SCAG Economic Roundtable Update

SCAG’s Economic Roundtable met for its quarterly discussion on the current state of the regional economy. The region’s employment situation, the logistics sector, and labor market conditions were the focus, and several overarching themes emerged from the conversation:

• The Economic Roundtable’s consensus is that the Southern California economy continues to exhibit resilience, with the region averting a recession in 2023.
• The region’s labor market remains strong, with unemployment hovering near historic lows at 5.1 percent (seasonally adjusted).
• Although the West Coast ports’ labor agreement with International Longshore and Warehouse Union (ILWU) dock workers has been ratified and the writer’s strike has been resolved, the continued labor dispute in the hospitality industry poses risks to the regional economy.
• While employment in the region’s tourism industry is not quite back to pre-pandemic levels, international passenger traffic at Los Angeles World Airports increased by 42 percent from January to July relative to last year. The region’s other airports have also observed a surge in passenger traffic.

Labor Market

• The SCAG region unemployment rate is 5.4 percent (5.1 percent seasonally adjusted). All six counties are enjoying low unemployment rates. The lowest is in Orange County at 3.9 percent (3.2 percent seasonally adjusted).
• The SCAG region added 140 thousand (seasonally adjusted) jobs in August relative to August 2022, representing a 2 percent year-over-year job growth.
• The region’s labor supply is 9.3 million (seasonally adjusted), about 2.3 percent below the pre-pandemic high in February 2020. In the Inland Empire counties, labor supply slightly exceeds the February 2020 pre-pandemic levels by 2.3 percent (seasonally adjusted).
• Though the Writer’s Guild of America (WGA) strike has been resolved, it and the Screen Actors Guild-American Federal of Radio and Television Artists (SAG-AFTRA) labor disputes are being felt severely in the region, especially in Los Angeles County. Particularly concerning are the ripple effects on the industry’s supply chain. Workers not covered by WGA and SAG-AFRA have been impacted and have withdrawn $44 million from retirement accounts. These disputes bring uncertainty to the industry, putting financing for the pipeline of projects at risk.
• The lagged recovery in the SCAG region’s tourism sector is attributed to reduced international travel due to COVID-related travel restrictions and reduced business and conference travel. Employment in the accommodations sector is 11 percent below the pre-pandemic high in February 2020 across the SCAG region, 14 percent below the pre-pandemic high in Los Angeles County, and 17 percent below pre-pandemic levels in the Inland Empire counties of Riverside and San Bernardino.
• Despite the slow recovery, the outlook for the region’s tourism sector is positive. Los Angeles World Airports reports that as of July 2023, international passenger traffic grew by 42 percent compared to last year; however, this growth rate may reflect a surge in tourism following the reversal of strict Chinese COVID restrictions and may not be sustained. Southern California is in an enviable position relative to the state and nation in international tourism; however, proposals for hotel worker wage ordinances pose a challenge to recovery in the Los Angeles County hospitality industry.

Logistics Sector

• In late August, the ILWU workers ratified the labor agreement with the West Coast ports (California to Washington State), resolving a years-long dispute at the regional ports.
• Inbound container traffic struggles to return even with the labor dispute resolved. September is usually a critical month for holiday imports. The forthcoming September container traffic data will indicate how well the ports are recovering and show consumer confidence. The Conference Board recently reported declining consumer confidence in the U.S.
• Port Hueneme cargo volumes remain high but slightly lower than last quarter due to fewer vehicle shipments.
• The region’s logistics sector enjoyed rapid growth during the pandemic as consumer share of spending on goods surged. In 2023, however, employment in this sector has leveled off as consumption, tempered by inflation, shifts from durable goods to services.
• While employment in the region’s logistics sector is expected to decline, it remains an essential component of the Inland Empire and SCAG region economies, making up nearly 12 percent of employment in the Inland Empire counties of Riverside and San Bernardino.

Housing

• Higher mortgage rates and meager inventory have slowed home sales throughout the region. Year-over-year home values have increased in all counties except Riverside County.
• New home construction is up in Orange and Los Angeles Counties as builders attempt to address low inventory. As new housing is delivered, home prices are expected to stabilize.
• Rents have cooled slightly in all SCAG region counties, but rents are still up year-over-year.

Macro Economy

• The economic outlook for the European Union is more pessimistic than the U.S., and for China, it is increasingly grim and compounded by severe leadership uncertainty. While this is not expected to impact the U.S. economy meaningfully, it may impact California and the SCAG region due to regional dependence on trade.
• The risk of regional banks collapsing has subsided for the time being, as the Federal Reserve has loosened some restrictions on deposits and blustered bank liquidity programs.
• Other countries around the globe are struggling economically, which creates uncertainty for the U.S. economy.
• Many of the concerns discussed during the last quarter’s Roundtable appear to have dissipated. We have managed to steer clear of a recession for the time being. Waves of layoffs that once troubled the tech sector have ebbed. However, we remain watchful of the persistently high office vacancy rates, which, fortunately, seem to be confined primarily to that sector.
• Roundtable members agree that even though wages are up, we are not caught in a wage-price spiral. In such cycles, higher wages lead to further inflation without improving affordability. Local ordinances regulating wages in specific occupations have been proposed to tackle high living costs for our residents. However, such measures could limit employers’ flexibility to adapt to changing market conditions and exacerbate inflation, especially in the regional housing market.
• Roundtable members emphasize that the lack of bipartisan cooperation in Congressional budget deliberations and within many state legislatures across the country poses significant economic risks to the U.S. However, a government shutdown is unlikely to pose a substantial risk to the regional economy because the region is home to few federal government operations likely to shut down. Moreover, advanced manufacturing, tourism, and technology strengthen the California economy.

SCAG’s Economic Roundtable is a consortium of regional economic experts that meets quarterly to update the region’s economic outlook and discuss challenges and opportunities facing the six counties that comprise SCAG.

Members are:

• Imperial County, Michael Bracken, Development Management Group, Inc. (DMG)
• Los Angeles County, Shannon Sedgwick, Los Angeles County Economic Development Corporation (LAEDC)
• Orange County, Wallace Walrod, Tech Coast Consulting Group (TCCG) and Orange County Business Council (OCBC)
• Riverside & San Bernardino Counties, Manfred Keil, Inland Empire Economic Partnership (IEEP) and Claremont McKenna College
• Ventura County and the SCAG Region, Mark Schniepp, California Economic Forecast (CEF)
• Equity, Karthick Ramakrishnan, University of California, Riverside (UCR) and California 100
• Sustainability, David Roland-Holst, Berkeley Economic Advising & Research (BEAR) and University of California, Berkeley
• Workforce Development, Shaun Fernando, Guidehouse Consulting