Category: Uncategorized

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.

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.

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.

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 2^nd 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 4^th quarter of 2020 weighed in a 4.0 percent, great by pre-pandemic standards but much slower than in the 3^rd 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 2^nd 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 22^nd. 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.

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 2^nd 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

by Mark Schniepp
December 2020

The 2^nd Wave

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

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

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

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

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

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

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

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

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

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

CARES Act Unemployment Aid Expires

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

Operation Warp Speed Has Delivered and the Vaccines are Nearly Here

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

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

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

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

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

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

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

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

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

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

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

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

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

by Mark Schniepp
November 1, 2020

The Second Wave has Arrived

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

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

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

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

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

Meaningful Indications of Improvement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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