Economic Update (Monday, June 7, 2021)

[Lloyd Segal]

Economic Update
(Monday, June 7, 2021)

Is Los Angeles a City-State? I ask this question because no one seems to know what Los Angeles is, exactly: city of angels, revenge city, or something else. In 1925, Aldous Huxley called it “suburbs in search of a city.” William Faulkner, screenwriting in the middle of the century, said it was the “plastic ******* of the world.” Local essayist Lynell George once wrote “I often tell people that Los Angeles makes no sense if you talk about it out loud.” The land of slow car chases and girls with Mercurochrome hair. People use Los Angeles to refer to both the city and the county (which in fact is composed of 88 separate cities). L.A. refers more broadly to what’s known as Greater Los Angeles—that is, the largest metropolitan region in the United States, stretching from the hills approaching Ventura County to the hinterlands of Orange County (if you don’t believe me, just ask the Angels). It is colossal and miscellaneous: some 11 million inhabitants spread over thousands of square miles. But to call L.A. a city doesn’t account for its very own “game of thrones,” the ways county supervisors, city-council members, and eccentric billionaires tug at power. Similarly, Metropolis doesn’t consider our countryside and endless townships. The idea that L.A. County is a collection of villages and suburbs doesn’t do justice to a place that’s bigger than 40 U.S. states in population, bigger economically than almost all of them. And yet L.A. is simultaneously too dense with city centers to be dismissed as a single sprawl. “There are a lot of things that are true of Los Angeles that are also true of other American cities,” the local novelist Héctor Tobar once wrote. “But in no other American cities are those truths as evident as they are in L.A.”


Unemployment Falls to 5.8%. The U.S. added a modest 559,000 new jobs in May even though most companies are eager to hire, signaling that widespread labor shortages are holding back an economic recovery. The unemployment rate, meanwhile, slipped in May to a pandemic low of 5.8% from 6.1%. Yet the official rate almost certainly understates the true level of unemployment by 2 to 3 percentage points, economists say. Tour economy is strong and getting stronger thanks to a disappearing coronavirus pandemic, massive federal stimulus cash and a torrent of pent-up demand. Americans are now rushing to do all kinds of things they couldn’t do during the pandemic. But the biggest obstacle to a full recovery are major shortages of key supplies and labor owing to ongoing disruptions resulting from the pandemic. The emerging labor shortage is the biggest surprise. The unemployment rate still quite high and the U.S. is missing almost 8 million jobs that existed before the pandemic. Economists say early retirements, a lack of child-care options, lingering fear of the coronavirus and generous unemployment benefits explain why more people haven’t returned to work. These problems probably won’t clear up at least until the fall. Many companies have increased wages in an effort to lure workers, but it still hasn’t been enough. Average hourly pay rose 15 cents, or 0.2%, to $30.33 an hour in May. As expected, the bulk of the new jobs in May were created by the businesses that suffered the biggest declines in employment during the pandemic. Restaurants added 186,000 new jobs last month as more Americans went out to eat. Other service-oriented businesses such as hotels, museums, parks and entertainment venues also added a flush of new jobs. Hiring increased among manufacturers, health-care providers and government as well.

ISM Services Index Shows Labor and Supply Shortages. The large service side of the U.S. economy expanded rapidly in May as Americans rushed to do all the things they couldn’t do during the pandemic. But, as mentioned above, widespread labor and supply shortages kept companies from growing even faster. A survey of businesses such as retailers, restaurants and hotels climbed to a record high of 64% last month from 62.7% in April, the Institute for Supply Management says. The U.S. economy is on fire! ISM services index climbs to record 64% in May (Any number above 50% signals expansion and readings above 60% are exceptional.) Americans are eager to go away for vacation, eat dinner out, visit a museum, take in a ball game or do many of the wild and crazy things that were largely off limits in the past year. And they have some extra cash to do it (courtesy of the federal government). The result has been an explosion in sales — and a struggle by many companies to keep up. Labor is in short supply despite high unemployment for example, and prices for virtually everything are on the rise. The price gauge rose again in May and touched the highest level in 13 years. Labor and material shortages are expected to ease in the months ahead, but it could be awhile before businesses fully regain their footing, prices spikes reverse, and our economy is back to normal. All 18 service industries tracked by ISM expanded last month — a rarity. The indexes for production and new orders both increased and topped the 60% mark, pointing to an explosion in demand. Yet business still can’t keep up. The biggest obstacles are widespread shortages and soaring prices for key supplies such as lumber, steel, plastics and medical products, among other things. What many companies did not anticipate was a shortage of labor, especially with the unemployment rate still quite high. Some 8 million people who were working before the pandemic are not working right now. The employment barometer slipped 3.5 points to 55.3%.

Weekly Housing Trends. According to the National Association of Realtors, median listing prices grew at 15.2 percent over last year, marking 39 consecutive weeks of double-digit price growth. Although the size of home price gains has held steady or dropped over the last 4 weeks, median home listing prices are on pace to exceed the record-high May national median asking price of $375,000. New listings–a measure of sellers putting homes up for sale–were up 5 percent, adding on to gains of 18 percent or more in each of the last 4 weeks. Surveys showed that seller confidence continued to rise in May. Extra confidence plus our recent survey finding that more homeowners than normal are planning to list their homes for sale in the next 12 months suggest that while we may not see an end to the sellers’ market, we might see the intensity of the competition diminish as buyers have more options to choose from. Total active inventory remains 52 percent below this time last year. The total number of homes actively available for sale continues to be less than half of last year’s abnormally low levels. Continued scarcity of homes for sale is likely a contributor to the fact that among new home owners whose companies had not finalized return-to-work plans at the time of the survey, nearly three times as many would rather find a new job than sell and find a new home in the event in the event that they have to be go to the office in the future. Time on market was 28 days faster than last year. Following record-fast time on market for April and May, homes continue to sell quickly in what’s normally the fastest-moving time of the year. This is in contrast with 2020 when homes sold slower in the spring and fastest in September and October. While you can expect the fall months to be competitive, this year's seasonal pattern is likely to be more normal, with homes selling fastest from roughly now until September. These fast-moving conditions can be challenging, especially for first-time home buyers.

Lawmakers Eye Shuttered Malls for New Housing. This is a no-brainer. California state lawmakers are grappling with a particularly 21st-century problem: What to do with the growing number of shopping malls and big-box retail stores left empty by consumers shifting their purchases to the web. An obvious answer in crowded California cities is to build housing on these sites, which already have ample parking and are close to existing neighborhoods. Even before the pandemic, big-box retail stores struggled to adapt as more people began buying things online. In 2019, after purchasing Sears and Kmart, Transformco closed 96 stores across the country, 29 in California. But local zoning laws often don’t allow housing at these locations. Changing the zoning is such a hassle that many developers don’t bother trying. And it’s often not worth it for local governments to change the designations. They would prefer to find new retailers because sales taxes produce more revenue than residential property taxes. However, with a stubborn housing shortage pushing prices to all-time highs, state lawmakers are moving to pass new laws to get around those barriers. A bill that cleared the state Senate last week would let developers build houses on most commercial sites without changing the zoning. Another proposal would pay local governments to change the zoning to let developers build affordable housing. The pandemic, of course, accelerated this trend, prompting major retailers like J.C. Penney, Neiman Marcus and J. Crew to file for bankruptcy protection. An analysis by the investment firm UBS shows online shopping will grow to 25% of all retail sales by 2025. The analysis predicted that up to 100,000 stores across the country could close. Still, the idea of repurposing shopping centers has divided labor unions and affordable housing advocates, putting one of the Democratic Party’s core base of supporters against backers of one of their top policy goals. California needs to build about 150,000 new housing units per year to keep up with demand, according to the state’s latest housing assessment. But it’s only managed about 80,000 per year for the past decade. That’s one reason the state’s median sales price for single-family homes hit a record high $758,990 in March.

Los Angeles Street Vendors. An estimated 10,000 food vendors are operating on L.A.’s streets and sidewalks. The past year has proven, more than ever, that all of these street food vendors are vital to our local economy. The very small-business owners who run sidewalk carts and food trucks — the original outdoor-dining experts — not only preserved access to good cheap meals throughout the pandemic; they’re paving a delicious path back to in-person interaction. Which is why calls to legalize street vending — which has, historically, required complex permit procedures (and often operated at the margins of the law) have been stepped up to promote economic recovery as the pandemic subsides. Investing in the “open-air economy” is also a way cities can step up to support the communities hit hardest by the pandemic. In fact, if all the U.S. cities that have put progressive street-vending policies in place, we should be proud that Los Angeles might serve as the best model. Since 2018, L.A.’s City Council has had an ordinance decriminalizing vendors, backed up by a state law, the Safe Sidewalk Vending Act (passed in 2019). The city’s permitting process began in January 2020 at a discounted rate of $291. Later in the year, the city council made $6 million in grants available to help vendors pay for paperwork and equipment. (As of May 2021, however, only 142 L.A. street food vendors have received city permits so far — and the price goes up to $541 on July 1). L.A. is also taking small steps towards demarcating space for vendors in public rights-of-way. A brand-new type of permit for vendor-driven food markets that’s handled more like that street festival could also be tested in L.A. soon. Carla De Paz, senior organizer at Community Power Collective, is working with the city on developing a “special vending district” permit, that’s somewhere between a special event permit and a farmers market permit. Under this model, groups of vendors could theoretically sell together under a blanket permit with city support, similar to private food events. That solution would bring relief, for example, to the Avenue 26 market in Lincoln Heights, where 100-plus vendors gather in a narrow canyon between beige-walled warehouses in what might be the country's largest informal night market.

Making California’s Wildfires Less Deadly. 2.7 million Californians live in the state’s highest-risk fire zones. California State Senator Henry Stern has two bills in the legislature right now to deal with this issue. SB-63 would fund fire-prevention efforts in existing communities and train local organizations in statewide standards for home fire preventions (known as “hardening”). SB-55, on the other hand, would do something that’s practically sacrilegious in the land of $20-million mega-mansions built on spec: It would prohibit new development on the state’s most fire-prone lands. Stern — an environmental lawyer and the first millennial elected to the state legislature — openly acknowledges that passing these bills will be politically difficult. Just weeks earlier, Stern had advanced critical legislation that might meaningfully reduce this ever-present anxiety for the 11 million people who live in the state’s wildland-urban interface (“WUI”). But with each year’s fire season starting earlier (or, maybe, never actually ending?), the crisis only worsens. What Stern’s bills would do is chip away at the state’s bad growth patterns that have put millions of people — including, more and more often, firefighters and first responders — in harm’s way. Last month’s Palisades Fire, for example, spread through chaparral that last burned 50 years ago, which is about when developers started grading the nearby hillsides for the Palisades Highlands neighborhood (amid protest from environmentalists who argued new development would overwhelm local fire resources). The first homes were sold here in 1975, carved out of the Santa Monica Mountains into a dozen aspirationally named gated communities like Enclave and Summit, which are technically located in the city of Los Angeles — but about two miles of wilderness away from anything else. Yet even as the city has become well-aware of the increased fire risk, homes have continued to be built higher and higher onto this hillside — there’s a 1.2-acre vacant lot for sale, for example, just a block away from where the Palisades Fire started — a pattern that is repeating across the state; in the past 40 years, the people living in the higher-risk areas has doubled. What Stern is proposing is the state’s first comprehensive effort to prevent loss of life and property by regulating where people can build. This, it can be argued, is a more appropriate approach for a state confronting not only a climate emergency but also a housing crisis.

Kurt Cobain and Courtney Love’s One-Time L.A. Nirvana. The Hollywood Heights house that the duo rented in the ’90s (while both were writing landmark albums), just sold. The property, which has fallen into serious disrepair, was listed for $998,000, though the sale price hasn’t been publicized. The home is a two-story, 2,458-square-foot, three bed, three bath Craftsman-style home built in 1921. Beyond its Cobain-Love connection, a main selling point of the home is that it is part of the legendary High Tower Elevator Association, and comes with a key to the elevator. The cluster of homes above the High Tower Elevator were featured prominently in the 1973 film The Long Goodbye. Additionally, the house is about 600 feet from the Hollywood Bowl (maybe not ideal for a quiet summer night). In 1992, Cobain and Love rented the house where they each began writing landmark ’90s albums. Cobain wrote most of Nirvana’s final studio album, In Utero, in the upstairs closet. The process was documented in Patty Schemel’s documentary “Hit So Hard.” Meanwhile, Love began writing Hole’s second studio album, Live Through This. The couple also lived there when their daughter, Frances Bean Cobain, was born. The home has since become a popular destination for Nirvana fans to visit and post about to YouTube. As you would expect, several of the people interested in the house were big fans of Nirvana, “including one guy who had a tattoo of Nirvana on his ankle.” Sale of the home is set to close this week, but neither the final sale price nor buyer have been publicly disclosed.

Iconic Sunset Beach Water Tower Listed for Sale. I think the strangest house I was ever inside was the infamous water tower in Seal Beach. You can’t miss it when you’re driving north (or south) on PCH through Seal Beach. I was there for a sunset cocktail party many moons ago. I remember there were too many people in the tower. Every time another person came up the stairs, I was convinced the tower was going to collapse. It never did, but I swore I would never go there again. Set atop a support structure bordering Sunset Beach and Seal Beach along Pacific Coast Highway, the 2,828-square-foot, four-level abode has four bedrooms and bathrooms, a rotunda-style living room, an elevator, and a severe never-ending staircase. Inside, I remember the house features a kitchen, laundry room and a bedroom with a secret room behind a bookshelf. The two master bedrooms each feature a sunken shower in the bathroom. A hot tub, two garages and ample storage space round out the listing. Glass doors open to a walk-around deck for unobstructed 360-degree views, from the Pacific Ocean to the mountains. Originally, the circa-1892 tower served steam engines as they traveled along the coast. A 75,000-gallon tank that held more than 300 tons of water went up in the 1940s. But by the 1970s, the tank sat empty. A successful “save our water tank” campaign launched in the early 1980s spared it from the wrecking ball. The structure was sold to a pair of investors who built a house designed to look like a water tank in 1984. South Pasadena retired fire chief Gerald Wallace then bought the tower in 1995 for $800,000. He tried to sell it several times, once for as much as $8 million. It wasn’t until 2016 when investors quietly bought property for $1.5 million and had it professionally restored and decorated.

This Week. Looking ahead, investors will continue watching global Covid case counts and vaccine distribution. Beyond that, the Bureau of Labor Statistics will release its “Consumer Price Index” (“CPI”) for May on Thursday (6/10). CPI is a widely followed monthly inflation report that looks at the price change for goods and services. Economists are forecasting a year-over-year rise of 4.6% for the index, after a 4.2% jump in April and a 3.4% gain for core CPI (which excludes volatile food and energy prices). The next European Central Bank meeting will also take place on Thursday (6/10). The University of Michigan’s “Consumer Sentiment Index” for June will be released on Friday (6/11).

Weekly Changes:
10-year Treasuries: Fell 001 bps
Dow Jones Average: Rose 100 points
NASDAQ: Rose 50 points

Calendar:
Thursday, 6/10: Consumer Price Index
Thursday, 6/10: ECB Meeting
Friday, 6/11: JOLTS

For further information, comments, and questions:

Lloyd Segal