Author: californiaforecast

by Mark Schniepp
December 2020

The 2^nd Wave

The anticipated second wave represents a potentially large threat to the economy, if state governments choose to meaningfully restrict business operations. And many have to date.

The seven-day moving average of daily new cases now exceeds 160,000, more than double the peak reached in July.

The economic recovery is bound by the prevalence of the virus, and the recent trend is setting the stage for a brutal ending to a terribly difficult year.

Our base forecast and general outlook for how the economy evolves in 2021 did not assume further restrictive measures on economic activity. The degree of “openness” within state economies back in September was assumed to be maintained into the winter months. California was assumed to retain its status which, relative to other states, has been quite restrictive since July. Now however, a 10 PM curfew has been added to the myriad of other restrictions businesses face. LA County closed gyms, bars and restaurants entirely for 3 weeks starting Thanksgiving eve. Santa Clara County has banned all sporting events. The 49ers will have to play elsewhere.

GDP is expected to rise 2 to 3 percent in the 4^th quarter following the 33.1 percent jump in the 3^rd quarter. However, recent shutdowns could dash that forecast. GDP growth could turn negative in the first quarter of 2021 and there is rising concern that a second recession is possible.

According to the New Blueprint regimen that defines how businesses in California Counties can open, county-level economies are automatically reversing as case counts rise in the 2^nd wave. Currently, more than 94 percent of California’s population is now living in counties that are in the state’s most restrictive reopening tier (purple), which mandates significant closures of businesses.

Across the pond, France is currently in a nationwide lockdown. Germany has closed bars, restaurants, theaters, and soccer for a month. Italy and Greece have imposed very early curfews. Museums are closed in Italy. Madrid banned all but essential travel in and out of the city.

And recently, reversals are either recurring (especially in New York and Illinois) or being considered where the virus is raging particularly fiercely in mid-western states.

The unfortunate revisiting of the potential need for mandated closures and movement restrictions is sparking more dissent. The current trajectory, which is quite common for viruses like the flu and coronaviruses in the Fall and Winter months makes it difficult to imagine the U.S. economic recovery getting back on track and heading closer to normal any time soon.

There are 10 million people currently unemployed who were employed in February of this year. And this number is going to go higher over the next month or two. We are already seeing an increase in unemployment insurance claims at both the national and state levels. Consequently, a weakening labor market is already occurring.

CARES Act Unemployment Aid Expires

A significant number of people could be impacted soon by the expiration of unemployment aid under the CARES Act, which is set to lapse at the end of this calendar year. This includes the Pandemic Emergency Unemployment Assistance and Pandemic Unemployment Assistance, which is for gig workers. The total number of people on these benefits is approximately 13 million nationwide and 2.1 million in California.

Operation Warp Speed Has Delivered and the Vaccines are Nearly Here

The most important ingredient to the U.S. economic outlook in 2021 and beyond is the distribution of an effective vaccine for the coronavirus that enables a return to economic normalcy. Recent news continues to paint an optimistic picture. AstraZeneca, in partnership with Oxford University, became the third pharmaceutical giant after Pfizer and Moderna to announce a promising vaccine candidate on November 23.

The positive vaccination news of the past three weeks is encouraging, but we are likely months away from any widespread distribution.

Pfizer announced on November 8 that their candidate has proved 90 percent efficacy in Phase 3 trials. They later upgraded the efficacy to 95 percent. The FDA will evaluate the application for widespread vaccination.

Pharmaceutical company Moderna announced on November 17 that early clinical trial data analysis shows its coronavirus vaccine is 94.5 percent effective, and that it has a long shelf life in the refrigerator, making it more amenable to delivery needs in rural areas. The announcement comes one week after the Pfizer announcement.

AstraZenaca announced on November 23 a third vaccine with 90 percent efficacy in one of its clinical trials. The U.K. pharmaceutical giant is in partnership with Oxford University. The vaccine also does not require ultra-cold storage, making it more portable into rural areas.

While both Pfizer and Moderna have filed their vaccine applications with the FDA, AstraZeneca is not quite ready yet. However, it’s possible that their vaccine would be available around the world while still pending FDA approval in the United States. The company expects to produce 3 billion doses of its vaccine in 2021. The drug can be stored, transported and handled at normal refrigerated conditions for at least six months, and administered under normal health care settings.

Starting this month (December), vaccinations will commence. The vaccines should be used by everyone in the population to control the pandemic. CVS, Rite Aid, Walmart, Kroger and Walgreens will be the delivery companies of the vaccines.

California is poised to start vaccinating 2.4 million of the state’s highest-priority health care workers in December, according to Gavin Newsom. Pfizer has already produced millions of doses which will be ready for role-out as soon as December 11. Vaccines are being pre-positioned at distribution sites now to allow for rapid delivery once authorized.

The likely priority of who gets the vaccine first in the U.S. includes:

• Healthcare workers: 17 to 20 million people
• People with health conditions
• People 65 and over living in nursing homes or group settings: 33 million
• K-12 teachers and staff
• Critical infrastructure workers: food supply and public transit
• Children
• Everyone else

An effective vaccine is necessary but not sufficient to bring the pandemic to an end.

The government, along with healthcare providers, will need enough buy-in by the general population for the distribution of a vaccine to help achieve herd immunity.

According to a Gallup poll conducted just before the Pfizer and Moderna announcements, 58 percent of Americans said they would agree to be vaccinated against COVID-19, up from a low of 50 percent in September. Among those who reported to Gallup an unwillingness to be vaccinated, 37 percent were concerned about a rushed timeline.

by Mark Schniepp
November 1, 2020

The Second Wave has Arrived

There is now a resurgence of coronavirus cases in the world, especially in Europe where a “second wave” of the virus is raging. Adjusted for population, the number of new infections in the EU and the U.K. has now overtaken the United States.

So despite the onset of dissenting policies, such as the Great Barrington Declaration, European countries are reinstating mobility restrictions, limiting public gatherings, instituting curfews, closing bars early, and prohibiting travel. Italy has imposed a 6 PM curfew on restaurants and bars and shut down cultural and recreational venues. All non-essential movement in and out of Madrid is banned. France has reinstated a nationwide lockdown, and Germany has closed restaurants, bars, gyms, concerts and theatres for a month.

The infection rate for Spain, France, Italy, Germany, the U.K, and many Eastern European countries exceeds the initial surge that prevailed last March and April. Positive case numbers may now appear higher, simply because the sharp increases in testing capacity are identifying many more cases than during the initial surge in March and April. However, this 2^nd wave pattern is typical of influenza and coronaviruses to arrive in fall and peak in winter. Furthermore, hospitalizations are rising in most countries.

A new round of gathering and distancing rules and limitations will lead to more economic trauma in Europe. The U.S. is bracing for higher case surges than what has already occurred, particularly in the mid-western states where the weather has chased people inside.

The 2^nd wave inevitably will lead to restricted supply: that is, limitations on how businesses can provide goods and services. When that occurs, there can only be limited improvement in the economy which appears certain for the remainder of this calendar year.

Meaningful Indications of Improvement

• Though now rising in other Midwestern states, coronavirus cases remain relatively contained in California so far. The 2^nd wave has not yet hit. Many California counties have advanced from the purple tier to the red tier, and a few have climbed into the coveted orange tier recently. This enables more of their regional economies to relax restrictions. For example: a restaurant will be able to serve twice as many parties inside.

• Public transportation usage, while slightly improved, remains a fraction of its pre-pandemic level. Airline traffic also remains depressed, though U.S. airport security checkpoints continuously process more travelers every week.

• Retail markets have largely recovered. For the entire country, sales are above where they started the year and year-ago growth actually exceeds early-2020 rates. People buying new and used cars is a major factor. Consumer spending appears to be more durable than originally expected despite the absence of any new government support.

• Record-low mortgage rates are supporting housing demand, and existing home sales and selling values have more than recovered. In fact, sales in August and September substantially exceeded sales in August and September of 2019, and selling values for homes in most California counties have recently soared, eclipsing their previous record highs.

• The broad financial market indices have been moving close to historical highs. Why? Because investor behavior mirrors the upbeat responses by CEOs responding to sentiment surveys. More than half of respondents say economic conditions will be better in their own countries in 6 months. The 30 percent who said conditions will worsen is the smallest share of respondents all year to expect declining conditions.¹

• Third quarter real GDP soared 33.1 percent at an annual rate following the 31.4 percent decline in the second quarter. The gain reversed about 75 percent of the prior decline.

• States are opening: Most states continue to progress their business activity opening plans despite marginally rising cases this fall. Missouri, Alaska, Florida, Wisconsin and Tennessee have fully opened.

• Loser economic restrictions around the nation for now have enabled more workers to be rehired. Six months ago during the first week in May, 25 million workers received unemployment benefits for either being laid off or having their work hours sharply reduced. Today, total claimants for unemployment insurance have dropped to 8.2 million.

• The Dodgers won the world series for the first time in 32 years. You may not consider this an improvement if you are from or live in Florida.

Employment has Improved but the Onset of a 2^nd Wave Threatens the Streak

Rehiring has resulted in the restoration of just over 50 percent of all jobs lost in the March-April period, and there have now been 5 consecutive months of new job creation. Furthermore, in California, there are many technology sectors that have fully restored employment, and the construction workforce has been restored to 94 percent of its February 2020 peak.

There are headwinds however. With airline demand depressed, the major airlines have announced further layoffs in October. With no plan to reopen Disneyland, Disney announced 28,000 potential layoffs of domestic employees in October. There is also the unwinding of temporary jobs for the decennial Census by the federal government, and there will likely be subdued hiring for the holiday shopping season, which starts now.

We are also concerned that chillier temperatures in November and December will curb outdoor dining and threaten another wave of job cuts. Grocery stores, meal delivery services and take-out will surge again, at the expense of eating out.

If the 2^nd wave arrives in California, new restrictions may be reinstated, slowing economic progress further and yes, jeopardizing the improvements that have been achieved to date.

Unless or until we see more relief and stimulus from fiscal policy and better therapeutics and the much heralded vaccine, the economy will recover selectively, and only marginal improvement should be expected.

¹ McKinsey Global Survey, September 2020, The coronavirus effect on global economic sentiment. Executives report increasingly upbeat expectations for profitability and consumer demand for their products, between May and September.

by Mark Schniepp
October 2020

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 — mighty Casey has struck out.

— Ernest Thayer, 1888

While there is conjecture on this, for a V-shaped recovery to occur, we would need the level of employment to return close to or at the level last recorded in February of this year. And we would need that to occur, by say, the end of 2020. Initially the labor market recovery was quite fast, as workers were recalled back to their jobs when the economy reopened in mid to late May. But further restrictions on business activities during the summer, and continued restrictions in all California counties today, have led to tepid improvement in the state’s labor markets.

The September employment report released on Friday was quite meek and the pace at which jobs are being restored will not reinstate all of the job loss by December, or anytime in 2021 for that matter.

So much for the V-shaped recovery. We’ve been warning you that a quick rebound in economic activity was improbable when the Spring lockdowns extended into mid and late May in Mudville, aka California. And when the economies opened up partially and everyone breathed a sigh of relief there was genuine hope that men would laugh and children would shout . . . .

But cases started rising and instead of moving towards Phase 4 opening, California reversed, meaning the Governor’s office effectively closed businesses again, or required them to operate at restricted capacities. Travel was limited or stymied by smokey environments or closed national and state forests and parks. Few planes were flying due to slack consumer demand and hotel occupancies remained at or below 50 percent.

The new Blueprint for a Safer Economy was instituted to keep California very safe, but the criteria for opening is onerous, and the long waiting times between tiers is clearly destructive to business, creating permanent business losses and extending the period of ultimate recovery. But that is the current environment we are living in, and it is the principal reason for the sluggish labor market, and persistent unemployment in the state.

More layoffs in the hotel industry are coming. More layoffs from the airlines are coming. Disney recently announced 28,000 layoffs of domestic employees is coming; largely due to the inability of Disneyland to open. And even if they do, they will open at a limited capacity (where the need for all those employees will be meaningfully reduced). Consequently, California labor markets face lengthy recovery prospects. Clearly, the economy must be allowed to fully open to jump-start hiring and restore joy in Mudville.

That will occur with the successful dissemination of the vaccine, due out soon. Or the coronavirus will ultimately burn itself out as we speculated might occur 4 months ago. Look for either of these conditions to occur next year. Either way, when economic restrictions are lifted, economic growth will surge.

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.

by Mark Schniepp
September 15, 2020

So now we know that the answer to restoring the economy is to end the pandemic. That may seem obvious but here’s why it’s not. Containment has proven fragile, with notable spikes in parts of the country. Moreover, premature reopening may mean that the curtailment of pandemic hot spots will take longer.

The pandemic must be eradicated rather than controlled, because new outbreaks are possible and/or a 2^nd wave might occur, resulting in the possible reinstatement of business closures and economic carnage. In other words, we can’t predict which way the virus will go and who it will affect. We have already witnessed this with the reopenings and subsequent closures of regional and state economies and with public protests and non-distanced civil unrest in late May and June.

These events caused another surge in cases. They also caused an increase in hospitalizations and deaths, among more than just the elderly age group.

Eradicating the coronavirus means a therapeutic cure or a vaccine to inoculate the population from contracting the virus, now, or in the near future.

To forecast how the economy will evolve, we have to devise a plausible story with particular milestones and conditions, mostly about when business restrictions are entirely lifted.

We have assumed that the vaccine becomes ready after the beginning of the year, or in January/February of 2021. Dissemination occurs over the subsequent 3-4 months when most of the U.S. population receives it. Consumers will gain new confidence that they won’t contract the virus and most will resume public interaction and gatherings as before. Businesses prepare for normal operation during the spring months of 2021.

The economy effectively opens up more fully next summer. Travel resumes with more exuberance and spending on goods and services, and recreation surges. The 2nd half of 2021 results in stronger growth and major gains in employment and income.

The economy however is not back to the pre-crisis status. During most of calendar 2020 and in much of the first half of 2021, ongoing economic restrictions will have resulted in millions of permanent business closures and jobless workers. These closures cannot be reopened quickly by replacement businesses. There may also be some lingering fears that a mutated strain of the virus could be present, unaffected by the vaccine, and this would prevent some consumers from spending freely at stores, shops, or other public venues. Furthermore, many people may opt to forego the vaccine. It will also take some time for the demand for travel to be reestablished. It took more than 2 years after 9/11 for air travel to return to its prior peak.

We believe that even with the availability of a vaccine it will take time for consumers to return to normal.

With businesses taking on a huge amount of debt, repayment of that debt will take a priority over new capital spending. This will produce a drag on growth. And do not forget that state and local budgets suffered a revenue collapse that even with federal assistance it will take years to recover from.

Consequently, because the economy needs time to fully recover, don’t expect a rapid return to normal once the pandemic is declared over. During 2022 and 2023 new businesses will open, workers become rehired, income is generated, and spending will rise as a result of the wider income growth.

California Will Lag

This state has been subject to the harshest restrictions on business in the nation. Most of the largest counties were shut down for a 9 to 10 week period, or longer. The easing of restrictions for all counties by June 1 was effectively removed 4 weeks later when reversals in re-openings were put into place just ahead of the July 4 holiday and on July 13. Limitations principally designed to keep people outside remained in place through August.

Unemployment surged in April, May and June, appearing slightly better in July. However, the effective unemployment rate that we track weekly still reports a 15.8 percent rate in the first week of September.

And compared to other states, California’s official unemployment rate ranks 6^th highest for the month of July:

Through August 21, spending at restaurants is down 39 percent from spending levels that prevailed in January of this year. For transportation, spending is off 52 percent. Few people are flying anywhere, and gasoline prices are very low.

Consumer spending is down nearly 12 percent from January. In other states, the spending decline is significantly lower or has largely recovered:

There are 25 percent fewer small businesses open today in California than there were in January. The carnage has been significant, especially for businesses in the leisure, hospitality and recreation sector which have suffered a 35 percent closure rate. In retail trade and transportation, the small business rate of closure is at 30 percent.

Many of these businesses will not reopen. A surge in bankruptcies has not emerged yet but more bankruptcies are coming over the next 5 months.

To date, the national economy has recovered 52 percent of all jobs lost in March and April. The California economy has recovered just 30 percent.

The New “Blueprint” for a Safer Economy

As of today, 33 counties representing 71 percent of the population remain in the most restrictive tier of counties based on daily case rates and the test positivity rate. The criteria for meeting the thresholds that reduce the restrictions on business are very strict. The restrictions on establishments prohibit indoor operations of nonessential business. Retailers can only allow customer capacities in their stores of 25 percent. Ditto personal care shops. No entertainment venues can open. Bars and restaurants can’t open unless they are outside.

If a County moves from the most restrictive (tier 1 or purple) to the next less restrictive (tier 2 or red), capacities are allowed to increase from 25 to 50 percent, and gyms can move indoors but only with 10 percent or normal capacity.

This is likely going to be the California economy for the next few months or the remainder of the year. Moving to the less restrictive tier 3 or tier 4 appears to be near impossible for most counties unless the virus burns itself out, an unlikely condition in view of the daily new case counts in the state. Right now there are only 11 counties classified in tier 3 or tier 4 and they represent less than 5 percent of the population of California.

Schools are not going to open for the remainder of the year. Given the opportunity to open with a waiver, few public schools applied for that waiver, choosing to remain closed to in-person instruction. However, more private schools are choosing to apply, and many have already opened up.

Even if the pandemic were to suddenly end tomorrow, the economic carnage to date would be both irreversible and not yet over.

Therefore, with new protocols for California that are more restrictive on business than before, and with public schools remaining closed for the remainder of this year, the outlook for the economy predicts little improvement.

Expect a challenging fourth quarter for small businesses in California. Expect no change from the way your kids are currently receiving their education, unless you move them to a private school. And expect the travel industry to struggle for an indefinite time period because that industry is not really evolving with all distance business conducted via zoom.

by Mark Schniepp
August 4, 2020

The strong recovery we observed in May and were optimistic about going into the summer has clearly weakened. The economy is now moving sideways, at best.

The western world has now suffered through 20 weeks of the pandemic. During the 20 weeks, May 16 to August 4, 4.9 million people have tested positive for coronavirus in the U.S. Reported deaths from the disease now stand at 160,000.

Most of the U.S. economy was locked down for half of March, all of April, and about half of May. Consequently, economic activity was dramatically impacted in the second quarter.

The growth of total output in the United States from the peak quarter (2019 Q4) to the second quarter of this year was negative 11 percent. On an annualized bases, the economy was down 33 percent in Q2. To put this into context, our annual average growth rate over the last 10 years has been +2.3 percent.

There has been very little travel, no large public gatherings, no audiences at sporting events, no in person concerts, conventions, or conferences since mid-March. There is now a pause in re-opening plans in most large states, or reversals of openings with re-closings of restaurants, bars, personal care stores, shops, gyms, and museums.

European countries are now open and travel within the EU is rising but occupancy at most hotels remains low because tourism is crippled by the travel ban on U.S. visitors. We represent 15 million travelers per year to Europe, mostly in the summer months. None are there now.

Consumer confidence dipped in July. And consumer sentiment is unlikely to make a comeback until the labor market improves, states reopen non-essential businesses, and the number of reported corona cases falls significantly, and for long enough, to extinguish fears of another wave of infections.

While the second quarter GDP report was ugly, it was no surprise. Despite the reversals, economic growth will rebound in the third quarter because so much more of the national economy is open and operating than in the April-May period.

However, the labor market will be slow to follow. Because of the ongoing restrictions, the unemployment rate will remain elevated and may not improve in the third quarter. It is already increasing again in California. Moreover, most businesses are no longer investing or hiring, meaning those permanently laid off will find it difficult to return to work immediately.

Continuing unemployment claims rose again at the end of July (the latest report), and surveys indicate that fewer people are currently working. This is all because of the reversals in the economy and the depletion of the Paycheck Protection Program loans that rescued many workers from layoffs between April and June.

Those loans were largely used up on worker payrolls. Also now completed is the federal program to supplement unemployment insurance benefits to laid off workers. The bonus payments ended on July 31st.

The first round of Federal stimulus is therefore wearing off. Federal Reserve chairman Jerome Powell said that additional direct fiscal stimulus is needed as the economy has begun to weaken because of the surge in COVID-19 cases and states either pausing or rolling back their re-openings. There is no replacement rescue program, yet.

There is now a divergence emerging between the U.S. and California, and this is because California is still the most locked down state.

The number of small businesses open in California has turned down again and is now off 22 percent from the number of small businesses that were open in January 2020.

Small businesses are suffering in most states, so the decline of establishments is not unique to California. It is estimated that states accounting for 70 percent of the nation’s GDP have paused or reversed their re-openings. Furthermore, more people are putting themselves in self-quarantine and this along with the massive number of layoffs is curtailing overall spending.

Because schools are not starting in-person education in the fall, the economy will be absent a significant boost in economic activity from student transportation services, food services, school and campus events and sports activities, social group spending, and dormitory services at universities.

How will schools raise money for special education services? Will there still be bake sales or Christmas wrapping paper drives? What about high school football? 27 states will start the fall season as scheduled. Seven have yet to decide. The rest including California, Nevada, Arizona, Oregon, and Washington will delay or cancel the season. California will move football to the winter season, starting in January.

College football will proceed, but the number of games will be reduced and often limited to intra-league play. Will games be played in empty stadiums? In many states this will be the case, eliminating all of the economic activity generated by spectator spending.

The haze over the outlook for the economy is clearing some. We can now see that what is needed to rebound out of this mess is restoring confidence so consumers will leave their proverbial bunkers and go out and spend. We need state and local governments to withdraw all the restrictions and allow small business (and all business) to expand production and sales and hire again. Neither of these actions will occur until the pandemic is under control, and the concern about infection has passed.

Ending that concern may be near impossible without a cure or some clear evidence that the virus is burning out.

by Mark Schniepp
July 3, 2020

We are assuming that the recession is now technically over, because growth in employment, payrolls, and spending has resumed. Therefore, the recession that began in March and likely ended in May could be both the deepest and shortest recession on record.The average length of a recession is 11 months and none has lasted less than six months. However, this isn’t, or wasn’t, a normal recession or business cycle. This recession wasn’t caused by the traditional catalysts, and the recovery is likely to differ from those in the past.

The monthly estimate of GDP declined 5.2 percent in March and 11.4 percent in April.

As of 7/2/20, we were 15 weeks into the Coronavirus crisis. The reopening of many U.S. state economies has led to a gradual economic pickup. Mobility has risen, and although initial claims for unemployment insurance benefits have been steadily declining, they still remain at massive levels. GDP estimates for the month of May should be positive because the economy was allowed to slowly wake up.

But because the reopening is limited to specific business sectors and with capacity limitations it will produce a limited and temporary boost in demand. People still find their movements and options to spend severely restricted.

Consequently, retail sales and services still suffer today from unprecedented reductions.

This is the contributing factor as to why a V shaped recovery cannot occur, because of the manner in which the economy is being allowed to recover.

If regional economies could phase out restrictions, economic growth would bounce back more sharply. In sectors or states in which restrictions were eased earlier or more than others, there is a higher level of production and a faster restoration of spending.

The PPP Flexibility Act, which became law on June 5, creates a downside for the number of workers rehired in June. Businesses that received PPP loans in late May and June are now in no rush to rehire, and can delay until local lockdown orders easy enough to make it worthwhile to restore workers. Hiring foregone in June should show up in later months providing there is continued progress on reopening up the economy.

Economy Reversals

Troubling signs of coronavirus re-emergence are coming from some of the nation’s largest economies. And with this resurgence, the progress of the economic recovery has now been interrupted.

Bar and restaurant and some gym closures in Colorado, Texas, Florida, Arizona, and Michigan occurred in June. On July 1, dining inside restaurants and drinking inside bars, breweries, lounges and wineries was closed down again in 19 Counties in California. Also closed were movie theaters, zoos and museums, all for at least the next 3 weeks. This is a major setback to California’s economic recovery.

The reclosure of business activity will slow rehires and reduce hours for many restaurant and food services employees. It will also reduce business revenue potential leading to a greater likelihood of more business failures and permanent layoffs.

Consequently, if no new progress is made on reopening the economy further, the gains in employment and revenues are unlikely to continue in the month of July, and may even reverse for the food and beverage services sector.

Uncertainty

There is no shortage of the unknown still, and this is frustrating for us who forecast the economy. Sudden brute-force lockdowns of economic activity, or the delays in deciding to move to Phase 3 or Phase 4 of re-opening, make predicting the growth of new production, jobs and income impossible.

Consequently, the status of the recovery can change weekly based on the public health determinations of what and how much we can and cannot do.

The European Union opened up their economy to international visitors on July 1. However, the U.S. is still precluded from all but essential travel there. This will slow the recovery of airlines and the airports this summer. The EU could still reverse this decision and if they do it could bring major upside impacts to the airlines. But clearly, this is a huge unknown.

Our baseline forecast anticipates that the economy will continue to grow throughout the year and into 2021. We assume a steady path of reopening without start-and-stop reversals of economic activity due to forced shutterings.

But these assumptions are clearly becoming precarious. Backpedaling on the gradual enabling of businesses to operate more normally will have significant economic costs and will lengthen the period of time needed to restore fuller employment. The economic recovery was going to be hard enough without the re-emergence of COVID-19. In the case of much of the country once again subject to reinstatement of some form of shutdown, the U.S. economy could experience a double-dip recession.

The good news is that home buying is rebounding along with automobile purchases. Housing inventory is way down, but that should pick up this summer because home values have not been impacted. Car purchases continue to improve though car production may lag due to factory work stoppages as plants contend with new protocols and COVID-19 concerns.

Neither of these sectors will produce a drag on the recovery providing demand holds up. But here again, demand is dependent on the progress of the recovery which is clouded by the potential erosion in consumer confidence to spend, as a result of the start and stop economy.

From an economic perspective, it’s imperative that this state and all states work cooperatively with the business sector to provide the most effective way to address public health concerns without subordinating business concerns. To date, that has not appeared to be the approach taken, at least not in California.

by Mark Schniepp
June 5, 2020

The labor market report for May was presented today from the Bureau of Labor Statistics. The U.S. unemployment rate is 13.3 percent.

However, more important, it showed that the economy created (yes created) 2.5 million jobs during the month. Leisure/hospitality, which had suffered the largest declines in April, led the way back. Payment of workers through the Paycheck Protection Program may explain some of the increase, even if they did not actually work.

Now, many people who were employed but were “absent from work” again misclassified themselves because they should have been counted as “unemployed but on temporary layoff.” This understated the unemployment rate in May, just as it did in April.

We routinely estimate the U.S. unemployment rate from the unemployment insurance claims data that is reported weekly.

During the particular survey week in May that would have produced the official unemployment rate of 13.3 percent, our estimates of the actual unemployment rate were 16.1 percent, or nearly 3 percentage points higher. For California, the rate was 16.2 percent, or nearly the same.

The number of unemployed workers declined by 2 million in May. This is an encouraging sign that the economy is taking the first steps that clearly define the economic recovery. And the recovery of jobs and income is the most critical step.

How does this report change our expectations for the labor markets over the summer months?

Restarts

We clearly expect the restart of the economy to bring more improvement in June and July. By June 1, all 50 states had some parts of their economies re-open and more sectors in all states will be opening further this month.

With Europe opening up to tourism once again in the mid-June to July period, there will be more jobs in travel restored, more airline flights, and more hotels opening back up.

Universal Studios in Orlando Florida opened on Friday, June 5. Visitors take temperature screenings, are required to wear face masks and are encouraged to social distance. Capacity at the park is being limited to 35 percent of normal. Disney World in Orlando will start opening up on July 11.

Because amusement parks are labor intensive, these initial re-openings will re-employ thousands of furloughed workers this summer.

Church services are opening in California along with barber shops and salons.

Destruction and Vandalism

Some businesses in the larger American cities are now under added stress due to losses from store destruction and the looting of inventory. Until the social unrest subsides and police protection is restored, consumers may not feel confident to participate in large city downtown areas in tandem with re-openings of restaurants, retail stores, and personal care shops and services. Store repair is going to delay job creation in June and July in big cities including New York, Los Angeles, Minneapolis, Washington D.C., Seattle, Philadelphia, and Chicago.

Insurance industry groups say common business insurance policies will cover most of the damage caused by looting or vandalism. Business insurance does cover civil commotion, and most commercial buildings, homes, and cars will be replaced with insurance proceeds.

While some stores may choose to close permanently, most will elect repair and restoration.

PPP Funding

As of May 30th, 4.4 million loans have been extended to small business in both rounds of the Paycheck Protection Program for a total loan value of $510 billion. The PPP loans require that employers use no less than 75 percent of the funds to pay their workers so that they maintain their incomes and their ability to spend.

The program potentially kept millions of workers on business payrolls in April, May and now June. Proceeds from the loans will generally run out this month or in July. Consequently, we will be watching to see if some or many of these workers lose their jobs when the program’s funds are depleted. This critically depends on whether businesses can restart and keep the number of employees they were paying through the program.

If businesses are generally up and running, many of these workers could be seamlessly reabsorbed into their previously productive roles with little impact on the summer employment reports. Stay tuned for future reports on this development.

Upside Risks this Summer

The downside risks dominate the scenarios of how the economy will grow over the next 6 months because there are too many unknowns associated with how COVID-19 will evolve or devolve. Furthermore, the unknowns extend to how state and local governments will respond and how people will tolerate their response if they perceive the shutdowns as an impediment to their civil liberties.

Nevertheless, the upside alternatives to muted demand for goods and services and hesitation by consumers to participate in the restart of the economy is an encouraging display of pent-up demand behavior.

If we observe stronger than expected demand for cars, appliances, homes, personal care, food away from home, and entertainment with minimal hesitation by consumers, labor markets would generate impressive job creation in June, July and August. This kind of response would jump start a robust economic recovery this year.

We look for the third quarter to show positive economic growth with more upside potential if the confidence of consumers is more rapidly restored and people will believe it’s safe to resume increasing levels of pre-crisis movement and participation in commerce.

by Mark Schniepp
May 1, 2020

Annualized GDP growth in the first quarter came in at -4.8 percent. The report doesn’t really provide information on the extent of the actual GDP decline that has occurred over the last 6 weeks or since mid-March.

GDP was tracking at about a 2 percent rate of growth in January and February (and likely the first 2 weeks in March). Consequently, over a two week period in which there was an abrupt and severe closure of the economy, the impact on GDP was crushing. And this has continued through April and likely will through much of May.

The rate of real GDP growth is likely in the vicinity of negative 35 to 40 percent.

The immediate loss of sales and then jobs and income is the first blow to the economy. Stay-at-home orders substantially limit spending even by consumers who are not losing income. The first quarter GDP numbers show that the principal pullbacks on spending were restaurants and bars, airlines, and healthcare.

Stimulus checks and unemployment insurance are offsetting some of the impact but it’s tiny in comparison to the losses being suffered. Only half of small businesses that applied for PPP funding received it in the first round.

A second blow to the economy affecting households is diminished wealth. Losses in the U.S. stock market are 25 percent, even with its recent recovery. The negative wealth effects—the change in consumer spending in response to a loss of wealth—are and will continue to be substantial. The baby boom cohort, now in its late 50s to early 70s and owning 60 percent of all stock value, has become particularly reticent about spending.

Stay-at-home mandates are wrecking the economy, not only in the present but for the future. The longer the present carnage persists, the longer the recovery period and the higher the chance for subsequent business failures and persistent unemployment.

In a recent Goldman Sachs survey, 23 percent of small businesses are not confident they will survive. This number will grow if these firms are not allowed to resume business.

The Bay area shutdown has now been extended through May. This was a characteristic of the pessimistic scenario we described in the April newsletter which we hoped to avoid.

While the Governor has formulated a plan, no date has been scheduled for easing shelter-in-place in California. Meanwhile 15 other states have already or will open partially by May 4. This puts California behind the rest of the nation and many European Countries that have recently opened or never closed.

The rock bottom of the crisis on the economy has probably been reached. The unemployment rate in the nation was 20.1 percent this past week. For California, it was 23.8 percent. 3.9 million California workers are receiving unemployment insurance due to layoffs. We estimate an additional 1 million workers that are laid off or have substantially reduced hours.

Federal rescue money will now start circulating through the economy in earnest. The injection of stimulus to small businesses will help to prevent further layoffs and generate some “rehires.” Disaster relief funding will do the same as will the Federal Reserve Banks’s new loan program to larger businesses.

So from right here and now, and as other States start to come back, we believe we have moved to the recovery phase of the recession.

And the speed and length of the recovery is entirely dependent on the guidelines and protocols enacted by States on businesses when shelter-in-place orders are eased.

Capacity limitations of people in places of public gathering hinder spending and therefore revenue earned by business. Reticence to enter public places by consumers will be another limiting factor on demand. Consequently, businesses face a tough uphill challenge on the road to recovery unless or until restrictive distancing rules are removed.

But what’s the chance of that? This is not my area of expertise, but health officials are telling us “not likely until a vaccine or a cure for COVID-19 is developed and disseminated.” Consequently, we are in this for a longer period than people, including those making key decisions, generally realize.

by Mark Schniepp
April 3, 2020

In February while we were assessing the early economic indicators for the U.S. and California it became clear that the momentum from 2019 was pushing into 2020. Moreover, momentum was actually accelerating.

We thought the forecast for 2020 would be another year similar to 2019 when employment reached record highs, unemployment fell to record lows, trade was improving, manufacturing output was growing, and general economic sentiment by Americans was near historic levels of optimism.

Well, that condition rapidly turned on a dime.

A National Emergency was declared by the Trump Administration on March 13. By March 15, Governor Newsom ordered shelter-in-place for the Bay Area, and 4 days later, for the remainder of the state. Everything closed and events were called off. Not just a few events, all of them. Only grocery stores and stores selling critical products to households and to workers who work from home remain open. Little else.

Many grocery items are intermittently scarce, except toilet paper which is always scarce. There is plenty of booze and oddly I can always get tomatoes but not garlic. Why is that? Pasta and rice and flour sell out quickly. More delivery trucks and larger loads are needed to supply grocery stores now that everyone is buying nearly all of their food there.

The unemployment rate (that we estimate for the latter part of March) surged and is now higher than during the Great Recession of 2008-2009. Five million jobs in California are at risk of being lost. Many of these jobs will remain on company payrolls and/or workers will be furloughed without pay, but an unknown number will be terminated.

So far, over one million workers have filed for unemployment benefits. These will remain elevated for the next week or two because there is likely a backlog of filings.

The rescue program passed by Congress last week will prevent many potential layoffs because it provides businesses with payroll relief loans for the next 2 ½ months. And down the road, the loans may be forgiven.

Airline travel has declined 74 percent. Flights through LAX have been reduced from 1,675 a week in mid-January to 431 this week.

Sales of new vehicles plunged in March, off 40 percent from sales in February. With most car dealers closed, sales of new automobiles can principally occur online, with little chance of kicking the tires before hand.

The Great Coronavirus Shutdown

The amount of economic activity that has been concurrently shut down is both shocking and unheard of.

• Other than take-out, all restaurants and bars
• All recreation and personal care: Gyms and salons
• Retail stores except for groceries, household necessities and drugstores
• The NBA Season suspended
• The Major League Baseball Season postponed
• March Madness cancelled
• All schools closed
• All high school sporting events suspended
• Colleges and Universities closed, offering online classes only
• All amusements closed, Disneyland, Universal Studios, Magic Mountain, etc.
• All movie and live performing theatres closed
• State Parkes, campgrounds, and state beaches closed
• Concerts cancelled
• Conventions cancelled
• Conferences cancelled or postponed
• Non-essential government offices closed
• All flights from Europe and China banned and other areas as needed
• Shelter-in-place ordered in most states; 250 million people nationwide at home
• The 2020 summer Olympics postponed for a year

These activities will result in a massive loss of revenue, due to the lack of expenditure, and subsequent earnings by workers. All jobs associated with these activities are idled.

The vulnerable sectors of the economy in which the most jobs are at risk include recreation, leisure, and hospitality including food services, retail trade, manufacturing, and administrative business support.

Over 737,000 California workers were laid off in March, excluding self employed workers and independent contractors.

The Outlook for 2020 / An Early Assessment

The economic outlook changes because information underlying the principal assumptions seems to be changing rapidly, largely due to the policy response. Critical to the forecast is the length of time economic activity remains shut down in California and the rest of the nation. Tell me when we are allowed to go back to work and I’ll tell you what the forecast for 2020 looks like.

Our assumptions today reflect the following scenarios:

California and the nation remain in shelter-in-place through the month of April. Activity begins to return during the month of May. Events and travel begin to ramp up in June. That’s the optimistic scenario.

1. For the entire nation, GDP falls sharply in the April to June period, with some recovery occurring in late June and then during the third quarter of 2020 (the July to September period).
2. The unemployment rate rises sharply in April and remains very high in May, with noticeable improvement coming in June and July. The July to September period of 2020 has jobs returning and the army of unemployed sharply declines.
3. Under a pessimistic scenario in which the current effective “lock-down” persists another 31 days through May, the slow return of the economy in June and during the summer months will effectively render it still in a negative growth state.
4. By the fourth quarter (October through December), the economy rallies sharply as supply chains are more fully restored and events and travel occur near normal. There will be persistence however, in that a number of businesses will not return to operation and workers will remain unemployed as a result. Consequently, the unemployment rate remains elevated for much of 2020.

The pessimistic forecast is the result of a lengthier period of economic stagnation in which businesses can’t operate, people can’t go out, and travel and events don’t occur. Businesses can’t hold on and they fail. Supply chains move to alternative uses where revenue can be generated. Workers find alternative employment opportunities and don’t return to their previous jobs.

All of these unintended outcomes lead to a more lengthy economic recovery that further reduces household income, spending, and delays the return of the pre-COVID-19 world.

Watch for our regular updates of how the U.S. and California economies are responding to the tight restrictions put in place under the pandemic.

Go to COVID-19 Update Page

Follow our COVOD-19 page and you will be the first to understand the extent of the fallout and the first to see the beginning stages of the recovery.

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.

COVID-19

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.

² https://www.cdc.gov/coronavirus/2019-ncov/summary.html

³ https://www.cnbc.com/2020/02/01/coronavirus-more-of-china-extend-shutdown-accounting-for-80percent-of-gdp.html

⁴ https://www.amchamchina.org/uploads/media/default/0001/12/2d4eedc6090762958f083af0865a94d68422f189.pdf

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