Southern California’s Strengths Could Soften Impact of Recession

At the 13^th Annual Southern California Economic Summit, hosted Thursday by the Southern California Association of Governments (SCAG), economists reporting on each of the six SCAG region counties indicated Southern California’s current economic strengths as:

• Continued growth in core industries, such as information, logistics and tourism.
• Measurable increases in labor productivity in 2022.
• New development and construction in infrastructure and housing, both public and private.
• Household debt and real estate values that are less likely to decline than elsewhere.

“Southern California is a major economic driver, not only for the region but the world. As a result, we are in a better position than most to withstand some of the negative economic pressures that are surfacing,” said Wallace Walrod, Chief Economist for the Orange County Business Council.

More than 400 regional leaders participated in this year’s Summit, which took place amid growing uncertainty about the state of the global economy. While the job market has been strong throughout much of the world, inflation concerns have triggered interest rate hikes as governments try to rein in prices.

Building on prior annual summits, SCAG convened a new Economic Roundtable consisting of experts across the region as well as specialists in labor, equity and sustainability to provide both a current snapshot of Southern California, as well as a preview of economic opportunities and challenges ahead. Their research was released in a report that offers caution on turbulence ahead from global forces, but also promise that Southern California is better positioned than other regions to withstand it.

Among factors that could moderate the impacts of a possible recession across the six-county SCAG region:

• Strong outlooks for the three industry sectors currently experiencing the most robust job growth: Information; Transportation and Warehousing; and Arts, Entertainment and Recreation.
• Labor force participation throughout the region has returned to pre-pandemic levels.
• Continued heavy demand for housing, commercial building and infrastructure development, which has led to the highest construction employment levels since the 2008 housing crash.
• Strong demand and spending on non-residential construction, which has increased by 19.3 percent, in real terms, over the past year – a trend expected to persist into 2023.
• Productivity gains in 2022, as the region’s GDP/capita increased 7.6 percent in 2022.

The report also identified localized opportunities across the region. In Imperial County, for instance, billions of dollars of investment in new geothermal and rare-mineral extraction has the potential to create thousands of new jobs and significantly increase the county’s tax base. The Inland Empire’s role as a global supply chain hub should continue to drive job growth, though the area’s long term prospects would benefit from diversification into sectors offering higher quality jobs. And in Orange County, emerging industry clusters, such as medical devices, biotech, information technology and advanced transportation (EVs and hydrogen), along with major new developments, such as Disneyland Forward and OCVibe, promise vibrant future economic growth.

“Improvements in the global inflation picture, combined with continuing 2022’s positive momentum, the region’s economy raises hopes that the much-anticipated global recession of 2023 may  not  impact Southern California as severely,” said Dr. Gigi Moreno, Senior Economist at SCAG.

Even so, the economists urged policymakers to recognize and be able to adapt to early clues about a broader economic weakening, including:

• Significant downward shifts in the labor market.
• A meaningful slowdown in consumer and business spending in the region.
• A collapse of interest rate-sensitive sectors, such as new and existing housing.
• Rising unemployment leading to increased out-migration from the region or inability to service mortgage payments.
• Other debt that would raise the probability of asset devaluation. 

Other threats include high housing costs and a proliferation of lower paying jobs, which have flattened real income growth, could soften consumer spending, and further increase wealth inequity. Another challenge is a decrease in the region’s overall population – down 300,000 people since 2019 – due to out-migration, increased mortality and a steep drop in foreign immigration, which threatens to stymie innovation and job growth.

In Los Angeles County, real gross domestic product growth is expected to slow to 2.9% in 2022 and 1.3% next year.

“LA County’s strong post-COVID recovery is at risk of a slowdown over the next five years,” said Shannon Sedgwick, Director of the Institute for Applied Economics at the Los Angeles County Economic Development Corporation (LAEDC). “The deep socioeconomic inequities spotlighted by the pandemic remain and are now seen with lower income households disproportionately feeling the effects of inflation.”

Ventura County, meanwhile, is among the most vulnerable localities with the SCAG region with regard to a potential recession.

The county has struggled this year to attract the workforce lost during the pandemic recession. Despite a historically low unemployment rate of 3.2 percent, the county has thousands of unfilled positions. 

“The local economy in Ventura County is the most sluggish in the SCAG region in terms of job growth, new housing, and consumer spending on retail goods and services,” said Mark Schniepp, Principal of the California Economic Forecast.

Click here for the complete Southern California Economic Update.