First-Half 2021: Faster Growth Potential, Yet Slow Return to Normalcy

After slowing in late 2020, California’s economic recovery is expected to kick into higher gear during early 2021 — although much hinges on the state’s reaction to weekly COVID-19 numbers, the vaccine distribution effort, and persistent restrictions on businesses and gatherings.

That’s according to the most recent forecasts and trends presented by experts from UCLA Anderson Forecast, Beacon Economics consulting firm, California Economic Forecast consulting firm, Chapman University, Claremont McKenna College, the Economic Roundtable, and others. These experts’ opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately.

Presented on Dec. 9 by the UCLA Anderson Forecast (“December 2020 Economic Outlook: Business Change and Climate Change”):

A return to pre-pandemic employment levels in California before COVID-19 disrupted the economy in spring of 2020 won’t be fully experienced until 2023. California’s unemployment rate will average 6.9 percent in 2021, 5.2 percent in 2022, and 4.4 percent in 2023. Currently, using November to December figures, the state’s unemployment rate is hovering in the approximate range of 7.8 – 8.3 percent (it’s hard to peg down an accurate monthly number when many people are leaving and/or re-entering the labor force — the pool of teenage and adult individuals willing and able to work). Regarding total new jobs coming online during the economic recovery (company payroll jobs plus independent contractors/freelancers, “gig” workers, and seasonal farm/agricultural workers), the state’s employment growth will surge 6.1 percent in 2021 before downshifting to 3.4 percent in 2022 and 2.2 percent in 2023. In context, much of 2021’s job surge is due to several independent contractors coming back to work.

The COVID-19 pandemic’s outsized and negative economic impact on California compared to other states is expected to continue in the near future. “California has responded, as before, with more restrictive non-pharmaceutical interventions (NPI) via mask mandates, closures and gathering restrictions,” states the forecast report. “We expect this to continue, as significant traveling by Americans has thus far presaged further increases in COVID cases. We also know that at least three vaccines are in the latter stages of testing and approval. Does this mean we are out of the woods soon? The answer is maybe.”

An elevated number of COVID-19 cases will persist in California during the first quarter of 2021, and caution will prevail with respect to many consumer/business activities. This will translate into more weaker economic growth through the first-half of 2021 than not. Additionally, this assumes a large number of people across the state are on track to receiving a COVID-19 vaccine by the beginning of summer (mid-June) or already have done so, ushering in the beginning of the anticipated return to normalcy.

Approximately 1.37 million non-farm payroll jobs (company jobs) in California have been lost from October 2019 to October 2020. Although there has been a recovery in some of those jobs since April 2020, a handful of sectors will remain the state’s weakest economic areas (bearing the brunt of the state’s employment losses, such as leisure and hospitality, retail, and education). However, California’s technology, residential construction, and logistics/warehousing sectors will lead the continued economic recovery in 2021.

California’s post-pandemic economic recovery will finally flip its under-pace trend to an above-average trend and grow faster than the United States as a whole (although this will begin later in 2021 rather than sooner). This would be an inflection point to what California has been experiencing all along (a slower economic recovery than the nation as a whole) due to local and state business/consumer restrictions and social distancing policies. Seasonally adjusted annual U.S. gross domestic product (GDP) will be 1.8 percent in first-quarter 2021 before experiencing a robust 6 percent in second-quarter 2021. After that, growth rates should remain above 3 percent every quarter well into 2023. However, more than 20 million Americans across the nation are receiving some form of unemployment insurance benefit; nearly 9 percent of residents live in households that are behind on their rent or mortgage payments; 12 percent live in households where there is not enough food to eat; and 34 percent live in households where it’s been difficult to pay for typical expenses.

A COVID-19 vaccine (and its distribution) will help release pent-up consumer demand over the next 12 months across California and the nation, leading to a strong recovery. The forecast anticipates that a surge in services consumption and continued strength in housing markets will propel the economy forward. The housing market will remain “hot” through at least 2023, with home-builds already at their highest level since 2007. “However, as the economy adjusts to a post-pandemic normal, a few areas of weakness will remain, with more people working from home and more online commerce than before,” states the forecast report. “For better or worse, some parts of the economy will never be the same.” Regarding new home starts in California, it’s expected a combined total of 123,000 single-family and multi-family permits will be pulled in 2021, nearly 130,000 in 2022, and 132,000 in 2023.

California’s ongoing labor market recovery will be slower in the leisure/hospitality and retail sectors due to the disproportionate reliance on international tourism in the state. Also, the job market recovery will be “mixed” in the transportation and warehousing industries due to the shift to online shopping. However, it will be faster in professional/business services, scientific/technical services, information technology, and even residential construction due to the demand for new technologies. The new way people are working and socializing remotely has caught on as California’s shortage of housing relative to demand drives new developments in lifestyles and work trends. Real personal income (adjusted for inflation) in the state will fall by -1 percent in 2021, but then grow 2.1 percent and 3.4 percent in 2022 and 2023.

You can view “The Economic/Pandemic Question: To Close or Not to Close?”, which spotlights several 2020 pandemic recession trends in California. You can click here for a summary of California labor markets; non-pharmaceutical interventions (such as mask mandates and restrictions on business operations); states with more restrictive non-pharmaceutical interventions and corresponding unemployment rates; and the future for technology sectors, residential construction, and logistics/warehousing leading the recovery. You can also watch/listen to the three-hour event via the archived video.

Beacon Economics (consulting firm)
Presented on Dec. 11 by Beacon Economics consulting firm (“Beaconomics: Economic Forecast for California and the United States”):

California’s economy is not shattered and is heading into 2021 with a good degree of economic momentum. Overall, the state’s economic recovery has lagged the performance of the national economy, but the outlook for 2021 is brighter with the distribution of COVID-19 vaccines on the horizon. The state’s underperformance relative to the entire nation in 2020 should actually flip, with California outperforming the U.S. economy in 2021 as it plays catch-up.

However, there are still challenges to overcome. While California’s labor market is improving, only 44 percent of the state’s jobs lost during March to May of 2020 had been recovered as of early December (with 1.5 million fewer workers employed than in February 2020). A huge share of retail spending has shifted online during the pandemic and the pace of “de-retailing” in both California and the United States will intensify, no matter if other sectors continue recovering (such as leisure/hospitality, entertainment, and tourism).

California’s housing market has not only been left unscathed by the COVID-19 pandemic — it has experienced significant growth. Single-family home prices surged 13 percent between third-quarter 2019 and third-quarter 2020. “Although much has been made of telecommuting workers fleeing expensive cities for cheaper locales, the new analysis says speculation about the demise of cities is greatly exaggerated,” the forecast report states. “Urban centers will return to their former glory once the pandemic is in the rearview mirror.” Regarding office workers: While many firms will be downsizing their floor space due to a permanent shift to working from home, it is far too soon to call an “end to the office” as society knows it.

U.S. gross domestic product (GDP) most likely grew 5 to 6 percent in fourth-quarter 2020 and is forecast to grow 4 to 5 percent in first-quarter 2021. While economic growth is not back to normal, the nation has already recovered three-fourths of the economic output it lost between February to April of 2020 and “is not in economic freefall.” As of September 2020, the nation’s economy was only 4 percent below its long-run growth trend projected before the COVID-19 recession — a much faster rate of recovery than most prognosticators have been anticipating throughout the crisis.

You can view the entire California outlook for 2021 from Beacon Economics. Just click here to see more trends and projections for the entire state in 2021 (pages 15 – 23).

California Economic Forecast (forecasting firm)
Released on Jan. 4 in a forecast update (“Outlook for 2021: Can We Count on the Rosy Consensus Forecast?”):

California’s economic outlook for 2021 should be much easier to predict in the first couple months of the year than the past few months, but concern is still prevalent across many business industry groups. 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 — and there is more online acquisition of products than ever before. Many services are being provided in spite of the COVID-19 prohibitions, both legally outside and illegally inside. “However, COVID-19 test-positive case counts are not diminishing despite the severe restraints on business, the mask mandate, the curfew, and the prohibition of gatherings,” the forecast report states. “And unless case counts begin to meaningfully decline soon, an even larger pullback in business activity than expected might ensue.”

A self-sustaining economic recovery in California will not occur until COVID-19 vaccines are widely available, perhaps in spring of 2021. Only then will many consumer-facing businesses begin to function more normally, such as restaurants, hotels, public transit, entertainment venues and so many others. Additional vaccines from various companies are coming to market very soon, and their delivery and implementation is breeding new optimism, making a return to normalcy possible by mid-year 2021. The distribution of vaccines that started weeks ago will begin to ease the medical necessity for restrictions.

“However, there are still risks that the usefulness of the results of the COVID-19 vaccine will be delayed, causing economic growth to fall short of expectations,” the forecast report states. “There is an emerging narrative that after receiving both vaccine doses, we will still need to wear masks and social distance. What?” Given this, restrictions on businesses will probably remain largely in place through much of 2021 even after many in the population are vaccinated. If there are persistent restrictions on businesses during 2021, a robust recovery in California will not be possible (or certainly not the kind of growth that is being forecast for the entire U.S. economy). “We will see fits and starts, and generally positive growth, but no significant surge in overall economic activity.”

Two economic forecast scenarios are emerging for California in 2021. The most optimistic says that business and commerce restrictions are removed with widespread dissemination of the COVID-19 vaccine. This outlook, assuming societal conditions return largely to normal by mid-2021, has California’s state gross domestic product (GDP) rising 3.8 percent this year. Many entertainment, leisure, hospitality, tourism, food establishment and other businesses that are barely open or completely closed would mostly open back up for consumers and businesses. The less optimistic (and second) scenario says that business and commerce restrictions will persist well into 2021 even after a majority of California’s residents are vaccinated. In fact, more restrictive state and/or local social distancing rules and stay-at-home orders could possibly come back into play that are tied to local intensive care unit (ICU) capacity at hospitals. Meanwhile, ongoing higher job unemployment that drops ever-so-slowly could suppress consumer demand for a variety of goods and services in the state over 2021.

Chapman University and Claremont McKenna College
Released on Jan. 14 in a monthly update by Chapman University’s A. Gary Anderson Center for Economic Research and Claremont McKenna College’s Lowe Institute of Political Economy (“4Q 2020 Consumer Sentiment Index”):

The Chapman-Claremont McKenna California Consumer Sentiment Index fell from a value of 67.4 to 65.9 in fourth-quarter 2020. With a 2.2 percent decline, this latest reading is the second lowest on record. The low level of California sentiment is driven by uncertainty regarding the COVID-19 pandemic and lockdown measures that reduce economic activity and spending. This California sentiment index is based on responses of 2,000 California residents to survey questions about current and future economic and financial conditions in the state.

You view the entire index update report. Make sure to click here to see all survey responses regarding household finances in 2021, business conditions, the economy's effect on households, finding a job in 2021, the likelihood of purchasing an automobile, and more.

Economic Roundtable
Released on Jan. 12 by the Economic Roundtable think-tank (“Locked Out: Unemployment and Homelessness in the COVID Economy”):

Over the next four years, the COVID-19 recession of 2020 is projected to cause chronic homelessness to increase 68 percent in California. Homelessness among working-age adults caused by the 2020 recession is projected to peak in 2023. California will probably add 131,000 additional adults to its current homeless population (already 193,000) by that time, swelling the state’s total current homeless numbers to 324,000 in just a couple years. “People are likely to fend off homelessness as long as possible by foregoing other expenses, relinquishing assets, and going into debt in order to remain housed,” the report states. “However, without money to pay for rent or the help of family and friends, it is likely that individuals will be evicted and lack a place of their own to sleep. Thus, the total number of homeless will continue to grow.”

Most homelessness from the COVID-19 recession of 2020 is projected to be in the form of “couch surfing” — in fact, about 73 percent of homelessness in California. Housing is hard to afford for most families in poverty. In California, nearly three-quarters of “poverty families” pay over half their income for housing. “The most important determinant of pending eviction or foreclosure is recent household job loss,” the report states.

You can view more California trends, charts, graphs and information. Make sure to click here to see them.

U.S. Bureau of Labor Statistics and Challenger Gray & Christmas Inc.
Released monthly/quarterly (third quarter 2020 “Job Openings and Labor Turnover Survey: JOLTS Experimental State Estimates” and “January Job Cuts Report”):

More than 682,000 job openings across California were actively “posted” and waiting to be filled as of late September 2020. This is according to the U.S. Bureau of Labor Statistics’ quarterly state-by-state “experimental” data. Additionally, California’s job opening rate was 4 percent, the “hires” rate was 4.3 percent, and the “quits” rate was 1.9 percent. When the quits rate starts edging closer to, or above, the hires rate is when many experts say a healthy job market is in play because workers feel comfortable quitting one job to move to another (which is what the economy was experiencing in January of 2020 before the COVID-19 pandemic). To download the state data, click here.

However, there have been more than 406,000 official job cuts in 2020 across California (does not include furloughs or furloughed hours). This compares with 100,000 job cuts in 2019 (a 306 percent increase or a quadruple increase). Today’s figure is the state’s highest annual total on record (and 18 percent higher than the previous record high of 1.95 million cuts in 2001). You can click here for the full January 2021 report.

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 (all different types and propensities) were filed in third-quarter 2020 versus 89,000 during the same period in 2019 — a 72 percent jump. While many economists say a large portion of these represents the beginning of a much-awaited wave of small business jobs to come, others say a small portion of these start-ups may be either fraudulent or possibly not truly representative of any intent to start a business. You can dig more into the state-level U.S. data here.

Caltrans’ State and County Economic Forecasts
Released in December 2020 by Caltrans (the California Department of Transportation):

You can view Caltrans’ economic, demographic, housing, population, job, inflation, and industry breakdown forecasts for all-California or each county across the state. View the following California trends and projections from 2021 – 2025 (or click here to view counties).

California Small Business Activity (by Homebase)
Updated routinely by Homebase, a provider of real-time digital tools for small businesses:

Small business activity across California was down at varying amounts compared to pre-COVID levels as of December 2020. Across the state, activity was down -25 to -30 percent depending on the measurement analyzed. Put into context, the state was down between -60 to -74 percent in April 2020 before starting to recover. Measurements include the volume of hours worked by employees, the number of businesses open, and the number of employees actually working. You can click here to learn more and pick a localized region or state.

California Center for Jobs and the Economy
Released Jan. 8 in an update report (“Unemployment Data Update”):

California’s unemployment insurance data and trends are slowly changing. The state’s unemployment data from Mach 2020 – January 2021 can be seen here, including trends on unemployment insurance claims, county tier status, COVID-19 vaccine status (share of doses used), backlog of unemployment insurance claims, and continuing unemployment claims.

California: Demographics, Labor, Education & Economic Resources

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