12th Annual Inland Empire Economic Forecast Conference by UC Riverside School of Business

12th Annual Inland Empire Economic Forecast Conference

THE GREAT RECOVERY: COULD IT BE DERAILED?

Growth, Change, and Renewal in a Post-Pandemic Economy

ucreconomicforecast.org

12th Annual Inland Empire Economic Forecast Conference

12th Annual Inland Empire Economic Forecast Conference Wednesday, November 10, 2021

Speakers

About the UCR School of Business David A. Robinson, Executive Partner, Holland & Knight LLP Emcee

Christopher Thornberg, Director, Center for Economic Forecasting and Development United Stated & California Forecast

The University of California, Riverside School of Business, home of the A. Gary Anderson Graduate School of Management, is a nationally ranked and internationally recognized business school. It is alma mater to nearly 20,000 alumni, and has provided students with an outstanding researchbased professional education in the field of business for nearly 40 years. One of only three University of California business schools to offer both undergraduate and graduate programs, UCR Business educates leaders who are as diverse as the challenges they face, the workforces they lead, and the enterprises they grow.

About the Center for Economic Forecasting and Development Taner Osman, Research Manager, Center for Economic Forecasting and Development Inland Empire Forecast

Patrick Adler, Manager of Sustainable Growth and Development, Center for Economic Forecasting and Development Downtown Dreaming: Developing the IE's Urban Cores

The UCR Center for Economic Forecasting and Development is the first world-class university forecasting center in the Inland Empire serving one of the most dynamic regions in the United States. The Center brings the full resources of the University to bear in creating modern, first-rate economic forecasts and economic development products that expand understanding and amplify interest in this vital area. As a hub of collaboration, innovative economic development ideas and strategies emerge from researchers as well as business and government leaders.

Table of Contents

THE UNITED STATES OUTLOOK

CALIFORNIA OUTLOOK

1 15

INLAND EMPIRE OUTLOOK

EMPLOYMENT AND WAGES

COVID-19 TRENDS AND BUSINESS ACTIVITY

RESIDENTIAL REAL ESTATE

COMMERCIAL REAL ESTATE

DEMOGRAPHICS

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12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

As the UCR Center for Forecasting has noted since COVID-19 first became a household term, a quick economic recovery was to be expected given the nature of the shock. This was a natural disaster type supply shock—and as heartbreaking as that is for the population, it simply doesn’t have the same long run effects of a

more traditional demand shock, such as what caused the Great Recession. The pandemic recession was the deepest in U.S. history, but also the shortest, running just two months, peak to trough, followed by a remarkably quick recovery that took slightly over a year. In contrast, the Great Recession lasted a full 9 years from start through recovery.

Place Photo

United States Real GDP 25,000

THE UNITED STATES OUTLOOK

10,000

5,000

Q2-21

Q2-20

Q2-19

Q2-18

Q2-17

Q2-16

Q2-15

Q2-14

Q2-13

Q2-12

Q2-11

Q2-10

Q2-09

Q2-08

Q2-07

Q2-06

Q2-05

Q2-04

Q2-03

0 Q2-02

In the 2nd quarter of 2021, the U.S. economy grew at a 6.5% annualized pace, pushing overall output to a level higher than where it was in the 4th quarter of 2019, just before the pandemic hit, and a full 12.2% above where output was in the 2nd quarter of 2020. From a demand perspective, the U.S. economy has completely recovered. Spending by businesses, consumers, and the government reached its long run trend in the 2nd quarter of 2021, and data suggests that demand will grow well above trend for the next year – at a minimum. Output has yet to return to its long run trend, but that gap is being driven by supply chain problems, not by a lack of demand. It too will soon be above long run trend. The pandemic has been a tragic human event, but it has not been the depression-like economic crisis that so many predicted.

15,000

Q2-01

A Recovered Economy?

Real GDP (Billions $2012, SAAR)

By Christopher Thornberg, PhD

20,000

Source: U.S. Bureau of Economic Analysis

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

The Overheated U.S. Economy While aggregate output has recovered, this is not the same economy it was a year and a half ago, structurally, financially, or demographically. Structurally, parts of the economy that were materially impacted by the pandemic have yet

to fully recover. Consumer spending on services including healthcare, recreation, travel, and hospitality is still 3% below where it was pre-pandemic. Business investment in non-residential structures also remains depressed, as do U.S. exports.

Real Consumer Expenditures 180

160

140

Goods

Jun - 21

Dec - 20

Jun - 20

Dec - 19

Jun - 19

Dec - 18

Jun - 18

Dec - 17

Jun - 17

Dec - 16

Jun - 16

Dec - 15

Jun - 15

Dec - 14

Jun - 14

Dec - 13

Jun - 13

Dec - 12

0 Jun - 12

Just as significantly, political distractions have prevented policymakers from discussing, much less trying to solve, the critical long-run issues facing the United States and California. Indeed, governments at every level continue to operate in catastrophe mode even though the nation has largely moved beyond the crisis—something that will ultimately come back to haunt us.

Dec - 11

There is little doubt that the stimulus efforts have hastened the recovery and given plenty of politicians bragging rights for saving the world (even though it didn’t need that kind of saving). However, stimulus is not free and the massive injection of money into the economy comes at a serious cost. These excesses will end up introducing dangerous instabilities into the next expansion, such as inflation and asset bubbles, deepen the nation’s long-run fiscal budget challenges, and possibly lay the seeds for the next downturn.

100

Jun - 11

Public policy responses have not been aligned with the economic realities of the pandemic. The Federal government has instead followed a narrative of collapse and economic depression, and even today, the media continues to rumble about an economy ‘at the brink’, ‘on the edge’, or ‘falling over a cliff’. Ultimately, the U.S. government ended up sending trillions of dollars in the form of monetary and fiscal stimulus out across the entire economy, regardless of whether a sector or group was actually at risk of pandemic-related fallout. And it didn’t stop there, with governments at every level indulging in all sorts of policy tools to prevent problems that weren’t that much of a threat.

Indexed (Index = 100 in Jun-11)

120

Services

Source: U.S. Bureau of Economic Analysis

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

Investment

3,510.3

1.0%

Non Res Structures

453.9

-20.4%

Equipment

1,318.2

6.3%

IPP

1,119.9

9.0%

712.1

16.3%

Exports

2,295.6

-10.1%

Imports

3,554.7

4.5%

Government

3,378

1.9%

Federal

1,357.6

4.6%

State and local

2,021.2

0.2%

Residential

Personal Income

Aug - 21

-3.3%

Aug - 20

8,222.3

Aug - 19

Services

Aug - 18

11.9%

Aug - 17

3,368.1

Aug - 16

Non-Durables

Aug - 15

28.6%

Aug - 14

2,307.4

Aug - 13

Durables

0 Aug - 12

3.1%

Aug - 11

13,659.3

Aug - 10

Consumption

Aug - 09

0.8% Aug - 08

19,358.2

5,000

Aug - 07

GDP

10,000

Aug - 06

Difference Q4 19 to Q2 2021

15,000

Aug - 05

21 Q2 Level SAAR

20,000

Aug - 04

these high costs are not the problem for the economy that many believe. There has been a lot of concern that inflation will hurt consumers—but hot consumer demand is exactly what is driving inflation! And as for industry, high input prices have not hurt earnings; from the 3rd quarter of 2020 through the 2nd quarter of 2021, corporate profits have risen to the highest level ever seen.

25,000

Aug - 03

heated these benefiting sectors to white hot levels, as anyone who has tried to buy a bicycle, car, or house in the last year can attest to. The production part of the economy is struggling to keep up, and supply chains are a large part of the problem; this is evidenced by the boats backed up at Southern California’s ports and the shipping containers waiting for a truck. Not only are these

30,000

Aug - 02

But the massive stimulus thrown at the economy has

The impact on input prices has been sharp, with commodity prices up 20% over the last year, intermediate inputs up 10%, and consumer prices up by over 5%. These represent some of the sharpest increase seen since the 1970’s—a comparison that should not be ignored. But

Personal Income

Aug - 01

sectors dealing with the short-run issues of the pandemic, such as workflow interruptions at ports and factories, in some places they never had the capacity to deal with the extraordinary level of demand. And in the era of just-intime production where inventories and capacity are kept tight, even small disruptions can create havoc.

Personal Income ($Billions, SAAR)

But weakness in these sectors has been more than offset by stronger than normal levels of activity in other parts of the economy, including consumer spending on goods, a booming housing market, and business investment in equipment and software. These sectors were bound to benefit at some level by the transfer in spending from sectors that were directly negatively impacted by the pandemic (since we couldn’t take the family to Disneyland, we instead bought bikes and tents for a wilderness adventure).

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

Personal Income minus Transfers

Source: U.S. Bureau of Economic Analysis

It’s reasonable to suggest that the most recent surge of the COVID-19 virus, driven by the Delta variant, will be the beginning of the end for the pandemic. Between the latest surge and the nation’s supply chain problems, U.S. economic growth looks to be slowing sharply in the 3rd quarter of the year. U.S. GDP growth may be close to 0, with the blue-chip consensus now below 4%. But this is irrelevant to the nearterm direction of the economy, given that consumers are flush with cash and inventories are near record low level. In other words, demand will continue to stoke supply for at least the next couple years.

We can thank excessive government stimulus for the strong economic momentum. Personal income numbers suggests that over the course of the last year and a half, households suffered $500 to $700 billion in total earnings losses (including wages, proprietor profits, and returns on assets) while the Federal government injected over $5 trillion in debt-financed ‘stimulus’ into the economy. For every one dollar of lost household earnings, the Federal government gave U.S. households $3.5 dollars in stimulus. Combine that with pandemic-driven decreases in spending and U.S. household savings are $6.5 trillion above normal trends.

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

quantitative easing as an opening move, without waiting to see how bad the damage to the economy would be – and has pushed even more liquidity into the economy since.

Household Net Worth 160,000

The decline in interest rates, driven by panic and bond purchases, has led to a spike in refinancing and a massive decline in the debt burden on U.S. households. That has caused housing markets to take off, with a 20% increase in home prices over the last year. The stock market has continued its heady rise and now sports the second highest PE ratio ever, beaten only by equities back in 2000. All of this has led U.S. household net worth to grow from $116 trillion to $141 trillion in 6 quarters – that’s $25 trillion in new wealth created in less than 18 months. Nothing like this has ever happened before.

Financial Obligations Ratio 20 18

140,000

120,000

Household Net Worth ($ Billions)

It wasn’t just the U.S. Congress that overreacted. The Federal Reserve, home to an army of economists and typically the more rational actor in the policy pantheon, also engaged in stimulus that was clearly excessive. At the start of the Great Recession, under then Chairman Ben Bernanke, the Federal Reserve enacted far more aggressive stimulus than Congress, which was the right call given the scale of the problems facing the economy at that time. But back then the Fed engaged in quantitative easing on a gradual basis, purchasing more bonds only as losses in the loan markets and declines in household wealth showed the need for an additional push to keep financial markets and the money supply steady. This time, Fed Chairman Jerome Powell enacted over $3 trillion in

100,000

80,000

60,000

16 14 40,000 Percent

12 10 20,000 8 6 Q1-21

Q1-20

Q1-19

Q1-18

Q1-17

Q1-16

Q1-15

Q1-14

Q1-13

Q1-12

Q1-11

Q1-10

Q1-09

Q1-08

Q1-07

Q1-06

Q1-05

Q1-04

Source: Board of Governors of the Federal Reserve System

Q3-20

Q4-19

Q1-19

Q2-18

Q3-17

Q4-16

Q1-16

Q2-15

Q3-14

Q4-13

Q1-13

Q2-12

Q3-11

Q4-10

Q1-10

Q2-09

Q3-08

Q4-07

Q1-07

Q2-06

Q3-05

Q4-04

Q1-04

Q2-03

Q3-02

Q4-01

Q1-01

Q1-03

Q1-02

Q1-01

This new wealth will continue to drive consumer spending growth above normal levels in the months ahead, even though it has already returned to the path it was on prior to the pandemic. In short, all this stimulus will push economic

activity in the U.S. above its long run sustainable growth path—the very definition of an over-heated economy. Expect high growth rates to continue over the next few years – the new roaring 20’s, and we all know how that ended.

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

Most commentators who suggest that the U.S. economy is still suffering from the COVID-19 crisis point to the one area of the aggregate statistics that show the nation is still way behind where it was pre-pandemic—the labor market. Indeed, there are still 6 million or 3.8% fewer jobs in the United States than there were before the pandemic. Most pundits and politicians have leapt to the conclusion that this lower number implies the economy is still weak. While it could suggest that, we have to appreciate that the number of jobs in the economy at a specific point in time represents a labor market equilibrium, and equilibriums have multiple drivers that can cause them to shift. Typically, there are fewer jobs following an economic downturn than prior to it due to weak labor demand in the recovery period. There were fewer jobs in 2010 than in 2007 for that very reason. But it isn’t necessarily the case. Consider that for the last two months there have been over 11 million job openings in the United States, 40% more than the highest-ever reading back in 2018. This indicates that the nation is not facing a labor demand problem, but rather a labor supply problem, which also leads to there being fewer jobs, but with completely different implications for worker incomes and inequality. One of the biggest shocks to the U.S. economy in the last year has been the 3.5 million worker decline in the labor force. Some of these folks may fear or have experienced significant health issues stemming from the pandemic. Others may be constrained by family or personal needs. But the large majority have left the labor force voluntarily. Most have decided to retire while others may simply not be interested in finding a job given that they are financially secure due to the hot financial markets and massive excess reserves of savings.

United States Labor Force This supply problem is at the heart of the sluggish job recovery—the openings are there, they just lack the carbon-based hominid life form to fill them. The United States was already facing a labor supply dilemma due to demographics—baby boomers, the largest generation ever, are transitioning into retirement on a massive scale. The problem has been intensified by the decline in birth rates over the past five decades and, more recently, by the sharp slowing of international migration into the nation.

170,000

165,000

160,000

Forming a coherent immigration policy, providing more public financial support for childcare, raising retirement ages, and overhauling pension and health systems that discourage seniors from working, are all policy solutions the United States should be pursuing. Weak labor markets are bad for workers. Tight ones are tough on employers. Today’s tight labor market has induced a record number of workers to quit their jobs, as they feel empowered to search for better employment opportunities. This means that the higher-than-normal unemployment rate is being driven in part by selective workers rather than selective employers. And that means economic growth in the years ahead will be less driven by attracting employers and far more driven by attracting workers—particularly younger, skilled workers. Those worried about income inequality should applaud accelerating earnings growth, particularly among low skilled workers. For those concerned about wage fueled inflation, these trends should be setting off inflation warning sirens. Those running businesses will have to readjust their prices to reflect higher labor costs even as they scramble to find labor saving technologies. So much for the ‘robots are stealing our jobs’ panic seen over the last few years – soon we’ll be calling for the robots!

155,000

Labor Force (Thousands, SA)

The Labor Market Paradox?

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

150,000

145,000

140,000

135,000

Sep-21

Sep-20

Sep-19

Sep-18

Sep-17

Sep-16

Sep-15

Sep-14

Sep-13

Sep-12

Sep-11

Sep-10

Sep-09

Sep-08

Sep-07

Sep-06

Sep-05

Sep-04

Sep-03

Sep-02

Sep-01

130,000

Source: U.S. Bureau of Labor Statistics

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

The Law of Gravity

Delinquency Rates unsustainable. Eventually the United States will be forced to back off on its borrowing-fueled fiscal stimulus. Bank accounts will start to shrink back towards normal levels and the nation will experience sharply slowing growth rates.

Economies can only stay overheated when there is a fuel source fanning the flames. While the UCR Center for Economic Forecasting & Development sees little sign of a balanced budget coming out of Washington, DC anytime soon, the nation’s current spending binge is clearly

Household Net Worth Growth

Delinquency Rate (%)

Consumer Debt

Q1-21

Q1-20

Q1-19

Q1-18

Q1-17

Q1-16

Q1-15

Q1-14

Q1-13

Q1-12

Mortgages

Source: Board of Governors of the Federal Reserve System

-5

-10

Source: Board of Governors of the Federal Reserve System

Q1-21

Q1-20

Q1-19

Q1-18

Q1-17

Q1-16

Q1-15

Q1-14

Q1-13

Q1-12

Q1-11

Q1-10

Q1-09

Q1-08

Q1-07

Q1-06

Q1-05

Q1-04

Q1-03

Q1-02

Q1-01

-15

Q1-11

Q1-10

Q1-09

Q1-08

Q1-07

Q1-06

Q1-05

Q1-04

Q1-03

Q1-02

0 Q1-01

Year-over-Year Growth (%)

The risks don’t end there. As a result of fighting an economic battle that doesn’t exist, Fed Chairman Powell’s massive engagement in quantitative easing has caused one of the largest increases in the money supply ever seen in the United States. Chairman Powell has been quite adamant that the inflation seen in the nation over the past few months is a largely transitory situation, driven by tight supply chains and the overall economic recovery. The UCR Center for Economic Forecasting & Development agrees, but this in no way

suggests that long-run monetary inflation isn’t still a huge risk for the economy—of course it is. The unit money supply is the highest it’s ever been, significantly higher than in the 1970’s, and the economy is in the process of overheating because of the fiscal stimulus. Inflation risk is the highest it has been in decades, and to suggest otherwise, as many policy officials have been wont to do lately, is nothing short of gaslighting.

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

How could the Fed get it so wrong? While the mission of the Federal Reserve, and the bureaucracy that operates it, is largely apolitical, those who run the institution are not—up to and including the lawyer (rather than an economist) currently running the system. While the

Federal Reserve is supposed to operate and act based on data and economic theory, the leadership of the Fed has become highly political in today’s hyper-partisan world, and like other “elected” politicians, can be swayed more by political narratives than economic realities.

M2 Money Supply/Nominal GDP 100

The interaction between excessive monetary and fiscal stimulus is of serious concern. One reason the Federal government has not yet suffered the consequences of its borrowing binge is because the cost of borrowing has remained remarkably low despite the inflation surge seen in the last few months or the huge buildup in the money supply, which suggests more inflation to come. The Federal gross debt-to-GDP ratio has grown from below 60% in 2000 to over 130% today, but Federal interest payments as a percent of GDP have remained flat due to falling rates.

Percent

But history tells us that bond markets are shockingly slow in reacting to inflation, and generally don’t until the market is being pummeled by inflation-driven losses. In short, today’s supply-chain inflation is highly likely to turn into long run structural inflation over the next couple of years. And eventually, bond buyers will have to build inflation risk into their bond purchase models, causing interest rates to climb sharply.

Source: U.S. Bureau of Economic Analysis, Board of Governors of the Federal Reserve System

Q4-20

Q1-20

Q2-19

Q3-18

Q4-17

Q1-17

Q2-16

Q1-15

Q4-14

Q1-14

Q2-13

Q3-12

Q4-11

Q1-11

Q2-10

Q3-09

Q4-08

Q1-08

Q2-07

Q3-06

Q4-05

Q1-05

Q2-04

Q3-03

Q4-02

Q1-02

Q2-01

These two issues, inflation and rising interest rates, could cause a particularly nasty problem for the United States. The Fed will have to fight inflation by reducing the money supply. The spiking costs of paying for debt along with the structural

deficits created by the last two rounds of Federal tax cuts will lead to a sharp contraction in government spending. This creates the unpleasant economic condition known as stagflation and will almost assuredly drive a re-pricing in the similarly overheated asset markets. Will this be enough to set off another recession not unlike the early 1980’s when Volker waged his fight against inflation? Very possibly, but much will depend on the path that policymakers take in the coming months. For example, will the Fed move aggressively to mop up extra cash? What happens also depends on how much the private sector buys into current trends in the economy and ends up overinvesting based on a temporary surge in demand. There are a lot of future factors that need to be carefully watched. The near-term forecast boils down to this: expect a great run over the next couple of years, with the major constraint being the ability to find the workforce to manage demand. Further out, the risks are now enormous, albeit unlike in 2005 when the risks were in the private sector. This time the risks are within the public sector, so keep an eye out for the storm clouds on the horizon and be prepared for the worst if and when the maelstrom hits.

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

One of the most intriguing features of the pandemic economy, as noted in the national outlook, is the extent to which the recovery of the labor market has lagged the recovery in output. There are still nearly 1 million fewer people employed in the state compared to pre-pandemic levels or around 5.6% fewer jobs. Supply-side factors

have been a major feature of the labor market’s slower recovery. There are around 420,000 fewer workers in the state’s labor force today than there were prior to the pandemic. School closures, leading some parents to drop out of the labor force, fears of contracting COVID-19, and enhanced unemployment benefits have taken a toll on labor force participation in the state.

Total Nonfarm Employment, California 18,000

16,000

14,000

CALIFORNIA OUTLOOK

Employment (000s, SA)

12,000

10,000

8,000

By Taner Osman, PhD

2,000

Sep-21

Mar-21

Sep-20

Mar-20

Sep-19

Mar-19

Sep-18

Mar-18

Sep-17

Mar-17

Sep-16

Mar-16

Sep-15

Mar-15

Sep-14

Mar-14

Sep-13

Mar-13

Sep-12

0 Mar-12

As with the national economy, many aspects of California’s economy have recovered to their prepandemic levels and, in some cases, have returned to their pre-pandemic trend. After falling by about 10% from the fourth quarter of 2019 to the second quarter of 2020, by the second quarter of 2021 (the most recent period for which data are available) economic output in the state had surpassed prepandemic levels.

4,000

Sep-11

California’s Recovery: Output Up, Workforce Down

6,000

Source: California Employment Development Department

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

It is also worth underscoring that California is now producing pre-pandemic levels of output with nearly 1 million fewer workers. In other words, the state’s economy is producing the same level of output with many fewer workers. In addition to supply-side dynamics, productivity gains have clearly replaced many thousands of jobs in the state. In the fourth quarter of 2019, each worker in the state produced $158,000 of real output, compared to $173,000 in the first quarter of 2022. While in the shortterm, productivity gains can replace jobs, productivity growth is the lifeblood of economic expansion over time.

likely due to a combination of reduced demand for their services because of fears surrounding COVID-19, as well as supply-side constraints driven by labor shortages.

EMPLOYMENT BY MSA , C ALIFORNIA

With respect to labor supply in these industries, the unemployment rate in California stands at 7.5%, still double pre-pandemic levels. Since the unemployed count as those who are officially looking for employment but are not working, under normal circumstances the high number of unemployed workers in the state would equate to slack in the labor market for these industries – this is not true today. Since February 2020, the number

Total Nonfarm

As of September 2021, Transportation, Warehousing and Utilities and Professional, Scientific, and Technical Services are the only sectors in California that have seen employment growth since February 2020, the last pre-pandemic data point. Two-thirds of all job losses sustained during the pandemic have occurred in just three sectors: Leisure and Hospitality, Government, and Other Services, which includes hair and nail salons. Leisure and Hospitality and Other Services are largely made up of relatively low paying jobs and the core functions of these businesses rely almost exclusively on person-to-person contact. The continued losses in these two sectors are

of unemployed workers in the state has increased by 573,500. Some of these 573,500 unemployed workers may be holding out for a different type of job than they held prior to the pandemic (e.g., a better paying job). It is also possible that enhanced unemployment benefits pay better than pre-pandemic wages for these workers, meaning they are slower in returning to employment. Notably, there is some evidence that a hiring boom has not yet occurred in states that cut enhanced unemployment benefits early1, suggesting that labor shortages have not been driven by these benefits.

Sep-21

Change Since Feb-20 (#)

Change Since Feb-20 (%)

16,669,900

-991,000

-5.61

774,300

42,100

5.75

Professional, Scientific & Technical Services

1,368,900

10,800

0.80

Health Care & Social Assistance

2,446,000

-28,500

-1.15

Finance & Insurance

528,800

-14,000

-2.58

Construction

880,700

-32,600

-3.57

Retail Trade

1,578,400

-70,100

-4.25

Information

555,000

-26,100

-4.49

Management

242,600

-11,800

-4.64

Manufacturing

1,265,700

-62,100

-4.68

Administrative Support

1,092,200

-66,600

-5.75

Government

2,463,200

-152,100

-5.82

Wholesale Trade

643,300

-43,000

-6.27

Real Estate

281,500

-24,500

-8.01

Educational Services

348,800

-39,200

-10.10

Mining and Logging

18,700

-3,600

-16.14

Other Services

495,500

-97,800

-16.48

Leisure & Hospitality

1,686,300

-371,900

-18.07

Industry

Transportation, Warehousing & Utilities

Source: California Employment Development Department

Uneven Regional Recovery Geographically, in relative terms, the largest job losses have occurred in Santa Cruz and San Luis Obispo. Local universities play an important role in the economies of both regions, and online instruction has led to fewer students spending money locally. The communities of the Central Valley, as well as the Inland Empire, have been the most resilient with respect to labor market performance.

https://www.cnbc.com/2021/08/04/early-end-to-federal-unemployment-pay-in-26-states-not-getting-people-to-work.html

The Inland Empire has been boosted by the performance of the Transportation and Warehousing sector, which has a strong presence in the region. For Central Valley communities, the importance of the Agriculture sector has likely sheltered the region’s local economies from significant job losses. After all, the state has continued to grow crops over the past 18 months!

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

E MP LOYMEN T BY MSA , CA L I FOR N I A MSA

Sep-21

Change Since Feb-20 (#)

Change Since Feb-20 (%)

Stockton-Lodi MSA

250,500

-2,100

-0.8

Redding MSA

67,700

-700

-1.0

Modesto MSA

178,000

-5,700

-3.1

Merced MSA

68,700

-2,200

-3.1

1,538,900

-50,100

-3.2

Santa Maria-Santa Barbara MSA

189,500

-7,500

-3.8

Fresno MSA

355,200

-14,800

-4.0

Sacramento--Roseville--Arden-Arcade MSA

995,300

-41,900

-4.0

Yuba City MSA

46,200

-2,000

-4.1

Madera MSA

39,100

-1,700

-4.2

El Centro MSA

51,700

-2,500

-4.6

Hanford-Corcoran MSA

39,500

-2,000

-4.8

Visalia-Porterville MSA

124,900

-6,700

-5.1

San Jose-Sunnyvale-Santa Clara MSA

1,104,400

-62,300

-5.3

Anaheim-Santa Ana-Irvine Metro Div

1,591,800

-96,900

-5.7

Oxnard-Thousand Oaks-Ventura MSA

298,800

-18,200

-5.7

San Rafael MD

110,200

-6,900

-5.9

Vallejo-Fairfield MSA

135,400

-8,900

-6.2

Salinas MSA

136,700

-9,100

-6.2

Bakersfield MSA

262,400

-17,600

-6.3

San Diego-Carlsbad MSA

1,417,600

-105,200

-6.9

75,000

-5,600

-6.9

Los Angeles-Long Beach-Glendale Metro Div

4,270,800

-352,000

-7.6

San Francisco-Redwood City-South San Francisco Metro Div

1,100,500

-97,700

-8.2

Santa Rosa MSA

193,900

-17,300

-8.2

Oakland-Hayward-Berkeley Metro Div

1,101,400

-99,700

-8.3

Napa MSA

68,400

-6,400

-8.6

San Luis Obispo-Paso Robles-Arroyo Grande MSA

109,000

-11,100

-9.2

Santa Cruz-Watsonville MSA

93,900

-10,000

-9.6

Riverside-San Bernardino-Ontario MSA

Chico MSA

Wage Strength Amid Worker Shortage By the first quarter of 2021, at the heart of the second wave of the virus, wages in the state had increased by 11.5% on a year-over-year basis. While such wage growth is intriguing in many ways, pandemic effects are clearly at play. For example, one of the largest wage growths of any sector was seen in Leisure and Hospitality, the sector most affected by job losses during the pandemic. Wages for Leisure and

hospitality workers grew by 13.6% on a year-over-year basis, growth that was likely driven by compositional effects: parttime workers were laid off, while managers, the better paying workers in the sector, were least likely to have been laid off. In other words, the mix of workers who retained employment in the sector were found in higher paying occupations.

W AGE GROW T H BY INDUST RY, C ALIFORNIA Industry

Q1-21

YoY Change (%)

Total Nonfarm

81,744

11.5

Information

239,067

21.4

Finance & Insurance

162,631

14.8

Leisure & Hospitality

37,936

13.6

Other Services

48,783

12.9

Professional, Scientific & Technical Services

150,476

11.0

Educational Services

62,774

9.6

Manufacturing

108,892

9.3

Management of Companies & Enterprises

151,284

9.2

Retail Trade

42,045

7.1

Administrative & Support & Waste Services

53,098

6.4

Health Care & Social Assistance

58,050

5.7

Wholesale Trade

86,974

4.7

Government

77,660

4.6

Real Estate & Rental & Leasing

77,041

4.0

Construction

76,300

2.3

Transportation, Warehousing & Utilities

65,981

0.0

Mining and Logging

40,300

-2.3

Source: U.S. Bureau of Labor Statistics

Source: California Employment Development Department

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

That said, there should be sustained upward pressure on wages, at least in the short-term, given the aforementioned labor market shortages. These shortages, while amplified, have certainly not been caused solely by the pandemic. Since 2016, population growth in California has been slower than the national average, and population growth turned negative in the state in 2020. There are a variety

of reasons for California’s slow population growth rate, including housing supply and costs, as well as stringent immigration policies under the Trump administration, which disproportionately affected California. The immediate effect of these trends is a labor shortage that will place upward pressure on wages.

Housing Market: Inventory, Inventory, Inventory The performance of the housing market has been by far the most impressive aspect of the state’s economy over the past 18 months. After home sales collapsed in the second quarter of 2020 due to the fallout from the pandemic, the rebound since that time has returned home sales to their pre-pandemic trend. At the same time, home prices have

surged over the past year, growing by more than 30% in the state, on average. Although this level of price growth is not sustainable and should subside, house price growth in some parts of the state has been truly staggering, with prices growing by nearly 35% in Santa Barbara.

Population Growth, California 1.0

REGIONAL H OME PRIC ES, C ALIFORNIA

0.8

0.6

0.4

0.2

Region

Q2-21

YoY Change (%)

California

641,242

30.1

East Bay

977,448

29.3

Fresno MSA

339,146

19.3

Los Angeles

840,938

27.5

Marin

1,502,452

22.7

Monterey

786,284

21.7

Napa

786,706

27.0

Orange

982,974

22.5

Riverside

519,239

24.3

Sacramento MSA

522,549

24.5

San Bernardino

428,803

26.9

San Diego

801,823

25.8

1,627,800

12.3

San Luis Obispo

758,034

25.2

Santa Barbara

728,107

34.7

Santa Clara MSA

1,408,330

18.5

Santa Cruz MSA

1,017,209

27.7

Solano

530,578

16.6

Sonoma

715,910

15.6

Ventura

786,044

21.4

Visalia MSA

284,776

17.9

San Francisco MD 0.0

-0.2

-0.4 2011

2012

2013

2014

2015 California

2016 United States

2017

2018

2019

2020

Source: CoreLogic

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

Coronavirus Clouds? While many aspects of California’s economy are back on track, there are concerns surrounding the resurgence of COVID-19 cases, which currently number more than 75,000 new cases a day nationally. In California, there are now more than 5,000 new cases a day.

2.2

Napa

3.4

Orange

1.5

Placer

1.8

Riverside

2.0

Sacramento

1.7

San Benito

2.2

San Bernardino

2.3

San Diego

1.6

San Francisco

2.3

San Joaquin

1.8

San Luis Obispo

1.8

San Mateo

1.5

Santa Barbara

1.7

Santa Clara

1.4

Santa Cruz

1.8

Solano

1.6

Sonoma

2.1

Tulare

2.1

Ventura

1.9

Source: California Association of Realtors

8,000

6,000

4,000

2,000

Single-Family

Q2-21

Monterey

10,000

Q4-20

2.0

Q2-20

Merced

Q4-19

1.9

Q2-19

Marin

12,000

Q4-18

2.0

Q2-18

Los Angeles

Q4-17

2.0

Q2-17

Kings

14,000

Q4-16

2.1

Q2-16

Kern

Q4-15

1.9

Q2-15

Fresno

16,000

Q4-14

1.5

Q2-14

Contra Costa

Q4-13

1.4

Q2-13

Alameda

Q4-12

1.9

Q2-12

California

18,000

Q2-11

The strength in the demand for housing is well understood. Low interest rates, increased savings for the wealthy, and a labor market fallout from which high-wage earners were largely sheltered, are key drivers of the strong demand. On the supply-side of the market, housing inventory has fallen to unprecedented levels. Currently in California, there is only 1.9 months of housing inventory available. Housing inventory refers to the number of months it would take for the current inventory of homes on the market to sell given the current pace of sales. A balanced housing market is usually one in which there is about six months of inventory. Moreover, there is little evidence of relief anytime soon, as the number of building permits issued for multi-family housing units over the past three years has declined, while the number of single-family permits issued has remained constant. In other words, there are no indications that supply constraints in the short-term will be resolved by the construction of new housing.

Sep-21

Number of Units

Unsold Inventory of Existing SF Homes

Residential Building Permits, California

Q4-11

REGIONAL HOUSING SUPPLY, CALIFORNIA

Multi-Family

Source: Construction Industry Research Board

The spread of the virus will not have the same impact on the economy as it did in 2020, primarily due to vaccinations. In the state, 61% of the population has been fully vaccinated compared to 57% nationally. Rather than business closures, which seem unlikely given high rates of vaccination and a better understanding of how to manage the spread of the virus, the biggest impact of continued spread could be on labor supply. If school closures are extended, as they have been in some places across the country, or if parents are reticent to send children to school, this will again place a

constraint on labor supply. Additionally, some workers in industries that have a high degree of person-to-person contact could withdraw from (or remain out of) the labor market in the short-term, further exacerbating labor supply issues. All said, the trajectory of California’s economy in the third quarter could be influenced by the coronavirus but would amount to a slight slowing of growth rather than an economic contraction.

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

Total Nonfarm Employment, Inland Empire 1,800

1,600

1,400

600

400

2026

2025

2023

2024

2021

2022

2019

2020

2018

2017

2016

2015

2013

2014

2011

2012

2010

2009

2008

2007

2006

2005

2003

2004

2001

2002

1999

2000

1998

1997

1996

1995

1993

200

1994

Like the United States and California, many aspects of the Inland Empire economy have fully recovered and returned to their pre-pandemic trends. In fact, the Inland Empire has experienced an even stronger recovery than the rest of the state. The region’s economic performance has been boosted by its central role in California’s logistics complex and has directly benefited from the consumption that shifted online during the pandemic. For example, employment in the Inland Empire’s Transportation and Warehousing sector is 22% higher today (or +34,000 positions) compared to pre-pandemic levels. This helps to explain why the region’s labor market recovery has outperformed the rest of the state. Private employment in the Inland Empire has recovered to 2% of pre-pandemic levels, compared to a 5.6% deficit statewide.

800

1991

By Taner Osman, PhD

1,000

1992

INLAND EMPIRE OUTLOOK

1990

1,200

Source: California Employment Development Department (EDD)

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

As of September, there are 27,000 fewer private sector jobs in the Inland Empire compared to pre-pandemic levels. With new cases of COVID-19 dropping quickly and vaccination rates edging higher, seasonal tailwinds will push employment in the region very close to, and perhaps even beyond, pre-pandemic levels by the end of 2021. As the

Center for Economic Forecasting & Development’s current forecast indicates, both employment levels and the Inland Empire’s unemployment rate will return to trend in 2023. In the longer-term, growth in the labor supply will continue to moderate, driven by low permitting trends and lack of housing supply.

Unemployment, Inland Empire

Labor Supply, Inland Empire 2,500

2,000

14 1,500

1,000

8 500 6

2026

2025

2024

2023

2021

2022

2019

2020

2017

2018

2016

2015

2014

2013

2011

2012

2010

2009

2007

2008

2006

2005

2004

2003

2001

2002

1999

2000

1997

1998

1996

1995

1994

1993

1991

1992

1990

Source: California Employment Development Department; Analysis/Forecast by UCR Center for Forecasting 2

Source: California Employment Development Department; Analysis/Forecast by UCR Center for Forecasting

2026

2025

2024

2023

2022

2021

2019

2020

2017

2018

2015

2016

2014

2012

2013

2011

2010

2009

2007

2008

2005

2006

2004

2002

2003

2001

2000

1999

1997

1998

1995

1996

1993

1994

1991

1992

1990

The strength of the consumer, due to the numerous factors and trends discussed in the United States outlook (high savings rates, increasing wages, etc.), has led to a surge in consumer spending in the Inland Empire. In the second quarter of 2021, consumer spending, measured by taxable sales, was 34% higher in the region than it was in the

first quarter of 2020, just before the worst effects of the pandemic set in. With rising wages, healthy bank balances, and the expected removal of remaining state restrictions on consumer activity, 2022 will continue to see strong growth in consumer activity.

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

The performance of the Inland Empire’s housing market has been nothing short of remarkable over the past year. From the second quarter of 2020 to the second quarter of 2021, the region’s median single-family home price rose 25%. This has pushed the median home price far beyond levels seen prior to the Great Recession, although the similarities between

now and then end there. Today’s home price growth is being driven by consumer strength rather than financial gimmicks. The strength of the regional housing market is due, in large measure, to its relative affordability compared to neighboring regions where median house prices are double

Home Prices, Inland Empire 800,000

700,000

600,000

what they are in the Inland Empire. That said, the region is becoming increasingly expensive relative to the rest of the nation. While home price growth is expected to continue into 2022, the fundamentals of strong demand coupled with relatively limited supply will not relent next year. Home price growth will slow if, as discussed in the United State outlook, interest rates begin to tick up. As this forecast reveals, home price growth is expected to begin moderating in 2022, returning to pre-pandemic trends.

500,000

400,000

The outlook for the Inland Empire’s commercial real estate market is less certain. The pandemic accelerated certain trends with respect to retail space, the demand for which has been in a secular downward trend due to the overall increase in online retail. Demand for office space has also fallen over the last year in the region. The office vacancy rate hit 17.8% in the second quarter of 2021, up 0.9 percentage points from one year earlier. This vacancy increase was driven by a -0.7% decrease in occupied stock over the last year.

300,000

200,000

Source: CoreLogic; Analysis/Forecast by UCR Center for Forecasting

2025

2026

2023

2024

2021

2022

2019

2020

2017

2018

2015

2016

2014

2012

2013

2011

2010

2009

2008

2007

2005

2006

2004

2003

2001

2002

2000

1999

1997

1998

1995

1996

1993

1994

1991

1992

1989

1990

1988

100,000

With the rise of work-from-home trends, what will become of the office, and therefore, the demand for office space? Although there have been highly publicized stories about major corporations giving up or reducing portions of their office space, many firms are retaining their space and https://wfhresearch.com/wp-content/uploads/2021/09/SWAA-August-2021_forwebsite-1.pdf https://www.washingtonpost.com/outlook/the-great-pandemic-work-from-home-experimentwas-a-remarkable-success/2021/10/14/c21123d0-2c64-11ec-985d-3150f7e106b2_story.html 1

intend to have employees return to work in some capacity in the near future. In a recent survey, employees indicated a preference to work from home 2.5 days a week, on average, while employers preferred their workers to work from home only one day a week1. The endurance of work-from-home trends will ultimately depend on worker productivity. While some studies have revealed that workers are more productive working from home2, a large body of academic research finds that face-toface contact between workers is a key source of productivity. While the work-from-home trend will not end the demand for office space, it will continue to inject slack into the market in the short-term. Overall, in the Inland Empire, 2022 will see a continuation of the trends experienced in 2021. Constrained labor supply will push wages higher for workers, and higher wages should draw more workers into the labor market. The demand for housing in the region will remain strong, placing upward pressure on home prices. While there are longer term instabilities in the larger economy, as discussed in the United States outlook, economic growth over the next year looks relatively strong and steady.

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

The Inland Empire’s unemployment rate has improved from the lows of last year. It is now 6.8%, still significantly elevated compared to 4% in February 2020. This rate is lower relative to California (7.5%) yet higher relative to the United States (5.2%). Unsurprisingly, the largest job losses have been concentrated in the region’s Leisure and Hospitality

sector, with -25,300 fewer workers compared to February 2020 (a -14.3% decline). Other significant job losses have occurred in Government, Manufacturing, Natural Resources/Construction, Other Services (a sector including hair and nail salons and other personal care services), and Administrative Support. These are the sectors most impacted by government health mandates and consumer reservations due to COVID-19.

Inland Empire Nonfarm Employment 1,650

1,600 10 1,550

1,500

1,450

1,400 -5

Industry Breakdown & Regional Comparisons

1,350 -10 1,300

Total Nonfarm

Aug - 21

Apr - 21

Dec - 20

Aug - 20

Apr - 20

Dec - 19

Aug - 19

Apr - 19

Dec - 18

Aug - 18

Apr - 18

Dec - 17

Aug - 17

Apr - 17

-15 Dec - 16

1,250 Aug - 16

The Inland Empire’s labor market has continued to steadily recover from the COVID-19 pandemic, adding 168,800 jobs since it hit bottom in April 2020 (gaining back roughly 76% of total jobs lost between February and April of last year). Despite the ongoing jobs market recovery, total payroll employment is -3.4% (or -53,500 jobs) below the pre-pandemic peak in February 2020. Even so, employment growth in the Inland Empire has outpaced the state (still -5.8% below) and the nation (-3.5% below) during this period.

Growth (SA, %)

EMPLOYMENT AND WAGES

Total Nonfarm SA, (Thousands)

Growth

Source: California Employment Development Department; Analysis/Forecast by UCR Center for Forecasting

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

While many aspects of the economy are back on track, there are concerns surrounding the resurgence of COVID-19 cases. The spread of the virus will not have the same impact on the economy as it did in 2020. Rather than business closures, which seem unlikely given high rates of vaccination and a better understanding of how to manage the spread of the virus, the biggest impact of continued spread could be on labor supply. If school closures are extended as they have been in some places across the country, or if parents are reticent to send children to school, this will again place a constraint on labor supply. Additionally, some workers in industries

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

having a high degree of person-to-person contact could withdraw from (or remain out of) the labor market in the short-term, further exacerbating labor supply issues. Although local job losses have been widespread, a few bright spots exist. The surge in e-commerce has helped boost payrolls in the region’s Transportation and Warehousing sector over the last year. Payroll employment in Transportation and Warehousing expanded 19.1% since February 2020, outpacing growth in the state by a wide margin.

INLAN D EMP I R E I ND UST RY E MP LOYME N T Sector

Aug-21 Emplt (000s)

YOY Chg. (000s)

YOY Chg. (%)

Transport/Warehouse

185.3

29.7

19.1

Education/Health

260.1

2.1

0.8

Utilities

5.2

0.2

3.5

Management

8.7

-0.2

-1.9

Wholesale Trade

66.4

-1.6

-2.4

Prof Sci and Tech

43.0

-2.0

-4.4

Information

9.1

-2.2

-19.3

Retail Trade

176.0

-2.8

-1.5

Financial Activities

42.3

-3.7

-8.1

Admin Support

107.5

-4.2

-3.7

Other Services

41.9

-5.9

-12.3

NR/Construction

106.4

-6.5

-5.8

Manufacturing

90.9

-9.2

Government

241.1

-21.9

-8.3

Leisure and Hospitality

151.5

-25.3

-14.3

1,535.4

-53.5

-3.4

Total Nonfarm Source: California Employment Development Department (EDD)

Wages in the Inland Empire have trailed the state in recent quarters. From first-quarter 2020 to first-quarter 2021, wages in the Inland Empire fell -0.2%, well behind the 6.2% growth in California over this period. However, much of the growth in wages at the state level is due to the mixture of jobs. California lost a higher proportion of jobs in lower-paying industries such as Leisure and Hospitality and Other Services during the pandemic, resulting in

an increase in average earnings for workers currently employed. Growth in the Logistics industry in the Inland Empire has helped the region offset some of the losses in low-paying industries; however, this has also resulted in average annual wages remaining fairly stable in the region. Wage growth in the Inland Empire was strongest in Riverside County, where it increased 1.4%. In contrast, wages in San Bernardino County fell -1.7%.

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

Vaccinations have played a key role in the Inland Empire and California’s re-opening efforts in recent months. As of Oct. 6, the Inland Empire had supplied nearly 4.8 million doses of the COVID-19 vaccine. This amounts to 54% of San Bernardino County and 58% of Riverside County’s

individual populations receiving at least one dose of the vaccine. While these aren’t the levels needed for the region to reach herd immunity, the decline in COVID-19 cases has still allowed for restrictions at most businesses to be lifted.

Inland Empire Total New COVID-19 Cases 6,000

1,000

San Bernardino County

8/24/21

7/24/21

6/24/21

5/24/21

4/24/21

3/24/21

2/24/21

1/24/21

12/24/20

11/24/20

10/24/20

9/24/20

8/24/20

7/24/20

0 6/24/20

Continuing to contain COVID-19 cases will be essential to sustaining the economic recovery in the Inland Empire and the nation. In early October, the seven-day moving average for new daily COVID-19 cases in the Inland Empire was under 1,700, a significant improvement from the more than 7,000 new daily COVID-19 cases earlier this year. While cases have risen in recent months, these improvements have allowed state officials to lift restrictions at most businesses, and the spread of the virus will not have the same impact on the economy as it did in 2020.

2,000

5/24/20

Cases, Vaccination Rates & Sales Tax

3,000

4/24/20

COVID-19 TRENDS AND BUSINESS ACTIVITY

4,000

3/24/20

Total New COVID-19 Cases (7-Day Average)

5,000

Riverside County

Source: Los Angeles Times, California Department of Public Health (CDPH)

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

INLAND EMPIRE SALES TAX REC EIPTS BY C AT EGORY

Inland Empire Cumulative Vaccination Doses

Category

3,000

2,500

Total Doses (Thousands)

2,000

Q2-21 ($ Thousands)

1-Year Change (%)

3-Year Change (%)

Fuel and Service Stations

22,289

78.1

9.9

General Consumer Goods

47,235

67.9

19.5

Restaurants and Hotels

25,537

65.6

19.4

Business and Industry

56,601

48.8

68.8

Autos and Transportation

45,241

41.6

36.6

Building and Construction

27,473

24.7

34.7

County & State Pool

42,221

13.3

77.5

Food and Drugs

11,589

9.4

28.8

Total

278,186

41.7%

38.3%

Source: HdL Companies

1,500

Consumer spending has rebounded strongly from last year’s lows. From second-quarter 2020 to second-quarter 2021, taxable receipts in the Inland Empire increased 41.7% and expanded by 38.3% over the last three years.

1,000

The pandemic has led to a surge in spending at some locations. E-commerce has surged during the pandemic, with spending up 77.5% over the last three years for the county and state pool (the category collecting taxes for e-commerce sales). Economic stimulus and lowinterest rates have increased demand for Autos and Transportation, with spending up 36.6% over the last three years.

500

San Bernardino County

9/15/21

8/15/21

7/15/21

6/15/21

5/15/21

4/15/21

3/15/21

2/15/21

1/15/21

12/15/20

Riverside County

Source: Los Angeles Times, California Department of Public Health (CDPH)

The Inland Empire’s Construction sector has also been aided by the pandemic. As people spend more time at home, many have started or finished home upgrades in recent months, with spending at Building and Construction stores growing 34.7% over the last three years. More people eating meals at home has also led to an increase in spending at Food and Drug Stores, which is up 28.8% over the last three years. While spending levels for all categories have expanded over the last three years, increases were more modest at Fuel and Service Stations, which grew 9.9%. This is due to less car travel during the pandemic. Increases have also been modest at Restaurants and Hotels, which is up 19.4% over the last three years. This shouldn’t come as a surprise given these were the sectors most impacted by stay-at-home orders and public health mandates. General Consumer Goods (19.5%) also increased modestly over this period.

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

With this backdrop, home prices in the Inland Empire continue to increase rapidly. From second-quarter 2020 to second-quarter 2021, the median single-family home price rose 24.7%. This was stronger growth relative to Orange County (22.5%), but trailed growth in Los Angeles (27.5%) and San Diego (25.8%) counties.

Part of the reason the Inland Empire is experiencing more rapid growth is because it is one of the last markets for relatively affordable housing in Southern California. At a median price of $482,000, the Inland Empire’s existing single-family homes are significantly more affordable than those in Los Angeles ($841,000), Orange ($983,000), and San Diego ($802,000) counties.

Inland Empire SinglevFamily Homes 25

600

500 20

Sales (SA, Thousands)

10 200

5 100

Median Price

Q4-20

Q1-20

Q2-19

Q3-18

Q4-17

Q1-17

Q2-16

Q3-15

Q4-14

Q1-14

Q2-13

Q3-12

Q4-11

Q1-11

Q2-10

Q3-09

Q4-08

Q1-08

0 Q2-07

0 Q3-06

The housing market was by far the brightest spot of the Inland Empire’s economy over the last two years. Strong performance is likely driven by three factors. First, typical homebuyers (higher-income earners) have been less affected by the labor market downturn. Second, mortgage rates are at historically low levels, spurring purchase activity. Third, inventories are near historic lows. These factors have pushed purchase offers far over the asking price even as buyers waive inspections and other contingencies in an attempt to get a leg-up on the competition.

300

Q4-05

Home Sales, Prices & Apartment Rentals

Q1-05

RESIDENTIAL REAL ESTATE

Median Price (SA, Thousands)

400

Sales

Source: CoreLogic

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

After sales dropped during the second quarter of 2020 due to the pandemic, demand surged in the second half of 2020 and has continued growing into 2021. With demand remaining strong, existing single-family home sales increased 62.5% in the Inland Empire from second-quarter 2020 to second-quarter 2021, keeping pace with San Diego County (61%) but trailing growth in Los Angeles (84%) and Orange (105%) counties.

Economic stimulus and low interest rates have increased demand for housing throughout California; however, supply has not increased to meet these demands. In August 2021, there were just 2 months of housing supply in Riverside County and 2.4 months of supply in San Bernardino County. For context, a balanced market typically equates to 6 - 7 months of supply. Moreover, a buyer’s market is seven months of supply and above, and a seller’s market is six

Inland Empire YTD Residential Permits 8,000

7,000

Inland Empire Apartment Market

6,000

4.0

1,500

3.5

3.0

1,300

2.5

1,200

2.0

1,100

1.5

Vacancy Rate (%)

Cost of Rent ($)

1,400

YTD Permits (Units, through Q2)

1,600

5,000

4,000

3,000

2,000

1,000

0 2011

2012

2013

2014

2015 Multi-Family

Cost of Rent Source: REIS

Vacancy Rate

Q2-21

Q1-21

Q4-20

Q3-20

Q2-20

Q1-20

Q4-19

Q3-19

Q2-19

Q1-19

Q4-18

Q3-18

Q2-18

Q1-18

Q4-17

Q3-17

Q2-17

Q1-17

Q4-16

Q3-16

1.0 Q2-16

1,000

2016

2017

2018

2019

2020

2021

Single-Family

Source: Construction Industry Research Board (CIRB)

months of supply and under. The strong fundamentals at the start of this hot market imply there is still some headroom for markets to grow. And with inventory so low, it will take years for builders to catch up as demand also remains high.

If inflation begins to heat up consistently, mortgage rates will take a similar jump and the market could downshift rapidly. But these effects, if they occur, are unlikely within the next two years.

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

Inland Empire Warehouse Market

6.0

10.0

5.0

8.0

4.0

6.0

3.0

4.0

Vacancy Rate (%)

COMMERCIAL REAL ESTATE

12.0

Cost of Rent ($)

7.0

Industrial, Office, Flex/R&D and Retail

Cost of Rent

Q2-21

Q1-21

Q4-20

Q3-20

Q2-20

Q1-20

Q4-19

Q3-19

Q2-19

Q1-19

Q4-18

Q3-18

Q2-18

Q1-18

Q4-17

Q3-17

Q2-17

Q1-17

Q4-16

2.0 Q3-16

2.0 Q2-16

The vacancy rate for warehouse properties in the Inland Empire fell to 8.2% in the second quarter of 2021, a -2.3 percentage-point decrease from a year earlier. This vacancy decline came as 9.4 million square feet of new space opened over the last year, a 2.2% increase to the available stock in the region. In addition, asking rents grew a modest 1.5% over the last year to an average annual rate of $5.90 per square foot, but that still keeps warehouse space in the Inland Empire more affordable than Los Angeles ($8.07), Orange ($7.70), and San Diego ($9.34) counties.

Vacancy Rate

Source: REIS

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

The vacancy rate for flex/research and development (R&D) properties in the Inland Empire fell to 4.5% in the second quarter of 2021, a 0.6 percentage-point decline from a year earlier. Asking rents grew 2.3% over the last year to

Inland Empire Office Market 24.0

19.0

Inland Empire Flex/R&D Market

18.5

23.5

an annual rate of $9.03 per square foot, keeping flex/R&D space in the Inland Empire more affordable than Los Angeles ($13.44), Orange ($12.40), and San Diego ($14.83) counties.

10.0

8.0

18.0

17.0

22.0

Cost of Rent ($)

17.5

22.5

Vacancy Rate (%)

Cost of Rent ($)

9.5

7.0

9.0

6.0

8.5

5.0

8.0

4.0

7.5

3.0

7.0

2.0

Vacancy Rate (%)

23.0

16.5

21.5

Cost of Rent

Q2-21

Q1-21

Q4-20

Q3-20

Q2-20

Q1-20

Q4-19

Q3-19

Q2-19

Q1-19

Q4-18

Q3-18

Q2-18

Q1-18

Q4-17

Q3-17

Q2-17

Q1-17

Q4-16

Q3-16

16.0 Q2-16

21.0

Vacancy Rate

Cost of Rent

Q2-21

Q1-21

Q4-20

Q3-20

Q2-20

Q1-20

Q4-19

Q3-19

Q2-19

Q1-19

Q4-18

Q3-18

Q2-18

Q1-18

Q4-17

Q3-17

Q2-17

Q1-17

Q4-16

year (less users). Still, asking rents grew a modest 0.9% over the last year to an annual rate of $23.64 per square foot, keeping office space in the Inland Empire more affordable than Los Angeles ($40.75), Orange ($33.99), and San Diego ($34.58) counties.

Q3-16

In contrast, demand for office properties has fallen over the last year in the Inland Empire. The office vacancy rate hit 17.8% in the second quarter of 2021, up 0.9 percentage points from a year earlier. This vacancy increase was driven by a -0.7% decrease in occupied stock over the last

Q2-16

Source: REIS

Vacancy Rate

Source: REIS

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

Demand for retail space in the Inland Empire has fallen over the last year as a result of government health mandates and consumer reservations amid the COVID-19 pandemic. The vacancy rate held steady at 9.9% in the second quarter of 2021, unchanged from a year earlier.

However, asking rents fell -2.6% to an annual rate of $22.54 per square foot, which keeps retail space in the Inland Empire more affordable than Los Angeles ($33.42), Orange ($34.22), and San Diego ($32.28) counties.

Inland Empire Non-Residential Permits 900

120

100

800

Inland Empire Retail Market 24.0

700

10.2

10.0

23.0

9.8

Growth (SA, %)

23.5

Permit Values (SA, Millions)

600

500 20 400 0

22.5

9.6

Vacancy Rate (%)

Cost of Rent ($)

300 -20 200

-40

100 22.0

-60

9.4

Permit Values

Q2 - 21

Q4 - 20

Q2 - 20

Q4 - 19

Q2 - 19

Q4 - 18

Q2 - 18

Q4 - 17

Q2 - 17

Q4 - 16

Q2 - 16

Q4 - 15

Q2 - 15

Q4 - 14

Q2 - 14

Q4 - 13

Q2 - 13

Q4 - 12

Q2 - 12

Q4 - 11

Q2 - 11

9.2

Q4 - 10

21.5

-80 Q2 - 10

Growth

Source: Construction Industry Research Board (CIRB)

Cost of Rent Source: REIS

Vacancy Rate

Q2 - 21

Q1 - 21

Q4 - 20

Q3 - 20

Q2 - 20

Q1 - 20

Q4 - 19

Q3 - 19

Q2 - 19

Q1 - 19

Q4 - 18

Q3 - 18

Q2 - 18

Q1 - 18

Q4 - 17

Q3 - 17

Q2 - 17

Q1 - 17

Q4 - 16

Q3 - 16

9.0 Q2 - 16

21.0

Non-residential building permits in the Inland Empire has fallen considerably over the last year. Permit values during the first-half of 2021 totaled just $856 million, a -4.9% decline from the first-half of 2020 and -43% from 2019 levels. The largest declines were in retail permitting, which totaled just $145 million during the first-half of 2021,

off -30.8% from the first-half of 2020. Permitting for office properties, totaling just $5.9 million, was -69% lower than the first-half of 2020. Building permit values for industrial properties increased 12.2%, totaling $285 million in the first-half of 2021; however, permitting levels were still well below 2019 levels.

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

Inland Empire Population 5.0

4.5

4.0

3.5

3.5 3.0

2.5 2.5 2.0

Growth Rate (%)

Population (Millions)

3.0

2.0

1.5 1.5

Population

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

0.0 2004

0.0 2003

The population of the Inland Empire grew by 28,797 (0.6%) in 2020, with Riverside County growing 0.9% and San Bernardino County expanding 0.4%. This beat growth in Los Angeles County (-0.4%), Orange County (-0.1%), San Diego County (0.2%), and the state overall (0.1%).

2002

Population, Migration & Household Income

0.5

2001

DEMOGRAPHICS

1.0

2000

Growth Rate

Source: California Department of Finance (DOF)

12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

The affordability of the Inland Empire is continuing to attract people. Unlike its neighbors, the Inland Empire is still attracting migrants from other parts of the nation and state, with net domestic migration growing by 6,960 from

2019 to 2020. This is in stark contrast to the declines in Los Angeles (-73,409), Orange (-17,234), and San Diego (-10,425) counties over the period.

Inland Empire Net Migration

Household Income

terms. Median household income remains higher in Los Angeles County ($72,797), Orange County ($95,934), San Diego County ($83,985), and California ($80,440).

Median household income in Riverside County reached $73,260 in 2019, a 28.5% increase over 2014 levels in nominal terms, and San Bernardino County reached $67,903, a 30.5% increase over 2014 levels in nominal

MEDIAN H OUSEH OLD INCOME ( 2019)

100,000

Location

80,000

60,000

Median Household Income

1-Year Growth (%)

5-Year Growth (%)

Riverside County

$73,260

9.4

28.5

San Bernardino County

$67,903

6.3

30.5

California

$80,440

6.9

29.9

Los Angeles County

$72,797

6.9

30.6

Orange County

$95,934

6.9

25.7

San Diego County

$83,985

6.2

26.9

Population

Source: U.S. Census Bureau American Community Survey (ACS)

40,000

20,000

Foreign

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

-20,000

Net Domestic

Source: California Department of Finance (DOF)

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12th Annual Inland Empire Economic Forecast Conference The Great Recovery: Could It Be Derailed?

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Acknowledgments Research Staff/Chapter Authors Christopher Thornberg PhD, Director UCR Center for Economic Forecasting and Development

Book Design The Brandsmith, LLC

Taner Osman PhD, Research Manager UCR Center for Economic Forecasting and Development Brian Vanderplas, Senior Research Associate UCR Center for Economic Forecasting and Development

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