U.S. Economy Back, Yet Uncertainty is High
The deepest and shortest decline in the economy the U.S. has ever experienced is now over, but is the heyday only temporary — and at what cost? Above: aerial shot of downtown San José. Photo: David Schmitz
Our nation’s economy has recovered to pre-pandemic levels. According to the latest South Bay Regional Intelligence Report from Beacon Economics, the “V-shaped” business cycle — a deep decline followed by a rapid recovery — came to completion in fall of 2021.
According to the report’s author, Founding Partner of Beacon Economics Christopher Thornberg, this recession differed because it was “supply-shock driven,” without the typical longer-term consequences that come from, for example, a housing market crash that drives a demand shock.
Though monetary and fiscal stimulus helped guide the nation into recovery, Thornberg indicated that the response was far greater than the circumstances warranted. Ultimately, the financial wealth of many U.S. households grew immensely during the pandemic, but so did the debt of the government, leaving many Americans better off financially — but for how long?
Thornberg shared these insights as part of a panel discussion and Q&A at San José State University’s Center for Banking and Financial Services’ annual Economic Summit this month, presented by Bridge Bank in association with Hopkins and Carley. Thornberg’s Beacon Economics produced an economic, fiscal and social impact study for SJSU in 2021.
“Beacon has been a continued, trusted partner with San José State to provide this economic forecast,” said Lucas College and Graduate School of Business Dean Dan Moshavi. “They are one of the most respected economic forecasting firms in the state.”
Impact of People and Industry
Alan Cohen, partner at DCVC, provided a lens on local industry apropos to the Summit’s economic forecast, in conjunction with the panel discussion, which was moderated by Derrick Seaver, CEO of the San José Chamber of Commerce.
As an entrepreneur with hands-on experience running large companies as well as startups, Cohen is a venture capitalist who serves on several board of directors of DCVC’s portfolio companies and has been an advisor and investor in numerous billion-dollar enterprises.
He spoke of the rise in venture capital dollars deployed in the last decade and the doubling of activity in the VC industry in 2021 as the economy bounced back from the pandemic. Cohen pointed to the advent of the COVID vaccine as an example of the technological advances he is seeing investment opportunities in — particularly those who are combining machine learning and hard science to solve problems in and around Silicon Valley.
A few companies in our area that he thinks we’ll see a rise in are Pivot Bio, Freenome, Twelve and Caption Health.
“As we folks that are invested and care deeply about the economy of the Bay Area, it’s worth examining these new areas where these opportunities are emerging,” said Cohen.
As part of the Summit’s program, Thornberg provided a comprehensive overview of the local, state and national economy. Importantly, he noted a substantial gap between a dominant media and political narrative and the reality of financial and real estate markets, inflation, interest rates, among other related topics.
He is concerned about the state of the economy, “but not for the reasons you might think,” he said.
Highlights from Thornberg’s presentation
The inflation and rise in interest rates Americans are currently experiencing are a symptom of the overheated economy. “Even with the big sell-off we’ve seen in the stock market, the NASDAQ and S&P are still up,” Thornberg explained. “But the gains we’ve seen in the stock market over the last few years were never going to be sustainable.”
Industries in the Bay Area “saw a larger than normal outflow,” which is another temporary symptom of the overstimulated economy. Thornberg warned “lean times are ahead” for San José and California.
He confirmed that VC deals are up, along with corporate profits overall, as services are coming back. Gambling in particular, he said, is at an all-time high level, despite squeeze from inflation.
Even though there are more job opportunities and higher earnings on average across the nation, demand for supply is still an issue. This is related to the need for workers, as lack of staff remains a huge problem across service industries, especially restaurants, hospitality and tourism.
Coupled with the millions of people who dropped out of the workforce during the pandemic, mostly due to retirement, that need isn’t likely to get any better anytime soon.
For those concerned about recent news reports about the housing market slowing or crashing, Thornberg said America has never had more home equity. “The market may be pausing, but there is no bubble yet,” said Thornberg.
California still needs to boost its housing, which is a chief reason the state’s labor force has not grown much in recent years. “It’s not a shortage of jobs; it’s a shortage of workers.”
While there’s no impending recession tomorrow, it’s likely that taxpayers will be more impacted the longer it takes policymakers to act on issues, he indicated, such as asset market prices, the growing U.S. trade deficit and the Federal deficit.
Bottom line: “Don’t be afraid of inflation that’s happened; be afraid of inflation that’s coming.”
Access a recording of the summit, along with Cohen’s and Thornberg’s presentations.