California Economic Forecast:

State's Economic Recovery Will Lag U.S. as COVID-19 Continues its Toll

California’s current economic recovery and the health of its labor market are lagging behind the nation’s recovery — a trend that’s expected to continue as the COVID-19 pandemic continues weighing on government policy, business decisions, and consumer activity.

That’s according to the most recent forecasts presented and published by experts from the UCLA Anderson Forecast, the California Credit Union League, Beacon Economics, the California Economic Forecast, and California Policy Lab. These experts’ opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately.

UCLA Anderson Forecast
Released Sept. 30 in a report (Pandemic Policies and the California Outlook):

California’s economic outlook will improve substantially in the third quarter of 2020, but a full recovery won’t be realized until the end of 2022. The state’s total payroll employment (combined private-sector companies and public government-related employment) will reach 16 million jobs by the end of 2020, but this is still far below the roughly 17.5 million job level seen in February 2020. The unemployment rate will fall noticeably below 10 percent by the end of 2020 but probably won’t drop to 6 percent until late 2022. In general, a full recovery to pre-recession levels of economic activity is not expected until 2023.

As California’s unemployment rate lags the nation’s in the coming years, the U.S. forecast calls for: a 7.8 percent unemployment rate by late 2020; 6.3 percent by late 2021; and 4.7 percent by late 2022 (with California most likely trailing a bit higher along the way as the national rate drifts downward). This national picture of unemployment will be affected by people who are “willing and able to work” — those who are officially counted as part of the labor force. One of economists’ greatest fears is that certain unemployed individuals get discouraged and decide to not come back to the labor force, which is why a faster-recovery-than-not with ample monthly job growth is what they hope for.

The forecast assumes California’s pandemic-induced shutdowns will dissipate sometime in 2021, and some of California’s local/regional economies will display more weakness while others more strength. The California forecast is shaped in part by federal programs such as the Pandemic Unemployment Assistance (PUA) and Paycheck Protection Program (PPP). However, it should be noted that greatly reduced international arrivals at major airports in the state reflect the pain felt in the leisure and hospitality industry. But the news is not all bad. Home sales have bounced right back, which supports the projection of strong growth in residential building permits. Residential building permits are predicted to be back almost to their 2020 first-quarter level by late 2020 at 117,000 per year (and will reach approximately 130,000 units by late 2022).

California Credit Union League
Released Sept. 28 during the webinar Credit Unions and the Post-COVID Economy — Labor, Jobs, Policies and Recovery:

Click here to view the full slide presentation.

It may be 2022 or 2023 before the “real feeling” of economic recovery arrives in California. As California lags the U.S. recovery in the short term, the U.S. unemployment rate (currently 8.4 percent) is expected to hover around the 9-percent level as more workers continue re-entering the labor force (those able and willing to work) between now and December. It may not average 8 percent until sometime in 2021, then 6 percent in 2022, and finally 5 percent in 2023. California’s unemployment rate will drop in tandem, although not smoothly.

California’s economic recovery depends on the recovery’s “depth and duration.” The discussion surrounding V-shape, U-shape, K-shape or other-shape recovery scenarios unfortunately clouds the conversation in the news media. Ongoing government and social policies due to COVID-19 test cases remain the No. 1 determinant of the economic recovery’s pace. Should California’s residents and businesses prepare for another shelter-in-place period? Time will tell; it is unknown right now. Nonetheless, one factor to gauge is the pace of job hiring month by month. Businesses could start slowing down hiring if they foresee they are investing too fast in payroll costs and are “ahead” of the actual pace of recovery.

California could be facing a structural change in the way businesses hire workers. A renewed focus will be put on productivity and technology, which could initially have negative effects before positive ones in the long term. The COVID-19 recession earlier this year was not caused by an overheated stock market or housing bubble. Many businesses’ revenue and profits were impacted all at once by government decree due to the pandemic virus.

During a FREE archived webinar for Power Learner Passport subscribers of the California and Nevada Credit Union Leagues, Dr. Robert Eyler discussed recent forecasts and data regarding the direction of the California and Nevada economies in light of large uncertainties as 2020 slowly draws to a close, providing credit unions with guidance during this year's strategic planning/budgeting season. The data on the national economy provide context, especially which states are recovering more quickly than California and Nevada — and why. Click here to access the webinar.

Beacon Economics (forecasting firm)
Released Sept. 15 in a report (Sanguine Economic Outlook Says U.S. Will Near Full Economic Recovery in 2021):

Click here to view the entire California forecast. Additionally, click the following reports for local/regional context: Oakland/East Bay region, Los Angeles region, San Diego region, San Francisco/Bay Area region, and Silicon Valley region.

The recent bounce back in economic activity — from home sales to consumer spending to payroll employment — has California poised for a “relatively rapid recovery” from the extraordinary COVID-19 recession. California’s economy will nearly fully recover sometime in 2021. On its current trajectory, U.S. unemployment will fall below 7 percent by the end of this year (based on the economy’s healthy condition at the outset of the pandemic in early 2020). There is no reason to think that the shocks to the economy, as massive as they were, will linger and have more than a “transitory effect” once activity fully resumes.

U.S. consumer savings recently shot up to almost $1.2 trillion, four times what they were in December 2019. This $900 billion in excess savings will undoubtedly be spent once life returns to normal. It’s the “dry powder that will fuel a rapid recovery.” Relatedly, overall personal wealth has actually increased over the course of the current recession.

This California outlook is based on the assumption that 1) The virus will be brought under control; and 2) Health-mandated closures and restrictions will continue to ease. Economic recovery is highly contingent on containing the spread of COVID-19, and there continues to be uncertainty surrounding the nation’s ability to do that effectively and quickly.

In California, the economic recovery underway since April slowed following the resurgence in new COVID-19 cases. More recently, however, the number of new cases has started to decline. While the state’s economy is far from smooth sailing, cases and hospitalizations have been dropping in California as of late August, a critical trend for the state’s economic recovery. California has launched a four-tiered reopening plan, with 38 of the state’s 58 counties currently landing in the most restrictive tier. Counties are able to move to less restrictive tiers, which allow more businesses to open and more activities to resume as their daily virus case numbers and test-positivity rates decrease.

California’s major metropolitan areas have fared quite differently in their climb back from job and other economic losses suffered during the COVID-19 pandemic. When it comes to recapturing lost jobs, some regions (such as the San Jose/Silicon Valley area) have watched their largest industries return to near pre-pandemic employment levels, and others (Los Angeles) are trailing the national average. These variances are being heavily driven by the different industry and population composition among the state’s diverse metro areas. Among the five major metros examined, employment as of early September had recovered most robustly in the Silicon Valley area, where the unemployment rate has fallen to 8.4 percent, followed by San Francisco (9 percent), the East Bay/Oakland region (10.4 percent), San Diego (10.8 percent), and finally Los Angeles (17.5 percent). Overall, large metropolitan regional year-over-year employment growth across the state will most likely remain behind previous healthy, pre-pandemic annualized growth trends well into 2022.

California Economic Forecast (forecasting firm)
Released Sept. 15 in the California Economic Forecast’s September 2020 forecast update (Expectations for the California Economy for the Remainder of 2020 and Beyond).

Click here for the entire report.

As the national economy continues recovering, California will noticeably lag. However, the recovery will gain momentum going into spring of 2021 assuming a trusted COVID-19 vaccine is developed and disseminated (or at least weeks away from being released) to the general public by then, or at least the population most vulnerable and at risk. That means “normal” travel and recreation could resume as early as summer of 2021, with a much faster pace of job gains during the second-half of 2021 compared to today.

Why will California’s economic recovery continue under-pacing other states? The state has been subject to the harshest restrictions on business in the nation. Most of the largest counties were completely shut down for a 9 to 10-week period or longer this past year. The easing of restrictions for all counties by June 1 was effectively removed four weeks later when reversals in re-openings were put into place. Many limitations have lasted through August and September. When combining the “under-employed” to headline unemployment, California’s unemployment rate is realistically more like 14 – 15 percent (about 4 to 5 points higher than headline unemployment). Consumer spending is down nearly 12 percent year-to-day from January (but spending declines are significantly lower or have largely recovered in many other states):

The national economy had recovered 52 percent of all jobs lost in March and April by late August, but California has recovered only 30 percent. There are 25 percent fewer small businesses open today in California than there were in January. Specifically, the leisure/hospitality/recreation sector has suffered a 35 percent closure rate. Retail trade and transportation’s small business closure rate is 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 four months.

Expect a challenging fourth-quarter 2020 for small businesses in California compared to other states that are recovering faster. As of early September, 33 counties representing 71 percent of California’s population remained in the most restrictive social-distancing tier of counties based on daily COVID-19 case rates and the test positivity rate. The criteria for meeting the thresholds that reduce the restrictions on business are very strict, with prohibitions on indoor operations of nonessential business. If a county moves from the most restrictive to the next less-restrictive tier, 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 remainder of 2020. Moving to the less restrictive tiers appears to be near impossible for most counties unless the virus burns itself out. Right now there are only 11 counties classified in the least-restricted tiers, representing less than 5 percent of the state’s population.

California Policy Lab
Released Sept. 15 in a report (New Analysis: California Unemployment Claims Surged in August, Driven in Part by Questionable Increase in PUA Claims):

Click here for the synopsis of the report; and click here for key research findings/charts and visuals.

Evidence on the state of the California labor market from additional claims, partial unemployment insurance (UI) claims, and benefit denial due to excess earnings signal a temporary weakening of the economic recovery. Weekly additional claims (claims which are “reopened” after a claimant’s temporary return to work) have held steady at a high level and represent about 50 percent of regular initial claims in the week ending Aug. 29. Between late June and mid-August, the share of paid claimants receiving partial benefits or being denied benefits because of excess earnings dropped substantially among the most sectors most impacted by the crisis. Among others, this indicates a rising share of claimants who are not simply seeing reduced hours, but have been fully laid off (at least temporarily).

The number of California workers receiving unemployment benefits remains startlingly high. More than 3.5 million claimants, or 19 percent of the state’s labor force, were paid benefits for unemployment experienced in the week ending Aug. 15. Since the start of the COVID-19 crisis in mid-March, 7.5 million unique California claimants, or nearly 39 percent of the California workforce, have filed for UI benefits. The number of unique claimants during this period is 29 percent less than the more frequently cited count of claims, which stands at 10.6 million, because of individuals filing for multiple claims during the crisis.

California saw a surge in initial claims for PUA (federal Pandemic Unemployment Assistance) in August that led to the highest weekly count since the start of the PUA program. A steep upward trend in initial claims between Aug. 16 and Aug. 29 was driven by a surge in PUA claims, with well over twice as many new PUA claims filed in the week ending Aug. 29 than were filed just two weeks prior. The California Employment Development Department is investigating this surge amid possible fraud concerns.

Initial claims for regular UI in California also surged in late August, albeit less pronounced than PUA. The week ending Aug. 29 saw the largest week-over-week increase in regular claims since mid-June. Prior to this, however, the state experienced five consecutive weeks of a decrease in the number of new initial claims — a measure which excludes individuals re-opening unexpired claims after having returned to work temporarily.

A dramatic and recent increase in the number of payments processed each week (often called “continuing claims”) in California has been driven by a rise in claimants certifying retroactively for multiple weeks of benefits. This means the number of continued claims in recent weeks is considerably greater than the number of people actually receiving payments for unemployment experienced in those same weeks. The increase in retroactive payments has been primarily driven by new PUA claimants certifying for benefits for weeks of unemployment experienced back to the earlier stages of the crisis. The average number of payments each PUA claimant has been certified for has risen from about four weeks in June to over eight weeks of payments more recently.

The spike in California’s initial claims during August coincided with a shift in demographics. Relative to July, new claimants are older and more educated, and the racial compositions of claimants is also shifting toward more white claimants and fewer Hispanic claimants. The shift is driven by both an increasing share of PUA claimants and a demographic shift within the group of PUA claimants. Similar demographic shifts also occurred within the group of regular UI claimants but to a lesser extent.

California’s education sector saw a spike in claims near the end of August, with the share of new claims originating from this sector reaching its highest level since the end of last school year in the spring of 2020. School employees returning from summer break who find that their jobs for the fall no longer exist are now eligible to claim benefits. Although teachers in such situations would not be eligible for retroactive benefits for the summer period, other school employees technically referred to by the California Employment Development Department (EDD) as “non-professional” employees (such as aides and custodians) may be.

Throughout the summer, California’s claimants of regular UI have been roughly five times more likely to exit UI in any given week than those receiving PUA benefits. We define “exit” rates as the share of individuals potentially eligible for benefit payment in a given week who subsequently fail to certify for the next two weeks. We also show that these exit rates are substantially lower among black workers and workers in the food service industry.

Exit rates from UI have been substantially higher among California claimants who had reported they expected to be recalled to work by their employers. During May and June, about 5 percent of claimants who indicated they expected recall exited UI in each week, compared to only 3 percent of claimants who indicated they did not expect to be recalled.

California: Demographics, Labor, Education & Economic Resources

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