By Manfred W. Keil and Robert A. Kleinhenz | Inland Empire Economic Partnership
There is much talk these days about an imminent recession and the high inflation rate. Real Gross Domestic Product already fell during the first quarter of the year, and the GDPNow model of the Federal Reserve in Atlanta forecasts another decline of 1.5% for the second quarter.
The inflation monster is inching toward the 10% mark. Inflation at the gas pump acts like a tax increase: you really don’t care to whom you’re paying higher prices. Let’s do some calculations.
At an inflation rate of 10%, prices would double roughly every seven years. A Big Mac with cheese would cost you $8.60, instead of $4.30; a grande nonfat latte at Starbucks $8.90, not $4.45; Charmin toilet paper would go for $21.07, from $10.57. Of course, these higher prices would not be a problem if your wages and salaries also doubled. Unfortunately, wage growth currently is less than inflation.
But high inflation is not the same as a recession. For that you need to see a decline in “real” economic activity, such as output, or inflation adjusted GDP, or a significant and sustained increase in unemployment.
What are the numbers here and how does the Inland Empire differ from the state and the nation?
While California is still short some 194,000 workers compared to February 2020 and its labor force is 307,000 people below the level seen prior to the start of the downturn in March 2020, the national numbers are not much better: There are 148,000 fewer workers and the labor force is smaller by some 460,000 workers.
What about the Inland Empire? Let’s celebrate the good times (come on). According to the latest available numbers, the labor force increased by almost 30,000 compared to February 2020; and employment has reached a new peak, being 40,000 above the pre-pandemic level.
Does that mean every major sector has also recovered? No.
Which sectors are the winners or losers? The biggest winner is, you guessed it, Logistics, with an increase of 56,400. After all, we have changed our retail spending habits to the point where we are ordering food through Uber Eats and Instacart. New development of commercial, industrial, and residential structures has always been a key sector of growth for the Southern California region, since roughly 40% of U.S. imports come through the ports of LA and Long Beach, and the area around the ports is built up and does not allow for more warehouses.
However, some have raised environmental concerns and, as a result, there has been some local opposition to expanding the sector further. We would add that expanding and relying on the logistics industry cannot be a viable long-term solution for the Inland Empire, at least not in its current form. Why? Consider the following.
There are roughly 385 Metropolitan Statistical Areas, or MSAs, in the United States. “Los Angeles-Long Beach-Anaheim” or “Greater Los Angeles” is second largest to New York MSA.
MSAs consist of one or two regions or counties. The Inland Empire (“Riverside-San Bernardino-Ontario” MSA) just passed San Francisco as the 12th most populous. But if we sort the data by GDP, our ranking drops to 20th. Still not that bad, right? But when you consider moving to an area, you do not consult the size of GDP. What matters to you besides housing affordability is how much the average person makes, since that is also a proxy for average income.
Here comes the nasty surprise: The Inland Empire drops to 340 out of 385 MSAs for wages.
How is this possible? It means the output we produce within our area does not add much value, the result of Logistics, Leisure and Hospitality, and Retail Sales just not being the high wage sectors that Finance, Information, and Professional and Business Services represent. To be fair, if we add the income made by commuters to the equation, the Inland Empire strikes back and rises to 290 — still not a place you want to be in 20 years. To make matters worse, the fourth Industrial Revolution (artificial intelligence, robotics) will affect the Logistics sector negatively, since much of the automation will occur here. Time to think about economic policies to steer the economy in the right direction over the long run.
Beyond the Logistics sector, there are other positive notes in the employment numbers.
Leisure and Hospitality, the sector that suffered most during the pandemic, has now added roughly 3,000 jobs. Perhaps more importantly, the better paying sector of Professional and Business Services has employed 7,300 more people.
Which are the Biggest Losers? We are short 2,400 jobs in Other Services, and Government. Not Federal Government or State Government, but we are still 9,000 positions short in Local Government hires. This is the time to approach your county and municipality leaders and inquire about the number of jobs lost over the last two years and why the positions have not been refilled. And, more importantly, to have them start thinking about how to attract better paying industries. Not only would that result in a higher per capita GDP, but also give commuters more incentives to work locally.
Manfred W. Keil is chief economist, Inland Empire Economic Partnership and associate director, Lowe Institute of Political Economy, Robert Day School of Economics and Finance, Claremont McKenna College.
Robert A. Kleinhenz is CEO Kleinhenz Economics, Cal State Long Beach.
The Inland Empire Economic Partnership’s mission is to help create a regional voice for business and quality of life in Riverside and San Bernardino counties. Its membership includes organizations in the private and public sector.