ARTICLE
Today’s current economic environment is a mixed bag. The GDP is tracking in ranges from 2.2 to 2.8 percent growth annualized. In anecdotal comments around Santa Cruz County, retail sales are slower than anticipated as we hit the last two weeks before the Christmas holiday festivities. Many say that online sales are impacting local businesses. However, on a national scale, the job growth and rise in real inflation have adjusted consumer buying which has powered the economy for most of 2022. This is about to change according to several economic forecasting reports. Millennials are working and will likely stay employed and demand the kinds of goods and services that they buy. Gen Z is part of the entry level workforce or graduating from colleges and universities. They will be vulnerable to layoffs and some might struggle to find employment. Boomers are retiring in a rapidly growing wave that started in 2020. In 2023 and 2024, we will see the largest waves of Boomers turn 65. An estimated 36 percent will not retire and elect to remain in the workforce. Nevertheless, expect many of the senior people in your workforce to retire and require replacements. This will lighten business healthcare expenses but could increase recruiting expenses. Consumer sentiment from surveys is currently at levels that are consistent that we are in or near a recessionary environment. The American consumer is clearly frustrated with high gasoline prices, the steep decline in stock values, and on-again-off-again shortages of goods. The high levels of inflation are leaving real household incomes lower than they were a year ago. Compared to last year, consumers will spend as much this Christmas but receive less. That means businesses will sell fewer products, while facing higher costs. Consequently, there is a greater likelihood of a lower net income holiday season for retailers that disproportionately rely on the holiday season. The recent stretch of high-tech layoffs are starting to pile up. There is a cycle in the tech industry fueled by hiring in the last ten to eighteen months for product execution in the new year. Yet, large tech companies are pulling back with a large number of layoff reports. Yet it hasn’t produced any evidence of the unemployment rate. But economic theory shows that once a tech sector slump happens other industry sectors are soon to follow. With more layoffs coming, and the record number of job openings present, the economy will shrink from 11 million to 6 million over the next four to six months. Manufacturing is facing significant challenges as 2023 approaches. High producer prices, rising interest rates, and supply chain issues are on the horizon. Deteriorating business confidence is another key concern. Expectations can turn on a dime, but the increasingly pessimistic outlook among businesses does not bode well for the near-term prospects. The housing market has cooled off.. Both existing home sales and new home sales are below their pre-pandemic levels now. If your business relies on real estate, 2023 will be tough because mortgage rates will remain high and the risk of declining real incomes is high. The interest on the 30-year fixed mortgage rate has backed off a bit from its peak of more than 7 percent, but the rate has effectively doubled since the start of the year. Buyers are priced out of the market and will have to delay their jump into homeownership. However, some buyers will still be looking for ways to buy homes using creative financing arrangements that should work to sell homes in 2023. Real estate will return to normal towards the end of 2023, or after the traditional buying season is over. Why? Because the business cycle bottom may be occurring at that point. Perceived bottoms are the start of stock market rallies, and there will be bargain-hunting buyers for all assets. Here are three predictors of what to watch for: Watch the monthly labor market reports for early clues on the direction of the economy. Unemployment is currently 3.7 percent. Job creation is around 250,000 per month. An upward trajectory in the former and a downward trajectory in the latter represents the weakening that we are forecasting. Watch the bond market. The inverted yield curve would have righted itself and the spreads between short and longer term yields will be widening, suggesting the end of the contraction. Watch the stock market. A sharp upward movement lasting more than a few weeks would be an indication that the bear market has reversed and the market is projecting rising growth 6 months in the future. On February 15, 2023, the Chamber and UCSC will host an economic forum at the Cowell Haybarn on the UC campus. Our keynote speaker is Jon Haveman, a Principal at Marin Economic Consulting, an economic research and consulting firm specializing in entrepreneurship and local economic issues. You can read about his background and register for the forum here: https://web.santacruzchamber.org/events/UCSC-Economic-Forum-Luncheon-5329/details. Part of the forum will include a panel of local economic experts from the University and the Santa Cruz community. Let’s see where the next 60-plus days take us. And finally, one of the early economic indicators will happen in January when Governor Newsom releases California's 2023-24 State Budget. Currently, the Dept. of Finance is predicting a shortfall of nearly $24 billion, so for the first time since the last 2015 timeframe, the Governor and California Legislature will be looking at a spending plan. The Legislative Analyst Office (LAO) publishes the Fiscal Outlook in anticipation of the state budget process. The goal of the report is to help the Legislature in crafting the 2023-2024 budget. You can review the report here: https://lao.ca.gov/Publications/Report/4646 The topics in the report are similar to the other economic reports I have seen in the last few weeks. Economic Conditions and Revenue Projections, The Budget Problem (i.e $24 billion deficit). State Budget and Inflation and the State Reserves. The summary statement of the report is here: “The current economic environment poses a substantial risk to state revenues. In the past, when economic conditions have been similar to today, revenues subsequently have tended to decline. This presents the Legislature with the challenge of balancing two key risks when selecting a revenue assumption for the 2023-24 budget. On the one hand, adopting overly optimistic revenues which fail to account for the potential of an economic downturn would create a high risk of shortfalls in future years. On the other hand, while it appears likely a recession will occur, it is far from certain. Further, the exact timing and severity of a possible recession are unknowable. Because of this, adopting revenues consistent with the abrupt onset of a recession would run the risk of making cuts to public services before they are necessary.”
Today’s current economic environment is a mixed bag. The GDP is tracking in ranges from 2.2 to 2.8 percent growth annualized. In anecdotal comments around Santa Cruz County, retail sales are slower than anticipated as we hit the last two weeks before the Christmas holiday festivities. Many say that online sales are impacting local businesses. However, on a national scale, the job growth and rise in real inflation have adjusted consumer buying which has powered the economy for most of 2022. This is about to change according to several economic forecasting reports.
Millennials are working and will likely stay employed and demand the kinds of goods and services that they buy. Gen Z is part of the entry level workforce or graduating from colleges and universities. They will be vulnerable to layoffs and some might struggle to find employment.
Boomers are retiring in a rapidly growing wave that started in 2020. In 2023 and 2024, we will see the largest waves of Boomers turn 65. An estimated 36 percent will not retire and elect to remain in the workforce. Nevertheless, expect many of the senior people in your workforce to retire and require replacements. This will lighten business healthcare expenses but could increase recruiting expenses.
Consumer sentiment from surveys is currently at levels that are consistent that we are in or near a recessionary environment. The American consumer is clearly frustrated with high gasoline prices, the steep decline in stock values, and on-again-off-again shortages of goods. The high levels of inflation are leaving real household incomes lower than they were a year ago. Compared to last year, consumers will spend as much this Christmas but receive less. That means businesses will sell fewer products, while facing higher costs. Consequently, there is a greater likelihood of a lower net income holiday season for retailers that disproportionately rely on the holiday season.
The recent stretch of high-tech layoffs are starting to pile up. There is a cycle in the tech industry fueled by hiring in the last ten to eighteen months for product execution in the new year. Yet, large tech companies are pulling back with a large number of layoff reports. Yet it hasn’t produced any evidence of the unemployment rate. But economic theory shows that once a tech sector slump happens other industry sectors are soon to follow. With more layoffs coming, and the record number of job openings present, the economy will shrink from 11 million to 6 million over the next four to six months.
Manufacturing is facing significant challenges as 2023 approaches. High producer prices, rising interest rates, and supply chain issues are on the horizon. Deteriorating business confidence is another key concern. Expectations can turn on a dime, but the increasingly pessimistic outlook among businesses does not bode well for the near-term prospects.
The housing market has cooled off.. Both existing home sales and new home sales are below their pre-pandemic levels now. If your business relies on real estate, 2023 will be tough because mortgage rates will remain high and the risk of declining real incomes is high.
The interest on the 30-year fixed mortgage rate has backed off a bit from its peak of more than 7 percent, but the rate has effectively doubled since the start of the year. Buyers are priced out of the market and will have to delay their jump into homeownership.
However, some buyers will still be looking for ways to buy homes using creative financing arrangements that should work to sell homes in 2023.
Real estate will return to normal towards the end of 2023, or after the traditional buying season is over. Why? Because the business cycle bottom may be occurring at that point. Perceived bottoms are the start of stock market rallies, and there will be bargain-hunting buyers for all assets.
Here are three predictors of what to watch for: Watch the monthly labor market reports for early clues on the direction of the economy. Unemployment is currently 3.7 percent. Job creation is around 250,000 per month. An upward trajectory in the former and a downward trajectory in the latter represents the weakening that we are forecasting.
Watch the bond market. The inverted yield curve would have righted itself and the spreads between short and longer term yields will be widening, suggesting the end of the contraction.
Watch the stock market. A sharp upward movement lasting more than a few weeks would be an indication that the bear market has reversed and the market is projecting rising growth 6 months in the future.
On February 15, 2023, the Chamber and UCSC will host an economic forum at the Cowell Haybarn on the UC campus. Our keynote speaker is Jon Haveman, a Principal at Marin Economic Consulting, an economic research and consulting firm specializing in entrepreneurship and local economic issues. You can read about his background and register for the forum here: https://web.santacruzchamber.org/events/UCSC-Economic-Forum-Luncheon-5329/details. Part of the forum will include a panel of local economic experts from the University and the Santa Cruz community. Let’s see where the next 60-plus days take us.
And finally, one of the early economic indicators will happen in January when Governor Newsom releases California's 2023-24 State Budget. Currently, the Dept. of Finance is predicting a shortfall of nearly $24 billion, so for the first time since the last 2015 timeframe, the Governor and California Legislature will be looking at a spending plan. The Legislative Analyst Office (LAO) publishes the Fiscal Outlook in anticipation of the state budget process. The goal of the report is to help the Legislature in crafting the 2023-2024 budget. You can review the report here: https://lao.ca.gov/Publications/Report/4646
The topics in the report are similar to the other economic reports I have seen in the last few weeks. Economic Conditions and Revenue Projections, The Budget Problem (i.e $24 billion deficit). State Budget and Inflation and the State Reserves. The summary statement of the report is here: “The current economic environment poses a substantial risk to state revenues. In the past, when economic conditions have been similar to today, revenues subsequently have tended to decline. This presents the Legislature with the challenge of balancing two key risks when selecting a revenue assumption for the 2023-24 budget. On the one hand, adopting overly optimistic revenues which fail to account for the potential of an economic downturn would create a high risk of shortfalls in future years. On the other hand, while it appears likely a recession will occur, it is far from certain. Further, the exact timing and severity of a possible recession are unknowable. Because of this, adopting revenues consistent with the abrupt onset of a recession would run the risk of making cuts to public services before they are necessary.”