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Economic Forecast 2020: Trade, tariffs and labor – how global forces impact our local economy

01/23/2020 4:52 PM | Cinnamon Thompson (Administrator)

Kicking off the new year, SCDF hosted a panel focused on a widely-discussed topic – the state of the local economy. More specifically, members of our community have been concerned with how the factors at play internationally, will affect our local industry. Architects, general contractors, engineers and more, all joined us last week for a full house of development community professionals eager for a variety of opinions regarding the 2020 economic outlook. This particular panel differed from others in that it was smaller, and did not have any members of our community speaking. Instead, we opted for a localized view from expert sources. Joining our panel discussion was Dr. Monica Morlacco, assistant professor of economics at University of Southern California, as well as Eric Hayes, associate economist at Los Angeles Economic Development Corporation’s Institute for Applied Economics. Both panelists presented the audience with different ways global impacts translate into local effects.   

Global Forces at Work in the United States

Among the key points made by Dr. Morlacco was that big, multinational business is only getting bigger, and this has many different side effects. Unfortunately, the majority of these effects are not so great for the average consumer or worker. Morlacco pointed out that since 1980, there has been a steady increase in the average markup – which is the amount companies typically charge over and above their costs, to sell their goods at retail. This is largely the case for U.S.-based corporations, where the average markup now hovers around 61 percent, compared to 21 percent in 1980. Since 1980, much of the increase in markups has come from large firms. Their growing influence and increase in size is concurrent with the diminishing power of antitrust laws in the United States, as well as the increased costs of simply doing business. Logistics, litigation, and administrative costs have seen substantial cost increases which may not be as easily absorbed by smaller firms. However, it is important to note the other cultural and geographic factors which play a role.

Technology, which has disrupted almost everything to some degree, has skewed consumer preferences toward big business as well. The effects of e-commerce and online networks tend to keep customers locked in to a specific platform or brand. A tendency for consumers to remain brand-loyal and static in their choices can translate into difficulties entering the business marketplace. This metric is referred to as turnover, or the rate at which new businesses establish entry, and conversely, old businesses exit the marketplace. Dr. Morlacco also highlighted the fact that there has been a broad decrease in turnover and a broad increase in concentration across most industries in the United States.

In addition to technology, the largest corporations are also able to establish global value chains in order to optimize business functions, and these large conglomerates quite simply have the resources to do so. These global value chains are best defined as a network of production, trade, and investments where different stages the product cycle span multiple countries. A great example of this would be shoes and apparel. The product may be designed in the United States, materials sourced in South America, manufactured in Asia, and then distributed worldwide. Many everyday consumer goods are likely the product of a global value chain.

Effects on Our Local Economy

In light of the recent trade wars, residents of Southern California are forecasted to see an increase in consumer prices across most product types – this includes housing. However, the most pertinent information to our region has to do with shifting demographics and unemployment rate. Currently, our state, and the nation, have unemployment rate of 3.7 and 3.9 percent, respectively. The national unemployment rate is the lowest it has been in over 50 years. However, all economic cycles are subject to disruption, and for California, our population may be a deciding factor. What may surprise many of us in Southern California, is the fact that our population has actually been decreasing this past year. For a continually robust economy, a steady population growth is required as it is an essential component of a strong labor force. Not only has Southern California, particularly Los Angeles, been losing residents to outward migration, but the birth rate has also dropped. Birth rate is an important metric to economists as it is an indicator of the future working population who will not only spur additional economic growth, but pay into social service programs.

A more peripheral effect of the birth rate might be the tendency for parents to become homeowners, an increasingly inaccessible milestone for Southern California families. To put this into perspective, the minimum qualifying income for a home in Los Angeles County is $127,200. The median household income in Los Angeles County is $68,093 – which is vastly less than what is required to own a home. This leaves the average renter spending approximately $31,000 in rent annually. Still, low rates of homeownership in Los Angeles are also attributed to other outside factors, such as a scarcity of housing permits issued by local governments.

Despite all of this, California is likely to continue on a path of moderate, but sustained growth throughout the year. Venture capital investments to large tech and media companies that call our state home will prevail. Lastly, the tendency for our state to be an incubator for innovative ideas and a pool for great talent will likely keep the California afloat throughout the year and many more to come.

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