Since the Great Depression began in 1929, dozens of adverse events have threatened to cripple the U.S. economy, including wars, recessions, and government shutdowns. Of course, the economy has taken some big hits, especially during the pandemic.
But overall, it’s heading in a positive direction.
„Our economy is tough,” said Peter Rupert, professor of economics at UC Santa Barbara and director of the university’s Economic Forecasting Program (EFP). That’s why I say, 'Be still!’
Rupert spoke to a crowd of hundreds gathered in Santa Barbara recently for EFP’s annual South County Economic Summit, where early conversation in the lobby of the Granada Theater focused on inflation.
This year, the summit brought in Christopher Waller, who sits on the Federal Reserve Board of Governors, to present the Federal Reserve’s broader outlook on the economy, particularly inflation.
Waller emphasized that the unemployment rate – now 3.4% – is the lowest since 1969. Gross domestic product (GDP), retail sales and hourly earnings continue to trend upwards.
Our banking system as a whole, he said, is „sound and resilient”. But he also admitted that he is „concerned about the lack of improvement in inflation” as food prices and rents are still relatively high.
Currently, inflation is at 5%, the highest since the late 70s and early 80s. Waller said the Federal Reserve’s target for inflation is to stabilize at 2%.
„The tool the Federal Reserve uses is the federal funds rate, which is what banks charge each other for loans overnight,” explained Rupert, who has been with UCSB’s economics department since 2007. „Higher rates lead to less credit and, in their view, the economy slows down.
Waller concluded by saying the Federal Reserve will review updated numbers on the labor market and consumer prices expected in the coming weeks before deciding on a possible interest rate hike this summer.
Case Study: City by the Bay
All is not well in the Golden State as the national economy as a whole recovers from the pandemic and realigns with overall upward trends. San Francisco, in particular, can offer a cautionary tale.
„We’re not headed for a Detroit situation,” said Ted Egan, chief economist for the city and county of San Francisco for the past 16 years. „But the next five to 10 years are going to be tough.”
In the past two years, San Francisco has lost over 8% of its population, the largest drop of any city nationwide. Former residents left the city. Many tourists stay away. With the massive increase in remote work, especially in the tech industry, downtown office buildings are all but vacant.
„The pandemic showed that you don’t need occupied offices,” said Egan, adding that the office industry — which fuels a city’s economy that includes transportation, food services, retail and development — makes up 80% of San Francisco’s gross domestic product. .
Fortunately, he said, there’s no sign of tech workers leaving the area, „and they’re working from home.”
Among other issues, the city must weigh the possibility of raising taxes to offset the drop in business tax revenue as employees work remotely, and how to deal with the perception that city streets are overwhelmed by poverty and homelessness.
„San Francisco doesn’t look like an outlier,” Rupert said. „It’s happened so fast because of the dominance of the tech industry and remote work. LA is seeing problems in the office market right now.
It’s too early to tell how widespread remote work might affect the economy, Rupert noted. „But the work arrangements will be different than pre-pandemic quotas.”