Back on Track Faster Than Expected . . . and Residential Real Estate Demand Remains Firm

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 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.

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.

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.

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The U.S. Economy Comes Roaring Back and California Reopens

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 2nd 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.

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.

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Moving into the Red Tier and Another Surge?

by Mark Schniepp
March 19, 2021

The COVID-19 crisis plunged the U.S. economy into its quickest and deepest economic recession in modern U.S. history. In the near-term, how and when the country gets out of the disaster will primarily be determined by its public health response and the efficacy of rolling out the vaccine.

Economic forecasts can be challenging under normal circumstances, but a global pandemic, the election of a new president, and emergency powers invoked by the states, have resulted in significant additional complications that economists must consider. The extent to which local economies are limited by restrictions on businesses and consumers is a major factor, if not the dominant factor in assessing how the economy evolves this year and next.

Opening Economies

Easing economic restrictions are occurring throughout the nation, and at a snail’s pace in California where most economic activity in the state is still subject to some form of limitation. Restaurant customers are limited as are retail store and personal service customers. Office workers are largely remote, schools are either not open or operating on a hybrid schedule. Sporting events are capacity regulated as are business meetings. Large events are prohibited.

The path of the coronavirus and the effectiveness of the vaccine have the potential to be significant wild cards for the economic outlook this year. But the downside risk is less than the upside risk to the forecast. New, more infectious variants of the virus are racing against the vaccines, the latter of which is winning so far in California. The ultimate victor will influence the implementation of restrictions on various types of business activity.

The extent of the recovery in the public’s perception of economic conditions will remain limited until the labor market improves and the number of reported COVID-19 cases falls significantly, enabling the removal of restrictions and restoring the ability to move freely.

This has largely occurred in many other states but not in California.

An unrestricted economy would likely result in a surge of growth, led by consumer spending, job and income creation, business travel, leisure travel and tourism, and strong demand for public gathering events such as concerts, conferences and sporting events.

Consequently, with the clear abatement of the pandemic, we expect a sharp rebound in the economy, though a return to the normal we knew in 2019 will be delayed until mid 2022 or early 2023.



Source: New York Times, March 19, 2021

The Outlook

As restrictions are eased in California this year, more travel will be unleashed. Visitors should inundate all regions of California. The demand for amusement parks, festivals, fairs, parades, and large events will be prolific as Californians desperately seek a return to normal fun activity.

The outlook calls for improvement, though California will remain limited for much of the calendar year. Unless the office of the Governor changes course, the Blueprint for a Safe Economy will continue to limit the restoration of business in county economies throughout the state. With most counties now advancing to the Red tier on March 16, it will be another 3 weeks before any county can advance to the next best tier, and 6 weeks to move to the least restrictive tier which is still relatively restrictive. Then what?

If mask and distancing mandates are going to be required even after all adult Californians receive the vaccine, business restrictions will also be required, at least in terms of capacities. This takes us through the summer months and into the fourth quarter.

Without a fully open and functioning economy, California faces limits on growth, including hiring. A swell of spending activity by consumers restrained for well over a year cannot fully occur. Therefore the larger spending and jobs surge in California is unlikely until 2022 when we presume all restrictions will have been lifted.

California Tier Assessments

Another Surge?

A potential threat to all the counties moving into the Red Tier and having business restrictions eased is the possibility of another surge, pushing counties back into Purple.

This possibility exists, and infectious disease experts from major universities in California are predicting the onset of another surge—at the end of March or beginning of April. If the European Union is a precursor to the path of the coronavirus in California, then another surge is likely, unless the vaccine can interrupt what has been a reliable predictor of past surges.

Going back to the beginning, infection rates in European countries rose first, in late February 2020. Italy peaked in late March. Cases in California and much of the rest of the U.S. followed in mid to late March, and peaked in early May.

Cases in Italy began rising last October, leading California by a month. Cases declined in December and January and California followed 3-4 weeks later. Cases in Italy have been rising again, since late February and early March of this year. Their cycle suggests that a rebound in infection rates will revisit California soon.

Germany, France and Italy have imposed new lockdown measures to slow down the third wave of the pandemic, now raging through Europe.

These fits and starts of the pandemic have and will continue to wreak havoc on public health, consumer confidence, the economy, and our ability to provide accurate forward-looking information regarding the economic recovery and when we can return to normal.

 

The Trevi Fountain in Rome was tourist-empty last week, in light of new lockdown measures imposed on March 15, 2021.

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

Progress of the Recovery; The Outlook for 2021 is Still Hazy

by Mark Schniepp
February 2021

California

We can’t see it so much in California because of the severe restrictions on business and the fact that we’ve not been able to go anywhere or engage in much spending activity since Thanksgiving. But the growth of the economy has been positive due largely to distribution of goods, technology, and home sales.

Homebuilding and Infrastructure projects are underway throughout the state, generating a rapid recovery in construction activity. By this month or next, construction employment will have completely recovered from the precipitous decline caused by the pandemic in April, May, and June. The state’s manufacturing sector has now completely recovered.

Imports and exports through the state’s ports of Oakland, Long Beach, and Los Angeles have also recovered sharply in the 2nd half of the year. There was surprisingly more container traffic in 2020 overall compared to pre-pandemic 2019, principally from stuff coming into the U.S. rather than going out.

The 2020 calendar year ended with 9.4 million fewer jobs in the entire U.S. compared to December 2019. California ended up with 1.4 million jobs fewer than in December 2019.

The December jobs report was negative for both the U.S. and California.

The victimized economic sectors that contributed to the downbeat report continue to be concentrated in leisure/hospitality and local government. The severe restrictions on food services, travel, and attractions produced the freefall in leisure, recreation and hospitality revenue and employment. This has contributed principally to City and County governments grappling with major declines in tax revenues.

California suffered the most severe business restrictions in the nation during December and January, and generally for most of the 2020 calendar year. We are guessing that restrictions will be gradually eased as clear evidence of fewer cases emerges in California this year. All counties are now in the purple tier of business restrictions after the stay-at-home mandate was ended by the Governor’s office on January 25.

We would also hope that as the number of people receive vaccinations, the number of positive cases will decline. Though the level of daily cases is still high, we are finally seeing a clear abatement over the last two weeks. It’s unlikely however that this reversal of trend is due to vaccine distribution because fewer than 8 percent of the state’s population had received the first shot by the end of January.

In sync with the lifting of the stay-at-home order in California is the deluge of snowfall in the Sierra. Mammoth Mountain received 9 feet of new snow in the week ending January 30. With hotels now able to book reservations, thousands of visitors can inundate the ski resort, and all of the ski areas around Lake Tahoe. Hopefully the ski industry in California can now post a solid 2021 snow season.

The U.S. Economic Recovery is More Convincing

Because the limitations on economic activity in other states have been far less onerous than in California, positive growth measured by employment or sales or fewer unemployment claims per capita has been higher for the aggregate U.S.

GDP growth during the 4th quarter of 2020 weighed in a 4.0 percent, great by pre-pandemic standards but much slower than in the 3rd quarter because of the increased infection rates during the Fall, tighter restrictions to contain the spread of the virus, and the lack of fiscal stimulus which had contributed to the previous two quarters.

Housing is one particular indicator that is contributing largely to GDP improvement.

Homebuilder confidence is solid; both housing starts and new home sales have rebounded sharply to their highest levels since 2006.

Home refinance activity remains very strong and existing home sales have surged month after month since June. Total existing home sales during 2020 were also the most since 2006.

30 year fixed interest rates for conventional mortgages were 2.95 percent in late January, consistent with accommodative monetary conditions. At the January meeting of the Fed’s Open Market Committee, the target range for the fed funds rate was kept at 0% to 0.25%. This target is unlikely to change anytime soon.

The manufacturing economy continues to grow. Output has increased in 7 of the last 8 months.

The Moody’s back-to-normal index has been generally slipping the past 2 months, to the lowest level since June 2020. The index evaluates the extent to which the economy is back to pre-pandemic normality. The decline is mostly due to the surging case counts across the nation. Of the 15 states tracked for how the recovery is trending upward, California ranks next to last, just ahead of Illinois.

And consumer sentiment is not improving, remaining steadily lackluster. The positive news on the delivery and administration of the vaccines is being offset by increased or sustained restrictions on business activity and the general lack of improvement in the unemployment rate. Not surprising, retail sales have now declined for 3 straight months, under the weight of business restrictions and consumer fears from heightened positive case numbers in the U.S.

Automobile sales nevertheless continue to increase and the pace of sales has now recovered completely.

New claims for unemployment benefits have declined during the last two weeks of January. This is encouraging news although the level of claims is still extremely high. Too many American workers are still out of work. The unemployment rate is 6.7 percent. But add to that the four million people who were working a year ago but have dropped out of the labor force and are therefore not included as unemployed. Counting them would boost the nation’s unemployment rate to 9.0 percent.

The US economy is clearly in recovery, but the start in 2021 is slow. The pace of growth is expected to accelerate in the second half because widespread vaccinations in the first 5 to 6 months of the year will enable the economy to recover more rapidly thereafter.

How strong the economy is later this year will depend on how the virus evolves and the effectiveness of the vaccines and mitigation efforts.

However, please read our January newsletter for my major concern about the outlook for general economic growth over the full calendar 2021 year. There are still too many big unknowns. Rapid recovery during the 2nd half of 2021 relies on an open economy. We can’t be sure the economy will be wide open in June.

Vaccine Update

There are two vaccines being administered in this country and many more worldwide at this time. Two additional vaccines—by Johnson and Johnson, and Novavax—are now completing clinical trials, with results and FDA approval expected this month.

The vaccine delivery of doses to individuals is the subject of criticism and frustration. Millions of doses are sitting unused in freezers. The original ambitious schedule of getting 20 million people inoculated by the end of 2020 was finally accomplished 22 days late on January 22nd. California has consistently ranked at the bottom of states in the percentage of distributed vaccines that have been administered. And because of its high daily positive caseload, California needs to vaccinate as quickly as possible.

Delays have been caused by the holidays, the tidal wave of new coronavirus hospitalizations which have interrupted vaccination campaigns, insufficient staff needed to administer shots, the challenges of the ultra cold storage requirement of the Pfizer vaccine, the wrong vaccine being used, fewer vaccines being delivered, and other delays.

The recovery period we are in might be called the vaccine phase. During this phase consumers remain reticent to engage in activities usually requiring high human contact and remain largely at home and/or isolated. This keeps a lid on spending and economic growth. Also during this time, business restrictions remain firmly in place in most states, constraining business openings, hiring, and opportunities for consumers to spend.

We are now looking forward to the post vaccine period of recovery when pent up demand for services is expected to surge. Therefore, we will be watching closely how restrictions are lifted and how consumer demand evolves as herd immunity from coronavirus is generated by a dominant share of the population receiving the vaccine. That is not expected however until the late Spring.

The Outlook for 2021

Presenting a credible outlook for the U.S. and California today requires knowledge of how the coronavirus will evolve in 2021. We’d like to think the pandemic will be called off by summer. That’s what we thought nearly a year ago, in March of 2020.

Right now, travel bans are still in effect. Rigorous testing for airline passengers entering the U.S. is now required. Effective January 26, the CDC now requires all air passengers including U.S. citizens to present a negative COVID-19 test, taken within three calendar days of departure.

Travel to most of Europe is still limited to essential workers only. The U.S. is still not on the welcome list. Travel from Europe to the U.S. is mostly prohibited. Ditto China, Brazil, and South Africa.

It is largely unknown when these conditions will change. Consequently visitor industry contribution to the U.S. and California economy is uncertain.

U.S. resident spending is expected to grow this year, for housing, food, clothing, autos, gasoline, furnishings, and healthcare. The unknowns include education, entertainment, recreation, and personal care.

When business restrictions are largely lifted, most consumers will return to pre-pandemic behaviors, though some reticence toward high human contact activity will still characterize some consumers. Consequently, we don’t anticipate airline, cruise ship, or tour bus travel to recover quickly.

The reticence will extend to live public gathering events, such as concerts, county fairs, or sporting events. These activities may remain social distanced anyway for most of the year, limiting audiences.

The outlook for the 2021 economy remains hazy. Most of us were glad when calendar 2020 ended. But so far, 2021 is looking a lot like 2020.

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

 

Outlook for 2021: Can We Count on the Rosy Consensus Forecast?

by Mark Schniepp
January 4, 2021

2020 is now in the rear view mirror. For the economy and for most every living person, the year was horrific. If anyone was guessing, they’d likely say that the outlook for 2021 would be better if not infinitely better, especially now that the world is being vaccinated meaning the pandemic will soon be eradicated.

Nevertheless I’m still concerned. And I hope I’m wrong about what I’m writing about in this month’s newsletter.

U.S. economic forecasts for real GDP in 20201 are shown here from a number of organizations.

Real GDP contracted 3.7 percent in 2020, and grew 2.2 percent in 2019. So a 4.0 percent consensus forecast for 2021 appears quite auspicious, and encouraging.

With a fair amount of growth, the Fed expects the unemployment rate to drop to 5.0 percent in 2021. That implies another million jobs created during the year and greater mobility of consumers as they buy goods, services, entertainment and recreation.

The outlook for 2021 should be easier to predict than what we just went through. But then, practically anything would be easier compared to 2020 when guessing when and how much businesses could operate was a game of musical chairs.

Today the in-person California economy is largely closed. There is still production and in-person sales of retail goods including food, clothing, home supplies and a few services. There is more online acquisition of products than ever before.

Many services are being provided in spite of the prohibitions, such as personal care services like manicures and haircuts. Gym recreation activities are relatively widespread, both legally outside and illegally inside.

Hotels are closed unless you are traveling in an official essential worker capacity. Short term rentals are also supposed to be prohibited.

Construction activity is busy in the state. Agricultural production continues though the industry’s workforce has sharply contracted because the restaurant industry is largely closed.

The case counts are not diminishing, despite the severe restraints on business, the mask mandate, the curfew, and the prohibition of gatherings. And unless case counts begin to meaningfully decline soon, an even larger pullback in business activity than expected might ensue.

A self-sustaining recovery will not occur until the vaccines are widely available, likely by the spring of 2021. Only then will many consumer-facing businesses begin to function more normally. Only then will businesses ranging from restaurants and hotels to public transit to entertainment venues begin to function more normally. Or will they?

Two vaccines are well underway, Pfizer and Moderna. Two additional vaccines are coming in January or February. Their delivery and implementation around the country is breeding new optimism. There is a strong belief that a return to normalcy is possible by mid year 2021. The stock market’s performance would suggest this as do the recent economic forecasts for the nation in 2021.

We all believe that the distribution of vaccines that started three weeks ago will begin to ease the medical necessity for restrictions.

But with the vaccine now being administered to thousands of recipients in California, there are still risks that the usefulness of the results of the vaccine will be delayed, causing economic growth to fall short of expectations.

This is because there is an emerging narrative that after receiving both vaccine doses, we will still need to wear masks and social distance. What?

“We don’t know if all the vaccines will be equally effective. We don’t know whether a vaccine prevents asymptomatic infections and if there’s still the possibility that a vaccinated person could transmit the virus without knowing it. Because there’s still a chance that you could be a silent carrier even after getting vaccinated, wearing a mask, practicing social distancing, and handwashing all remain important.”1

If this is true and mask and distancing policies are still widely enforced, it’s probable that restrictions on businesses will also remain largely in place even after much of the population is vaccinated.

I’m just guessing but in view of the very cautious approach we have observed in California since July regarding limited business openings, a continuation of a regime of restrictions for much of calendar 2021 would not be surprising.

Consequently, despite widespread participation of the population with the vaccines, if there are persistent restrictions on businesses during 2021, a robust recovery will not be possible. Or certainly not the kind of growth that is being forecast for the U.S. economy. We will see fits and starts, and generally positive growth, but no significant surge in overall economic activity.

I hope I am wrong, but be prepared for delays in reinstating the California economy to February 2020 conditions. Also be prepared for many schools, colleges and universities to remain closed for the remainder of the current 2020-2021 academic year. The loss of that activity alone produces a meaningful drag on the state’s economy.

The absence of large events, such as concerts, conventions, theatrical performances, and audience attended sporting events also dampen many options for consumer spending, and needless to say, job creation or restoration of thousands of these jobs which have been absent for 10 months now and counting.

Scenario A: Restrictions are removed with widespread dissemination of the vaccine

The outlook assuming conditions return largely to normal by mid year has California GDP rising 3.8 percent this year with strong gains in the 2nd half. Employment surges in construction, professional services, and healthcare. State and local government jobs will also start to recover in fiscal 2022 which starts in July.

People will begin to travel both domestically and abroad this summer as the world opens up. I would expect Disneyland to have opened, the Dodgers to be playing to live audiences, business meetings and large conventions to resume, and entertainment venues to ramp up again.

Largely, conditions are back to normal and the second half of 2021 would look quite vibrant.

Scenario B: Restrictions persist well into 2021 even after the majority of Americans are vaccinated

Here is what is closed now:

  • Movie theaters
  • Live audience sports
  • Amusement parks
  • Bars, breweries and distilleries
  • Wineries
  • Any indoor recreational facility
  • Hair salons and barbershops
  • Personal care services
  • Museums, zoos, and aquariums
  • Family entertainment centers
  • Card rooms and satellite wagering
  • Any indoor public gathering

For most of the state, restaurants are entirely closed for indoor or outdoor dining. And this has led to the further collapse of food service jobs during the month of December.

The December 2020 Stay-at-Home order was extended by 3 weeks into January by Governor Newsome on December 29, 2020. Consequently, most of the state’s hospitality economy is in for another empty month of growth.

Clearly, Stay-at-Home orders will be rescinded as positive case counts decline and ICU capacity loosens up. But the nightmare scenario going forward would extend many restrictions on the above list though the spring and into the summer months of 2021. That said, vacation travel will be as unlikely then as it is now. Schools will not open broadly until the fall of 2021.

In the meantime, rising unemployment and layoffs from accelerated restrictions will suppress demand for a variety of goods and services. This is why a second stimulus bill is desperately needed to circumvent the growing likelihood of declining growth this quarter.

The U.S. will not return to its pre-COVID-19 employment level until the end of 2023, and many industries face more long-lasting impacts. Risks to the outlook in 2021 are mostly negative. The increased spread of the virus across much of the country could result in an even larger pullback in business activity than expected.

Under either scenario, the housing market is forecast to generate an increase in sales and selling values. The California Association of Realtors’ forecast for 2021 has home sales rising 3.3 percent and the median price edging up between 1 and 2 percent (in the wake of an 8.1 percent increase in home values during calendar 2020).


1 https://www.inquirer.com/philly-tips/covid-vaccine-coronavirus-mask-vaccinated-efficacy-20201216.html

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

2nd Wave Update and the Heralded Vaccine

by Mark Schniepp
December 2020

The 2nd 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 4th quarter following the 33.1 percent jump in the 3rd 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 2nd 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.

The vaccines are here. Operation Warp Speed has delivered, and millions of inoculations will begin this month. The beacon of light that will enable us to be freed from the personal and economic shackles of COVID-19 begins now.

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.

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

Will the New COVID Surge Dash Economic Improvements to Date?

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 2nd 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 2nd 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 2nd 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 2nd 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 2nd 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.

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.

There is no Joy in Mudville; There is no V-shaped Recovery

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.

Bloomberg, September 30, 2020


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.

Expectations for the California Economy for the Remainder of 2020, and Beyond

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 2nd 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 6th 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.

Watch for our regular updates on the U.S. and California economies during the pandemic. Follow our COVOD-19 page to be the first to understand the extent of the fallout and the trajectory of the recovery.

Go to COVID-19 Update Page

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

The Reversals Have Slowed the Recovery

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.

Watch for our regular updates on the U.S. and California economies during the pandemic. Follow our COVOD-19 page to be the first to understand the extent of the fallout and the trajectory of the recovery.

Go to COVID-19 Update Page

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.