RECOVERY LIKELY TO BE A MIXED BAG
Outlook: Some state economic sectors will come roaring back, but costs could be steep
The pandemic shackles on California’s economy will have officially lasted 452 days — from a full lockdown starting in March 2020 to an all-but-reopened business world after Tuesday.
The economic toll of strict mandates to slow the spread of COVID-19 was high, and for years to come there will be debates over the government’s pandemic policies.
California is down 1.4 million workers since we learned the word “coronavirus.” The state’s economy is huge and recovering, but April’s job counts are only 92% of February 2020’s pre-pandemic levels.
Only Hawaii, New York, Nevada, New Mexico, Massachusetts and Washington, D.C., are further behind.
Let’s not forget what the business limits were battling: A pandemic that killed nearly 63,000 Californians that, on a percapita basis, was below the national average and better than 30 states.
California this year has slowly allowed many businesses to return to some normalcy. Tuesday’s “official” grand reopening of commerce will serve as a major opportunity to reverse much of the economic pain.
Like any financial pivot, the impact will not be universal. It may be business as usual for niche businesses near their pre-pandemic pace, but several industries will be receiving a much-needed lifeline. For other businesses, reopening may herald surprising challenges.
Let’s look at California’s potential winners and losers as the throttle is taken off the economy:
WINNERS Unemployed’s choice
California has 676,000 more people “officially” unemployed than it did just before the coronavirus crushed the economy.
Fully reopening should mean the jobless have more options for work. UC Berkeley economics professor Jim Wilcox says job opportunities may blossom in manufacturing.
Businesses making goods in short supply will be hiring, he says. One example is the limited inventory of computer chips that are as equally important to our vehicles as an engine.
“If you got a few chips missing, you can’t make that car,” Wilcox said.
More fun ahead
If any business will succeed in a reopened economy, it’s the leisure industries.
The lockdown and a widespread reluctance to travel hammered the state’s tourism businesses in the last 14 months.
Combined, California’s hotels, amusement attractions, recreation facilities and entertainment venues are down 303,000 jobs in the pandemic era. This “fun” industry is only at 62% of pre-virus staffing.
The reopening will motivate travel and trim attendance limits in what will be a big boost to employers.
“Hotels along the coast are achieving some of the best revenues in May that they have ever seen, so fully opening is only going to add another match to that fire,” said Alan Reay at Atlas Hospitality.
As for full-service business hotels, he said, “It will take time, but you will now see future bookings start to spike up.”
Refilling offices
A return from the pandemic’s “work from home” to traditional workplaces will bring life back to many empty office spaces.
In San Francisco, 16.7% of offices were vacant in this year’s first quarter compared to 5.2% at the end of 2019, according to the JLL brokerage. In Los Angeles, it’s 17.5% vacancy now versus 13% pre-pandemic.
There’s plenty of conjecture about how many workers will return to old workspaces and it’s not just coming from the bosses.
A JLL survey of 3,000 workers found 33% of the workforce wants to end working from home, up from 28% in October 2020. A desire for remote work fell to 1.5 days a week versus 1.9 days in October.
Tuesday’s lifting of restrictions means many employers will quicken returns to the office, says Peter Belisle, JLL’s director for Southwest U.S. markets.
“Office landlords are seeing more tours with prospective tenants as well as less sublease space come on the market,” he said.
Dining indoors
The virus changed where we dined out. It became a fast-food, takeout world.
Just look at employment in the sector. “Limited-service” jobs at eateries statewide are at 90% of prepandemic staffing levels compared to 69% at fullservice restaurants and 60% at bars.
First-quarter sales at fast-food chains were down 4% in a year versus a drop of 10.5% at sitdown restaurants, a study by restaurant financier Trinity Capital says.
Sit-down restaurants competed by getting better at takeout meals and delivery. Reopened dining rooms will get more customers indoors. Serving more drinks and selling more side dishes and desserts will boost owners’ bottom lines.
“As dining rooms began to open in May some of the restaurant sales enjoyed by the (quick-serve) segment began a slow but steady migration to sitdown restaurants,” according to Trinity Capital’s study.
LOSERS Employers
The reopening may get employers thinking “be careful what you wish for.”
Where are the workers who’ll service this renewed rush of customers?
Labor shortages have forced some employers to scramble for staff, using incentives such as pay hikes to lure new hires. Recent unemployment trends may tell us more about why it’s so hard to hire.
Bosses’ employment costs in Southern California rose 4.8% in the year ended in March, the nation’s biggest jump according to a federal index. The region’s combined unemployment rate was 9.2% in April.
But in the Bay Area, costs rose just 2.1% with unemployment only at 5.6%
Wilcox isn’t buying the argument that expanded unemployment benefits are keeping workers from the job market, especially in hospitality and construction. Rather, he thinks “there are better jobs to be had, with higher pay, making the things.”
Home binge blunted
People shopping for a house or looking to refinance should get the pandemic’s cheap financing while it lasts.
Historically low rates fueled a buying binge that pushed California’s median sales price for an existing single-family home to a record $813,980 for April — up 40% from February 2020.
“Our expectation is for the market to remain strong but fall into a healthier, less feverish pace in the coming months.” said Ali Wolf, chief economist at Zonda.
Remote schooling and working from home nudged many households to seek larger living quarters, sometimes in distance communities. Will a return to the office dull this slice of demand?
Plus, the home price surge has created affordability concerns. Monthly house payments are up because rate drops aren’t equal to appreciation. And a nation’s worth of reopenings should create enough economic momentum to force up mortgage rates, further eroding the notion of affordability.
“If/when rates rise, the extent and swiftness is critically important,” Wolf said. “A gradual increase could favor housing, enticing those on the sidelines to jump in. A rapid and meaningful rise would quickly cool the market.”
Motorists
Gas prices are at a level not seen in seven years (save two weeks in 2019), but buying a vehicle might be even more painful to your wallet.
An average gallon of regular California gasoline was $4.08 last week, up $1.44, or 55%, from the pandemic low, according to federal energy statistics.
Drivers will see the reopening fill freeways and parking lots. All this travel put a key ingredient, crude oil, at its highest price since the fall of 2018. Growing supplies could stabilize pump prices — or even lower them a bit.
”From an inventory perspective, there is plenty of gas in the tank to support what people want to do,” said David Hackett of Stillwater Associates.
If you need wheels, finding new cars will be challenging thanks to those chip shortages. So used cars are a hot commodity.
California’s average used car cost 18.7% more in April than 12 months earlier, according to the iSeeCars buying service. Only 15 states had larger increases.
“Car prices will remain elevated for the rest of the year, meaning shoppers should hold off switching vehicles,” said Karl Brauer, executive analyst at iSeeCars.
Shoppers pay price
Remember early in the pandemic when merchants slashed prices?
Discounts have been on the wane for months, and the reopening should bring more customers to stores. Other business owners will likely boost prices to recoup the higher costs of stocking their stores.
Look at local inflation. In Los Angeles-Orange County, May’s inflation rate was 3.9%, the highest since October 2018. For the Bay Area, its most recent rate of 3.8% in April was the highest in two years. And it’s not just California. Nationally, May’s 5% inflation rate was the highest in 13 years.
A rebound from last year’s weakened, lockeddown economy is part of the story. But some price hikes will stick.
“We already have significant inflationary pressure but reopening the economy will exacerbate it,” said Jim Doti, a Chapman University economics professor.