SCAG’s Economic Roundtable met for its quarterly discussion on the current state of the regional economy. The discussion focused on the potential impacts of the Silicon Bank failure on the SCAG region, the logistics sector, water resources, and the regional employment outlook.
Several overarching themes emerged from the conversation:
- Tight labor market conditions continue in the SCAG region, with signs of cooling.
- The recent Silicon Valley Bank failure has triggered credit tightening, which can slow regional growth and large regional development projects, including housing developments.
- While the extent of damage from the recent storms is still unknown, the historical snowpack poses a continued risk of flooding. However, flooding is a short-term problem, and policymakers must keep sight of the continued threat of long-term water shortages. The respite from drought is an opportunity to build water resilience in the region.
- The competitiveness of the region’s ports and logistics sector has been negatively impacted by the uncertainty created by the ongoing labor dispute at the ports. Other factors contributing to the decrease in volume at the region’s ports and logistics sector include softened demand for goods, competition from Gulf and East Coast ports, potential environmental regulations, and risk from automation.
Inflation and Banking Situation
- The regional (Los Angeles-Long Beach-Anaheim MSA) annual inflation rate in March 2023 was 3.7%, down from 5.1% in February 2023.
- High interest rates were a factor in the failure of Silicon Valley Bank (SVB) last month. The Roundtable does not foresee significant banking failures regionally due to the strength of the federal deposit insurance system and more risk-averse lending behavior following the SVB collapse. California and Los Angeles County have more exposure to regional banks relative to the U.S. as a whole and are more vulnerable to impacts from the SVB failure. City National Bank ($96.5 billion), based in Los Angeles, has one of the highest ratios of unrealized losses to equity relative to its peers.
- Expectations about credit conditions are worsening, with banks pulling in lending, which may impact the region’s growth. The evolving credit crunch is starting to impact the region. For example, some entitled projects are facing difficulties getting financing.
- High interest rates are also affecting the already weakened commercial real estate market. Many commercial real estate investments in the region have loans rolling over to higher rates in the next one to two years. The largest office building owner in Los Angeles recently opted to default rather than refinance at higher rates, given the weak demand for office space.
- Some banks have significant exposure to office real estate market assets. However, community banks have seen an influx of deposits because people are spreading around their $250k FDIC insurance threshold.
- Small and mid-sized banks disproportionately serve small and minority-owned businesses. Regional credit unions and community banks have solid access to capital and continue to lend to small businesses. However, capital-intensive small and medium size construction firms face credit pressures because the capital required for these firms is currently unavailable. This may slow housing development in the region.
- Increased work from home combined with high interest rates is impacting the downtown Los Angeles office building market, with high vacancy rates and several downtown L.A. high rises in foreclosure. Office market weakness is anticipated to persist over the next couple of years.
- Roundtable members expect continued uncertainty in banking markets, at least through June 1, when banks are required to report their share of uninsured deposits.
- Cargo volumes at the Ports of Los Angeles and Long Beach fell 20 percent between August 2022 and March 2023 following the expiration of the dockworker contract in July 2022. The reduction in volume at the Southern California ports is due to uncertainty created by the stalled contract negotiations, which has induced importers and exporters to divert cargo to competing ports. Other factors also contribute to the reduced cargo volumes, including:
- A national slowdown in consumer demand due to inflation and uncertainty about recession,
- High inventory-to-sales ratios,
- High interest rates also make businesses wary of investing in more inventory, and
- The expected seasonal downturn in cargo.
- Port Hueneme in Ventura County is the only West Coast port not feeling the effects of the port labor issues. Trade at Port Hueneme is surging to all-time highs.
- Recent policy reversals in China provide a positive outlook for the ports. China has reversed its zero-COVID stance, has relaxed its invasive relationship with its technology sector, and is creating a foreigner-friendly investment climate. California exports have reached their highest level in the past five years.
- Logistics sector jobs in the Inland Empire increased from 9 percent of all jobs in 2012 to 16 percent in 2022. However, logistics sector jobs are among the five most vulnerable to the risk of automation, with 50 percent of Inland Empire occupations at high risk of automation. However, the actual risk of automation of logistics sector jobs may be less than 50 percent because the adoption of robotics technologies in warehouses has been slower than suggested by the significant decline in the cost of the technology.
- The Infrastructure Investment and Jobs Act of 2021 and the Inflation Reduction Act of 2022 will bring projects online and could lead to opportunities at the San Pedro Bay ports as they are looking to fund cleaner equipment and energy sources to reach sustainability targets.
- The proposed moratorium on warehouse expansion in the Inland Empire promulgated in the draft California Assembly Bill 1000 poses an economic risk to the region that should be weighed against the environmental and health concerns.
- Throughout the region, labor markets are fully back or close to pre-pandemic levels, and unemployment rates in the region are at historic lows. However, the Roundtable members see weakening in regional labor markets, with fewer job openings.
- Even with increased reports of layoffs, impacts from the technology sector layoffs are exaggerated. Unemployment rates remain low, which suggests that many laid-off workers are quickly getting new jobs. There is a concern, however, about a slowdown in the motion picture/TV industries and among downtown Los Angeles businesses, which depend on the robust daytime foot traffic reduced by remote work.
- Roundtable members expect unemployment between 5 and 6 percent within the next 1 – 2 years.
- The recent storms caused significant damage in the region, but it is too early to assess damages. Snowpack in the Sierra Nevada is seven times the average, posing additional flood risk once the snow melts. This provides an opportunity to implement innovative solutions for turning water evacuation into water retention this season.
- The precipitation brought by the Winter 2023 storms also offers positive trade-offs to the region, including,
- Weakened wildfire risk this season,
- Recharging of groundwater aquifers in the region,
- Boost to high-value crops and an extended growing season,
- Reduced seawater intrusion, and
- Significant energy savings from reduced need to move water across the state (water transportation accounts for 19 percent of the state’s electricity consumption).
- Despite the deluge of precipitation, Roundtable members emphasize the importance of planning for long-term water shortages. According to the U.S. Drought Monitor, the eastern part of the region, including San Bernardino, Riverside and Imperial Counties, continue to face “Abnormally Dry” and “Moderate Drought” conditions. The respite from the drought provides an opportunity for the region to get out of water-intensive crops and invest in water-use efficiency, especially in agriculture. The long-term water supply challenges are best addressed through water pricing, which can spur investment in conservation technology.
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.
- 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