Despite problems with the supply chain and inflation, the recovery from the brief COVID-19 recession of 2020 should continue. That’s according to the recent forecast given by Jim Doti, Chapman University president emeritus and economics professor, at the Musco Center for the Arts on the school’s Orange, California, campus.
Doti first joked about being kind of like Usain Bolt in winning the October 10 Chicago Marathon—for the 75 to 79 age group.
Then he noted that Chapman’s forecast from a year ago was once again the most accurate in the nation, with a spot-on prediction of 5.7 percent real gross domestic product (GDP) growth for 2021. An average of other forecasts came in at just 4.2 percent. Two other such forecasts came from Wells Fargo at 4.8 percent and UCLA at 3.6 percent.
Chapman’s expectation for 2022 is a little more modest at 4.4 percent, but that’s still “gangbusters,” according to Doti.
Of course, the main worry now is inflation. Chapman expects it to rise to 6.3 percent in the second quarter of 2022. What will the Federal Reserve Board do about it? Its weapon of choice is raising interest rates: It’s just a question of how much.
The Fed Funds Rate is expected to rise from 0.08 percent today (essentially 0 percent), to 1 percent by yearend 2022, with further increases anticipated to come in 2023. The increases won’t much perturb 2022 GDP growth because the aggressive COVID-19-era monetary growth, although halted, will still carry momentum.
However, by 2023, the chances of a recession hitting will be fairly high. Similar increases in interest rates caused the recessions of the early 1990s, the dot-com bust of 2000, and the deep sub-prime recession of 2007 to 2009.
Doti said the current post-COVID-19 inflation is similar to the post-World War II inflation of the late 1940s, both of which occurred during recoveries from significant dislocations. While he didn’t mention it during his presentation, even the death totals are similar by compairson: 800,000 from COVID-19 against a population of 330 million, or 0.24 percent, to 405,000 from the war against a 1941 population of 132 million, or 0.31 percent. However, the COVID-19 deaths were heavier among the elderly, whereas deaths from the war were heavier among young soldiers.
“Only a recession broke” the post-World War II inflation, according to Doti. The Federal Reserve also increased interest rates during that time.
“The Federal Reserve is meeting as we speak,” he said. “I wouldn’t be surprised if the tapering [of the stimulus] will happen sooner. Structural inflation is hard to beat. Generally, you can only beat it with a recession.”
Doti noted the pain inflation has brought to the wallets of consumers: Producer prices for all commodities in October were up by 23 percent. The price per gallon of gas was up by 61 percent from November 2020.
Sen. Elizabeth Warren (D-Mass.) charged that poultry prices were up by 20 percent because of a producers’ cartel. Doti said he knew something about it because he raises chickens at his home for eggs, joking that he wanted to “join the cartel.” From experience, he noted that chickens only do two things: lay eggs and eat chicken feed.
“Chicken feed prices are up even higher, 30 percent,” he said.
So much for chicken prices being fixed.
Then there are the several stimulus bills of 2020 and 2021, which totaled $10 trillion.
“The deficits the past two years are $6 trillion total,“ Doti said. ”We’ve never had anything like this. Our baseline budget projections: Deficits will drop from $3 trillion to $1 trillion. Still huge.”
And the pain for workers is real. Wages the past year have risen by 4.9 percent. But real wages—which factor inflation—have dropped by 1.9 percent.
California Forecast
For now at least, housing price increases in California will slow, but not go into reverse. Mortgage rates will rise from 3 percent to 3.9 percent. That, in turn, will drop housing sales by 6.2 percent, to a still-strong 412,000 units.In California, housing median home prices have shot up from $589,000 in the first quarter of 2020 to $816,000 in the third quarter of 2021. That’s a 39 percent increase.
By contrast, U.S. home prices rose by 32 percent in that same period, from $275,000 to $364,000.
Unemployment in California has bounced back to 17.4 million jobs. But that’s still 300,000 jobs below the peak of 17.7 million reached in the Fourth Quarter of 2019, before the start of the COVID-19 pandemic.
A positive sign is the increased volume of imports that are flowing through the state’s ports, despite the supply problems. They’re coming not only from China, but from Taiwan, Vietnam, India, South Korea, and Vietnam as well.
The two top U.S. and world ports are those in Los Angeles and Long Beach, California. Increases in imports for all U.S. ports were by 13 percent in 2021, with another 4.7 percent expected in 2022. The imports to all U.S. ports from Pacific Rim nations were almost $1 trillion in 2020.
There’s good news on California jobs growth, according to Doti, with a 4.2 percent increase in the past year compared to 3.5 percent for the United States as a whole. “The principal reason is what’s going on with COVID. We did worse during” the COVID-19 lockdowns of 2020, with jobs dropping by 9.2 percent compared to a U.S. drop of 6.6 percent. But the upswing now is stronger to make up for that.
The reason California lost more jobs was because of more stringent lockdowns. Doti cited the Oxford University Stringency Index, which measures 11 factors, such as mask mandates, school closings, and so forth. “As California has become less stringent, becoming more like the rest of the country,” its economy has recovered robustly, he said.
On California’s home shortage, Doti, as he has in the past, said there isn’t one. The reason prices are so high in the state is because incomes are so high. He pointed to the difference in home prices in Orange County, California, now with a median of $926,000, and Detroit, with a median home price of just $146,000.
The reason is that Orange County’s median income is $107,000, compared to Detroit’s $66,000.
He cited a new study by Chapman and the University of California–Irvine of the 81 largest counties in United States.
“If median family income increases by $10,000, housing price increases by $121,000, or 17 percent,“ Doti said. ”It’s a very elastic good.”
Orange County
“Orange County did worse than California during the brunt of the recession, because we have a larger proportion devoted to tourism, leisure, and hospitality,” Doti said.As an example, Disneyland, located in Orange County, was shut down early during the pandemic lockdowns. However, as the county continues to recover economically from the lockdowns, its growth is outpacing the state, according to Doti.
“But OC has come back stronger, and now is growing faster than California,” he said.
But he pointed out that Orange County is getting hit especially hard by state and local taxes. Net domestic migration—people moving to other areas of the state or the United States—was negative 2.4 percent for the county in 2020 alone.
It was negative 2.8 percent for Los Angeles and negative 1.5 percent for San Diego.
A significant worry is the major losses in the 25 to 44 age group, which is considered to be“the prime working age.” For the decade of 2010 to 2020, the number for that group dropped by 37 percent, while it increased for those aged 55 and older by 37 percent.
One potential reason for this is because those who bought their homes before about 2000 haven’t been affected by the runup in prices, except to enjoy more equity, whereas those who are younger simply can’t afford to live in Orange County and are leaving.
“Significant changes are happening in Orange County,” Doti said.
