From a demand standpoint, the U.S. economy has completely recovered from the pandemic recession. And output, although not there yet, will return to its long run trend in the near-term future. That according to a new forecast released yesterday at the 12th annual Inland Empire Economic Forecast Conference, hosted by the UC Riverside School of Business.

The new outlook argues that while COVID-19 has been a human tragedy, it has never created the depression like economic conditions predicted by so many – and fear of those conditions led to a far too vigorous stimulus response. 

According to the new forecast, the current economy has been set on fire by an overly aggressive government reaction to the pandemic, and it is that incitement that is driving today’s ballooning inflation and supply chain disruptions.

“What we saw was one of the most tremendous levels of economic stimulus ever dreamed of,” said Christopher Thornberg, Director of the UC Riverside School of Business Center for Economic Forecasting and one of the forecast author. “Lots of public money created lots of private sector wealth – $29 trillion in household wealth in the United States to be exact – and that has overheated the economy.”

The effects of that wealth are showing in the form of high savings rates, excessive consumption, rapidly rising asset markets, and exploding home prices. Indeed, for every dollar lost during the pandemic, the U.S. government gave back three and a half dollars, according to the analysis.

Although the forecast is predicting a continuation of robust economic conditions in the nation, California, and the Inland Empire over the next few years, in the longer term, the excessive Federal stimulus will introduce instabilities such as long-run monetary inflation, deepen the nation’s long-run fiscal budget challenges, and possibly plant the seeds for the next downturn.

Select Key Findings: 

• In the United States, consumer spending on services including healthcare, recreation, travel, and hospitality is still 3% below where it was pre-pandemic. Business investment in non-residential structures also remains depressed, as do U.S. exports.
• Weakness in these sectors has been more than offset by stronger than normal levels of activity in other parts of the economy, including consumer spending on goods, a booming housing market, and business investment in equipment and software.
• Although long-run monetary inflation (increase in monetary supply) remains a significant risk, the inflation of the past few months is most likely transitory and is being driven by tight supply chains and strong consumer demand.
• There are still 6 million fewer jobs in the United States and 1 million fewer in California than there were prior to the pandemic. However, over the last two months there have been more than 11 million job openings in the nation, 40% more than the highest-ever reading (in 2018). The U.S. is not facing a problem with labor demand, but with labor supply.
• Notably, California is now producing pre-pandemic levels of output with nearly 1 million fewer workers.
• California’s population growth turned negative in 2020. The primary reasons include the state’s low housing supply and extraordinarily high housing costs, as well as stringent immigration policies enacted under the Trump administration. Combined with the overall labor shortage, this population trend will place additional upward pressure on worker wages in the state.
• Although not sustainable, home price growth in some parts of California has been truly staggering. On average, prices in the state expanded by more than 30% over the past year.
• The Inland Empire has experienced an even stronger economic recovery than the rest of California. The region’s performance has been boosted by its central role in the state’s logistics complex and has directly benefited from the consumption that shifted online during the pandemic.
• Overall, in the Inland Empire, 2022 will see a continuation of the trends experienced in 2021. Constrained labor supply will push wages higher for workers, and higher wages, in turn, should draw more workers into the labor market.
• The conference’s special topic explored the idea of developing a ‘major league downtown’ in the Inland Empire, something that smaller metropolitan areas across the country, from Milwaukee to Seattle have, but that is missing from the IE.
• A Key Takeaway: Despite being the 13th largest metropolitan area in the United States, the Inland Empire is missing a high-profile element of other major metros – it has no major league sports teams. The reason is not solely because there is no adequate stadium to put a team. Underlying that fact, the IE doesn’t have the kind of dynamic, dense, core urban area (downtown) that generally surrounds major sports stadiums and that can attract investment and interest.

The 12th annual Inland Empire Economic Forecast Conference was held virtually on November 10th.  A copy of the forecast book can be downloaded in its entirety here.