SCAG Economic Roundtable Update

SCAG’s Economic Roundtable met for its second 2024 quarterly discussion on the state of the regional economy. In addition to discussing employment, the labor market and the macro-economy, economists discussed the causes and implications of challenges in the California insurance market and the outlook for the region’s logistics industry. The following overarching themes emerged from the conversation:

• The region no longer appears to be losing population but should anticipate slower labor force growth in the future. Focusing on both housing and high-productivity sectors can help grow the economy despite the slower labor force growth.
• The logistics industry is stable, and office demand continues to drop, but both carry some long-term risks due to evolving geopolitics and workplace habits. Consumer spending is relatively soft, with some households still cutting back on discretionary expenses due to inflation that remains above the Fed’s conventional target.
• Continued residential, commercial and industrial development across almost all of the region is a reason to be optimistic about the Southern California economy in 2024 and 2025.

Jobs and the Labor Market

• According to data released April 30 from the state Department of Finance, the state’s population increased modestly in 2023 after three years of decline. Mortality fell after the pandemic ended, and the pandemic-related drop in immigration and spike in out-migration have both reverted to levels more consistent with prior decades.
• Nonetheless, the region’s labor force has been growing slowly if at all—for example, Ventura County’s population is at its lowest level since 2010. Since total job growth is dependent on population growth (or the ability to attract in-commuters), policymakers can also look to growth in key, tradeable economic sectors or measures of worker productivity (e.g., GDP per capita) for a fuller picture of regional economic growth.
• Economic data has recently shown some anomalies. The California Employment Development Department revises its annual data every March—what was thought to have been a 1-3 percent job increase in much of the region from 2022-2023 was actually a 0-1 percent increase. The drop resulting from this revision was especially pronounced in Los Angeles County.
• Some economists believed that the tight labor market is responsible for some oddities in job data—for example, better wages and more employer-provided benefits could cause workers to shift from self-employment or gig work to wage labor (i.e., filing a W-2). These shifts can affect data sources differently.
• While unemployment in most places is slightly above 2022 lows, new development across the region is expected to generate labor demand. Major investments in healthcare facilities in Orange County could potentially make the county a destination for specialized healthcare. Entitlements have begun for 11 lithium extraction projects in Imperial County. The Imperial County Board of Supervisors approved the first project, Hell’s Kitchen, from Australia-based Controlled Thermal Resources, in February. Region-wide new housing production has not softened in part due to mega-projects in places like Costa Mesa and the Antelope Valley.
• Jobs in Los Angeles County’s Motion Picture and Sound Recording sector remain low several months after the resolution of last year’s writers’ and actors’ strikes. The industry’s value chain integrates many steps, and the slow recovery of the sector may signal a structural shift. Blockages in post-production are a unique concern, as this work is increasingly done outside of Southern California.

California Insurance Market

• Financial institutions, commercial property owners (especially multi-family housing), and homeowners are reporting greater difficulties in obtaining property and liability insurance. Building industry experts have expressed concern that rate increases could delay projects when compounded by other headwinds like high interest rates and labor cost.
• Increases in claims as well as litigation have forced insurers to increase rates, leave the marketplace or exclude some geographical areas from coverage. If the state is able to expedite and approve rate increases commensurate with the cost of insuring property, this market distortion could be remedied.
• Wildfire, flood and other environmental risks are a huge factor for insurance cost and availability—in the specific areas subject to such risks. Environmental risks might be more pronounced at a regional level elsewhere, e.g., in Gulf states where a high proportion of homes are at risk from hurricanes and flooding.
• While tenant and homeowner property insurance rates have risen sharply in the past year, they represent a fairly small share of the household budget and rates in California remain lower than most other states on the whole.
• Recent inflation in the cost of labor and building materials also results in higher insurance premiums, indicating how inflation can beget more inflation—sometimes with a time lag.

Logistics Industry

• Marked in part by tensions with China, the phenomenon of “nearshoring” trade with Mexico is expected to continue and to have impacts on the region’s logistics industry in the five- to 10-year timeframe.
• According to Census trade data, Mexico was the United States’ top trading partner in February, with two-way trade increasing 11 percent year-over-year. According to Mexico’s Ministry of the Economy, Mexico received $31 billion of investment commitments between January and mid-March 2024, compared to $36 billion during all of 2023. The majority of these investments originated in the United States and is directed to the manufacturing sector. As such, Mexico should be considered a first-tier trading partner for Southern California.
• Favorable exchange rates have sustained a strong domestic demand for goods despite inflation, but so has the Chinese government’s extensive subsidizing of manufacturing exports with low-cost credit and revenue from other sectors of its economy. These factors have both increased the trade deficit—as evidenced by the 25 percent year-over-year container traffic increase at the San Pedro Bay ports and a high inventory-to-sales ratio of 1.32.
• Southern California’s logistics industry is especially price-sensitive and can be impacted by national or global changes. For example, in 2023 concerns over labor disputes led to the diversion of some discretionary cargo (cargo not bound for Southern California) to East Coast ports. Increased Chinese foreign direct investment in Mexico could have the potential to poach Southern California port traffic to Mexican ports or land borders.
• The Inland Empire’s soft logistics job growth in 2023 appears to have been a result of overshoot—capacity was rapidly expanded when e-commerce increased during the pandemic; however, demand has since shifted back toward consumption of services.
• Despite the potential dual threat of nearshoring and automation to the logistics industry in Riverside and San Bernardino counties, employment there is currently at 119 percent of its pre-COVID level.
• While separate data updates are unavailable for Riverside and San Bernardino counties, their industry strengths appear to be gradually diverging, with the highest shares in Riverside County belonging to Leisure & Hospitality and Construction, and the highest shares in San Bernardino County belonging to Transportation & Warehousing and Wholesale Trade.

Southern California Economy

• The compounded effect of inflation in recent years appears to have softened consumer demand overall, as some households appear to have cut back on discretionary expenses. This decline in discretionary expenses is apparent in hotel occupancy rates, which have been declining for most of 2024 and in some special events. Coachella didn’t even sell out this year! While the Southern California economy is generally diversified, some subregions are heavily leisure- and tourism-dependent.
• The Bureau of Labor Statistics’ national GDP estimates, released on April 25, also showed lower annualized first quarter growth than most expectations, which is consistent with soft demand.
• While the roundtable does not generally believe the state’s budget deficit would substantially dampen the state’s generally positive economic growth, investments in renewable energy today may impose tradeoffs today—however, the long-term benefits should be substantial.
• Past roundtable meetings have emphasized the importance of community colleges for workforce skill development in the region. Last year, Governor Newsom signed Executive Order N-11-23 which detailed several state efforts to strengthen career pathways. Along with the VISION 2030 roadmap for community colleges in the state, the intent is to provide a way for high school students to acquire at least 12 college credits by graduation.
• A report by tenant representative Hughes Marino indicates that when sub-leases are included, office vacancies are startlingly high—33 percent in the San Francisco office market, 22 percent in the Los Angeles market and 19 percent in Orange County. This can be explained by both lower overall office demand from hybrid work, but in part the relative inflexibility of downtown office spaces.
• As the roundtable has reported in prior quarters, housing inventory and sales volumes remain uniquely low in all portions of the SCAG region, with chronic affordability challenges being exacerbated by high interest rates.
• While Artificial Intelligence has emerged as an economic growth opportunity, as with any technological change, skilled labor often complements new technology, but unskilled labor (even if it is not manual labor) is often substituted or displaced by new technology. Skill development and especially adult education will be essential to maintain worker productivity in parallel with technological change.

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

Members of the Roundtable are selected for three-year terms and have expertise in the economics of SCAG’s six counties, workforce development, equity, and sustainability.

Members are:

• Imperial County, Michael Bracken, Development Management Group, Inc.
• Los Angeles County, Shannon Sedgwick, Los Angeles County Economic Development Corporation
• Orange County, Wallace Walrod, Tech Coast Consulting Group and Orange County Business Council
• Riverside and San Bernardino Counties: Manfred Keil, Inland Empire Economic Partnership and Claremont McKenna College and Robert Kleinhenz, IEEP and Kleinhenz Economics
• Ventura County and the SCAG Region, Mark Schniepp, California Economic Forecast Equity and Karthick Ramakrishnan, University of California, Riverside and California 100
• Sustainability, David Roland-Holst, Berkeley Economic Advising & Research and University of California, Berkeley

For more information and for previous Economic Roundtable Reports, visit the SCAG website.