Cal State Fullerton economists Anil Puri and Mira Farka presented their annual economic forecast virtually on Oct. 22. Amidst the uncertainties related to the coronavirus pandemic, they examined the outlook for the national, state and local economies.
As 2020 dawned, economists anticipated a slowdown in economic growth and a possible end to the longest expansion in modern U.S. history. But no one foresaw the unprecedented disruption caused by the coronavirus pandemic, which in the past eight months has cost more than 1 million lives globally and upended economic growth in much of the world.
“As 2020 dawned, even the gloomiest projections could not have foreseen that the world was on the cusp of a global pandemic, much less anticipate the devastation that followed both in human lives and economic costs,” reported CSUF economists Anil Puri and Mira Farka, who presented the Woods Center for Economic Analysis and Forecasting annual economic forecast on Oct. 22. “The threat of the disease sent governments across the world scrambling for answers. Most resorted to containment measures that involved broad restrictions on movements and daily economic activity, though the severity of the lockdowns varied from country to country.”
These restrictions ranged from the draconian measures undertaken by China, the world’s second-largest economy, to the more muted approach of Sweden, Japan and Taiwan.
No nation has seen as many deaths or cases as the United States, with more than 8 million cases and 220,000 deaths. Still, the U.S. experience must be kept in perspective, according to Puri, provost emeritus and director of the Woods Center, and Farka, associate professor of economics and Woods Center co-director.
“The American experience with COVID-19 is neither as terrible as critics argue nor as great as its politicians would like to claim,” they said. “In absolute terms, it has the highest number of cases and deaths. Adjusting for population, the mortality rate, though tragic, is not exceptional when compared to other European nations.”
While the severity of lockdowns has been a major factor in the economic malaise wrought by the pandemic, Puri and Farka look to more than government-mandated restrictions to understand economic performance.
“The hit to the economy is not solely due to government mandated restrictions but voluntary individual behavior as people self-isolate in order not to contract the disease. Fears are on the rise that as the winter knocks and activities migrate indoors where the virus is spread more easily, infections will spike again, sending skittish consumers back to hibernation and dealing another powerful blow to the recovery.”
Where Do We Go From Here?
Despite the devastating toll of the coronavirus and continuing economic uncertainty, Puri and Farka offer a more optimistic outlook than the consensus. In addition to progress in understanding the best containment measures – which seem to be moving away from crippling lockdowns – and a race for vaccines and therapeutic treatments that could allow life to return closer to normal, the mortality rate from the disease has declined and remained stable even as cases surged in the summer as compared to the spring wave. And it’s better understood, through serology tests, that the infection rate is more prevalent than what official numbers show, which means that the percentage of cases resulting in death is quite low.
Compared to the 1957-1958 Asian flu pandemic, which left 2 million dead worldwide, and the 1918 Spanish flu, with a death toll of 50 million, the coronavirus has so far been below the levels of the worst infectious disease outbreaks going back 130 years.
Still, the spring lockdowns and continuing cautions – both on the regulatory and consumer levels – have wreaked havoc on an economy that was once one of the strongest in modern times, with unemployment skyrocketing from 3.5% ‒ the lowest level in 50 years – to 14.7%, the highest rate since the Great Depression. The second quarter’s GDP drop of 31.7% was the largest decline in history.
But Puri and Farka maintain that fears of successive years of economic hard times, as predicted by many analysts, are a bit overdone and the economy is likely to recover at a faster pace than after the Great Recession and certainly faster than the Great Depression.
“We might not be entirely sure what this is yet, but it is not the Great Recession, and the path this recovery will take will be radically different from that one. And while we agree that some of the wreckage wrought will take time to reverse, our outlook calls for a faster return to normalcy with real GDP reaching its pre-pandemic peak by the end of 2021 and unemployment dropping to a level consistent with full employment by the end of 2022,” they said.
Despite the political rancor around the coronavirus, Puri and Farka noted that on the economic side, the U.S. response was powerful and impactful, with three massive fiscal rescue packages passed by the U.S. Congress in rapid succession, amounting to the largest financial relief legislation in history. Measures adopted from the Federal Reserve have also been unprecedented both in size and scope. The strong support has helped stock markets recover strongly from their March lows.
But more needs to be done, and Puri and Farka believe that more will be done, as elected officials are again negotiating a stimulus.
“Our view is that despite political rancor, Congress will manage to scrape together a package as this year draws to a close, though the chances that this will happen before the election have all but vanished. We expect the size of the stimulus to be around $1.6 trillion,” they said, with allocations for enhanced unemployment benefits; tax rebate checks to households; and support for businesses, schools and local governments.
And an unusually lopsided recession has the makings of an unusually lopsided recovery, impacting some sectors much more than others.
“Skewed and unequal, warts and all, our view is that the recovery, which commenced sometime in May, will persist over the forecast horizon, gaining breadth and traction as the distance from the initial pandemic shocks lengthens and the world adapts,” they said. “The case for a stronger recovery rests, in part, on the notion that, unlike financial crashes brought on by overburdened households and overleveraged banks, natural disasters (such as this pandemic) cause disruptions of economic activity that are typically followed by rapid recoveries. The economy was on solid footing circa February 2020: The unemployment rate was the lowest in over five decades; household balance sheets were pristine; consumers and banks had deleveraged fully, and business sentiment was running high. Sure, the business cycle was a bit long in the tooth, but there were no sizable misallocations or glaring debt overhangs that normally spell an impending doom.”
Perhaps surprisingly, and because of some local exoduses in New York City and San Francisco that are making the suburbs and exurbs in greater demand, the housing market has made a strong early-phase recovery, fueled by the work-from-home transition for many employees and ultra-low mortgage rates. But the commercial real estate sector has been hit hard, and demand for retail workers has also taken a big hit, just some of the consequences of the pandemic.
According to a poll conducted by The Wall Street Journal, economists give the chance of another recession in the next 12 months at 37%, but Puri and Farka disagree with this view.
“Our outlook is that the recovery, while beating the most bearish estimates, will be beset by a number of risks and setbacks, which will be resolved only when the virus is fully behind us either through therapeutic treatments or a vaccine,” said Puri and Farka.
The Orange County View
None of the counties of Southern California were spared from the coronavirus and the economic fallout, though the impacts varied from place to place, with different state and local policies to contain the outbreak and various adherence to safety measures.
After Orange County witnessed California’s first COVID-19 case on Jan. 25, the state became a regional epicenter for the virus, and it endured shelter-in-place policies from March to May. Once these were relaxed, California coronavirus cases jumped, resulting in another round of closures, impacting indoor dining and bars statewide and bans on many other types of indoor activities, including gyms, church services and hair salons, in harder-hit areas, including Orange County.
Since Aug. 28, the state has relied on the California Blueprint for a Safer Economy for reopening – or reclosing – county economies based on local COVID-19 cases and positivity rates (a health equity measure, ensuring ethnic groups don’t suffer disparate impacts, was later included as an additional metric).
Orange County is currently in the second tier, which allows for some non-essential indoor business operations to resume, while Los Angeles and San Bernardino counties remain in the first tier, in which most non-essential businesses must curtail indoor operations.
Unlike previous recessions, Orange County’s labor market was ravaged by the COVID-19 pandemic, with the county’s May unemployment rate of 14.7% matching the nation’s top jobless rate, well above the 10.1% peak in the aftermath of the Great Recession.
By August, the situation was improving, but the county was still almost 200,000 jobs below the pre-COVID-19 level, with certain sectors lagging behind, most notably leisure and entertainment, which was recently impacted by Disney’s decision to lay off 28,000 workers, including a majority of their part-time cast members.
“A third of these job cuts are expected to be at the Disneyland Resort in Anaheim. Though a majority of these jobs may be for part-time workers, the impact will be felt widely by businesses dependent on Disneyland tourists’ expenditure on hotels, restaurants and related businesses in the area,” they said. “This will further add to the woes of the Orange County economy while adversely affecting tax revenues of the surrounding cities, especially those of Anaheim and Garden Grove.”
Not everyone is equally hit: Disparities in unemployment include higher unemployment claims of Black and Asian unemployment early on in the pandemic, continuing for Blacks in recent times, and higher rates of unemployment claims for those with lower educational attainment levels. Younger workers have also been negatively impacted, with those ages 45 to 54 having low rates of jobless claims.
Still, business executives in Orange County show optimism in their views of the recovery, according to the Orange County Business Expectations (OCBX) survey conducted by the Woods Center.
The measure dipped to a record low of 22.7 in the second quarter, but now stands at 80.9 in the fourth quarter, though still below the levels of recent years before the pandemic.
And considering the paucity of traditional data in real time, Puri and Farka, along with other forecasters, have been turning to novel metrics, such as mobility data, to divine the local recovery.
Using this method, they find that trips to retail establishments and workplaces are still 30% to 40% below their pre-pandemic peaks, even as park and grocery store trips have ticked back up.
All told, Puri and Farka anticipate the Orange County and Southern California economies to recover in line with their national counterparts.
“Our baseline outlook is for the recovery to continue in Southern California and Orange County, though the next phase is expected at a more gradual clip. We anticipate that it will take up to the end of 2022 for employment levels to approximate those at the beginning of 2020,” they said.
For More on the Woods Center
Cal State Fullerton’s Woods Center for Economic Analysis and Forecasting is Orange County’s go-to resource for business professionals, entrepreneurs, government leaders, the media and academics in search of what to expect in the ever-changing economy in the coming months and years.
In addition to their annual economic forecast, which they hope to present in person again in fall 2021, Puri and Farka also produce a forecast update each spring, as well as periodic reports on the economy in the interim, which include the contributions of Cal State Fullerton economics faculty and students.