Inland Empire Regional Intelligence Report
This report explores how the Inland Empire has been affected by the novel coronavirus, including how the region will recover, the damage caused, and the reaction to the pandemic. The report traces how the national, state and Inland Empire economies have performed since the outbreak. Although the economy appears to have bottomed in April, a full recovery of the region’s labor market is not expected until the end of 2021.
The novel coronavirus (COVID-19) has created a worldwide economic shock, one from which the United States has not been immune. Health mandates to curb the spread of the virus have restricted and limited business operations, in some cases for close to three months.
Throughout the mitigation phase of the pandemic, the global priority has been to control the transmission of the virus and safeguard capacity in the health sector. The mandates have been intended to spread cases over a prolonged period to reduce strain on health care systems, allow more time to find better treatments and increase testing capacity, and, in some cases, build contact tracing programs. These measures have resulted in business closures, supply chain disruptions, unprecedented layoffs, and reduced consumer demand.
The economic situation is unique because the economic damage sustained is not the result of structural imbalances in the economy, as in most other recessions, but the result of mandates. Although the mandates have been significantly eased in many places, many restraints remain or have been reestablished. As the virus has surged in new parts of the nation, local governments have been slowing, and in some cases reversing, measures to lift limits on activity. The length of time before health mandates are fully lifted, and the consumers’ confidence to resume their normal activities, will be key in determining the speed of the economic recovery.
The Economic Fallout
Employment: Nationally, nonfarm employment rose in May following record job losses in April. In May, employers added about 2.5 million jobs, following a loss of roughly 22.5 million in April. In another positive sign, the unemployment rate fell from 14.7% in April to 13.3% in May.
Industries Affected: The economic fallout has hit some sectors harder than others. Despite the addition of 1.2 million jobs in May, the Leisure and Hospitality sector has lost 6.3 million jobs nationally since March 2020. Since this time, the sector has accounted for roughly 37% of all jobs lost nationally. The Leisure and Hospitality jobs added in May accounted for nearly half of the total job gains in the month. In Leisure and Hospitality, most job gains have been in Food Services, as restaurants reopened. Jobs in Accommodation will be slower to return, because it relies mostly on international and inter-regional travel, which has been relatively slow to recover. As of June 23, year-over-year passenger traffic through U.S. airports was down 81%1.
Other industries with sizable job increases in May were Construction (444,000 added, compared with 1 million lost in April), Retail Trade (368,000 added, compared with 2.3 million lost in April), and Health/Education (424,000 added, compared with 2.6 million lost in April). As these figures suggest, despite the positive gains in these sectors, there is a long way to go before these jobs are recovered. Furthermore, not all industries grew in May: The Government (585,000 jobs lost), Logistics (19,000 lost), and Information Services (38,000 lost) sectors declined.
Slow Recovery: These numbers reveal that the labor market in the U.S. economy experienced significant trauma in April and that May stanched the bleeding. The labor market’s recovery should be slow but steady, with pre-pandemic employment levels returning in the second half of 2021.
GDP: In the first quarter of 2020, the national economy contracted 5%. This is noteworthy because California was the first state to mandate stay-at-home orders, on March 19, 12 days before the end of Q1. Given the magnitude of the drop in GDP, it’s unlikely that it was due solely to stay-at-home orders. The drop in demand was probably due mostly to consumers’ changing their behavior in response to virus fears, before mandates were enacted. This does not bode well for economic figures for the second quarter, when stay-at-home measures were in place longer. In addition, the recent virus surges in California, Texas, Florida, Arizona, and other states probably constrained consumer behavior at the end of Q2 and will taper growth in Q3. In Q2, GDP has been predicted to have fallen from 25% to 40%, on an annualized basis, depending on the forecasting agency.
Personal Income: Disposable personal income fell 4.9% in May, but personal consumption expenditures increased 8.2%. This may seem counterintuitive (increased spending in the face of income losses) but is due to the stimulus checks and enhanced unemployment benefits. These Federal measures expire at the end of July. If the economy has not returned to trend by then, the end of the stimulus will act as a headwind for the economy. In a positive sign, Congress has extended parts of the Paycheck Protection Program (PPP), which has enabled employers to keep many of their workers employed.
In May, as officials grappled with the appropriate response to the pandemic, the labor market in California showed signs of life. Nonfarm employment in the state expanded by 141,600 positions after the loss of 2.4 million jobs in April. Given this modest rebound, the unemployment rate in the state remained stubbornly high at 16.3% in May, down from 16.4% in April.
Year-over-year employment in California fell 13.0%, the second-largest annual decline on record, trumped only by April’s figures. The state performed slightly worse than the national economy, where nonfarm employment declined 11.7% over the period. About 75% of workers who have been laid off in the state report that they are temporarily unemployed, and the hope is that many will return to their jobs as businesses reopen. That said, following the surge in cases in the state, many restrictions have been placed back on activity, which will certainly slow the speed of the recovery. Furthermore, many workers have been unemployed nearly five months.
From May 2019 to May 2020, 2.2 million workers were added to the state’s unemployment ranks. In May, they totaled 3,018,200, over three and half times the level of a year earlier. The magnitude of the job losses and the high unemployment rate suggest that the damage to the state’s labor market will take some time to repair.
The state has lagged the national economy for two possible reasons. Some states reopened businesses more quickly. It could also be that Californians are more cautious than those in other parts of the nation and have been reluctant to resume normal activities.
Leisure and Hospitality has been the hardest-hit sector, shedding over 890,000 jobs from May 2019 to May 2020, nearly a 44% decline. With the state mandating that a number of counties (covering 70% of the state’s population) reverse parts of their reopening, jobs will be slow to recover in the sector. Other sectors significantly affected have been Retail Trade (285,000 jobs lost), Education and Health Care (223,000 lost), Professional and Business Services (208,000 lost), and Other Services (162,000 lost).Virtually no major sector was spared from job losses associated with COVID-19.
The state will not regain its lost jobs until the end of 2021 for a number of reasons:
1. Many segments of the state economy will not operate at full capacity until at least the end of the year.
Many universities have moved to online instruction until the end of the calendar year. This means that the economies that surround universities will continue to struggle.
Government restraints on international travel, coupled with cautious travelers, mean the peak travel season will come and go before jobs in tourist-related sectors can be fully regained. Relatedly, executives of the major airlines have said to expect significant layoffs once restrictions tied to Federal bailouts are lifted.
Professional and collegiate sports will return at reduced capacity. Major League Baseball has proposed cutting its season in half. And in Europe, sports leagues are returning to empty stadiums. We expect to see a similar situation in California.
Most major music concerts and festivals in the state have been postponed until 2021.
Theme parks around the world are reopening at reduced capacity.
To be clear, most of the activity outlined above is found in the Accommodation and Food Services and the Arts, Entertainment, and Recreation sectors, which account for about 13% of the state’s workforce. But because of multiplier effects, the bleeding will not be restricted to these sectors. The plunge in air travel, for example, has meant that companies like Boeing have seen the demand for planes crater and have laid off thousands.
2. As in any recession, some employers will find productivity improvements and learn they can produce more or the same level of output with fewer workers. Such productivity gains benefit the economy in the medium and long term but cause short-term labor market dislocation.
3. Strains to public budgets will inevitably lead to Government job losses.
4. Finally, the effect of Federal policies, which have kept the economy on life support, will fade. At the end of July, the additional $600 per week in unemployment benefits will disappear. Congress could extend the program, but at present, the economy is set to lose a major stimulus in the next few weeks.
HOW THE INLAND EMPIRE HAS PERFORMED
As of May, the response to the virus had taken a significant toll on the region’s economy. Compared with a year earlier, nonfarm employment was down nearly 12%, or roughly 180,000 positions. This compared favorably with Orange County, which had a 15% contraction in nonfarm employment, and Los Angeles County, where it fell 13%.
It was also better than the state, where nonfarm employment declined 13%. Substantial losses in Los Angeles and Orange counties were primarily driven by their larger concentration of employment in the Leisure and Hospitality and Retail Trade sectors, which had significant job losses.
All sectors of the Inland Empire economy have shrunk since the beginning of the pandemic, except for Logistics, which has grown 3.6% (2,600 jobs). Again, in addition to national figures, the performance of industries in the Inland Empire is our best guide to understanding how the region has fared.
The Logistics sector, a longtime driver of growth in the Inland Empire, is the only major sector to have expanded on a year-over-year basis (2.6%, or 3,600 jobs) since stay-at-home orders began. The sector has benefited from a consumer shift to increased online spending.
Leisure and Hospitality
The Leisure and Hospitality sector sustained the biggest job losses in the region, with a loss of 78,500 positions, or 46%. The sector has accounted for 44% of the net jobs lost in the region year over year. As businesses reopen, Food Services jobs should rebound more quickly than Accommodation jobs because restaurants, in some capacity, will fill up faster than hotels. Air travel, although it has picked up since the lows of April and May, is still about 80% lower than its pre-crisis level. Given constrained inter-regional and international travel, the pain for the Accommodation subsector will last longer.
This category includes auto repair and maintenance, personal laundry services, and personal care, such as nail salons and hair salons. Together, they sustained the second-biggest annual percentage drop: 26%, or roughly 12,000 jobs. These sectors involve a great deal of personal contact, which means that the recovery of the jobs will depend on consumers’ level of comfort in resuming their normal activities.
As expected, Retail was hit hard, with a year-over-year loss of 32,200 jobs, or 18%. This is another sector disproportionately affected by stay-at-home orders and consumer hesitancy.
Jobs lost in the Manufacturing sector totaled 12,700 from a year earlier, or 12.5%. This sector was perhaps the most affected by stay-at-home orders, because its workers have little ability to work remotely. With stay-at-home orders modified, we expect a significant rebound in sector employment.
THE INLAND EMPIRE’S ROAD TO RECOVERY
Despite the historic job losses in April, the economy appears to have bottomed, with the May employment data indicating recovery in some sectors. Although this is a positive development, nonfarm employment in May was well below pre-pandemic levels, and despite the month-over-month increase, there is a long way to go before March and April job losses are reversed.
The data in this report show that the Inland Empire economy experienced considerable trauma in the months following the viral outbreak. Because the economic fallout has been the result of public health mandates rather than a structural imbalance in the economy, as was the case during the Great Recession, it is tempting to assume that jobs will return as quickly as they left, as businesses reopen. Regrettably, cases in the U.S. and Southern California are resurgent. Until the spread is contained, clouds will linger over the region’s economy. The growth of the virus will prevent a quick recovery.
This all means that the region’s employment highs and lows have probably been posted for the year. Before the virus outbreak, the unemployment rate in the region had fallen to less than 4%. We will not see sub-4% unemployment in the region again this year, and it will take until the second half of 2021 for the labor market to fully recover. Predicting exactly when the market will recover is contingent on the trajectory of the virus and the public’s reaction to it.