Economists Agree: Cautious Optimism is Necessary in Evaluating Bay Area’s Recovery from COVID-19 Recession

Fifth Third Bank, Bay Area Council Economic Institute, Public Policy Institute of California, San Francisco Bay Area,
Courtesy of Daiwei Lu

By Meghan Hall

COVID-19 has shaken economies globally as work from home and shelter-in-place orders have disrupted business and supply chain operations. But while the San Francisco Bay Area is typically heralded as one of the nation’s strongest regional economies, national and regional economists at the Bay Area Council Economic Institute’s most recent summit concurred that the region still has a number of hurdles to overcome before recovery can truly begin.

“This economic cycle is different from most traditional economic cycles in that we had no fundamental, underlying economic imbalances to address,” explained Jeff Korzenik, chief investment strategist at Fifth Third Bank. “Traditionally with cycles you have some excesses that have to be wrung out of the system; the time it takes to wring out those excesses makes for a longer and more drawn out recession. This time around it’s an exogenous event—the pandemic—and in theory that means we should be able to return the economy more quickly.”

The fiscal response to coronavirus did stymie some of the impact as the level of stimulus provided by the government thanks to its sheer size at 13.5 percent of gross domestic product (GDP). By comparison, the stimulus passed during the Great Depression was 5.7 percent of GDP and the fiscal crisis response during the Great Recession of 2008 and 2009 hovered around 6 percent of GDP. That did help control unemployment and bring back the economy to a healthier level.

However, the pandemic has accelerated a number of trends that were already in place, and the San Francisco Bay Area is not necessarily an exception to these trends, noted Korzenik. Topping Fifth Third Bank’s list of concerns is the consequences of long-term unemployment. 

“Post 2008-2009, we had great difficulty reengaging people in jobs. We saw the highest levels of long-term unemployment that we had seen since World War Two,” said Korzenik. “By 2010, 45 percent who had been unemployed had been unemployed long-term…We have very good evidence and very consistent evidence that the longer you’re unemployed once you hit that mark, it becomes increasingly difficult to gain a job.”

Typically, unemployment is denoted long-term when it lasts 27 weeks, or about six months. The timing is important as the U.S. begins to reach this benchmark after rounds of furloughs and layoffs between April, May and June. Economic recovery will be closely intertwined with the production of a vaccine and COVID-19 treatment options.

“Ultimately, we are still held hostage to medical outcomes; we’ve all become armchair epidemiologists,” stated Korzenik.

Additionally, the U.S. workforce participation rate is declining, particularly for women of child-bearing age. At the end of the day, a net number of unemployed never get back into the workforce, a huge loss to the economy’s growth potential and its ability to recover.

“This really zaps the vitality of the workforce. Economists have long understood that economic growth potential is a function of workforce growth and productivity growth,” added Korzenik. “We have a big challenge for workforce growth.”

Historically, California is known to operate like a pendulum, and is more likely to swing  more widely in response to recessions. As the pandemic continues, the state is facing its own barriers to recovery as labor market improvement began to stall in the early fall. To date, California’s unemployment hovers at 11 percent, three percentage points higher than the U.S. national average at 7.9 percent. Only Nevada and Hawaii are currently seeing higher rates of unemployment. 

The San Francisco Bay Area itself has regained just 33 percent of the jobs it has lost and is lagging a bit in terms of recovery, according to the Bay Area Council Economic Institute’s Research Director, Patrick Kallerman. While the Bay Area added 100,000 jobs in June, the region added just 60,000 in July, 32,000 in August and 20,000 in September. The region is still down about 366,000 jobs. However, the regional unemployment rate sits at 8.1 percent, closer to the national average. 

“That’s just a tradeoff. We’ve taken the more cautious approach in the region and some of the areas here have a lot of travel to and from places,” said Kallerman. “…The result is we remain pretty far away from a full recovery.”

Incomes will also likely take a hit. According to Sarah Bohn, vice president of research and senior fellow at the Public Policy Institute of California, it took five years for incomes within the 90th percentile to recover from The Great Recession, while median incomes and low incomes didn’t recover fully until eight and nine years post-recession, respectively. The result will be an exacerbation of inequality, with women and minorities likely bearing the brunt of the pandemic’s economic impacts.

To add insult to injury, local municipalities are facing massive deficits over loss of revenue. Around $2.5 billion in budget deficits are expected over the next two years as a result.

“We should expect declines in spending in education, social safety net health…That is tough to deal with in a crisis that disproportionately affects groups who need that support,” said Bohn.

As California advances in its recovery, other big questions remain, including the impact of work from home. As employees are able to maintain their positions despite geography, California and the Bay Area could see an increase in the number of residents leaving the region. Nearly half of all Bay Area residents are remote work “eligible” according to the Bay Area Council. This will likely build upon a trend already in place as residents move away, typically to states with lower or no income taxes like Florida, Texas and Washington. Declining birth rates across the nation—including in California—and the timing and structure of another round of stimulus will also be key.

“I’ll be totally honest, I think my answer changes frequently depending on the unfathomable level of uncertainty that we face personally, professionally and looking at the economy. The range of expectations is really wide,” said Bohn. “I would say overall, I am cautiously optimistic. We’re going to bounce right back as soon as we have a solution to COVID-19. But we’re in the Bay Area. It’s good to be in a place that is the seat of the sector that usually drives recovery.”

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