Monterey Bay Economic Partnership, eighth annual economic outlook -- May 20, 2022
8:05PM May 25, 2022
Come to the eighth annual economic outlook brought to you by Monterey Bay economic partnership and our wonderful event sponsors. My name is Tarik Araya, and I am the president and CEO of Monterey Bay Economic Partnership, or what we call mbappe. For short. I'm very excited to join this annual tradition as this is my inaugural economic outlook. I joined mbappe as president and CEO in January, and feel very privileged to represent the diverse stakeholders in this region. Before we begin this morning, I do want to acknowledge the sacred lands that we occupy. And also that May is National, Asian American Pacific Islander and Native Hawaiian American month, Jewish American Heritage Month and mental health awareness month. As we come through the pandemic and are still going through the pandemic at some extent, I think we should be aware and cognizant of the toll that is taken on our youth and families and our communities, especially in the area of mental health. So please be kind to yourselves and those around you. I think it is important to remember the ancestors and the region we serve as we look to build healthy and thriving communities, and economies for all that live here. And for those of you who might be new to us this morning. mbappe is a regional member supported nonprofit organization consisting of public, private and civic entities located throughout the counties of Monterey, San Benito, and Santa Cruz, founded in 2015, our mission is to improve the economic health and quality of life in the region. And we do this through convenings research, education, and raising public awareness in four key areas housing, and basically housing for all across all income levels, broadband access to reduce the digital inequity in our region, economic and workforce development, and finally, policy advocacy in the Tri County region, while recognizing the vital intersection of these issues with climate and transportation, health, and cradle to career educational spaces. And BEPS. Work is centered on the triple bottom line of equity, environment and inclusive economics. I like you, I'm excited to hear Dr. Thornburg this morning, who is no stranger to the Monterey Bay region or to embed. I'm eager to hear his expertise on the regional economy. And a hot button issue that we live with in this Tri County region like economic and workforce development and housing will be impacted alongside the very real and salient issues of inflation, rising interest rates, supply chain issues, plus the war abroad. Not to mention the whiplash this target market gave us this week. But before Dr. Thornburg shares his forecast and Outlook, a few housekeeping items, I would like for you all to introduce yourself, I'm new and I'm eager to know you all. And I'm slowly but surely getting to know the folks in the Tri County region. Tell us who you are. Put your name in the chat, your organization or company you represent and what brings you here today. Secondly, we're going to begin some survey questions or do little mini pop surveys shortly to gather some information. So let's all take just a quick few seconds to pop in our name. And continue to do so throughout the time of our webinar here this morning. Feel free to introduce yourself, we'd love to know who's here. At this time, let's pop up our first question. I'm curious, how are you feeling about the economy today? What's top of mind? So let's pop up the first question. You'll see on your screen. It says how do you feel about the economy? And you have four traces? Please do take a moment to answer five traces here. Please take a moment and we will see our results and live in in a few short minutes. So please take a moment to do that. We'd love to hear what you feel as we center and ground ourselves before the conversation this morning.
All right. Are we ready for the next one? So everyone had a chance to answer this question. Huh, somewhat recovered. 48% of us feel it's recovered. And some of us feels very overheated. Interesting. Great. Thank you for participating. Next question. What do you consider the most pressing problem for your business right now?
What is the most pressing problem Boom for your business right now, a weak demand labor shortages, state and local taxes and regulatory conditions, supply chain problems other What do you think are the most pressing problems? All right, let's see what are the results? labor shortages, supply chain problems. Absolutely. Thank you. And last but not least, it's with the last question I have is what is your biggest challenge to local economic development? You think it's worker shortages, inequality, housing costs, state policy infrastructure needs? Or you can put a comment in the chat on other What do you think is the biggest challenge a local economic development?
All right, let's see what our answers. housing costs hands down how the housing cost 72%. Again, thanks, everyone. I was really fun to do and hear your thoughts as well. Before we get into our conversation. Now it is my pleasure to introduce to you our board chair at mbappe. Chancellor Cynthia Lurie. She's an absolutely amazing thought partner leader and a trailblazer both on and off the UC Santa Cruz campus. Chancellor Lori you've joined UC Santa Cruz in 2019. As the 11th Chancellor, she's an accomplished by analytical chemist. And Laurie, you've arrived to UC Santa Cruz from UC Riverside, where she was Provost and Executive Vice Chancellor. Her accomplishments are innumerable for authoring over 155 publications to personally mentoring over 30 doctoral and master's students. She has been active and engaged to make sure and ensure the success of women and other underrepresented groups in the STEM fields at Senator Cruz alone says Upon her arrival in 2019, she immediately prioritize improving graduation rates and eliminating the graduation gaps for low income and first generation students. And for students from groups traditionally underrepresented in higher education and the University have created a robust COVID-19 testing lab and has been involved in long list of research projects. And other accomplishments include issues that are very local to the West Coast like studying wildfires, coastal erosion and the genome of the Chinook salmon, which is very important because they are very local and regionally important to us. And when it comes to women leading in your universities, UC Santa Cruz is first in the nation for racial and gender diversity and leadership, as I mentioned is absolutely a trailblazer. She's a first generation college student earned her bachelor's degree of science from South Dakota State University and a master's from Purdue, both in chemistry. She earned her PhD in analytical chemistry from UC Riverside while raising her two daughters with husband chin. It is now my pleasure to have their program over to chancel Reeve who will introduce Dr. Thornburg.
Well, thank you Tara, and good morning everyone. I am so glad to be with you today as mbappe board chair and excited to collaborate with folks from throughout our region. Equitable economic development, high quality education and health care systems and protecting this special qualities of the greater Monterey Bay region are not mutually exclusive. I'm excited to work together with leaders, businesses and organizations from throughout our region to advance this vision and ensure our communities thrive. It's my great pleasure to introduce today's speaker Dr. Christopher Thornberg. Chris was a speaker at our regional economic summit in person pre COVID. And then he joined us virtually in 2020. To help us better understand what was happening economically in the region. Chris founded Beacon Economics in 2006. And this firm is one of the most respected research organizations in California, serving public and private sector clients across the US. In 2015. Dr. Thornburgh became the director of the Center for Economic Forecasting and development at the UC Riverside School of Business, and he serves as an adjunct professor at the School. Christopher also serves as chair of the California Chamber of Commerce Economic Advisory Council. He specializes in economic and revenue forecasting, regional economics, economic policy and labor and real estate markets. Dr. Thornburg holds a PhD in business Economics from the Anderson School at UCLA, and a BS in business administration from the State University of New York at Buffalo. Please warm join me in warmly welcoming Dr. Thornburg.
Thank you so much, Chancellor, I very much appreciate that. And good morning, everybody. It is great to be back with you. It's great to be back with Tara, as she of course kicks off when I'm sure it'd be a wonderful career here with M three. Wow. So it has been a couple of years, as noted, last time, I had an opportunity to talk to you was at the start of this whole thing. And of course, back then we were dealing with some distinct uncertainty, to say the very least. And if you remember, for those who might have been on that talk, I had a relatively optimistic view for how things were going to shake out. Now, I will tell you, I was watching those
survey questions with incredible interest. As in particular, I found the questions about where you think the economy is quite interesting, because the vast majority of you said that the economy has not recovered or is still in the process of recovering. A tiny share of you said the economy is actually overheating. Now, obviously, a big part of today's conversation is going to be distinctly about that question, where are we? And to be clear, for those of you who answered the majority, that we're still in the recovery, or in the midst or are not even close to recovered? To be clear, and still where you get that from? Basically, you read the news. And that really is, if you will, the story. This was a headline came out a couple of months ago from the New York Times, December of last year, but I I found it so profound, I hung on to it. Good morning, what do Americans say the economy is in rough shape? Because it is all right. But you know, I am a I'm a data guy. And you know, it's interesting, because in the last year and a half or so I read a book that was for me was absolutely profound. Because if you haven't seen my previous talks, you know how I have? Well, I have talked extensively about what I would call the gap between the public narrative and the actual data, the objective analysis of the data. And by the way, that gap, I termed it kind of semi humorous, late miserabilism, the philosophy of pessimism. Well, a year and a half ago, Robert Shiller wrote a book called Narrative economics. And I will tell you, as noted, it was incredibly profound for me, because what he did was pointed a finger at the economics community. Economics starts with the idea that people are largely rational, which is dangerous to say the least. And something we need to examine more carefully. But in that world of, shall we say, the rational human, the data, by definition drives the story. Ergo, if you're an economist is good with data, you can ignore the story. But in his book, Robert Shiller says that's preposterous. And he says it in a lot of different ways. And he makes a very compelling argument. But it really boils down to this, that stories have been with humanity far longer than data as and the idea that that we take data into account when we build our internal stories, is frankly, well, a ludicrous assumption, simple as that. And the history of business cycles is littered with situations by which the narrative and the reality have become substantially disjointed. And this becomes an incredibly important part of the economic story, this disjointedness. So in a sense, I'm going to start by talking about this gap, we hear what the New York Times has to say. But let's look at some data. So according to them, in December of last year, the economy was still in rough shape. What Not really, I mean, take a look at this. On the left hand side here. This is the two year growth in aggregate household net worth in the United States. And yes, it's up nearly 28% in two years. This is the greatest expansion of household net worth. The only time we've seen a great almost as large of expansion and net worth in such a short period of time, was in the run up to the Great Recession, which should probably worry everybody. Now it's easy to say, Well, that's all well and good, but if Jeff Bezos and his buddies will not really take a look at the middle. This is an estimate of the median of the net worth for the bottom 50% of households, obviously those who are in the lower income category, and there by the way, Net worth is up 90%. Now mind you income I'm sorry, wealth inequality has been growing dramatically. And so the wealth gap is still pretty profound even if the bottom half is saying a larger growth in the top half. But we're clearly moving in the right direction, which again, is probably a surprise to you who were saying that you thought the economy wasn't in recovery. We're gonna take a look at the far right hand side, this is the financial obligations ratio. And let me explain this is the percent of household income spent on current debt obligations, credit cards, mortgage rates, and no your eyes do not deceive you. We're not drowning in debt, quite the opposite. Coming into the pandemic, we have one of the lowest financial obligation ratios we've ever seen. debt markets were incredibly clean debt has been incredibly cheap, we've not seen a lot of debt expansion. And then as a result of that was not very, of course debt constrained at all, over the course of the pandemic, largely because a lot of folks were not refinancing incredibly low interest rates, this has now dropped to the lowest we've ever seen an Emir 14% This doesn't sound like it got him it just kind of be in rough shape. Well, how about workers? How are they doing? Well, yet again, let's take an objective look at the numbers. On the left hand side is unemployment and job openings in the United States through March. And yes, if you couldn't tell the job openings rate is substantially higher than the unemployment rate. The unemployment rate right now, of course, is that a 3.6%, the job openings rate is a little above 7%. The ratio of job openings to people looking for work right now in the US is roughly two to one, which in the last 25 years of collecting this data is the highest it's ever been. By the way, you can clearly see that in the data. On the right hand side. This is worker earnings growth. This is based on on basically paired observations from the current population survey so it reflects what your average worker is seeing. And yes, yet again, you're seeing about a 6% increase in earnings year over year the fastest pace since again, they started collecting this data 25 years ago. And indeed, it for those of you think that workers are suffering, let's keep something in mind quits, rates have never been higher. And workers who are worried about getting another job don't quit. So no, not really, workers have supply and supreme confidence in their ability to get another job, indeed, to the point where, of course, it's gotten so bad that potential employees who maybe have accepted a job offer may not show up on a Monday. Yes, ghosting from dating apps is now showing up in the job market. Thankfully, I'm beyond the dating world. But I am suffering a little bit of a job bargain situation like everybody else is. So Wow. I mean, to me, this doesn't look like an economy and recovery or economy suffering. This looks like the wealthiest generation ever and workers in the midst of one of the strongest labor markets ever. But mind you get again, let's go back to the narrative versus the reality. Because for all this good news, I just gave you take a look consumer confidence. It's absolutely plummeting. And on the right hand side, of course, the probability of recession, according to the Wall Street Journal, next recession survey over the course of the next year is rising pretty sharply. What is going on? I hope your neck is hurting right now. Because, of course of this crazy whiplash. Well, it all boils down to the story I told you a couple of years ago, having to do with the pandemic, specifically. And you can't. The pandemic has been absolutely tragic. A million people in the United States have lost their lives, millions and millions of families are suffering. And this is of course, just the United States across the world. We know places like China are still struggling through the pandemic.
Try tragic. There's no doubt about it a obviously a real wake up call for humanity. Yes, pandemics. Diseases are still an enormous problem and something we have to face and face, right. But with all that in mind, the key here, of course, is that this was a tragic, natural disaster. operative word natural disaster. Why is that the important word, because in a very real way, when you think about natural disasters, what you have to realize is as tragic as they are, they do not have long run economic consequences. This was nowhere near as dangerous for the US economy, as the collapse of the subprime bubble was a little over a decade ago. But of course, that wasn't the narrative. Remember, we spent an entire decade convincing ourselves that the US economy was falling apart, that that people a large portion of humanity in the United States was living ham and a mouth started on their feet. And we're one paycheck away from financial disaster and homelessness is Despite the fact that none of the data suggested anything like that, and none of this, of course, isn't to say that there aren't a portion of Americans suffering, there are, and there will continue to be, and there always have been. And as human beings, we have a duty, of course, to help those folks who need or need. But from an aggregate standpoint, the share population that was truly in need has been falling and falling pretty sharply over the course of the last decade. But again, that's not the story. And that story, the story where every single bump, every single twist in the road ahead of us turns into an existential crisis. Because that's exactly where we have gone, we have turned in, if you will, into the 13 year old economy, where everything is the end of the world that put policymakers into a position where they ended up injecting $11 trillion dollars of stimulus into our economy, 5 trillion in quantitative easing 6 trillion and direct fiscal stimulus. And to be clear, the foot still on the gas pedal? Yes, the Fed is turning the corner very, very slowly. But they haven't touched their balance sheet and that continues to grow. And as for the federal government, the fiscal deficit is still $1.6 trillion annually, which is, again, enormous ly stimulative. They're stimulating an economy that doesn't need stimulating. The net result of that, of course, is our economy is bluntly, overheated period, every statistic, from asset prices to income numbers to the labor market to the trade deficit, everything suggests our economy's overheated. And by the way, that is not good, because overheated economies will eventually crash. Now, if you're hearing what I'm saying, Yeah, I'm worried about a crash. I am worried about a recession. But let's be a little clearer. That's different than what you're hearing in the news. In the news, you're hearing Oh, the Feds raising interest rates, ergo, we're going to have a recession. No, no, the real story is the Fed way overdid it, Congress way overdid it, the economy is now overheating. And yes, that is liable to end in a recession. It's a different kind of story. The problems we have are not what's happening right now. But what happened over the course of last two years, so be worried, be very worried. But if you're saying real estate, you got to take a step back, because again, everybody always thinks that this recession is going to be just like the last one. And that's not how it works. Every recession is different. This one's going to be completely different than what the Great Recession look like, just like the pandemic recession was as well. Because this time, the risks the shock, the problems don't come out of Wall Street, they don't come out of a disease, but rather they come out of Washington DC, the risks of that enormous government deficit that we're going to that we're continuing to see. And of course, the massive problem with inflation, that is now settling in across the US economy. As for Ukraine and Russia, tragic, horrifying. Putin has revealed himself to be the scumbag he is period. But with all that in mind, it's a distraction. And it's not a significant issue for the US economy beyond the fact that is indeed distracting the rest of the economy world from where our economy currently is, which is in a very dangerous, overheated position. Now, it's not just the short run, that is, of course changed a lot. It's also the long run. Now it's not because the pandemic creating any new normals, I that stuff may be crazy, because, again, the history of civilization is littered with massive pandemics and epidemics. And there's no evidence that human beings fundamentally change their behavior post epidemic they just didn't. But with that, in mind, sitting at home for two years has surged, surely accelerated underlying trends are already in the economy, if you will, it lubricated the wheels of social change. And as a result that the world does feel a lot different. And it's different in a lot of different ways. It's completely flipped economic development unsaid. And of course, issues such as, I don't know, buying stuff online, or the massive retirement wave, will those problems are going to continue to be with us for some time. Now, that is particularly true in the Monterey, Monterey Bay Area. You know, what's interesting is, again, going back to a little bit of the issues, everybody said the economy wasn't required, recovered, but then every turn around. So the labor shortages were the biggest problem the local economy faces. I agree with the ladder. But understand that the ladder does not correspond with the former. You cannot have an economy that still recovered and have incredibly tight labor markets. It doesn't quite work that way. But the labor shortages are a profound issue and you're going to get worse. And of course the solution to that It is very simple, three words housing, housing, and of course, housing. So, lots to talk about. As always, I vastly too many slides for the amount of time we have the buckle up, let's get through these. So we have some time for some good q&a at the end. And as always, we will make a copy of this presentation available to everybody on the call here, if I'm going through too fast through stuff, you'll be able to get a PDF of it. And that in turn, will allow you to go through the slides a little bit on your own basis. So again, getting back into it, let's go back a couple of years ago, we suddenly realized the COVID virus what we call back then Corona had showed up of course, on American shores, we started to go into a basically a complete panic. And at the back end of that health scare, panic came, of course, the ridiculousness for my community of economic forecasters. I mean, just look at these headlines. They're laughable. When you realize where our economy is, right now, it's gonna scar the labor market for a decade worst downturn, since the Great Depression, home prices are going to fall 30 to 40 million people are going to be evicted. 30% of people aren't going to pay their mortgages. And here's one of my favorites. Make no mistake, this has morphed into a depression like crisis. Now, again, absolutely preposterous. None of this was true. This wasn't going to happen. I get it, it was very scary. We saw some absurd numbers at the beginning of this incredible drop off and activity and enormous surge in unemployment rates. But it was a completely different kind of business cycle. And the rules of the past didn't apply to this one. Why was it a completely different kind of business cycle? Two major reasons. First of all, it was a supply shock, not a demand shock. What does that mean? Well, in the Great Recession, if you really want to talk about why it was such a nasty, long run business cycle that took us nearly nine years from beginning to end to fully recover from it was because it was really boiled down to an in a massive demand shock. Yes, I understand about housing and foreclosures and the problems that consumer finance but it really boils down to in this in 2005 2006, people thought they were rich. And in 2009, they realized they weren't. Now look, that is a very profound situation, you find yourself because you need to rebuild for the future for retirement for kids college education, so on and so forth. What do you do you save, now that in there in lies the problem, everybody's saving, and so nobody's spending because nobody's spending the economy's weak. And because the economy's weak, incomes aren't going up, making it difficult for people to save. So it ended up in this kind of vicious cycle. And it makes it very difficult for the economy to get out of that particular situation. Now, this time around, it was a completely different type of situation. It was a supply shock at first, true severe supply, shock, the recession, this economy is has had, as far as I can tell, in the last 100 years.
What does it mean? What's the difference? Very simple. 2010, you didn't go to restaurants because you couldn't afford to in 2020, you didn't go to restaurants because you weren't allowed to? Why is that different? For a very simple reason. In 2020, because you weren't allowed to spend your money in restaurants in Disneyland, you damn well spent it on anything else you could, you know, we heard all the stories about the hotels and the restaurants suffering terribly. Well, we never heard about was the bike shop making money hand over fist, the fact that Home Depot had record profits and couldn't hire enough people. We didn't hear how the shift in spending, because some parts of the economy to pick up a lot of speed, which by the way, offset a lot of the pain in those sectors that were ground zero for the pandemic. Of course, it wasn't just that the other part of it had to do with how healthy the economy was. Look, we didn't just have to go through the adjustment, that wealth adjustment, we also had to deal with the the wreckage of what had happened in the run up to the Great Recession during the subprime bubble with too much building of homes too much buying of cars. The economy was a train wreck to its core, this time around, despite again, all that negative rhetoric about our economy, our economy was in fundamentally really good shape at the beginning of 2020. On it very simple. If it hadn't been for the pandemic, we now be in the 14 year now this particular expansion period, because the economy was just that healthy. So it was V, just like we talked about two years ago. And now it wasn't a you it wasn't a W it wasn't a square root site. That was all preposterous clearly a vague, particularly on the spending side, take a look at the right hand side. This is trends in real output and real consumption in the US relative to long run trends. You can see consumption got back to normal levels in the middle of last year, GDP still struggling a bit. There's no doubt about it. But the reason GDP is having trouble keeping up with demand is the type of demand we're seeing in our economy today. is different than what we've seen in the past. And that goes back yet again, to the shock, the supply shock that hit services, look, services got absolutely hammered. And that, of course, took consumer spending and it shifted it to goods. Take a look at the left hand side here. This is real consumer spending trends relative to long run trend, sorry, actual numbers compared to long run trend. And you can see services are still not back to where they were pre pandemic, from a trend perspective, was spending on goods is way above normal, above durable goods in particular. For one half of the year, spending on durable goods was 25%. above normal. That's crazy. And that's why of course, we're having supply chain problems. And that's why GDP isn't keeping up with demand. huge demand for goods in the US. Well, we're kind of a service producing nation. So we weren't prepared with this giant increase in demand for goods. And you can think of it this way, think of autos last year, auto sales fell pretty sharply. And that doesn't happen unless there's a big demand problem. Of course, we know there's not a demand problem this time. Auto makers just can't keep up with the amount of demand right now. They just can't keep up. They can't get the parts because imports don't have the capacity for all this demand. They their factories can't keep up with this. They put this in context. Last year, had the auto sector been able to keep up we probably would have sold 2 million more cars than we actually did 2 million more. And we're not out of the woods. I mean, take a look at inventory to sales ratio is how low they are right now. Again, context is king. In a typical month, there's a million cars for sale in the United States, a million cars. Right now, there are 73,000 cars available for sale in the United States, less than 10% of normal, incredibly low number. There's so much pent up demand out there right now, clearly consumers are not suffering. Simple as that.
Not all again, let me be clear, CMOs, of course, are always falling behind. We'll come back to that in a few minutes. But this is where all the supply chain problems come come come in from. Supply chain problems aren't a threat to the economy. And quite the opposite. It's holding the economy back, maybe for the better. Remember, people are overspending right now we see that in all sorts of different ways. And they will be overspending even more again, but for the supply chain problems. And you could certainly see this in the data. Take a look at the right hand side here. This is one of the craziest statistics and it just gives me it gives me a good idea of what's happening. This is San Francisco and Stockton taxable sales. And look at the massive shifts that are happening the beginning of this San Francisco Of course, well workers stopped driving to work local tourists are coming in, and taxable sales, which are driven by workers and tourists absolutely collapsed in the city stockin which, of course is down the hill and home to Tracy, which is the massive warehouse depot which supplies most of the Bay Area. Well, that of course that area has is absolutely on fire from a spending perspective. Now, if you think about the Monterey Bay region, well, of course, there's not that much in the way of industrial it's certainly not a warehouse area. But nevertheless, the spending on goods has pushed up overall consumer spending at some levels higher now that was pre pandemic, but again, not as high as a state and certainly not as high as the inland areas where a lot of those warehouses set. But again, this is all driven by that good spending. Now if you're worried about businesses, because well, you know, they can't keep up with demand don't because a you know, for all the complaints about supply chain Bronx Zoo in reality, the business America is doing fantastic. Corporate profits are up 20%, proprietor incomes are up 15%. And by the way, they're also in the midst of a spending binge take a look at the trends in overall business investment on the right hand sides in the first quarter of the year. And, you know, outside of power communication, mining, exploration and airplanes, everything else is up. And indeed some things information processing equipment, software research and development entertainment. By the way, these are all enormous sources of driving drivers within the California economy. They're all substantially above where they were pre pandemic in real terms. So again, times are good when you look at it this way. As for services, while they are trying to struggle to keep up to catch up, there's no doubt about it. Finance services are ahead. housing and utilities are had actually food and a combination caught up in real terms where it was pre pandemic, recreation transportation still falling behind. But again, is this a lack of demand or is it a problem with supplies? What I would argue actually, the supply chain problems in service sector are as profound as they are in the good sector. But we see it differently. service sectors, of course, are run primarily on the basis of labor. And that is the problem. Take a look on the right hand side, job openings and leisure, hospitality and other services, which is a lot of those basic services like hair and nails, things like that. Well, prior to the pandemic, there was about 1.3 million job openings for these three sectors, the academy, today, there's a million more 2.3 million job openings excuse me, 2.7 million 2.3 million job openings, a million more. I am Have you walked into a restaurant and and I'll give you a seat, but waiter is not going to look at you for 30 minutes. Or worse, you might put on a waiting list, even though half the tables are empty. Well, now your course are dealing with the supply chain problems in that service sector. They just can't hire enough people. Now, again, tourism is coming back, you can see the TSA checkpoint numbers here almost back to where they weren't 2019. Still a little bit off hotels. What happened in 2021, because at the beginning, everybody got clobbered in tourism. But in 2021, you saw a big bounce back in of course, what I would call the driving tourist destinations. And that would include of course, the Central Coast, people are desperate to get out of their homes, but you can't get on a plane. And of course, people aren't flying here. But a lot of folks ended up just getting into cars and driving someplace any place and drive and tourism, including Central Coast actually met the region did really well in 2021. And, you know, you want to see people in action take a look at gaming in Vegas,
in Vegas, scuze me in Nevada, I mean, they've never had more gambling revenues than they do right now. And by the way, the whales from China are not rolling in for the high roller tables right now. This is just people spending money like crazy. Again, it tells you a lot. Now, local tourism, again, a little bit soft, the bay area a little bit behind. You can see San Jose traffic, air traffic, by the way, is bounced back, but it's still pretty sharply below where it was the beginning of the pandemic. And hotels have continued to improve into 2022. Although at a slower pace again, Monterey, you can see for example, the Monterey that's that's Monterey Bay, that would include Santa Cruz is a little bit up. But still, if you will slow down just a bit towards recovery, whereas San Francisco is starting to bounce back because again, people are getting on planes. So you're seeing the recovery in the service sector. How back largely, of course, by a lack of workers. Were the workers. That's the next big question. Well, take a look at payroll, jobs, payroll jobs are not back to where they were pre pandemic. We know that. But we also know that this is not a labor demand problem. And that's exactly what you know often happens. You have folks who, of course, in the press who immediately leap to the assumption that there are fewer jobs. That must be there's less labor demand, but you're gonna have fewer jobs for another reason, which is less labor supply. How about that? Well, again, job openings, the unemployment rate never been higher quit rate never been higher unemployment rate 3.6%. The problem here we have is clearly a problem with labor supply. Now labor supply problems were absolutely predictable. It did. They were this is a long run in a short run issue here. The long run issue is demographics, the boomers, the boomers, of course, we're that generate that enormous generation, we had this huge surge in and baby production in the 50s post war. And these boomers were raised and apparently so scarred by the experience of being in a large family, that they all went out and had one kid. And that turned our population pyramid into a population column. So we knew we were going to have a problem when boomers started retire, because when boomers start to retire, while Millennials are like 1%, larger than the moments, so Ergo for everybody retiring, there's going to be one more person coming in, it's going to be hard to grow the labor force, hence, it's going to be hard to grow employment, this was going to happen, but took the pandemic to make it real right now. Why? Well, again, think about it. In the last couple of years, you know, we had a 3.5% unemployment rate in the US prior to the pandemic, which was a 50 year low. The previous administration took credit for that, which is nonsensical look, whether you are a Democrat or Republican, we ought to take a step back and recognize that presidents have shockingly little control over the short run movements of an economy. And it's not their purview. That's not what they do. We had a 3.5% unemployment rate, mainly because of the demographic problems. It could have been lower. In fact, it could have been worse in As much as a lot of people who probably would have retired didn't, we saw that. And that's what happens in tight labor markets, you encourage people to stay around. With the pandemic, it's, we all had to sit in our houses. And of course, at the same time the checking account was going up in value, interest rates drop, we refinanced our house, and our stock market portfolios. Were doing magnificent. Well, listen, I'm stuck at home anyway, I might as well go ahead and retire. And they did 3 million people left the labor force 3 million people. Now I've heard a lot of stories as to why these people laughed, oh, it's Lon COVID Oh, they're afraid or they're drug addicted. And
the current population survey, ask people that question, Why aren't you in labor force anymore? These people, almost 90% of them said one thing, I have retired. And they have. And now of course, we're dealing with profound labor shortages. Now, if you're worried about income inequality, your market solution has arrived. It's amazing how well, policymakers often want to ignore the market and go straight to rules. I'm a big believer in markets, which means if you really want to figure out how to change things, you got to figure out how to alter the market accordingly. Now, again, in this case, we didn't have a policy to alter the market, rather, we have a demographic shift. And, wow, again, I showed you in the left hand side, that 6% increase went to be clear in the middle. This is income growth by Occupational skill. Those in low skilled occupations are seeing more income growth in high skilled occupations. First time, that's happened in 25 years. And of course, workers in the bottom quartile of earnings are seeing the greatest increase in earnings over the course of not just the last two years. But over the last six years. Yes, for six years, income inequality has been falling, not rising inside the United States. Again, all good news, if you're worried about income inequality, if you're worried about low income Americans, fantastic. If you're running about running, if you're worried about running a business, this, by the way, is an enormous problem. And indeed, it goes back to the idea of how economic development is completely changed. You know, in the old days, three years ago, economic development was basically boiled down to jobs, jobs, jobs, you remember right, Steve Jobs, jobs, jobs, it's about jobs, hey, it's all about the jobs.
Not anymore. Because now one thing I do is look around the US and realize the problem with the United States is we have an excess supply of jobs. We need workers to fill them. Workers, workforce development, workforce growth, this is economic development, from here on out. Completely different kind of model. It means you're not worried about bringing a big company in. Right now. It's about how do I get more people to live here? It's about quality of life. Right? It's about your school districts. Are they good or not? What's What's the ratings, parks? Do you have good, affordable housing that's good for families? Do you have nice places to go out? It's a different conversation. So how does one think about maximizing the value of your workforce? One, grow it get more people to move there focus on expanding your housing supply, making a region more desirable to families. Another way of thinking about this is intensive, how do I get more out of my existing population? How do I encourage seniors to come back to work even if they're retired? How do I get women to work? Now, it's interesting, if you look across the developed world, the United States has one of the lowest rates of participation of women, much lower than anyplace in Europe. Why? Well, a big part of it has to of course, be due to the fact that we don't subsidize childcare. And of course, that's an enormous burden. If you have small kids, well, either you pay an enormous amount of money to get them into daycare, or be you stay home, or you have to find a family member to take care of them. That is a really difficult choice. And a lot of women end up leaving the workforce because of it. Well, again, you know, we always talked about pre K education. And we've talked about it's a it's great for the kids, it's great for the family. It's great for that woman because she can continue her career. But you know, hey, it's a social policy. Weapon. It's a good social policy. But putting that to one side, you can now argue it is also an economic policy, right? Because now it's good for the kid. It's good for the family. It's good for the mom who wants to continue her career. And of course, last but not least, it's now good for local businesses because it allows a higher participation rates. Now I apologize for mainly saying women there but it is really mainly a story about women. Obviously, there are some men who are primary caregivers as well. But again, the participation rate for women is is really what's what stands out. And then last but not least, of course, we have to think about worker training and about technology. But again, not so much because, well, you know, it's a good thing to do. But again, it's economic development, right? How do you help your businesses do more with less? I have a buddy of mine who does hotels across California, including there in the Central Coast. And he tells me, I can still get cleaning people from my my rooms, but I can't keep a middle manager. Well, a great form of economic development right now, is having the training programs that can take someone who's cleaning rooms, and teach them how to be a middle manager. What a great way of expanding that person's capacity to earn money. And of course, other ways of doing it. How about helping restaurants figure out how to serve more people with fewer bodies, that is to say, I don't know, maybe having iPad menus or, or doing a self serve type of situation. There's so many ways of doing it. And economic development yet again, can be there to train the workers to help the businesses adapt labor saving technology. Don't be afraid of IP or AI people. Now we need it more than ever asked for regionally Well, look, there's this game that's easy to play called comparative job analysis. Ooh, Arizona has more jobs now than it did pre pandemic and California has less, ergo, Arizona is doing great. And California is doing terrible. Don't play the job comparison game. It's an irrelevant statistic, in as much as job openings are up everywhere. I don't care what your unemployment rate is, I don't care where your payroll jobs are compared to where they were three years ago. The reality is you're going on any commercial street, you will see help wanted signs, because everywhere in the United States, we are suffering from labor shortages. It's not unique to any particular area. And then indeed, of course, has been the problem in California for a while. Why are people leaving California? Because we don't have enough housing. Why don't we have enough housing, because we don't build it. Period. We take a look at the last 40 years of homebuilding. The last time we built lots and lots of housing was in the 80s, we saw a little surge in the run up to the Great Recession, but the numbers got anywhere near back to where they were in the 1988. And of course, this last decade, has been one of the weakest housing cycles we've ever seen in the state. Ergo, labor force growth has been abysmal. So yes, we're suffering from labor shortages in California, worse than other places because of our unwillingness to build housing. Now, take a look on the right hand side, you think the national forecast for populations is scary. According to the Department of Finance, the number of people from 15 to 64, in California, is going to not change for the next 30 years. By the way, I think that may well be optimistic, because it depends on net migration bouncing back. And, again, I haven't seen enough action on our housing supply front to make that scenario reasonable. I just don't. So yeah, I am really worried about this date, but not so much from what I would call an overall stamp book just from where we call it a growth standpoint. I'm sorry, that was completely unclear, let me be a little clearer. There's two ways for a place to grow extensive and intensive, our ability
to grow extensive margin is limited by our lack of housing. But when you think about the net migration, negative net migration, that is masking, a churn, a churn by which we have high income people, high skilled people moving in, and low skilled lower income folks moving out. Now what that means is our state does continue to grow. Arizona and Nevada has had much more rapid labor force growth than California has. But real output in California and overall incomes have been growing faster here than Arizona and Nevada. And that is again, because our economy is being moved towards very high end sectors that can afford this housing, whereas lower end sectors that can't have to move out. Why did Elon Musk move to Texas? Oh, he'll tell you he's angry at California and their policies. I can tell you that's nonsense. He moved to Texas, because you can't build cars in this state. There's not enough available workers to expand output. So as Tesla plan is still spinning them out. But he's funk fundamentally kept because of a lack of workers. Ergo if you want to grow, you better go to Texas where they have workers. Now again, I don't want this because this means we're turning into Country Club California. And I don't think that's fair. So I would like us to build more housing. But remember, folks, you got to build more simple as that. Now the local conditions, we get a very similar sort of situation. Look at payroll employment across the region, San Luis Obispo, Monterey, Santa Cruz and every county in Of course, there's fewer jobs today than there were prior to the pandemic. But on the right hand side, unemployment rate in all three counties is the lowest it has ever been. Period, right? Bam, right there. March 2022, you see the numbers, in all three places, unemployment has never been this low. The problem, of course, is you cannot fill jobs. And what's interesting is, if you think about the massive shifts that have occurred over the course of the last couple of years, the service sector was closed down, people needed jobs, they found jobs. And now the service sectors reopen, there's no one left to hire. So you'll end up with a situation where take, for example, look at Monterey, Santa Cruz. I mean, look at some good numbers here. Manufacturing in both counties is up very strongly in the last two years, sorry, this is two year changes, healthcare, steady construction steady, you know, good steady numbers on this particular front. But of course, leisure and hospitality other services right up but leisure and hospitality both places substantially down. The tourism sector that has been a big part is really struggling, not with a lack of demand, but again, with a lack of workers because those workers have found jobs somewhere else in the economy. Now, there are some upsides take a look at the left hand side, this is weekly earnings in the private sector for Monterey and Santa Cruz counties, and you go back to 2017, was about the weekly earnings average with median workers median average Punisher, running about $800. Well, according to most recent data in Santa Cruz is now about 1100 hours, not even five years later. And for Monterey, it's about $1,000, substantial increases 25% increase in Monterey, and of course, about a 35% increase in Santa Cruz over the last few years. And on the right hand side, another element Equifax, subprime creditors, and interesting look at local credit conditions, see how that's fallen. Yet again, it's just that workers, even low skilled, low paid workers are doing very well in the bay area because of these labor shortages. But if you're trying to run a business, it becomes very complicated. The story here, of course, is one of labor force like it is in the rest of the state, you can see the enormous drop off in labor force in both regions. And that's because again, we think about the Central Coast, you think about a lot of folks who were near retirement, and they indeed did retire. And you know, what's interesting about this, or what's a problem in place, and beautiful place like Monterey and Santa Cruz is, you know, if someone retires in my, I don't know, Rochester, New York, where I'm from, you know what they do, they move, because retired people, for the most part, don't want to be in Rochester anymore. However, when you retire in Monterey County, you're probably not going to move, because it's a great place to be retired. So when you think about housing supply, it's not just housing supply, of course, if you will, to get new workers in. But it's also housing supply to make up for the housing that is being occupied by newly retired folks. Simple as that. Take a look at the right hand side, you can see our population growth is slowed. This is the fundamental problem, housing, housing, housing. So let's talk about housing. Housing, of course, was we were told it was going to zig and zag it took off like nobody's business prices are up across the board, housing permits are up like nobody's business. Why short run long run situations, long run homeownership rates been bouncing back, at the same time, a very, very conservative cycle from housing construction, housing, vacancy rates have been steadily dropping for the last decade, because we're just not building very much. Now, the short run story has everything to do with with the narrative. What's interesting is in 2019, a lot of people had convinced themselves get housing was in a recession, and D that is why a lot of economists were talking about a housing driven recession in 2019 and 2020. You saw articles in the New York Times and it fed back on itself. And yeah, there's no doubt that the housing market was crazy cold in 2019. And I couldn't quite figure it out. But then once you put layer the story on top of it now, it all makes sense. Look, the housing market slowed a bit in 2019, because interest rates have gone up and because there was a change in tax policy. But that set off a flurry of speculation that housing was going to take a big hit, and that took potential buyers and put them on the sidelines. Hey, why would I buy a house now when I think prices could fall in a year or six months? And I can't even tell you in 2019 How many people walked up to me and said, Well, when our home price is going to fall and you know it's only about that question is it wasn't even if it was when people were convinced now my answer back then by the way, it was never because for on temporary resists the fundamentals of the housing market are crazy good, particularly even now, believe it or not, these are good fundamentals. There's not a lot for supply of affordability. It's been decent. I know, I know. I'll come back to that in a second. And, of course, in general credit quality is really good. Why would we have a problem? Now, what happened here, of course, is that everybody said the sidelines until 2020, when you were stuck at home and your checking account was going up and interest rates kept coming back down and just spending four months in a house with your children made you realize you needed a very large house. And you people said, forget it, even prices are going to fall. Let's just go by. And they went out. And what did they see a line of 400 people lined up in front of that one house for sale in their neighborhood. Because there was no supply, there were four months inventories, even in that incredibly cold market. And of course, when you have a huge surge in demand, it immediately turned into of course, a bidding war price has exploded. Is it a bubble? Now? Well, kind of what we're just getting into now. But a couple things. First of all, debt levels in housing are incredibly low. It's incredibly clean for the last decade average FICO score, 80% of of debt has been to people with FICO scores over 720.
All the increase in prices we're seeing is mainly driving equities not being driven, of course, by borrowing. Right now in the US housing market, we have $26 trillion of household equity $26 trillion of house liquidity three times as much as we had a decade ago. We want to lowest debt to equity ratios ever. Well, what about affordability isn't isn't affordability terrible. And 2011 38% of California homeowners were housing cost constrained, that is to say used over a third of their income on housing by 2019. That had dropped to 28%. Still high nationally speaking. But that means that's over a 20 by 30% decline in household costs. Well, wait a minute, didn't housing prices go through the roof? Yes. But keep in mind, housing is expensive for everybody except for the people buying it. And that's the key. The reason housing costs are so high in California is not because of speculation or crazy debt is because there's so few homes for sale at the people who are buying them are incred are very wealthy, thus they can afford it. Now, again, that means that the housing market is fundamentally stable. Now, is there any signs of fraud there is now the last year you saw a big increase in housing prices relative to rents. That's kind of worrisome. You see housing units per capita going up, that's a sure sign of flipping behavior. But this is occurring now. In the midst of the pandemic. It didn't happen pre pandemic. In other words, the housing market is getting overheated. Now, this is when it's occurring. And it's got a long ways to go before that overheating becomes, of course profound. Now for California itself, they look, I know prices are up here. But we're just following the national trend. Take a look at the left hand side, the ratio of California prices, the National prices hasn't budged since the beginning of this thing. We're 80% more expensive. And that's the set. Yeah, it's the same as it was since 2012. So let's go. We're not the center of it this time. It's not a real estate bubble. It's not a California real estate bubble the way it's been the last couple of times. And as already noted on the right hand side, whether you're looking at the shared housing cost constraint or even the share of renter, cost constrained households, it's been falling not rising. So this is again, a supply supply supply situation. Simple as that. What's happening locally, well, prices are up pretty sharply across the area. We know that Santa Cruz we're approaching 900,000 Salinas 760 San Luis Obispo, 740 sounds insanely expensive unless of course you live in San Jose, in which case this sounds like a hell of a cheap place. As for apartments, as opposed to a massive number of evictions, the markets have been have done quite well. And indeed, just over the course of the last year, you've seen a big increase in overall rents, asking rents and sacristan, a cruiser up sharply and vacancy rates are down across the board again, this is suggestive of a very very tight apartment market with of course renters are doing just fine. The big issue the big question has to do with housing permits, and 2021 was a decent year for housing permits. But you need to do a lot better than this and on the right hand side, take a look at Santa Cruz which again barely builds housing. I mean it's it's amazing 60 units a quarter. That's nothing and of course for multifamily Well congratulations Santa Cruz. County, you did approve a 62 unit building just this last quarter. But that's the first multifamily building permitted in three years in Santa Cruz County. That isn't going to work, folks, the solution here, of course, for the Monterey Bay Area is multifamily. I know I know yet I like it, but you desperately need it. And by the way, that's exactly the kind of housing you need for your leisure and hospitality sector that is starving for potential workers. Now, with all this in mind, we probably have to spend a little time about adding housing and talking about of course, the drought. Yes, it's very, very severe up there. And, you know, policymakers are absolutely beside themselves, because people are not saving water. They keep saying you got to you got to use less water, you got to use less water and people aren't doing it. And Newsom is telling people more more restrictions do it now.
Look, folks policy that's relied on people doing the right thing, are bound to fail. A few years ago, yes, we panic people into doing the right thing. But people are kind of, shall we say, over their their panic. At this point in time, they got to worry about Ukraine, they have to worry about nuclear war, they have to worry about the pandemic, they have to worry about the fact that the New York Times as economy isn't good. They don't have the capacity to worry about water. So what are we going to do about the drought? Well, we should do what you do every time you have shortages, you raise the price people, you put the price up. By putting the price up for water, you can skip people to conserve more. And while we're at it, that goes for farmers as well. We'll leave it at that. Now. What about non res non rest bounce it back just fine loans and leases no major meltdown their Deed easier to borrow the banks are fine with that permits actually did okay over the course of the last couple of years. Now. If you take a look at the numbers retails been steady office took a big hit warehouse is doing wonderfully, not a lot of warehouse. Of course, you Euroregion as the case may be. But if you take a look, of course at retail, surprisingly strong as the case may be and office space has been remarkably steady in the region as well. So no major issues here. For me, however, when you think about of course, retail, let's remember local retail is doing okay, in part because consumer spending is so strong right now for goods, eventually it's going to go back to services eventually is gonna go to warehouses, and you're going to see some issues there, the region does is going to need a little bit of industrial, as the case may be just to deal with changes in local distribution, you'd rather have the warehouse in Monterey and Santa Cruz than having it and Tracy from a taxable spec perspective. But the bigger issue here, of course, has to do with not just the lack of bodies up in in the Monterey Bay region, but the lack of bodies in the Greater Bay Area. Look, there start surveys have shown that a lot of workers don't want to go back to the office now, some do but a lot don't. And according to the numbers, this suggests surveys of CEOs just get about 30% of office jobs are going to be worked from home. Now, what does that mean? Well, I suggest is probably going to end up being more office jobs in downtown San Jose and downtown San Francisco, because most office demand is the most office renters are going to look for smaller, nicer space to try encourage people to come in, but smaller because some of their folks weren't won't. Now what is it getting? Does that mean for Monterey Bay? Well, for folks who only have to go in once a week or once a month, they may very well be looking for a quality of life place to live. And that means I anticipate is going to be a strong demand of of commuters coming in from San Jose, to buy up relatively affordable housing down in the Monterey Bay Area. Hey, listen to 17 isn't all that bad, if you're only doing it a couple times a week or maybe once a week. So as a result of that yet again, the housing crisis is almost assuredly going to become that much worse, as you see a continued movement of people away from the expensive Bay, down, of course, into your area. Now, it's going to make local businesses have a tougher time finding people because again, housing is going to go to that computer. But remember, that person is not going to be spending more money locally. And that in turn will support the local economy. Yet again, it suggests a a shift towards understanding that a spender is good for the economy, even if that's better, doesn't actually work in the local economy. But if you want to continue to expand the local job base, it's a conversation yet again about housing. So with all that I'm running out of time, I apologize. I told you too many slides. Let me go ahead and hurry it up and tell you about where I'm worried. As are noted, I am worried about the over stimulus of the economy. How can you say it's over stimulated? And by the way, you know, whenever I say that I always get somebody who says well, they had to do something. Yes, they did. And They think they did what they needed to do. And then the next 80% was completely wasteful. Look, it take, for example, subsidies to American households in the form of, of unemployment and up to anybody who said they were unemployed, even if they weren't. And, of course, the direct checks and all the other things. Well, the US government gave American households directly 2.1 trillion. By the way, American households lost about $800 billion in income, the subsidy to income loss ratio was two and a half to one. That's, that's not economic stimulus folks is trying to buy an election. That's not stimulus. That's populism. This is terrifying. And of course, we see it in the data, 2.5 trillion excess accounts, 3 trillion excess commercial bank deposits. Now this isn't free, oh, hey, we feel rich. But we're building up our own personal wealth on the backs of our children and grandchildren, who are going to have to pay back the $10 trillion in new debt we've picked up in the last seven years, the 6 trillion we picked up in the last two. And by the way, we're not out of the woods, we have a $1.6 trillion deficit right now, coming out of the pandemic built into the system, it would be much worse, but for the fact that there's one guy named mansion out of West Virginia, who's been absolutely demonized, said no to the next trillion and a half dollar spending bill they wanted. We don't need any more, man, I gotta cut low debt, student loan debt, why? It's unbelievable to me.
Oops, sorry. And let's remember, we're right on the edge of, of course, a huge increase in spending on Medicare and Social Security for all those boomers who just retired. We have to be making space, not of course, borrowing like crazy. But you know, there is no tomorrow in this world of existential crises. And then, of course, Mr. Powell, who engage in quantitative easing, and of course, puts the federal funds rate down. But to be clear, I mean, look, quantitative easing, it's a tool that Ben Bernanke and Janet Yellen did. But they understood that this is a tool that you have to use delicately. It's very dangerous. They did $3 trillion of quantitative easing over six years in the face of one of the worst financial disasters this nation has seen since 1930. drawing power the 3 trillion over lunch. And then he did 2 trillion more over the next two years, despite the plethora of evidence that we didn't have any problems, financial problems on her hand. I mean, ask yourself the question, What is he doing? I mean, back then, the charge off rates were 3% per quarter. Now, there's no lung problems at all. Back then home prices were collapsing 15% per year, now they're going up 20% per year back then, massive numbers of bankruptcies and foreclosures. Now there are basically none. What are you doing, Mr. Powell? Now, you just take a look at these numbers here and to growth. Back then Jenny Ellen Bremen Yankee did a wonderfully M to growth nice and steady, didn't allow that financial crisis to turn into deflation. This time around, there was no financial crisis, and it turned directly into money supply, which of course is turning into flesh. In other words, this has been the worst, worst run Federal Reserve I've ever seen. Which is exactly why Jerome Powell was re nominated almost unanimously for another five years. Unbelievable people. Now, of course, when you throw all this money, world's on fire, we saw three and a half 50 and $350 billion of venture capital in 2021. Two and a half times what it wasn't in 2020. There wasn't that many new good ideas last year, folks, the P E ratio of the stock market almost it's 2000 Peak Cap rates for commercial keep falling commercial construction is through the roof. Bitcoin it's down to $30,000. Now, to be clear, if it goes down another $30,000 It'll be at its fundamental value. P O N zi, millennials Ponzi look it up? Enough said did you provide has the assistant been excessive? Gee, think. Now look, again, we're the quote unquote, richest generation ever. And we're in the midst of a binging and binge, the trade deficits open, final demand outputs too high. This is an economy that's consuming way more than it should be. And of course, in the midst of all that excessive amount of demand, prices are going up and going up sharply and 8% for the CPI 7% for the GDP deflator, highest inflation 45 years. What are we doing? Well, in the short run what we're doing is making excuses are they acknowledging that this is because they screwed up no supply chain issues the deficit greedy corporations, none of me The factory jobs Banerjee. Now it's Mr. Putin's fault. Now what next Saturn is in line with Jupiter discos making a comeback, the new host in jeopardy. Here no inflation see no inflation speak no inflation, folks, inflation is a monetary phenomenon period, when apparently no one in the Federal Reserve knows monetary theory anymore. And this is a very scary place. Again, no one seems to recognize that the bond market is barely acknowledging the problems. University of Michigan FX inflation expectations are still incredibly bullish. If you just look at basic monetary indicators of the unit money supply, and two divided by nominal GDP, we have 25 to 30% more inflation in front of us on top of the 7% that already happened. Obviously, this will be a cataclysm for the US economy. How do you deal with it, you have to get rid of the money supply through quantitative tightening. Now the interest rates are starting to show that some of the pressure mortgage rates are five and a half percent. But remember, that's still substantially lower than inflation rates. They're behind the curve. Keep that in mind, because there is the irrational expectation that inflation is going to slow down when there's no way it will. Now I know they raised the you know, the federal funds rate a half point irrelevant, longer interest rates are already gone up by way more than that. It's absolutely irrelevant. It's quantitative tightening, pulling 5 trillion out, they have announced plans to take 50 billion out which is a trivial amount of money.
Inflation is going to continue and it's going to get worse. Now the real scary thing here, of course, is what this does to the economy. And no, it's not because consumers are getting crushed. Look, there's no doubt some households are struggling with inflation. But for every household struggling with inflation, there's another household that feels richer than they've ever been either because of wealth or because of their earnings, and they're trying to spend money like crazy. Consumers are driving inflation period. And you're gonna have to cool off aggregate consumer demand in order to cool off, of course, that inflation driving situation. But that means quantitative tightening, which is going to drive interest rates up even more. Now, one might argue that the federal government could step in and use a little fiscal policy to offset some of the pain of that, but they can't do it either. Remember, the federal government is completely out of control $20 trillion in new debt in the last 25 years. Now, how come they haven't faced consequences for that? Well, they've been free riding low interest rates, interest payments is unprecedented GDP has not budged since 2002. Well, it's about to, then that means the federal government has to deal with a $1.6 trillion structural deficit, along with the course increasing expenditures being driven by nothing more than retired boomers pushing Medicare and Social Security, and of course, an enormous increase in federal interest payments. What are they going to do? They're going to have to borrow a lot more and get into that downward debt cycle, or equivalently. They're going to have to cut spending, and that's another negative hit to the economy. Last but not least, of course, we have to think about the local risks. You know, right now, Gavin Newsom is you know, he's been the adult in the room, we ever had enormous surplus $100 billion at the state level, we should spend it on one time stuff, a lot of folks that of course, in the State Senate Assembly, want to expand ongoing, ongoing programs. They're both wrong. Look, the huge surplus is driven by capital gain realizations in the history of capital gains realization says that once you go through a feast, you're gonna go through a famine. You know, right now, the Department of Finance forecast says that revenues are going to basically flatten out at the, of course, national level, they're not going to flatten out, they're going to fall. And we're going to be facing 30 to $40 billion deficits before you know it, they shouldn't be spending any of this money, they should be putting it to one side to deal with the 40 $50 billion budget deficits that we're going to be facing in the next two years. Does no one remember Gray Davis getting tossed out of office because of the fury of the voters? There's nobody member controller John Chang, using script to pay state vendors, because we don't have any cash. People who forget history are doomed to repeat it. Buckle up, folks. So look, the economy's back. It isn't recovering. It's recovered. Indeed, it's overheated and it would be more overheated. But for supply chain problems in the form of Port blockages are not enough workers. Probably just as well. The outlook on until it's not, it's going to be a good year because there's so much money out there. There's so much pent up demand. It will continue to push us forward right through inflation and higher interest rates. But at some point in time, there's going to be a sugar crash. functionally speaking, the quicker it happens, the less painful it's going to be. II, but the only way to make it happen quick is for the Federal Reserve to wake up and do quantitative tightening at a much more rapid pace, they're not doing it. And that means, of course, that this thing is going to continue to burn out of control. And when it does hit, it's going to be much uglier. And remember, we're going to be facing both fiscal as well as inflation and interest rate problems, it could be a very ugly cycle. Now, as for the long run, again, like the Monterey Bay Area, the economy there is doing well, some good jobs that come in manufacturing base is doing well, you're going to see a stream of new people moving into the area, out of the incredibly expensive Bay Area net will continue to boost local demand as well. And tourism Hey, man, people love to travel. And it's one of the best places on the planet to be everything's up, except for the fact that you just don't have enough workers to meet all these competing demands, someone's gonna fall behind. The solution to that is housing. And let me be blunt, it's multifamily housing people, it's apartment buildings, you got to build them. It's the key to success for the region. And I know, I know, people don't want to see him. But it's got to be done. And for local policymakers who wants to see the Central Coast continue to thrive. It's all in that multifamily space below that, and your economy can thrive. Thank you very much, everybody. I apologize for going a little long. But hopefully we have a little time for q&a. And
let's get right back. I'm sorry for going way too long on that. But again, hopefully we have a couple couple times for questions.
Well, that was a lot there. I
think I actually didn't get to a couple of slides I wanted to do. Anyhow,
talk about a whiplash in some way. Thank you for your remarks and joining us for this morning. You know, kind of the top of mind before I get to the questions I couldn't help but continue to think about it during the course of your remarks was how do we change or impact the data? Between the data and the narrative, this huge disconnect and the divide? What can we do he'll hear regionally? Maybe we don't have a lot of control over what's happening in other circles. And,
you know, that's, that's a personal thing. Look, everybody, we all have a tendency to have a set of opinions. And when information comes in, we we accept the information that that kind of conforms with a pre existing opinions, and we push away the other stuff. And that has become an almost violent tendency in these politically extreme times, okay? What everybody needs to do is take a step back, you need to let go of some of those personal biases. And listen to the listen to the other side. Try to understand there's multiple ways of looking at an issue. Look at the data, think about what people are saying and ask yourself, What's going on out there. And by the way, the other thing you got to do, and it's so hard to do in this information world, it's easy for me to pick on the press, because the headlines we see are ridiculous. But remember, the headlines aren't made by the reporter. They're made by somebody else. Reporters call me and ask me a question about something. And I'm like, Yeah, that's completely wrong question. And it's completely wrong situation, because the issue we're talking about doesn't exist. And I'll walk in through my reasoning, and I can hear them going, oh, oh, oh, and it's not they don't like what I'm saying, as they suddenly realize they have a completely different story. They're gonna bring it back to the editor editor, it's going to be like, I didn't ask you to write that story. So every every reporter is, is the child of two divorced parents don't talk to each other, their editor and their expert. They get the information and they do they try to do a good job. But you got to get away from the headlines and read into the article. You got to read into the article. So don't skim headlines, pick a few good stories from reporters you trust and read them deeply. Because that's going to help you. And it's a great question. By the way, it's so important. I
think you're one of the first question that was raised in your earlier part of your presentation was the question about the 50% increase in the wealth. That was a with the 50% of the population, that you said the wealth had increased? Do you think that's due to Jane Barasat question, is that due to government monies, which reverse child poverty rates or what do you attribute that increase to the spin increase increased to one I'm sorry, if I'm going to read it directly from my q&a, the
50% the 50% increase in net worth for the bottom right? Oh, yeah. Oh, there's no doubt that this is a function of a number of things. Yes, some of its stimulus. There's no doubt about it. Obviously, the CBO is famous, that went to low income households. Were a lot more needed. Now, mind you, again, you've heard the numbers and unemployment insurance alone, they're talking 120 $130 billion in fraud. You know, I think Bill Maher said it the other night that, you know, look, we all understand that, that when you're when you're moving money around, there's going to be some leaks. But this is insane. Right, it's actually obnoxious. So there's better ways of doing that. But the other part of it is, and I think that you've got to keep this in mind that, again, low income households are benefiting from these insanely tight labor markets. So the job opportunities that your career opportunities, the income increases being saved, by the bottom half of the labor market are great, they're fantastic. Again, the problem isn't the workers the problem are the businesses, particularly again, to small businesses, right, the mom and pop businesses are trying to struggle, because these are the companies that really get hit by the lack of labor. You know, it's easy for target to, you know, throw in some self checkout machines. But your typical mom and pop store doesn't have that kind of wherewithal. That goes back to the idea that if you really want to help those local small businesses, at some level, economic development organizations should be working with these companies figure out how to how do you integrate technology into what you do in a way that a lot of small businesses don't have the expertise or capital to actually invest in?
Thank you for that. And I'm going to go into our q&a box here and sort of start picking out and get to answer as many questions as you can the next eight minutes or so before we pivot. Tom Moran's a Morane as any sense of what this data looks like, you know, left most of the right most an earlier part of your graphics into 2021. Seems like things sharped have turned sharply in the interval. And he asks, What do you think has happened in the two years after these charts will terminate?
What charges you talk to you about? I apologize.
Early on and secure second year, third chart you're talking about? You know, the bottom half and the
Oh, the wealth, the wealth numbers for the bottom half? I see what he's, yeah. Okay. Well, look, yeah.
I'm sorry, I can't talk
to the long run fundamentals right, are good. There's no doubt about it. Right. labor supply shortages are really good for folks at the bottom half. And in a very similar way, for example, up even some of the fundamentals for the California economy look very good, right. Well, what do I mean by that? Well, if you go up into say, the before the Great Recession, California was ground zero. You know, when you think about subprime credit, well over half of all subprime lending ended up right here in the Golden State, right. So we got absolutely pummeled in a very real way. So this time around low end, low skilled workers, are, the fundamentals are good, California's economic fundamentals are good. But low skilled workers in California still have to face that enormous storm in front of us driven by inflation. And these massive government deficits, right. So low skilled workers almost assuredly will get hit, they always take it on the chin worse than high skilled workers in the context of economic cycles. So yeah, I do think it's going to reverse itself when this bubble cools off. But on the other side of that, I think that the fundamentals will come back and will continue to support diminished income inequality, because of the driving forces of basically labor shortages. So that was, that was a little long winded, but I think I got my point across.
You know, speaking of labor shortages, you know, our ag and hospitality and construction industry, have historically relied on undocumented labor. How does immigration policy factor into our labor force and what we what can we do here regionally to drive that conversation?
Well, you're absolutely right, right. I mean, immigration is one of the biggest keys to this and in the absurd immigration policies, our immigration policy has been broken since Reagan. Right. And and it's just amazing to me that we have not been able to overcome whatever internal resistance there is just some fundamental article immigration reform. There's plenty of room in this nation. There's plenty of space in this nation to bring in folks from the rest of the world and yes, Esther is part of this is absolutely racism. Common just popped up. Couldn't agree More. Yes, it's you know, we saw the horrible, horrific attract attack in Buffalo. And and then understand some of the underlying motivations there. You know, yeah, that's it's appalling. But you know, remember, listen, just the right wing lunacy. But it's also left wing lunacy who think that foreign workers are competition for American workers, which again in these labor shortage, no shortage times is again, not a reasonable, it's not a reasonable conversation to have. So it's very frustrating for me, and we and we need to fix it. What can you do locally? Well, I mean, obviously, you can, you could talk to, like, we don't pay enough attention to what our local congress people are saying, What is your local congressperson saying, Are they just talking the party line? Or are they the people who are willing to go to DC and say something different? Because that's what you need. Right? There's a very local large vocal contingent of the Democrats who don't want more immigrants is a very large vocal contingent to the ragas. Don't want more immigrants. Anybody you let what is your view on expanding immigration?
Absolutely. You have to constantly remain engaged in that conversation of the impact. And we have to continue to recognize the beauty of our nation. It's we're from all over the world. And we've you know, we've made economies on the backs of very diverse and rich communities, and how do we continue to keep us centered without making it a divisive issue?
And to be clear, you know, you know, Mike, people always talk about all this, you know, our prices in California getting too much, you know, we never talk about global immigration into California because we have one of the highest foreign populations. My kid goes through elementary school, there's, I think there's five American parents out of out of 19 kids.
It's fantastic. It's fantastic. You know, some notes, I think, is dairy, a Darius here who says that while you were speaking, the stock market officially went into bear country, Won't this put a potential hard stop on the tech stock field cash offers market for homes, San Benito County,
it's, again, what's what's driving housing right now is not stocks, it's $26 trillion of household equity. Okay. And that's not going anywhere, that's going to continue to slosh around and create a lot of demand period. Okay. So housing is going to take a big hit from from a stock market decline, but the stock market decline is what I would call the start, it's a sign that things are starting to turn a corner. Now, where does it go? I don't know, let the stock market is is not a driver of the US economy. It's incredibly warped, weird reflection of the US economy. I worry about the stock market, but it's because it's excessively volatile because of high speed trading. It's it's, it's it's abusive. It's, you know, it to the American investor, it just is. But with that in mind, you don't look at it as a good signal of anything that's happening in the economy. It's, you know, they they're reactive, not proactive.
And trying to squeeze in two more quick questions on what is do you have a prediction on interest rates in the next year? Up? And can you talk about our energy independence?
I mean, we were already approaching energy independence in as much as we've seen an enormous increase in oil extraction in the United States, largely because of lateral drilling in North Dakota and Texas. And, you know, believe it or not, well, we still import crude oil, we actually have been exporting refined products, which means our energy balance on that front is is almost balanced right now, believe it or not. So it's not really a function of that the real key to me is not energy independence. But what I would call continuing to work the wind ourselves off of fossil fuels in the first place. That's solar, that's wind power, it's developing, of course, better ways of doing things. Now, that kind of brings me to again, some of the insanity about oil gas prices. I mean, they're running around Sacramento wringing their hands over gasoline prices, when in real terms, they were higher in 2011, and 2011. We didn't have Priuses, and electric cars and hybrids all over the place. And in 2011, you couldn't work from home and have Jeff Bezos delivering the onto your front door. The fact that gasoline prices are up, we should be applauding, worrying about it's what we need to continue to push us away from those fossil fuels. That is what we need to do. That is the insanity of California in a nutshell right there. Right? We know we need to get ourselves off of fossil fuels, but we don't want to point a finger at the consumers of those fossil fuels. We only want to demonize the producer of those fossil fuels. Well Folks demand pushes supply. And if you want us to consume less fossil fuels start with the consumer. And that means higher gas prices, not lower ones.
So on that note, we have so many more questions that are in our q&a box and our chat box. And I've been texted right now. And so I apologize to everyone whose questions we were unable to get to. Dr. Thornburg. Thank you for your remarks. We're now going to pivot to our public private partnership and turn it over to Dr. Cynthia Reeve again, Dr. Thornburg. Thank you so much. As always, we appreciate your engagement with the Monterey Bay economic partnership and the time you spent this morning and visiting us in this Monterey Bay region virtually so hopefully next time it'll be in person and it'll be more lively in person discussion.