SCAG Economic Roundtable Update

Third Quarter, 2023


SCAG’s Economic Roundtable met for its quarterly discussion on the current state of the regional economy last week. Labor market conditions were a major focus of the conversation and several overarching themes emerged: 

  • Although a recession had been considered likely for the third quarter this year, the Roundtable was generally optimistic that a recession will be averted or will be mild, especially in California.   
  • The region’s economic resiliency is driven by strong labor markets.  However, the region is facing a number of labor disputes in regionally significant industries. 
  • Commercial real estate is a weak spot in the region’s economy and housing continues to be soft, largely due to high interest rates and low supply.  
  • Federal spending through the Inflation Reduction Act is ramping up and presents significant opportunities and multiplier effects for the region, especially surrounding green technology.  Lithium mining is an emerging opportunity in Imperial County with commercial grade production possible by 2025. 

Labor Market 

  • The SCAG region’s unemployment rate is at pre-pandemic levels at 4.5 percent (4.8 percent seasonally adjusted). All six counties are experiencing low unemployment rates. The lowest is in Orange County at 3.2 percent (3.6 percent seasonally adjusted). While Imperial County has the highest rate at 16 percent (17.6 percent seasonally adjusted), this is far lower than historical levels in Imperial County. Continuing unemployment claims dropped in the last quarter, indicating that laid-off workers are finding alternative jobs quickly.    
  • The region’s labor supply is at 9.2 million, about 3.8 percent below the pre-pandemic high of February 2020. In the Inland Empire counties, labor supply slightly exceeds the February 2020 pre-pandemic levels. The Inland Empire counties also lead the state in employment gains since the pandemic; however, total employment is slightly below the post-COVID highs set in Fall 2022.        
  • There have been labor disputes in regionally significant sectors, including logistics, entertainment and hospitality. Disputes are largely driven by concerns over working conditions, wage levels not keeping up with inflation or corporate profits – and in the case of the entertainment industry, artificial intelligence (AI). 
  • The tight labor market is a cause of many current economic anomalies; it is expected to take some time for the effects of inflation and interest rate hikes to work itself through various parts of the economy.  

Real Estate Market 

  • Sales of existing homes are still down significantly due to prices and rates both being higher for those looking to “step up;” however, sales are ’starting to increase. Despite supply constraints, new development is still rising in much of the region — and homebuilders’ stock prices are especially strong in reflecting optimism.  
  • Commercial real estate is the worst performing large sector, driven down by marquee loan defaults in large metropolitan areas and generally high office vacancy rates.  However, banks don’t want to take properties back and have an incentive to work things out with building owners to prevent accelerating vacancies or defaults.  

Broader Economy 

  • As of July, economic news as a whole is better than it has been all calendar year. Stock market indices are up and consumer sentiment from the University of Michigan’s index is the highest in two years. 
  • While many Economists predicted a third quarter recession, nothing suggests it is actually starting or about to come soon. Confidence is helpful in avoiding the self-fulfilling prophecy, which can trigger a downturn. In retrospect, the uniformity of COVID-era support payments in allowing for spending despite uncertainty may have been a major factor. 
  • Major risks may be on the horizon in commercial lending.  Nationally, corporate bankruptcies are at the highest levels since 2010, up 68 percent relative to the first six months of 2022. This is impacting some sectors more quickly, particularly the region’s large hospitality sector.  The reason appears to be that businesses are paying far higher rates for new commercial loans, which may lead to some difficult choices for small businesses—and lenders. 
  • Taxable sales are down as consumers continue to shift consumption from goods to services.  While personal spending is positive nationwide, this may be a challenge for local government coffers.  
  • The region’s year-over-year core inflation rate is 1.3 percent lower than a quarter ago; however, this is largely the result of a 15 percent drop in energy (mainly gasoline) prices. This drop opens the possibility of only one (rather than two) remaining interest hike from the Federal Reserve in the rest of 2023, which would be a positive signal. 

SCAG’s Economic Roundtable is a consortium of regional economic experts that meet quarterly to update the region’s economic outlook and discuss challenges and opportunities facing the six counties that comprise SCAG. 

Members are: 

  • Imperial County, Michael Bracken, Development Management Group, Inc. (DMG)
  • Los Angeles County, Shannon Sedgwick, Los Angeles County Economic Development Corporation (LAEDC)
  • Orange County, Wallace Walrod, Tech Coast Consulting Group (TCCG) and Orange County Business Council (OCBC)
  • Riverside & San Bernardino Counties, Manfred Keil, Inland Empire Economic Partnership (IEEP) and Claremont McKenna College
  • Ventura County and the SCAG Region, Mark Schniepp, California Economic Forecast (CEF)
  • Equity, Karthick Ramakrishnan, University of California, Riverside (UCR) and California 100
  • Sustainability, David Roland-Holst, Berkeley Economic Advising & Research (BEAR) and University of California, Berkeley
  • Workforce Development, Shaun Fernando, Guidehouse Consulting