Bay Area:

Mixed Job Demographics to Drive Slow Economic Recovery in 2021

The Bay Area’s economy will continue exhibiting the “haves versus have-nots” storyline in 2021 as higher-wage workers positively cushion the economic fallout from the COVID-19 recession unlike any other region across the state, while their lower-wage peers slowly recover from the brunt of unemployment.

That’s according to the most recent forecast and trends presented by experts from UCLA and UC Hastings. These experts’ opinions spotlight intriguing viewpoints and projections so your credit union can plan appropriately.

UCLA and UC Hastings
Presented on Nov. 10 by the UCLA Anderson Forecast and UC Hastings College of Law (“2021 San Francisco Regional Economic Outlook"):

Total non-farm payroll jobs in the Bay Area will grow 2.3 percent in 2021 and 3.5 percent in 2022. That’s after experiencing a -6.8 percent drop in 2020 due to the COVID-19 pandemic recession that hit the economy earlier this year. In 2020 and 2021, the local employment market will fare better than all of California due to the Bay Area’s high concentration of workers who are able to work remotely (technology and other office staff), along with their corresponding job security.

“Real” personal income in the Bay Area (adjusted for inflation) won’t feel the brunt of the 2020 pandemic recession until 2021. This annual growth measurement will register 6.1 percent growth in 2020 before falling -3 percent in 2021, then recovering to 2.9 percent in 2022 (outperforming both California and the United States in 2020 and 2021). The region’s high proportion of high-income workers from the technology and information sectors will help its economic recovery.

However, in 2020 the Bay Area’s total non-farm payroll job recovery has only underperformed California. Compared to where it stood in February 2020, the Bay Area’s active employment base was down -10 percent as of late September compared to -9 percent for California and -7 percent for the United States (although in April all three geographic areas were down approximately the same -15 percent). Why? Restaurants, retail stores, hotels, travel services, bars, and other leisure and entertainment venues and services are not being supported as much by the region’s professional workforce in the city’s urban core and other areas of commerce and interaction. On the flipside, areas having a lower-paid workforce (many supported by small businesses) were hit much harder by the recession earlier this year compared to higher-paid workers.

Broken out by individual metropolitan areas, employment is down from its pre-pandemic level by the following percentages across the Bay Area: -7.5 percent in San Jose/Sunnyvale/Santa Clara; -11 percent in San Rafael/San Francisco/Redwood City/South San Francisco; - 12 percent in Oakland/Hayward/Berkley (and all of these micro-regions were down by -13 to -18 percent, depending on the city, in April).

The breakdown of “continuing” unemployment insurance claimants in late August as a fraction of the local labor force (pool of adults who are willing and able to work) was as follows: Alameda County (15 percent); Contra Costa County (14.5 percent); San Francisco (13.8 percent); San Benito County (13 percent); Santa Clara County (11.5 percent); San Mateo County (11 percent); and Marin County (10 percent).

While several small businesses across the Bay Area remain closed, the statistical layout of this trend depends on the city and area. According to Opportunity Insights’ “Economic Tracker” that combines business payroll data and consumer credit card transactions, the percentage of small businesses that were open in late September compared to February was down -32 percent in Oakland; -34 percent in San Jose; and -44 percent in San Francisco (all three city areas were down by -50 to -60 percent in April).

Approximately 21 percent of all jobs in the Bay Area are in the professional/business services industry category — noticeably higher than the entire state (which bodes well for the local region going into 2021). For California, it’s 16 percent. However, nearly all other industry job sectors are equal between the Bay Area and California, which shows just how much of a high concentration of professional jobs the Bay Area has compared to anywhere else in the state (due mainly to its technology/information base). Counties such as San Francisco, Marin, San Mateo, and Santa Clara have higher worker incomes than Contra Costa, Alameda, San Benito, and all of California for that matter. This higher-income dynamic not only goes for the professional/business services sector in those higher wage areas, but also for manufacturing, financial services, and technology/information as well.

House and apartment rents have been dropping for all types of rentals across the Bay Area since the COVID-19 crisis began. In San Jose, the average rent has fallen 4 percent; and in San Francisco it’s dropped 6 percent. One theory is, some renters are switching to homeownership during an unprecedented era of historically low interest rates (whether they stay in the city or move to suburbia). Also, some residents may be migrating out of the area to suburbia, rural regions, or out of the state due to the COVID-19 pandemic. Anecdotally, younger individuals who were renting in the city have moved back with family (their parents usually) and are working remotely. However, most of these workers have kept their jobs and are seemingly planning to move back into the city when it’s possible to work in an office again. The important question is: Have they moved away temporarily or permanently? It is too soon to tell, but local business and government leaders should keep an eye on this anecdotal trend that hasn’t fully played out. If a temporary relocation becomes a permanent relocation for some, it could be the beginning of a longer-term migration effect. However, for younger professionals, it could be difficult to establish the onsite and in-person networking and connections they need to propel their career, thus mitigating the need to migrate far away and work completely remote.

When asked by the U.S. Census Bureau’s “Phase 2 Pulse Survey” how much their business has been impacted by the COVID-19 pandemic, the response by Bay Area small businesses ranked the region at No. 2 in the nation as of late October. About 40 percent of small business entrepreneurs in the San Francisco-Oakland-Berkeley metropolitan area say the pandemic’s health and economic implications have had a “large negative effect,” and 54 percent don’t expect this trend to go away for at least another six months. The only other area ranking worse than the Bay Area was the Las Vegas-Henderson-Paradise, NV metro region.

Assuming the COVID-19 pandemic has a limited effect on the economy and society in 2021 compared to 2020 (and another fiscal stimulus/relief package is passed in Congress relatively soon), the Bay Area will be one of just several local regions across California continuing its recovery. The state’s unemployment rate will fall from its current 10 – 11 percent range to 8 percent by sometime in early 2021, but then take a more gradual pace downward and not reach 6 percent until third-quarter 2022. This figure will fluctuate depending on re-entrants to the labor force (pool of adults willing and able to work) versus “dropouts.” Total non-farm payroll employment in the state will reach 17.2 million by third-quarter 2022 (up from 15.3 million in April 2020), versus the 17.5 million record high it was experiencing in January 2020.

The bankruptcy decisions of some large businesses and retail chains with site locations or headquarters in the Bay Area are an example of a larger phenomenon taking place in the world of corporate restructuring due to the COVID-19 recession. Due to societal health changes, social distancing, and shopping behaviors controlled by the pandemic, a spike in chapter 11 bankruptcies (corporate restructure) took place in the summertime and early autumn, but now the figures have dropped substantially (compared to staying elevated for several months during the aftermath period of the Great Recession from 2008 – 2010). Today’s chapter 11 bankruptcies are very different. It used to take an average of 457 days for a company to petition and get a chapter 11 bankruptcy legally confirmed by a court in 2000 — a number that has dropped to 103 days on average by 2020. Bankruptcy lawyers have gotten better at getting restructure-firms through the bankruptcy process over the past 20 years.

Pre-packaged chapter 11 bankruptcies have gained in popularity over recent years, where creditor/financial support is cooperatively pre-arranged and approved by stakeholders before the bankruptcy happens. Today, pre-packaged bankruptcies are an option for creditors and investment funds that are looking to strategically “purchase debtors out of bankruptcy.” Every creditor and investment fund operating in this space is looking for opportunities to buy distressed companies, which means a large amount of new capital is ready to be deployed to struggling companies to put that capital to work (a major difference between today and the financial crisis of 2008). Today’s availability of cash to be deployed into “good deals” is overwhelming compared to 2008 and 2009.

The mindset of corporate and bankruptcy leaders after the COVID-19 recession earlier this year is that this fallout was similar to a natural disaster, where the economy can recover relatively soon (over several months) — not a systemically financial risky proposition that will take years to remedy like in 2008. However, one downside is many firms that were financially overleveraged before the pandemic hit the economy are even more over-leveraged today as many creditors, property landlords, and bankruptcy court judges willingly allow companies in the retail, hospitality, leisure, restaurant, and health-fitness industries to essentially “kick the can down the road” and deal with the brunt of their financial debt sometime in 2021 when the economy is seemingly on healthier recovery footing. Companies are discussing how to weather through COVID-19, not how to get their pre-pandemic highly leveraged financial books in order.

Given the above, lenders and creditors want to arrive at a more certain outcome before making debt calls and are giving business borrowers/debtors more runway than originally thought. What will retail, hospitality, restaurant, leisure and consumer demand be post-pandemic? Nobody exactly knows right now, although they know it will be somewhat different. If physical, onsite shopping and service-related demand never fully comes back and is somewhat replaced over the long term by more socially remote experiences, many of these companies “kicking the can down the road” will find it much harder to service their debt from 2021 to 2022.

California ranks No. 1 in a “top 10” list of states that are home to large companies which received $500 million or more from congressional relief passed earlier this year under the Paycheck Protection Program (PPP) and still filed for bankruptcy as of today. California is home to 43 of these companies, according to a report in The Wall Street Journal. However, beyond the PPP storyline, the number of business-loan credit defaults are approximately 25 percent higher coming out of this year’s COVID-19 recession than the number of defaults spurned by the Great Recession of 2007 – 2009. However, the number of bankruptcies today are only half (50 percent lower) than the previous recession. Many property landlords are giving concessions and hoping that retail and restaurant businesses will survive going into 2021 and beyond. There are most likely more creditor extensions and concessions coming as the economy heads into early 2021.

While the U.S. economy will make greater strides in 2021, much of this prediction is based on the assumption that Congress passes another financial stimulus/relief bill and that the COVID-19 pandemic is brought under more control from a distributed vaccine. The U.S. economy probably won’t come back to its previous peak in January 2020 until first-quarter 2022. Total annualized U.S. gross domestic product (GDP) was $19.3 trillion as of late 2019, and the economy won’t recover to this level until March of 2021. It will probably reach $20.2 trillion by late 2022, which would show 7.7 percent growth over the two-year period from early 2021 to late 2022 (24 months) — an astounding increase since the economy is playing catch-up. However, consumer weakness and business bankruptcies will be somewhat of a drag leading up to late 2022. In context, GDP grew 4.3 percent over the two-year period from early 2018 to late 2019 (24 months). Additionally, annualized “real” non-residential fixed investment (business investment and commercial construction), adjusted for inflation, will grow 11 percent in fourth-quarter 2020 and average 3 – 5 percent growth in 2021 and 2022 (it plunged to -25 percent in mid-2020).

You can view the entire archived forecast presentation video on-demand. Just click here!

Bay Area: Demographics, Labor, Education & Economic Resources

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