An Economic Downturn without Modern Precedent by Manfred W. Keil1 The title for this State of the Region report is a quote from the Chairman of the Federal Reserve, Jerome Powell. His statement reflects the catastrophic unemployment rate numbers for April 2020, which were 14.7% for the nation, 15.5% for the state, and 14.6% for the Inland Empire (San Bernardino County and Riverside County, or the Riverside-San Bernardino-Ontario Metropolitan Statistical Area (MSA)). The worst affected MSA in California was the Los Angeles-Long Beach- Glendale Metro Division which shows a seasonally adjusted unemployment rate of 19.6% and is even higher, 20.3% before seasonal adjustment. While numbers for March 2020 were already elevated, they did not show the full impact of the crisis since they were based on household interviews taken before the March 19 lockdown. The employment losses from February to April were 16.0% for the U.S., 16.4% for California and 10.3% for the region. Note how much better, well, relatively speaking, the Inland Empire performed. By comparison, Los Angeles County lost 14% of its workers. Had it not been for an extraordinarily small change in the Inland Empire Labor Force (there were substantially fewer “discouraged workers” or individuals who dropped out of the labor force because they saw too small a chance of finding a job), the unemployment rate for the Inland Empire could have been as “low” as 10%. What is the good news here? Well there are signs that we are pulling out of this economic tailspin. While 2.1 million more workers filed for initial unemployment insurance claims, the number of continuing claims, meaning people who had filed previously and still require unemployment benefits, has started to decrease. We expect further improvements soon as the Health and Education sector will spring back to life. Many hospitals and doctors have focused on Corona Virus patients and have discouraged patients from seeking medical help unless there are emergencies. Dental practices were especially affected. This sector, which had been one of the major engines in the previous economic expansion, will spring back to life in the near future. Also, and as the unemployment numbers above indicate, we in the Inland Empire have fared relatively well. Think of employment: both for the United States and California, all jobs that were created during the 10½ year expansion have been eliminated over a short two months-period. The Inland Empire is “only” back to employment levels seen in 2015; and if you were working in Los Angeles County, then employment levels there have not just returned to 2009 levels, or even numbers you saw at the end of the previous recession in 2001. Instead, Los Angeles County is currently experiencing employment levels last seen in 1996. This is clearly the result of a different industrial composition in LA County, namely a much larger share of employment that depends on

1 Chief Economist, Inland Empire Economic Partnership, Associate Director Lowe Institute of Political Economy, Professor of Economics, Robert Day School of Economics and Finance, Claremont McKenna College

2 the hardest hit sector of the economy: leisure and hospitality. Think of restaurants, hotels, movies, sports, and concerts (the Coachella Music Festival not withstanding). The crucial question for the next two to three months is not are we soon going to get back to February 2020 levels of employment, output, and consumption. The simple answer is “no.” We feel that you should not be fooled by the minority of forecasters who predict a fast economic recovery because the American economy was in such a good shape before the shut-down. Put simply, there will not be a “V” shaped business cycle, with a rapid decline and a subsequent rapid ascent. Instead, the crucial question will be on the extent to which consumers are willing to return. The survey results listed below by my colleague Cameron Shelton are particularly telling: it will take time for consumers to return to restaurants, hair salons, and even to feeling comfortable about children going back to school. Note that the California State University system has already cancelled all in person classes for its campuses. Stanford, the UC system, and smaller institutions such as The Claremont Colleges or the University of Redlands, have not made a final decision. Add to this concern the fact that not everyone who was there when you switched off the lights on March 19 will be there when you switch the lights back on (think of Hertz: businesses have gone under), and we forecast this business cycle to resemble a “Nike Swoosh,” meaning a sharp decline in economic activity followed by a long and slow recovery. We predict that by November, when we will go to the polls for the Presidential Election, unemployment rates will still be in the double digits, and that we will not recover lost output until the end of 2021. Figure 1 shows the unemployment rate for the 10 most populous MSAs in California. Figure 1: Unemployment Rate, 10 Largest MSAs, California, April 2020

San Jose-Sunnyvale-Santa Clara MSA 12.0% San Francisco-Redwood City-South San Francisco MD 12.1% Anaheim-Santa Ana-Irvine MD 13.8% Oxnard-Thousand Oaks-Ventura MSA 14.0% Sacramento--Roseville--Arden-Arcade MSA 14.2% Riverside-San Bernardino-Ontario MSA 14.4% San Diego-Carlsbad MSA 15.0% Fresno MSA 16.7% Bakersfield MSA 18.6% Los Angeles-Long Beach-Glendale MD 20.3%

0.0% 10.0% 20.0% 30.0% Note: Source is EDD. The Inland Empire did relatively well when compared to Los Angeles County, which is unusual at the trough of economic recessions. As mentioned above, the Inland Empire, relatively speaking, held up relatively well in this downturn. Figure 2 shows the industries with the largest gains in employment going back to the start of the previous expansion (yellow bar) and the subsequent loss in employment from February to April

3 2020 (difference between the yellow bar and the red bar). Note the large losses in Leisure and Hospitality, where all previously created jobs have disappeared within a two-month period. However, Logistics (Warehouse, Transportation, Wholesale Trade) has held up remarkably well, despite the continued supply-side constraints from China earlier in the year, which has now been replaced with fewer imports coming in as the result of the demand decline generated by the downturn. Obviously increased domestic shipping to consumers has made up for much of the losses from imports and reduced shipments to most businesses. Education and Health Services have not suffered as much in the Inland Empire as in the nation and the state.

Figure 2: Sectoral Changes in Jobs, Inland Empire, Gains from Previous Sectoral Trough until February 2020, Remaining Gains after April 2020

200000

150000

100000

50000

0

-50000

Logistics Construction Retail trade Information Government Manufacturing Other services Financial activities Leisure and hospitality

EducationNumber and health servicesof Jobs gained as of Feb 2020 Number of Jobs gained as of April 2020 Professional and business services Note: Source EDD. The Logistics sector in the Inland Empire has held up remarkably well, and losses in Health and Education have been less than elsewhere in the country and state. We would like to briefly mention other indicators of economic well-being, such as the real GDP growth rate, inflation, and some external measure of performance such as the trade balance or an exchange rate. Both the inflation rate and the real GDP growth rate paint a similarly bleak picture, but are only available at the national level for recent data. As for inflation, we are in a deflationary period, meaning the average price level is falling, reflecting the extremely weak demand conditions of the shutdown. Even if we take out the food and energy component (gasoline), prices fell by 0.4% in April. Such a decline is unprecedented since the mid 1950s. Output (real GDP) fell by 5% during the first quarter. This is even more worrisome than the number indicates because the stay-at-home order did not occur until the last two weeks of March. Assume that the U.S. economy grew at 2% for 10 weeks during the first quarter (as it did for the last three

4 months of 2019), and then declined for an overall decrease of 5%. Simple mathematics will tell you that the U.S. economy collapsed at a rate of 40% during the last two weeks of March. While the numbers for the second quarter will not be available until the end of July, you should expect to see a huge negative growth number since restrictions for most states were not significantly relaxed until the end of May. The Federal Reserve in Atlanta publishes a so-called GDPNOW report, which estimates the decline in real GDP to be in the range of -12% to -40% for the second quarter of 2020. State and regional output numbers will not be available for some time. For the Inland Empire and other MSAs, official GDP figures showing the decline in output for 2020 will not be released until December 2021 (this is not a typo) and even then, it will only be available for the year as a whole. We have a research group at the Lowe Institute that is generating real GDP numbers for the Inland Empire at a quarterly frequency and will report on our findings in the near future. This short summary of our presentation is not meant to replace our usual detailed reports on the regional economy. The current economic situation is sufficiently volatile to require more frequent updates to reflect the month-to-month changes. It is therefore more important to have shorter updates and more frequent presentations as we had on May 28. Nevertheless, we want to leave you with some central figures to take away.

All the slides from our presentation are available from the IEEP website. In the following sections, Robert Kleinhenz will report on the housing sector, Cameron Shelton will talk about the Lowe Institute’s survey on consumer’s attitude, Barbara Sirotnik will say a few words about the upcoming IEEP survey, and Johannes Moenius will contribute a short analysis on the likely effects of technology on job creation during the recovery.

5 Housing Outlook: It’s Different this Time by Robert Kleinhenz2

Early in 2020, the Inland Empire housing market held the potential to make substantial gains over 2019. The economy was expanding, the unemployment rate was at a record low, and interest rates were favorable. Indeed, the market saw solid year-over-year sales gains in January and February, followed by the usual monthly bounce in March (+22%) that occurs as the housing market ramps up to peak season. But sales slid 25% from March to April as the pandemic shutdown took hold. The number of pending sales and new listings also fell sharply. Because the region’s inventory of homes for sale remains lean, home prices held up better than sales. Still, the median price fell from $399,000 in March to $390,000 in April.

Figure 3: Median Price and Sales, Inland Empire, Monthly Data, Seasonally Unadjusted

Note: Different from previous years, the April 2020 numbers saw a significant decline in sales. Median prices held up, although they declined slightly.

2 Kleinhenz Economics, California State University Long Beach, Inland Empire Economic Center.

6 Meanwhile, average rents held up in early 2020 in part because of the region’s low vacancy rate. As for new construction, building permits rose steadily in the first three months of the year decreasing in April. Through the first four months of 2020, residential building permits were six percent lower compared to the same period a year ago. As the region works through the current situation, the Congressional aid package to households and businesses, forbearance from lenders, and other measures will cushion the blow of the pandemic shutdown for households in the immediate term. As the economic recovery gets underway during the second half of 2020, the financial situation of many households will stabilize. Households were already in much better shape prior to the pandemic shutdown than they were in the period leading up to the Great Recession and financial crisis of the 2000s. The national household savings rate was considerably higher, the debt service-to-income ratio was much lower (under 10% of disposable income) than it was in the mid-2000s. Furthermore, those who bought homes in recent years have significantly better credit profiles, having to qualify for home loans under much stricter standards than those in place before the financial crisis. With all this in mind, the housing market in the Inland Empire is different this time. Measures of distress will undoubtedly increase in the coming quarters, but the region will avoid the spike in foreclosures and plunge in home prices that caused so much pain during the previous downturn.

Workers and Consumers Say: mMore Safety Measures Needed, Especially for Schools by Cameron Shelton3

One of the important determinants of how quickly economic activity resumes once permitted is the degree to which workers feel it is safe to return to work and consumers feel it is safe to make purchases. The Lowe Institute of Political Economy at Claremont McKenna College conducted a survey to measure these household attitudes. Our survey covered 500 individuals from the Inland Empire. The composition of these 500 was representative of our region’s demographics along four dimensions: gender, ethnicity, age, and income and represents a good mix of occupations from cashiers to CEOs. In most industries, large minorities of workers feel their workplace is safe only because adjustments have been made to standard work practice. However, large minorities also believe that more remains to be done. For instance, in the transportation and logistics sector, roughly 50% believe their jobs are safe because of changes while another 25% believe more changes are

3 Director, Lowe Institute of Political Economy, McMahon Family Associate Professor of Political Economy and George R. Roberts Fellow, Robert Day School of Economics and Finance, Claremont McKenna College

7 required. In several industries—particularly retail and entertainment—a significant fraction of the workforce believes it is not possible to make their workplace safe. As we look through the various occupations, we see that there is a great deal of variation. Almost 50% of retail sector workers believe their workplace is not yet safe whereas only 10% in finance feel the same. Taken together, these results are one indicator suggesting recovery will progress unevenly as some sectors have a greater hurdle to clear to convince their own workforce, let alone customers.

Figure 4: Worker’s Attitude Regarding Work Safety

Do you presently believe it will be safe for you to continue to work / go back to work?

Retail Education Healthcare Transportation, warehousing, and logistics Food Preparation and Serving Arts, Design, Entertainment, Sports, Media, Recreation Manufacturing Construction Finance

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Yes, no changes were necessary. Yes, because my employer has made necessary changes Not yet, but yes if my employer makes certain changes No, and it’s not possible to change my job such that it would currently be safe

Note: Source: Lowe Institute Survey. There is large variation across industries regarding work safety, depending on instituted changes at work.

When acting as consumers, large majorities say they find social distancing and sanitizing would be sufficient to make them feel safe engaging in essential retail such as grocery shopping. But these majorities are nowhere near unanimity. A surprising 10% still feel the grocery store is unsafe. Perhaps more worryingly, 20% feel the doctor’s office is unsafe. We also find that small retail and personal care, likely because of the more intimate contact, face more skepticism and will thus have a harder time enticing customers in the beginning of the recovery. Small business may face a longer period of difficulty upon reopening as some of their customers will shift to larger stores out of safety concerns.

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Figure 5: Consumer’s Attitude towards Essential Retail

Attitudes Towards: Essential Retail

Go to the grocery store (e.g. Vons, Target, Stater… Go to small retail (e.g. small stores on Main Street) Go to big box retail (e.g. Home Depot, CostCo, Walmart) See someone for personal care (e.g. haircut, nails,… Have a service person into your home (e.g. cleaner,… Go to the doctor for an appointment about an… Go to the doctor for a non-immediate health issue (e.g.…

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Yes, as normal Yes, with social distancing and sanitizing Not even with social distancing and sanitizing Not applicable

Note: Source: Lowe Institute Survey. Less variation in consumer’s attitude, but still significant differences across different retail outlets. On the other hand, only 30% of the public would feel safe at places with large crowds such as theme parks, casinos, concerts, and sporting events, even with social distancing. Movie theaters are at 40%. Restaurants around 50%. This signifies a significant erosion of demand. Upon reopening, businesses will need to earn public trust. Increased familiarity may do some of that work, but dedicated efforts may be needed. Figure 6: Consumer’s Attitude towards Elective Retail

Attitudes Towards: Elective Retail

Go out to eat at a restaurant Go to a movie theater Go to a showroom (car, furniture, etc) Stay at a hotel/resort Attend a sporting event (e.g. Football, Baseball, Nascar) Go to a concert Go to a Casino Go to a theme park (e.g. Disneyland) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Yes, as normal Yes, with social distancing and sanitizing Not even with social distancing and sanitizing Not applicable

Note: Source: Lowe Institute Survey. Locations with large crowds are considered less safe.

9 Finally, only half of those respondents who had school-age children believed it was safe to send them back to school, even if social distancing and sanitizing were implemented. Previously we saw that 90% of educators are optimistic that their environment can be made safe but fewer than 40% believe the necessary changes have been made. In addition to their positive effects on children, schools are a prerequisite for parents to fully rejoin the workforce. They will face a challenge both in innovating solutions and in convincing teachers and parents of their efficacy.

Figure 7: Consumer’s Attitude towards Transportation and School

Attitudes Towards: Transportation and School

Send your kids to school [if you have kids]

Take a taxi or ridesharing service

Ride the bus or train

Fly on an airplane

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Yes, as normal Yes, with social distancing and sanitizing Not even with social distancing and sanitizing Not applicable

Note: Source: Lowe Institute Survey. Surprisingly number of parents who do not feel that schools are sufficiently safe.

10 Knowledge is Power – So we need data by Barbara Sirotnik4 At a time of crisis, it is important to have current up-to-date information at hand for decision making. That’s why industry surveys are currently being conducted by cities, counties, and organizations such as the IEEP to provide insights that can be used to drive policy decisions at the Federal, State, and local levels. These, in turn, can support our region’s business community throughout the course of this crisis. Many of the data sources currently available to decision-makers are somewhat dated, and/or do not adequately reflect current conditions. To fill this gap, IEEC researchers have been conducting online surveys of businesses and residents. One such survey of Inland Empire organizations was conducted between March 23, 2020, and March 30, 2020, and some of the findings of that survey were quite concerning. Small businesses estimated that they could only survive the stay-at-home order for an average (median) of 4 weeks, and 71% expected to incur a loss of revenue. But now businesses are reopening, and it’s time for another survey. In order to support businesses, we need to provide City and County leaders with information about how prepared businesses are to reopen, whether businesses have the committed and trained staff ready to return to work, whether businesses have the money they need to operate with limited hours and social distancing requirements, etc.

Please help us promote the survey! Just ask businesses to access the following link for our short (7 to10 minutes) survey. https://bit.ly/2WZNjZt

ALSO, a new residential survey will be coming soon. It will address many of the same issues as those in Dr. Shelton’s quarterly survey, however we hope that the sample size will be large enough to enable us to look at potential differences in resident opinions and behavior by age, ethnicity, or geographical area. Stay tuned!

4 Director, Institute of Applied Research, Professor, Information Decision Sciences

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The Effects of Behavioral Changes and Automation After Covid-19 in the Inland Empire by Johannes Moenius5 In the first two decades of the 21st century, about as many new epidemic threats have been discovered as in the entire 20th century. With medical solutions, such as vaccines, normally taking several years to develop, companies face risks of supply chain disruptions and behavioral changes from consumers that affect their revenue. In the context of Covid-19, estimates point towards a higher than 50% increase in online sales, a sustained trend to work from home, avoidance of so- called high-touch industries and reduced large event participation. While it is yet unknown how many and to what degree these changes will be permanent, survey results indicate that substantial parts will be. As viruses affect humans, process automation reduces the risk of supply chain disruptions due to epidemics. To further reduce these risks , companies consider repatriating production, which can only be done cost–effectively with the help of automation. Specifically so-called essential industries are prone to such considerations. In addition, some consumers are expected to avoid contact-intensive services, such as personal care, shopping, and restaurants. A wide definition of these “high-touch” industries counts for about 46% of pre-covid-19 employment in these industries. 57% of jobs in high-touch industries can technically be automated, while in essential industries, 67% of employment are susceptible to automation. Note that there is some overlap between essential and high-touch industries. As noted above, inland metropolitan areas, and specifically the Inland Empire, saw lower employment declines relative to coastal metropolitan areas. What are the long-term employment implications for jobs? Inland Areas generally exhibit higher shares of jobs that are susceptible to automation. As a consequence, we expect initial rehiring to be stronger in coastal areas and dampened long-term by automation in inland areas. Simultaneously, repatriation of industries and a spurt of innovation initiated and fueled by the need to adjust to the new economic environment post covid-19 offer new job opportunities. As many Inland Empire workers will not be able to return to their old jobs but instead will see openings for entirely new jobs with different qualification requirements, it will be necessary to evaluate retraining opportunities immediately so that workers who will no longer be employed in their old occupations can be successfully guided towards new occupations.

5 Director, Institute for Spatial Economic Analysis, University of Redlands, Professor at the School of Business, The William R. and S. Sue Johnson Endowed Chair of Spatial Economic Analysis and Regional Planning, Inland Empire Economic Center

12 Figure 8: Employment, Essential versus High-Touch Industries

Note: There are significant differences between automable jobs in essential and high-touch industries.

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14 For more information visit IEEP.com