With an economy that is rapidly reopening as COVID-19 vaccinations increase, Cal State Fullerton economists Anil Puri and Mira Farka provided an updated outlook on the national, Southern California and Orange County economies on April 21.
Recognizing the resilience of the economy as workers return to offices and workplaces, students return to schools, and Americans go back to the recreational opportunities they once enjoyed, the economists provide a decidedly optimistic outlook in the near-term, despite fears of a potential fourth wave of coronavirus.
At the same time, they acknowledge that risks are greater than in a typical expansion, with the continued threat of potential vaccine-resistant COVID-19 variants and policy risks in the medium to long term, including possible inflation-driven interest rate increases.
“Our view is that while these risks are considerably higher now than at any point in the past, they are unlikely to materialize in the near term, at least not in the current year,” Puri and Farka predict.
The State of the Pandemic, One Year In
More than a year after the first COVID-19 infections were reported, the pandemic has resulted in more than 130 million infections and 3 million deaths globally, the worst toll for infectious disease in such a finite period since Spanish flu more than a century ago.
In the U.S., there have been three distinct waves, each more devastating than the previous, while in Europe, a third wave is currently in progress.
While vaccination provides hope of better times ahead, Puri and Farka note the risk that the disease may circulate for years, becoming endemic.
“Treating it as a transient emergency that can be kept at bay by bolting doors and shutting down economic and social activity is unsustainable in the long run. Months-long national lockdowns and endless school closures are not only devastatingly pricey in terms of economic costs but also impossible to maintain for lengthy periods of time. The next few years will likely be characterized by some adjustments to living with COVID-19 in both our private and public lives,” they report.
On the positive side, the arrival of vaccines, while too late for hundreds of thousands who have succumbed to the disease, has been miraculously rapid in public health terms, at least in the U.S.
“All are estimated to be 100% effective against severe infections, hospitalizations and deaths, which is what really matters,” they say. “Post-vaccination, ‘living with COVID’ may simply mean receiving regular booster shots tweaked to deal with the new variants.”
Vaccinating the world is a herculean task. But despite the U.S. having the higher number of both COVID-19 cases and deaths, it has fared well in vaccinating its people, albeit after a rocky start in early 2021. As of early April, 40% of Americans had received at least one dose of a COVID-19 vaccine, and 23% had received two doses, and the numbers are rising daily.
While falling short of the success of Israel, where 60% of the population is fully vaccinated, the U.S. is well ahead of European countries, where just a tad over 15% of people have received even a single dose.
“At the current pace, herd immunity will be reached by early June, with around 39 million recorded cases, an additional 28 million unreported and the rest (roughly around 180 million) receiving vaccines,” Puri and Farka say, noting that herd immunity may be reached even sooner as the administration of vaccines ramps up.
The New World of the Spending Economy
A sea change in political and economic thinking in favor of gargantuan fiscal stimuli is one enduring legacy of the COVID-19 pandemic which Puri and Farka highlight in particular.
In just over one year, the U.S. has spent $6 trillion in fiscal support alone, more than a quarter of its GDP, on relief packages for individuals, businesses, local governments and other sectors.
“Having done far too little during the Great Recession, there is no doubt the government is doing far too much now,” they say. “Post pandemic, the world has changed in many ways. Some of these changes are transitory and some more permanent. Unquestionably, the pandemic has redrawn the relationship between the state and its citizens, demanding a more expansive role of the former. Make no mistake about it: The era of big government is back!”
Roaring ’20s 2.0
After the horrors of the First World War and Spanish flu, the U.S. and global economies embarked on a previously unprecedented economic expansion more than a century ago. While conditions certainly are different from the world of 1920, Puri and Farka see some parallels with the present situation.
“Our view is that the economy is on the cusp of an unprecedented boom, buoyed by a vaccine-led reopening, lavish government support and strong fundamentals. For all the terrifying destruction the virus heaped on the economy, its worst impact was mercifully short, lasting only six weeks and ending when the iron grip of the lockdowns was loosened last May,” they say. “By our calculations, U.S. real GDP will reach its pre-pandemic level in the second quarter of 2021 and exceed its potential by the fourth.”
Pent-up demand among U.S. consumers is a major driver of the economists’ optimism.
“Having braved the worst of the pandemic with an admirable grit, as spring dawns, they seem poised to shed their pajamas, eschew endless Zoom sessions and once again join the world,” they say. “There has never been a better time to do so. Their balance sheets are rock solid: Household wealth has soared by an eye-watering $18 trillion dollars since the dark days of the pandemic, rising to an unprecedented $130 trillion. Much of this has to do with the meteoric rise in financial wealth as the performance of the stock market shattered expectations after it became clear that unprecedented government support would be in the offing. But quite a sizable chunk – $1.3 trillion, to be precise – came from home equity wealth.”
The rise of the housing market despite pandemic hard times has been extraordinary, with existing home sales reaching their highest levels since 2006, right before the Great Recession. Prices have risen in tandem, with many locations seeing their highest home prices ever, which has priced out many new entrants into the market.
Even the perennial laggard in recoveries – the job market – appears to be on the mend, with U.S. jobless rates down to 6%, well below the 14.8% at the peak of the pandemic downturn. Puri and Farka anticipate that the job market will reach its pre-pandemic peak by mid-2022.
The Local View
Unlike in many previous downturns, Orange and Los Angeles counties were actually hit harder by the coronavirus recession than the U.S. Unemployment rates peaked at 14.9% in Orange County and 18.8% in Los Angeles County. Today, the counties have rates of 6.8% and 10.9%, respectively.
“Industries suffering the sharpest decline were those that relied on direct consumer spending, such as leisure and entertainment, hospitality, and retail,” Puri and Farka noted. In the case of leisure and hospitality, half of the jobs in the sector were lost during the March to May 2020 period.
It’s been a challenging and uncertain year for Orange County and Southern California, but there are signs of better times.
“The ebb and flow of the virus and the ever-changing and ill-defined defined government rules combined for a very tough business environment. The economic environment remained troublesome also partly because the general public was reluctant to venture out and visit stores and restaurants, even as these establishments were operating under strict capacity limitations, whenever they were allowed to operate. Only after mid-January, when infections began to abate in earnest and vaccines became more widely available, did the economy pick up some momentum.,” they report.
The unevenness of the downturn and ensuing recovery has been particularly noteworthy. Puri and Farka report that job losses have skewed toward younger, less educated and non-white workers.
There are 1.5 million payroll jobs in Orange County in February 2021, down from 1.68 million a year before. Still, more than 93,000 jobs had been recovered since the worst of the pandemic downturn in May 2020, though with great disparities among sectors, with leisure and hospitality in the biggest hole.
The more than year-long closure of Disneyland and associated layoffs of cast members has been a major impact to the Orange County economy as well.
“While we do not have any direct data available from Disneyland, other than publicly available reports of the company, a back-of-the-envelope calculation shows that Disneyland’s closure may have cost the Southern California economy approximately $6.2 billion in output and 60,000 in jobs of which approximately 43,000 are in Orange County,” report Puri and Farka. “These estimates are based on expected direct expenditures by Disneyland as well as secondary impacts of that spending on local hotels, restaurants and other businesses. This estimate, we want to emphasize, is only an approximation and could be significantly revised once reliable data are available.”
Generally, Puri and Farka expect Orange County’s economy to add 69,500 payroll jobs on an annualized basis, for a 4.6% increase during 2021. On a year-over-year basis, the monthly increases are expected to be much larger in the second half of 2021. More than a third of this improvement is forecast to take place in the leisure and hospitality sector.
Similar to the national picture, home prices have followed the unusual pattern of rising sharply during the pandemic, a result of low mortgage rates, lack of sufficient supply and stimulus payments to households.
“Nonetheless, this pace of appreciation is not sustainable indefinitely. Going forward, home prices will fundamentally depend on future mortgage rates, supply of housing and the state of the economy,” say Puri and Farka.
The Orange County Business Expectations Survey (OCBX), which the Woods Center for Economic Analysis and Forecasting conducts each quarter, shows a level of 95.3, compared to 71.6 in the previous quarter. This is a remarkable turnaround in sentiment. Indeed, such optimism is comparable to pre-pandemic sentiment and is a strong signal of positive growth ahead – or a booming economy – ahead.