Author: californiaforecast

by Mark Schniepp
January 2022

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

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

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

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

Navigating a New Normal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

by Mark Schniepp
December 1, 2021

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

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

Supply Chain

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

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

Inflation

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

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

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

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

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

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

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

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

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

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

Labor Force

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

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

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

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

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

The Pandemic That Never Ends

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

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

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

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

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

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

³ https://bit.ly/3lnita6

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

by Mark Schniepp
November 5, 2021

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

What is stagflation?

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

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

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

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

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

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

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

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

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

Growth Prospects Going Forward

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

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

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

Risks and Scenarios for Stagnant Growth

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

Consider any of the following:

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

But what’s the chance?

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

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

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

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

by Mark Schniepp
October 7, 2021

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

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

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

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

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

The Great Shipping Debacle

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

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

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

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

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

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

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

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

Trucking

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

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

Delta

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

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

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

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

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

by Mark Schniepp
September 1, 2021

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

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

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

The Economy in the Aftermath of the Pandemic

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

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

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

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

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

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

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

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

The Workplace in the Aftermath of the Pandemic

The Great Resignation

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

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

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

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

Remote work and virtual meetings will continue

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

Longer term, most workers will return to the office

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

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

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

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

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

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

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

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

by Mark Schniepp
August 9, 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

by Mark Schniepp
July 8, 2021

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

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

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

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

Why?

There are a host of contributing factors:

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

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

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

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

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

Is this wishful thinking? I think it might be.

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

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

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

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

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

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

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

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

Home Price Increases Understate Inflation

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

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

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

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

Inventory and Prices Going Forward

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

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

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

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

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

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

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

by Mark Schniepp
June 7, 2021

Californians are ready to have the current set of business limitations rescinded on June 15.

On June 4, we received surprising news from the Governor of California. Newsome wants to maintain the emergency order and some capacity constraints on businesses even after June 15. We don’t know what those are yet. But let’s assume that on June 15 the blueprint regimen will be ditched and nearly all constraints on business will be lifted.

Lifting restrictions in California would align with what nearly all states have done to date.

Vaccinated people will no longer need to wear masks in most situations, aligning the state with CDC guidelines. Unless vaccinated, you will need to wear a mask at work.

Indoor events with more than 5,000 people will apparently need to be vaccinated. I don’t know how that is going to be enforced. Outdoor events with more than 10,000 people will have similar requirements.

In general however, we believe the economic-related restrictions will end this month, and that’s sooner than we all thought just a couple of months ago.

Given that the demand for travel is now soaring, we are expecting a fairly fast return to a normal economy, though employment levels associated with the leisure, recreation, hospitality, and amusement sector will unlikely return to pre-pandemic levels until late next year or even beyond.

This is because technology will have eliminated many of these jobs with automated alternatives, or businesses suffered permanent closure.

What will be different?

Restaurant jobs will be hard to fill immediately, and perhaps this condition will persist for much of this year.

The state is off 1.3 million jobs since February of 2020, the last full month before the pandemic shut down the economy. It will take some time to recover those jobs, especially if the labor force needs to bulk up to accommodate job openings. And the labor force should expand when the bonus unemployment benefits expire in September and school resumes at the same time.

Remember, the labor force is the population that is 16 and over and is either working or looking for work. 400,000 Californians who were in the labor force a year ago are not today. We expect them to slowly return. The labor force had shrunk for most of 2020 due largely to constraints on families to care for children not in school. Schools will reopen for the Fall 2021 quarter or semester and this will produce a surge of hiring in the education sector of the state.

Colleges and universities also open which will increase economic growth in student communities all over California. The return of students to college campuses represents a meaningful boost to food services, transportation services, and all personal services throughout California.

As the labor force rebounds, so will jobs in food services, hospitality and entertainment. As international travel resumes, larger gains are expected.

Filming in California was shut down sharply during the pandemic. There was an average of 309 days of filming per month in the Los Angeles region during 2019 and 1,126 days of TV filming. Between April and June of 2020 there were 3 film days and 52 Television shoot days. Conditions did not improve much in the third quarter.

Then film and TV work resumed sharply in the 4^th quarter of 2020, but employment in the film sector remains devastated, and through April of this year, has not come back much. The industry is 60,000 jobs short of where it was in February 2020.

Film and TV production activity has now returned. The opening of California will enable the film and TV industry to normalize its operations again. Film permits and filming days are soaring this quarter and should continue for the remainder of the year.

Construction resumes pre-pandemic pace

The construction sector never really stopped, except for perhaps the first month of the pandemic. Job levels are nearly back to normal.

New construction is underway all over Los Angeles, including LAX. The high-speed rail project continued through the pandemic and employs more workers now than at any other time. Large multi-family building projects have resumed in San Francisco and Sacramento. In downtown Los Angeles, they never stopped.

Even hotel projects are back after the pipeline for new projects slowed way down in 2020. Hotels in the U.S. suddenly had more guests over the Memorial Day weekend than at any other point during the pandemic, and exceeding Memorial Day 2019.

The 400 room Margaritaville Resort in Palm Springs opened last Fall. But many more large hotel projects are either underway or planned in the Coachella Valley. The Seabird Resort in Oceanside just opened with 387 rooms along 700 feet of beachfront.

The historic Breaker’s Hotel in Long Beach is currently undergoing a $150 million renovation.

U.S. Employment Report for May

Last Friday, the BLS reported on the U.S. May labor market and its progress. There were lots of new jobs created but less than what economists expected. And it likely means that the May report for California will also be disappointing when announced later this month. California’s employment reports have been worse than other states and the nation in general over the last year. But look for catch-up to occur with a surge in jobs this summer and beyond as restrictions end and schools resume.

The resumption of schools is critical to California’s public sector education workforce which has been effectively quarantined for the last 15 months.

A return to normal

The return to what we knew as normal will probably come faster than we predicted if people return to the labor force. We were told that virtual workers would spell the doom of office space and that retail malls would become ghost towns. This is not the case. More new housing all over the state will mandate more neighborhood retail, and existing retail centers are diversifying their tenant mix to include services and entertainment. Most retail space surprisingly remains relatively full today.

Hybrid office worker scenarios will likely characterize many firm workforce configurations as workers generally return to the office. It appears that greater office flexibility to accommodate the needs for privacy, collaboration, mentoring, and training of returning workers may actually increase the demand for space rather than shrink it.

The return of the availability of services that was denied us during the pandemic will result in a strong increase in the demand for them for the remainder of this year. Travel will be the most sought-after commodity over the next year or two. Book your reservations today.

by Mark Schniepp
May 5, 2021

Early spring and it’s all good news at this point. Though the improvement in the U.S. economy this year was expected, the actual levels of growth are better than anticipated.

Here is just some of the recent evidence that I’m looking at that is quite stunning:

Recent Evidence: U.S. Economy / May 2021

• Fiscal stimulus in March generated the largest increase in personal income on record
• Consumer spending soared in March, rising nearly 4 percent
• First Quarter GDP surged 6.4 percent
• April 2021 auto sales is the strongest April in the history of the U.S. auto market
• The labor markets are roaring back, especially in the wide-open states
• Manufacturing production and inventories have risen sharply this year
• The housing market has barely cooled, and selling values keep soaring
• The March 2021 median price was 17.2 percent higher than in March 2020
• Vaccination rates have ramped up as supply becomes more available

Spending would have been higher if not limited by pandemic obstructed spending on services.  Therefore, as limitations ease on close human contact businesses that provide services, higher rates of spending are likely this year, and this will translate into a meaningful boost to economic growth.

The pace of vaccinations has accelerated; everyone 16 and older is eligible to receive the vaccination at any time. Herd immunity is expected in August of this year.

Economic growth was impressive in the first quarter of 2021, but we look for a higher pace in quarters 2 and 3 as mass vaccinations continue and business restrictions are abolished.

Real GDP will reach its 2019 peak by the end of this quarter (2021 Q2) and be back to its prior (2019) trend by 2022 Q1.

California

Through April 2021, the recovery is geographically uneven across the state, with inland counties reinstating their workforces faster than coastal counties or the Bay Area.

Some of these inland counties will recover all of their pandemic losses by year’s end.

Counties benefitting largely from tourism – Orange, Los Angeles, San Francisco, Monterey, Sonoma, Napa, and Santa Cruz are dead last in March 2021 job growth, year over year, among all counties in California. Regarding the labor market recovery from the pandemic job loss, the inland counties are clearly dominating the coastal economies.

This tells me that when tourist attractions are open again and at some reasonable capacity levels, there will be rapid catch-up by the laggard counties. Furthermore, if air travel capacity loads and number of flights start rising more convincingly, you can expect coastal county economic growth to accelerate.

For the time being however, the inland counties in California generally have a head start on restoration of their regional economies.

Two major points in time this year should result in a surge of job creation:

1. In June when most restrictions are eased by the Governor’s office, and
2. In the fall when K-12 schools resume in-person full-time.

Consequently, a spike in job creation is forecast this year and next, and many inland counties will recover all pandemic-lost jobs by no later than mid 2022.

The largest ongoing issue for the Central Valley economies that became acutely more clear during the pandemic is their competitive locational advantage for distribution centers by the largest warehousing giants in the country.  Most of these firms like Amazon, Wal Mart, Costco, Safeway, Home Depot, and Sysco benefitted from the extraordinary online demand as a consequence of the pandemic restrictions in California on retail store access. They substantially increased their workforces, and realized strong increases in revenue during 2020.

Travel and public gatherings still uncertain and still restricted

We still don’t know about travel conditions around the world. Many countries have opened up and are welcoming U.S. visitors without the 14 day quarantine. But not everywhere. Cruise ship travel is still off the table.

Large public gatherings are conditionally enabled now in most California counties. Hopefully this will change by June. You have to be vaccinated to attend a 200 person indoor conference. And no more than 200 people allowed.

When conditions regarding travel destinations are more clear, large events like Stagecoach or Coachella are rescheduled, and Disneyland increases its capacity beyond 35 percent and can accommodate international visitors, we will see more upside to employment growth, if recalcitrant workers are willing to rejoin the labor force.  As the expansion in unemployment benefits ends in September, another surge in job creation will be likely.

We look forward to June

In June, if all goes well, the Blueprint regimen is abolished.  We’re all not sure what this means exactly, but all restrictions might disappear, as they have in Texas, Florida, Utah, Tennessee, Georgia, Missouri, the Dakotas, Mississippi, Louisiana, and more. Pennsylvania opens up entirely on Memorial Day and Virginia on June 15.

Residential Real Estate

Selling values are not likely to maintain their torrid pace of appreciation for much longer this year. To date however, sales data through March show no signs of faltering selling values in the U.S. or in California.  The median price for existing homes was up 17.2 percent in March for the nation, and 19.7 percent for California single family homes.

Sales of existing homes have cooled slightly in the nation, but are sharply higher this year in California.  For the first three months of the year, sales are at their highest levels since 2009.

I have no bad news to report in this month’s newsletter. The reports show nearly all conditions looking not only better, but much better than predicted.

by Mark Schniepp
April 8, 2021

With the advent of spring the U.S. economy is clearly strengthening and is further along than nearly every other big economy in the world. Nationwide, the economic recovery has gained new momentum with a collection of economic indicators recording some of their highest values since the pandemic began a year ago.

Attribute all of this to the precipitous decline in positive case counts, the complete or near-complete opening up of large states like Texas, Arizona, and Minnesota, and gradual relaxation of restrictions in other states.

The stock market remains at or near record levels of valuation. The S&P 500 index set another record high on April 8, 2021. The Nasdaq is only 200 points from it’s all time record high.

Consumer perceptions of their job and income prospects this year have now risen to their highest level in 13 months. As confidence rises, this normally also leads to increased spending and job opportunities.

Sure enough, job openings increased to their highest level in two years and the sales of vehicles soared in March, to the highest level since 2017.

Manufacturing surged in March, to it’s highest level since the 1980s!

Loosening COVID-19 restrictions on the economy unleased 916,000 new jobs in March. Rapidly then, the labor market is bouncing back and this indicator alone will give way to substantial increases in new spending, accelerating general economic growth.

This is an important lesson for California; we’ll also see a surge in the restoration of pre-pandemic job counts as (1) more counties are allowed to open this spring, and (2) as the state entirely reopens by mid-June.

Moody’s produces a “back to normal” index every week. The latest week shows a significant rebound in people’s perceptions of the economy advancing back to “normal,” or what economic conditions were like in February of 2020. The index includes seated diner volume, passengers at airports, people moving around, and time spent at the workplace (rather than at home).

What We NOW Know About the Economy

We have come to understand much more about the U.S. and California economies that we were skeptical about or could not have predicted (1) when the pandemic began in late March 2020 or (2) even as recent as October 2020. This is important because it explains to us and to you why the outlook will be much better than originally predicted this year.

We did not know that . . .

. . . total wage and salary worker income would not be severely impacted by the deep recession, largely because the highest paying jobs and professions were not as impacted.

. . . consumers would increasingly become more willing to travel and dine out, though not quite yet at the pre-pandemic pace. We do see a steadily rising number of shoppers, visits to restaurants and salons, gatherings in groups, and travel through airports. It also appears that daily car trips have returned to pre-pandemic levels. Have you noticed being tied up in traffic lately?

. . . despite the original 20, falling to 15, and then lingering to 10 million unemployed workers that have represented the ugly face of the coronavirus recession in the U.S., the economy would bounce back sharply when given the opportunity state by state.

We would never have predicted that the unemployment rate would fall to 6.0 percent a year after the draconian lockdowns all over the country that generated a near 20 percent effective unemployment rate last April. However, we also did not predict that millions of people would drop out of the labor force. If they didn’t, then the current rate of unemployment would be closer to 9 percent today in the U.S. and 11 percent in California.

In view of the momentum now recorded in 2021 and the expectations for continued progress through the year, this year’s forecast produces the fastest rate of growth since 1984.

California Reopens

On Tuesday, April 6, most of the 58 counties in the State moved into the Orange Tier, meaning that an expansion of economic freedoms will begin this week and continue through the month (providing another surge is averted).

However, Gavin Newsom announced on Tuesday of this week that by mid-June, the state will do away with the color-coded COVID-19 tier system and fully reopen the economy by lifting most restrictions.

“We are now moving beyond the blueprint,” Newsom said during a Tuesday press conference to announce the plan.” We can confidently say by June 15 that we can start to open up business as usual.  The June 15 goal is contingent on a steady supply of vaccine, along with getting as many people inoculated against the virus as possible.”

Newsom said he expects 30 million people will have received at least one shot by the end of April.

So if this goes forward, then our baseline forecast of a surge in economic activity this year would not be invalidated as I have cautioned over the past 2 months in previous newsletters.

We can expect a sharp reduction in unemployment claims and the ranks of the unemployed going into May and June.

Businesses should start scheduling the return of workers to offices, consider in-person business travel and in-person meetings and conferences, and revisit expectations on product and service inventory to meet the likely expansion of growth this year.

A return to the pre-pandemic normal is still not expected until well into next year, but business conditions over the 2^nd half of 2021 will represent a major change from how we have had to cope with restrictions on our activities, the way we have worked, and the limits on social and larger public gatherings. And so it will seem much closer to normal than at anytime since February 2020.