re less likely to be laid off when a weaker economy finally arrives. And layoffs are going to occur. If you are the person that does the laying off, think about what you can do now to reduce potential layoffs and position the company for greater resiliency. Perhaps that includes reducing your hiring of unfilled positions today. While broad thinking along these lines will push the unemployment rate higher, a tougher job market today or tomorrow is better than a horrific one in 1 to 2 years.


Affordability, particularly for first-time homeowners, is trending downward at the national level. This is not news in California and hasn’t been for the last 5 years. It is becoming increasingly clear that existing-home sales are past their cycle-peak, despite a recent uptick driven by the latest meltdown in mortgage rates.

Are you looking to sell your home? Lower the price and do it. Demand is still strong but affordability is the reason for sluggish home sales in many markets in California. If you’re a buyer, entertain the possibility of delaying your purchase until the recession. There might be lower demand at that time and therefore a higher likelihood that home values will soften. But don’t expect prices to collapse like they did in 2009. That was extraordinary because much of the price appreciation observed from 2004 to 2007 was speculation driven. That’s not the case today.

Existing home prices are moving higher again in many markets, after softening in the Fall of 2018 and continuing through the Spring of 2019. But as the economy shows more signs of slowing, expect additional price contraction.

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

The Housing Crisis in California: A Simple Explanation

by Mark Schniepp
August 2019

What’s the Cause of the Housing Crisis?

It’s being called a crisis because many people can’t obtain housing at current prices. But actually when this happens, it’s a crisis for the person seeking housing and a bonanza for the owners of rental and for-sale housing.

The law of supply and demand typically always prevails in markets that are mostly unregulated.

So here we are in the mostly unregulated housing market and due to strong demand and little supply growth, prices move exactly to where they should go, which is up. And why should they go up? To ration the existing housing and allocate it to those who can pay (which is how we allocate most goods in a capitalistic economy).

This sounds callas to many people, because there is an expectation that housing is a basic necessity like air and water and it should be more affordable. Well, it generally is. But not in Coastal California where (1) everyone wants to be, (2) where most of the jobs are, and (3) where building new housing is both limited and difficult (or near impossible) to navigate through the permitting process.

You can find much much much more affordable housing and plenty of it in Kern County, or Fresno County, or Colusa County, or Tucson, Little Rock, or Kansas City. There is no crisis in these housing markets and in the majority of the country.

But is the lack of supply the only reason for high prices in California, or I should say, coastal California? No. But the limits on supply are the principal cause.

There is an asymmetry between the growth of supply and the growth of demand. Growth of supply has lagged demand for a major part of the last 40 years in California.

Why? Because there have been increasing constraints on the development of housing imposed by legislation and court rulings since 1970.

CEQA (the California Environmental Quality Act) was enacted in 1970. In 1972 a California Supreme Court decision required an EIR for private development projects including housing projects. An EIR discloses the possible adverse effects on the environment of new development projects.

CEQA enables anyone the ability to litigate against homebuilding (or just about any building) in California. Lawsuits filed under CEQA against housing projects immediately delay them, increase their cost and increase the probability that they won’t get approved or built. Either that or the project is downsized. Therefore, less housing than originally intended is built, and this together with the efforts required to assure protection to the environment, increase the cost of housing.

In 1972 the City of Petaluma established a growth control on housing units, preventing the construction of approximately 50 to 67 percent of the housing units that would otherwise have been built in response to normal market demand. The City was sued. The suit ultimately made its way to the U.S. Supreme Court after lower courts found that builders were in fact injured by the City’s restrictive housing program. The highest court upheld the growth control.

This led to more cities adopting controls particularly in Northern and Southern California. And most coastal California cities have effectively restrictive measures embedded in their housing entitlement processes.

Then there are the development fees on housing that increase construction cost, and these fees are notoriously higher in California than in any other state, and by a magnitude of 2 or 3 or 4 to 1.1 In the referenced study, it was found that development fees increase the cost of housing in California by 18 percent.

There is therefore significant inertia either against the development of housing, or towards driving up the cost of housing in California.

Development fees are unlikely to go away, and CEQA is unlikely to be changed.

The desirability of coastal California increases demand and clearly, the growth of demand has been disproportional to the growth in the supply of housing. Consequently, predictable outcomes result with the price of housing. The great economic expansion of the 21st century has exacerbated that demand due to the prolific surge in job opportunities that have been created in California, and especially in the Bay Area and Southern California.

That’s it, a simple explanation of the housing crisis in less than 800 words.

What Can You Do About It?

Two things: (1) Wait for the next recession and hope it actually will soften the demand for housing (which recessions typically do), or (2) Move to Kansas City.

Even if the current level of demand abates, it’s unlikely to significantly impact housing prices and rents in Coastal California, but that all depends on the severity of the recession.


1 National Impact Fee Survey: 2015, by Clancy Mullen, Duncan Associates,

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

The Longest Expansion in U.S. History

by Mark Schniepp
July 8, 2019

On July 1, the U.S. economy quietly “celebrated” the longest consecutive spell of economic growth on record: 10 years and one month. The expansion officially started in mid-2009, following the horrific Great Recession, and no end is currently in sight.

We have already experienced the longest bull market on record in stocks during the expansion, and we continue to set a new record every month for continued positive job creation.

The current 121-month growth cycle edges out the previous record expansion of the 1990s that ended with the start of the 2001 recession, after 120 expansive months.

Everyone says that while the length of the expansion is remarkable, the strength of the expansion is not, and has in fact represented the slowest rate of growth over the last 70 years averaging 2.3 percent per year since 2009.

But it’s clear from the chart that the nation has shifted to a new growth path of GDP during economic expansions. Is growth really lackluster, or has it merely been replaced with the understanding that today’s $20 trillion economy won’t likely grow as fast as the $7 trillion economy that prevailed in 1975?

The 2 Percent Economy

We’ve been in a 2 percent per year expansion for 10 years. But so what? What’s to criticize? We are at full employment. Wages are rising faster than the rate of inflation. Inflation is historically low. Interest rates are historically low. Your car payment is low. If you financed a home purchase between 2010 and 2015, your house payment is low. If you already owned a home before that, your payments are probably even lower.

Technology has given you extraordinary freedom with smart cell phones and you are connected to everything and everybody practically 24 hours a day. Uber has become pervasive and is one of your best friends, and Amazon delivers you everything you need in 2 days or less. All this has occurred during the 2 percent economic expansion.

The End is Near

There have been numerous predictions of the onset of recession over the last 5 years, but no real consensus. And sure enough, the economy marched on. There is now a growing consensus that economic growth will slow from this moment on, ultimately manifesting in a recession.

A poll by the National Association of Business Economists in May showed that 60 percent of respondents expect a recession next year, even though there is not much evidence that economic conditions are weakening yet.

Corporate profits have weakened, but the stock market continues to set new record highs (the most recent record occurred on July 3, 2019).

Housing has weakened in all regions of the U.S., but home prices continue to rise, and the recent sharp decline in mortgage rates has produced another refinancing boom.

The trade war is not helping U.S. manufacturing, but the trade war alone is unlikely to push the nation’s economy into negative growth, unless tariffs and counter-tariffs suddenly escalate. This however is a low probability scenario. Even so, the Fed is poised to cut rates given this possibility (or other signs of weakness), and this would boost the outlook for rate-sensitive sectors including housing and automobiles.

The dreaded flattening of the yield curve has now become more worrisome because the spread between the 3-month and 10-year treasury yield has been negative for more than 6 consecutive weeks. A negative spread lasting a quarter or two is nearly a certain predictor of recession, though eminent doom is often a year or more away.

We have been reporting extensively in recent months on the U.S. labor markets, the housing market, interest rates, and the possibility of recession. We’ve been on a vigilant recession watch for over a year. But the aggregate indicators are either not breaking down or not breaking down enough for us to sound the alarm. And many indicators like the stock market, the labor market, and consumer spending continue to show unprecedented strength.

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

The California Unemployment Rate is Rising Again

by Ben Wright
June 2019

After 8 years of persistent improvement, the California unemployment rate began to drift upward in January 2019. A rising unemployment rate typically indicates that business conditions are deteriorating and companies are slashing jobs, and once the unemployment rate begins to rise, the economy often falls into recession within a year.

So is the California labor market indicating that a recession is imminent? Will mass layoffs begin sometime in 2019 or 2020? Not necessarily. The unemployment rate is now increasing because there are abundant opportunities to find a job, wages are rising, and people who had given up on finding a job are now returning to the workforce.

Recruiting Remains Extraordinarily Difficult

Even though the unemployment rate is rising, the job market is still excessively tight, and hiring managers are having problems finding qualified workers. Throughout California there are only 1.3 unemployed residents for every job opening, and in some regions there are more openings than people available to fill them.

The most extreme example is the Bay Area where there are 210,000 job openings but only 104,000 unemployed residents. Even if every applicant in the Bay Area was perfectly qualified for an open position, half of all jobs would still go unfilled.

In such a scenario, companies typically recruit from other cities and increase wages to poach employees from other firms. Both of these strategies are now being deployed, in varying degrees of intensity, across the major regions of California.

Statewide, the median wage increased by 3.5 percent in 2018, and increased much more quickly in some job categories.

In particular, wages are rising at above-average rates for jobs that do not require a college degree. This includes manufacturing, transportation, maintenance, and some healthcare jobs like home health aids and nursing assistants. After the 2007-2009 recession, workers without college training exited the job market in large numbers, but higher wages and fiercely competitive conditions appear to be bringing them back.

Influx of New Job Seekers

The California labor force (the number of people either working or looking for work) is expanding at the fastest rate since 2007. So far in 2019, the state is on pace to get 272,000 new job seekers, and because the job market may not be able to absorb them all, the unemployment rate could continue to move higher.

This is particularly true in the Bay Area, where the number of job seekers is expanding twice as fast as the rest of the state. And as a result, the unemployment rate is rising more quickly as well.

None of this rules out the possibility of a recession. When the unemployment rate gets too low and hiring becomes a challenge, it is difficult for companies to grow and for the economy to expand, meaning that a routine shock, like a stock market decline or government policy error, can more easily knock the economy off course. But in California, the labor market is signaling that times are still good, at least for now.


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