Economy Entering Major Inflection Period as Slow Recovery Drags On

While experts disagree over how fast California’s economy will continue recovering in 2021, late 2020 is a major inflection point as unemployed workers remain unemployed, or readjust into different jobs, or even start their own freelance careers and businesses amid the COVID-19 pandemic hangover.

That’s according to the most recent forecasts and trends presented by experts from the California and Nevada Credit Union Leagues, UC Irvine, the California Economic Forecast, the California Center for Jobs and the Economy, and the California Association of Realtors. These experts’ opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately.

California and Nevada Credit Union Leagues
Presented on Oct. 26 by Dr. Robert Eyler of Economics, Forensics & Analytics Inc. during the Leagues’ REACH 2020 virtual conference (“Beyond 2020: Seeing the Future for California, CU Members, and Employees”):

As California’s gross domestic product (GDP) stays elevated in 2021 and 2022 for economic growth to play catch-up, the fourth quarter of 2020 will probably represent a major inflection point as the state continues slowly recovering from the COVID-19 recession from earlier this year. In the United States, 2020 will probably see -4.3 percent GDP, while 2021 and 2022 will register 3.1 and 2.9 percent GDP (respectively). The third and fourth quarters of 2020 will mostly positively mirror in GDP what happened in the first and second quarters from a negative-growth perspective. However, the one huge lagging part of California’s economy will be the labor market — jobs destroyed and created, businesses going bankrupt and then re-emerging, and a major readjustment for many lower-wage workers.

Nearly 745,000 workers have left California’s labor force (adults who are willing and able to work) when you compare the state’s pool of workers in September 2020 versus September 2019. Some of these workers will be absorbed back into the job market (those employed) as time goes on, while others may remain displaced for several months or years (those either unemployed or those having left the labor force because they’ve given up looking for work). Taking into account the loss of both non-farm payroll (corporate) jobs and freelance/independent/entrepreneurial jobs, California was still down somewhere between from 1.6 – 2.05 million jobs as of late September 2020 compared to February 2020.

California’s slow labor market comeback can be deduced into three salary categories: low wage, middle wage, and high wage. As of late August, the combined low-wage worker sector (those making no more than $27,000 per year) was down 27 percent from earlier this year; middle-wagers were down 10 percent ($27,000 - $60,000 per year); and high-wagers were down 4 percent (above $60,000 per year). As more data comes out, this measurement is expected to show that the lowest-wage workers will have the hardest time during the current economic and jobs recovery compared to middle- and higher-wage workers.

The number of “open” small businesses in California is still down 29 percent as of late September compared to earlier in 2020. This measurement was as low as 45 percent in April but has recovered less than halfway since then. Going deeper, the number of leisure/hospitality small businesses (a sub-category) was still down 42 percent compared to earlier in the year (down 48 percent in April), showing structural damage to the retail, restaurant, entertainment, and personal services job sectors.

You can view the full presentation. For more California economic trends and insight into what credit union leaders should stay on the alert for, click here.

UC Irvine
Presented on Oct. 20 by the Paul Merage School of Business and Newport Beach Chamber of Commerce (“2021 Economic and Financial Economic Forecast”):

There is more downside risk to California’s gross domestic product (in sync with, but lagging, the U.S. economy) in 2021 than many forecasts are currently predicting. The Federal Reserve, which has a record of overestimating annual U.S. GDP, is predicting 4 percent national economic growth next year, which means California’s may actually be as low as 2.5 – 3 percent (assuming U.S. growth is 3 – 3.5 percent). This would also represent a very slow California job market recovery in 2021 that could be overestimated in other current forecasts right now (a lot of remaining “temporary” job market damage is becoming more permanent as time goes on). The good news is, the economy is doing a relatively “good job of adapting” — such as outdoor dining, temperature checks, and many other social-health business reactions. It will continue adapting in 2021.

California’s red-tier category within its four-tier colored coronavirus county-level health policy guideline is getting less restrictive. This less-restrictive posture over time will only help local businesses and workers go back to work and reopen (purple is a “widespread” virus, red is “substantial,” orange is “moderate,” and yellow is “minimal”). However, it will take several more weeks/months to notice this tier change taking place.

California’s economy is likely to start seeing its hardest-hit industries from COVID-19 recover faster as final vaccine testing and eventual confirmation and distribution come into play sometime between late 2020 and early 2021. In the long term, California and the nation’s economies have the same problem today as they had in January of 2020 before COVID-19 caused a major slowdown. There is nearly no annual growth in the working-age population. Demographic reasons are helping drive this trend (declining fertility and birth rates), which has been putting downward pressure on working-age population growth since 2002 (workers aged 18 – 55). Also, structural yearly U.S. budget deficits have been borderline, if not already, out of control for several years, which may continue to be a drag on economic growth going forward.

Coming out of the economic carnage of the past several months, retail sales (even in California) and other drivers remain a bright spot — even as high unemployment continues to put a damper on the forecast. Recovering and unexpectedly-high monthly consumer confidence and consumer sentiment surveys are also bright spots, but retail sales from a national perspective rose 1.9 percent in September. This indicates the country's biggest economic driver is still healthy — and California’s as well. Combined with relative strength in housing sales, construction, increasing small-business formation applications, and continued support from the Federal Reserve and Congress (low interest rates and fiscal stimulus), these factors will continue supporting California’s slow-and-steady economic recovery.

Meanwhile, higher unemployment continues to plague lower-skilled workers across California. The U.S. unemployment rate in September 2020 for those without a high school degree was 11 percent, and for those with only a high school degree it was 9 percent (“some college” was 8 percent and “college” was 5 percent). All of these categories were much lower before COVID-19 disrupted the economy. Additionally, there are hundreds of thousands of higher-skill job positions open (similar to before COVID-19), but many job seekers don’t have the immediate skills to apply and be considered. The rate of temporary job losses in lower-skilled areas that turn into permanent job losses is still a key indicator that will continue factoring into quarterly economic performance across the state going forward.

California Economic Forecast (forecasting firm)
Released on Oct. 19 and Oct. 30 in forecast updates (“There is no Joy in Mudville; There is No V-Shape Recovery” and “Will the New COVID Surge Dash Economic Improvements to Date?”):

Current total non-farm payroll employment in California (16 million jobs) was still down 9 percent from its pre-COVID, pre-recession level (17.6 million jobs in February) as of early October. It has improved greatly since April 2020 when it stood at 15 million jobs (or down 15 percent) from the pre-COVID level, but it is severely lagging behind the United States and needs to recover another 1.6 million jobs just to return to February 2020. However, this recovery would not even make up for lost-opportunity job losses between March – late 2020 if the COVID-19 pandemic had never even happened and new entrants were still coming into the labor force in during healthy economy.

For a V-shaped economic recovery to occur in California, the state would need the level of employment to return close to, or at, the level last recorded in February 2020 — and that would need to occur by Dec. 31, 2020. Initially the labor market recovery was quite fast, as workers were recalled back to their jobs when the state’s economy reopened in mid-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. Most likely, the state’s employment will not fully recover in 2021.

Although the coronavirus’s pace of spread continues determining the California economy’s performance, a more direct connection to performance is the state’s four-tier categorical social distancing and business re-opening restrictions. Also, travel was limited or stymied by smokey environments or closed national/state forests and parks due to the summer’s wildfires. Few commercial airliners have been flying due to slack in consumer demand, and most hotel occupancies remained at or below 50 percent. The state’s 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 reopening tiers is clearly destructive to businesses, creating permanent losses and extending the economic recovery.

California’s economy must be allowed to fully open to jumpstart hiring. This will probably occur with the successful dissemination of a coronavirus vaccine. Another scenario is, the coronavirus will ultimately burn itself out. Business leaders can look for either of these conditions to occur sometime in 2021. When economic restrictions are lifted, economic growth is slated to surge.

Though now rising in other Midwestern states, coronavirus cases remain relatively contained in California so far — and many California counties have advanced from the purple tier to the red tier, with few climbing 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. In California, there are many technology job sectors that have fully restored employment, and the construction workforce has also been restored to 94 percent of its February 2020 peak.

There are still many economic headwinds for California, however. With airline demand depressed, the major airlines have announced further layoffs. With no plan to reopen Disneyland, a huge direct and indirect employment impact is starting to ripple across Southern California. There is also the unwinding of temporary jobs for the decennial U.S. Census by the federal government, and there will likely be subdued hiring for the holiday shopping season, which starts in October. Chillier temperatures in November and December will curb outdoor dining and threaten another wave of job cuts, while grocery stores, meal delivery services and food take-out will surge again (at the expense of eating out). If a “second wave” of the COVID-19 pandemic arrives in California, new restrictions may be reinstated, slowing economic progress further and jeopardizing the improvements that have been achieved to date. Until we see more relief and stimulus from congressional fiscal policy and better medical therapeutics (and the much heralded COVID-19 vaccine), California’s economy will recover selectively — and only marginal improvement should be expected.

California Center for Jobs and the Economy
Released Oct. 19 in an update report (“Unemployment Data Update”):

California has recovered under half (45 – 49 percent) of the jobs it lost in the COVID-19 recession earlier this year, while the United States has recovered more than half (55 – 60 percent). Labor market data for both geographies is “noisy,” given different labor force participation rates on a month-to-month basis (adults who are willing and able to work). California’s September jobs data showed a continuation of job creation trends over the past few months, although the pace of monthly job growth has slowed. Also, employment, although improving, saw no substantial return to the labor force by workers who have been sidelined by the state-ordered closures.

Recent California Employment Development Department (EDD) unemployment insurance claim provisions and seasonal adjustments have brought the state more in line with other state unemployment trends, although California is still at an elevated level. As of late October, weekly “initial” unemployment insurance claims in the state finally trended down to 152,000 (after a peak of more than 1 million earlier this year), and weekly “initial” Pandemic Unemployment Assistance insurance claims (added emergency congressional/federal relief) have finally dropped to 26,000 (after spiking to nearly 700,000 in late summer). The drop is good news, but California’s underperformance relative to other states is mostly due to the economic/jobs impact of COVID-19 business restrictions on lower-wage workers. Meanwhile, "continuing claims" in the state (a better measurement over the long term) have slowly dropped from nearly 1.1 million in late summer to about 780,000.

Further recovery progress in the coming months across California will continue to be guided by the state-ordered restrictions within local counties. Only 10 counties as of Oct. 12 are in the highest purple-tier restrictions, but these account for 46 percent of the state’s workers who are currently unemployed (and 27 counties are in red-tier areas). Combined, the two most restrictive tiers cover 37 counties with 89 percent of total unemployed workers. Additionally, these numbers only count the official unemployed and not workers who have left the labor force due to current conditions. Continued progress towards recovery will be set largely by when these unemployed workers will be able to return to a job.

As the COVID-19 pandemic and slow economic recovery continue across California, the concept of “recovery” now has to consider an increasing series of factors. It is no longer a quick “V” or more subdued “U”-shape return of workers to their prior jobs. The issues have now become more of what jobs will be there to return to, and which workers will be able to do so. The economic effects have been felt more strongly in lower wage households.

Based on California State Controller and California Department of Finance reports, total state general fund revenues through the end of September have actually been running $8.5 billion ahead of the projections contained in the current budget. If only continuing at this rate, higher than projected revenues alone would erase nearly 60 percent of the $54 billion deficit on which the budget bill is based. Combined with the current draw on reserves, nearly three-quarters of that deficit will be covered by the fiscal resiliency mandated under Proposition 2 and the economic resiliency being shown through telecommuting, marketing channel shifts in the delivery of goods, and other potentially permanent changes within the state’s economic structure.

Based on California’s total initial unemployment claims filed between March and August, the Los Angeles region has led the state at 31 percent of the total (compared to having 29 percent of the population). The San Diego region, Orange County, and Inland Empire regions also show a relatively higher incidence of claims relative to their populations, while the Bay Area and the rest of the state show relatively lower claims rates relative to their local populations. The weekly and monthly data are continuing to reveal a churn in the economy since the closures began in March, as workers are laid off temporarily, then temporarily secure, but then subsequently lose their jobs, and as the other category of “temporary layoffs” have become permanent.

As of Oct. 7, California’s Employment Development Department (EDD) reported an “initial claims” backlog affecting about 451,700 workers (down from 541,800 on Sept. 30). At the current rate from the prior seven days, it would take 35 days to eliminate the backlog entirely. The backlog in processing “continuing claims” stood at another 889,900 workers, down from 1.02 million a week earlier (at the current rate, retiring this backlog would take 47 days).

As year-over-year job growth remains positive in approximately half of employment sectors (or well over half) within local regions across California, it is unfortunately still negative in other key sectors. However, those negative gaps continue to slowly narrow — yet imperfectly. California’s unemployment rate is most likely perpetually 2 – 3 percentage points higher than the officially reported monthly numbers since a noticeable amount of individuals have “left” the labor market (pool of adults and teenagers willing and able to work). However, this 2 – 3 percentage point difference is often in play even in a healthy economy “at capacity” with a low unemployment rate (such as in January/February 2020), making it an ongoing trend. To learn more, click here. The state’s unemployment rate fell to 11 percent in September (from 11.4 percent in August) as employers added 96,000 non-farm monthly payroll jobs in that month.

California Association of Realtors
Released on Oct. 13 (“2021 Market Forecast”):

California’s gross domestic product (GDP) will lag the United States’ 4.2 percent GDP forecast for 2021. Nobody knows by how much, but California’s GDP could register 3 – 3.5 percent next year. It means California’s labor market/job growth will also lag the nation’s job growth (and the state’s unemployment rate will decline at a slower pace in tandem). For context, U.S. GDP, non-farm annualized job growth, and the average-annual outstanding unemployment rate will probably be -5 percent, -6.5 percent, and -8.8 percent for all of 2020 and by the end of 2020 (respectively); and in 2021 those numbers are projected to be 4.2 percent, 3 percent, and 7.1 percent (respectively). These 2021 projections are much higher than 2015 to 2019 since the economy is playing catch-up after the COVID-19 recession. On a side note, other expert predictions peg 2021’s U.S. GDP to range between 3.4 – 4.6 percent (Bank of the West, Fannie Mae, Mortgage Bankers Association, National Association of Realtors, UCLA Anderson Forecast, and Wells Fargo).

Low mortgage interest rates and pent-up demand from a desire for homeownership will bolster California home sales in 2021. However, economic uncertainty caused by the COVID-19 pandemic and continued supply shortage will limit sales growth. Single-family existing home sales in the state will experience a noticeable downturn in 2020 (only 380,000 sold) until popping back to nearly 393,000 in 2021. This is still down from 398,000 in 2019 and 403,000 – 425,000 from 2015 to 2018, depending on the year. The state’s median home price will continue rising, averaging $640,000 in 2020 (up 8 percent from $592,000 in 2019), but its pace will noticeably slow down and only rise 1.4 percent in 2021 (hitting $649,000). The median value has only risen for several years on end, coming up from $476,000 in 2015 and bolstered by a historically low mortgage interest rate environment.

The average rate on a 30-year mortgage across California will drop from 3.2 percent in 2020 to 3.1 percent in 2021. This means the lowest rates in the mortgage marketplace will possibly fall to new lows for some borrowers (noticeably lower than 3.1 percent), while others will remain at a historically-low level already experienced for most of 2020. For context, mortgage rates hit 4.5 percent in 2018 before starting to drop again.

Approximately 60,000 foreclosures could be headed for California’s housing market (and 600,000 nationwide). The state’s current foreclosure and rental moratorium to help residents get through the ongoing financial pain of the COVID-19 recession earlier this year — combined with ongoing extensions of mortgage forbearance relief by national financial regulators — mean mortgage delinquencies will eventually have to be reckoned with when some approach 90 days (aka “serious delinquencies”) and turn into defaults. The extent of this upcoming foreclosure trend in 2021 is not fully known; however, it could modestly impact residential home prices in different markets. The good news is: the federal government has injected an immense amount of mortgage relief into the market; many mortgage lenders and servicers are implementing five-year “workouts” for troubled borrowers getting back on their feet; many homeowners with jobs are sitting on a combined record equity that they can cash-out at low interest rates if needed; and financial underwriting in the mortgage industry over the past 10 years has been healthy by historical standards. These factors should, altogether, bolster the housing market in the short-term.

The percentage of California home-sellers moving out of state is reaching levels not seen since 2005. So far in 2020, that number is 30 percent of sales (after stooping to 19 percent in 2013 and 2009). In 2005 it was 31 percent — and it ranged between 19 – 29 percent from 2006 to 2018. Additionally, in 2020, about 36 percent of California home-sellers have moved to a different home within the same county, and 18 percent have moved to a different county (sometimes from coastal vicinities to deeper inland for cheaper housing).

The share of California first-time buyers (versus repeat buyers) hit its highest level in 10 years in 2020 (38 percent). The state’s real estate market hasn’t seen this since 2010 – 2011 when interest rates on mortgages were steadily dropping to “new lows” back then. Today, it’s the same story (but combined with Millennial household demographic formation). Record-low interest rates are fueling a larger proportion of home sales to this first-time buyer group, who are younger on average. Additionally, housing affordability improved in 2020, although it’s still an issue for many would-be owners. In 2020 so far, 37 percent of first-time buyers changed the county they lived in so they could afford to purchase a home (down from 45 – 49 percent from 2017 to 2019).

Read more in the California Association of Realtors’ “2021 Market Forecast.” For a recap of the California economy, housing market, local/regional trends, suburbs versus urban/high-end areas, migration trends and more, click here. Also, to view more on the state’s housing affordability index and CAR’s economic/housing forecast for 2021, click here.

Glassdoor Economic Research and Challenger Gray & Christmas Inc.
Released monthly (“October Job Market Report” and “October Job Cut Report”):

More than 547,000 job openings across California were actively “posted” and waiting to be filled as of late October. About 31 percent were in the greater Los Angeles region and 21 percent were in greater Bay Area region. This October 2020 figure (547,000) is down 16 percent from October 2019 (655,000 job postings), although it is up nearly 2 percent month-over-month this year (September to October). To see job openings by industry group and other U.S. data, click here.

However, there have been more than 390,000 job cuts year-to-date in 2020 across California. This compares with 100,000 cuts during the same period in 2019 (a 290 percent increase). However, California job cuts have slowed down from a monthly and volatile 25,000 - 202,000 range (from March to August) to the 16,000 - 18,000 range over the past couple of months. You can click here for more job-cuts data.

California Business Data from U.S. Census Bureau
Released quarterly (“Business Formation Statistics”):

California’s year-over-year business formation applications are skyrocketing. More than 153,000 business applications were filed in the third quarter of 2020 versus 89,000 during the same period in 2019 — a 72 percent jump. While many economists say this is the beginning of the much-awaited-for wave of small business jobs to come, others say a small portion of these may be either fraudulent or possibly not truly representative of any intent to start a business unless Congress approves another round of Paycheck Protection Program (PPP) loan-grants. You can dig more into the state-level U.S. data here.

The Conference Board
Presented on Oct. 22 (“The Post-COVID US Labor Market: What can we expect in 2025?”):

View informative presentation slides on underlying factors shaping the U.S. economy by 2025. These include — but are not limited to — remote work, online purchases, automation, supply of workers with bachelor's degrees versus not, structural changes resulting from the COVID-19 pandemic, state and local government budget crises, and the decline of city centers. Click here to view the presentation slides.

California: Demographics, Labor, Education & Economic Resources

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