SCAG Economic Roundtable Update

SCAG’s Economic Roundtable met for its third 2024 quarterly discussion on the state of the regional economy.  Supporting data are available from SCAG’s Economic Trends Tool.  

The following overarching themes emerged from the conversation: 

• The region is gaining jobs, but net job gains are driven entirely by increases in healthcare and public sector employment while tech, film, and television have lagged.   
• Southern California’s economic growth has been more sluggish than U.S. gross domestic product (GDP) growth over the last year, due in part to slower population growth. However, California still has the nation’s fourth-highest per-capita GDP, and long-term productivity growth better measures economic well-being. 
• The region’s economy is still experiencing reverberating effects from COVID-19, including persistent inflation, high nominal interest rates, and lasting behavior changes, such as work from home. These effects have begun compounding for small businesses as they struggle to pay rent, make payroll, pay higher insurance premiums, and borrow.   
• Lower-wage workers, who largely experienced real wage gains following the pandemic, have been negatively impacted by higher credit card interest payments, and households without savings cannot benefit from high interest rates.  
• Warehousing and distribution growth is currently stronger outside of Southern California, where marginal growth can receive greater returns. The region’s ports are outperforming the rest of the West Coast, trade links with Asia will persist, and the alternative shipping route through the Panama Canal is less attractive in the long run due to climate change and geopolitics. 
• Monitoring national economic indicators over the coming quarter will help determine whether the regional economy’s modest expansion continues or lapses.  

Economic Outlook  

• Year-over-year inflation for all items in the region is down to a relatively normal 3.2 percent; the national indicator has fallen even further to 2.5 percent, suggesting that the “soft landing” scenario is still the most likely outcome for the regional and national economies in 2024 
• National GDP growth in the second quarter exceeded expectations (2.8 percent, annualized) and is due to rising inventory as the backlog cleared for oil, consumer products, and especially vehicles.  Whether this will hold true through the rest of the year remains to be seen.  
• Southern California’s slow labor force growth and relatively high unemployment compare poorly to other parts of the United States. However, there is significant variation by county: Riverside and San Bernardino Counties have exceeded pre-pandemic peak employment levels, while Orange County’s unemployment remains relatively low.  
• Regional housing production in the first half of the year has dipped below the levels seen in 2021-2023, consistent with the state and nation. However, the development pipeline and construction job growth are still strong as legacy projects are coming to fruition in much of Southern California, including hospitals, rail, logistics, and housing. 

Jobs and the Labor Market 

• Year-over-year regionwide job growth is positive but does not necessarily indicate economic strength as all of the gain is in public sector employment or healthcare jobs, where gains are likely in lower paying occupations.  
• The increase in public sector employment reflects education and local government. Gains in education are counterintuitive as K-12 and community college enrollments have declined and are projected to drop further due to current demographic trends.  State grants for hiring educational specialists and expansion of transitional kindergarten for the state’s four-year-olds may be partial explanations for the gains in this sector.  
• While the Federal Reserve’s interest rate policies have resulted in slightly higher unemployment rates nationally, the rise in Los Angeles County’s unadjusted rate from 5.1 percent to 5.9 percent in the past year stood out. June 2024 data brought an end to 17 straight months of decline in Information sector (year-over-year payroll) jobs, but the decline left the county with 43,800 fewer jobs in this sector—despite record capital investment in artificial intelligence.  
• Film and television jobs account for more than 90 percent of this drop in LA County, which was expected to gradually recover following last year’s strikes. Production has responded slowly thus far in 2024 begins to raise the question of whether the industry has changed structurally.   
• Southern California’s payroll employment growth has exceeded growth in the labor force for at least four years.  A recently reported increase in immigration may be the explanation, resulting in a larger labor force than officially reported.   
• Having just experienced Earth’s hottest days on record, the working conditions of new jobs merits review, in addition to wages. The region’s strong development pipeline has supported growth in (outdoor) construction jobs (see, e.g., the SCAG Job Quality Index). 

Logistics and Goods Movement 

• Declines in the warehousing, transportation, and wholesaling sector employment have recently reversed. 
• The recent tightening of a duty exemption by Customs and Border Protection on low-value e-commerce imports may impact demand for seaport and air cargo. Consumption through e-commerce retail and foodservice continues to increase. Retail inventories are modestly elevated, largely driven by the automative sector. 
• Freight shipments have been in recession for 18 of the past 19 months, while freight pricing, although having receded from pandemic peaks, remains above pre-COVID levels. The bankruptcy of Yellow Corporation, the shift towards clean technology, and the challenges facing independent operators highlight the evolving dynamics of the trucking industry. 
• Alternatives to West Coast ports have gained market share.  There has been an increase in trade volumes through Houston- and Mexico-based ports, indicating a growing trend of nearshoring.  
• Significant shifts in facility development have occurred across the U.S. Southwest. While initiatives such as the Barstow BNSF project aim to increase freight volumes in the Inland Empire, states like Arizona and Nevada are emerging as competitive alternatives for rail.  
• Despite the expansion of distribution and fulfillment capacity outside Southern California, the region continues to outperform other West Coast regions in Canada and the United States due to its strategic location, local consumption markets, and strong trade links with Asia. 

Small Business Check-Up  

Forty-one percent of the state’s workers are employed by a firm with fewer than 50 employees. Meanwhile, an April survey by the business networking platform Alignable found that 43 percent of small businesses nationwide were unable to pay rent in full and on time—the highest percentage in three years.  

• Roundtable members indicated that an increasing share of small businesses are having chronic balance sheet problems. Worse, the sub-$100,000 loans needed by these firms are becoming especially difficult to get: 
  • While large banks are still making large deals, smaller deals are costly to administer. Meanwhile, small enterprises without the benefit of large-scale financial analytics are more likely to balk at 8 percent interest rates, even though this level is in line with the average level over the last several decades when adjusted for inflation. 
  • Many small businesses that took on more debt when interest rates were low are now hitting a renewal cycle for their loans and will need to now pay higher rates.   
  • Small businesses relying on credit cards might be especially at risk due to high interest—the Philadelphia Federal Reserve reported that past due credit card bills are at their highest levels since 2012.  
• Starts of new food service businesses, especially restaurants, have dropped tremendously. Most of the exceptions to this trend are chains in an expansion phase (e.g., Chick-fil-A, Dutch Brothers Coffee). 
• For businesses that survived the pandemic, increases in insurance costs and the minimum wage have been poorly timed. Optimism to remain open has not been rewarded as at least some of the pandemic-induced shift in daytime population appears to be lasting. 
• One potential response, automation (e.g., ordering kiosks, robotic servers), is capital-intensive and more feasible for large chains. While the state fast-food minimum wage is aimed at chains, small businesses inside and outside the foodservice industry compete in the same labor market.   
• Based on the BEA’s GDP data for the United States, the share of consumer spending on goods (versus services) rose from 32 percent before the pandemic to 36 percent at its peak and has only dropped back to 34 percent. While a portion of the pandemic’s behavior changes have stuck so far, dining out is increasingly a “splurge” category.  

Insurance Industry Struggle Continues  

• Last quarter, the roundtable discussed how rising claims and litigation have led to increased insurance premiums and fewer carriers in the state. Consumer protection laws, which prevent insurers from increasing rates to match actual risk (especially environmental risks such as flood and wildfire), were considered hurdles that could be overcome.  
• While premiums have increased for nearly all homes, owners of multifamily housing—both landlords and condominium unit owners—face additional challenges.  
• Condominium homeowner associations must often lower coverage levels or increase the deductible for common structures, which often prevents buyers of individual units from getting a federally backed mortgage.  
• As condos are a much-needed entry point for homeownership and wealth building (see a recent Terner Center report) while also providing workforce housing in metro areas, policy fixes that support this property type have environmental and equity co-benefits. 
• The insurance industry is clearly in distress, as providing policies to homeowners suffered a $15.2 billion net underwriting loss last year, the highest in three decades.  Considering the importance of housing affordability and recognizing the collective interest in appropriately pricing climate risks, state and federal programs that carefully bear some of the cost of homeowners’ insurance could help to stabilize housing markets, improve equity, and facilitate responsible climate adaptation.  

 

The Economic Roundtable is a consortium of regional economic experts that meet to discuss and find consensus around the economic outlook, 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

• Mark Schniepp, California Economic Forecast  

Sustainability

• David Roland-Holst, Berkeley Economic Advising & Research andUniversity of California, Berkeley

Equity

• Beth Tamayose, University of California, Riverside 

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