Rising concerns about the nation’s growing wealth gap has Cal State Fullerton economists on edge.
On Thursday, economists Anil Puri and Mira Farka put a big asterisk on their predictions for 2025. A mild recession, which they previously predicted would land right around now, has been pushed to late 2025. Expect, they say, a “gradual downshift” and softening of conditions “likely a few months away.”
Both said the data here in Southern California and nationwide offers a mixed puzzle. Hiring remains positive though softening, gross domestic product growth is exceeding expectations. Wall Street’s S&P 500, Dow Jones Industrial Average and NASDAQ indexes are seeing double-digit increases year-to-date, and inflation has declined to near its 2% target.
So where lies the problem?
“Think of a big ship,” Farka explained Thursday during a gathering for the Orange County Business Council and CSUF annual economic forecast. “Basically, the upper decks are doing fine, but there’s turbulence in the lower deck. It’s this tale of two Americas that drives our outlook.”
In Southern California, the economists cited a rise in credit card debt and a lack of affordable housing as two markers of economic weakness.
Also see: For 20% of California, half the paycheck or more goes to housing
“There are some cracks in the low-income households,” Farka said. “They are showing a lot of stresses. This bifurcated economy eventually will catch up with us.”
On one side is rising household wealth, which has “gone through the roof since the pandemic,” she said.
Household wealth for top earners has risen $27 trillion from pre-pandemic levels; homeowner equity added another $16 trillion, combining for a $43 trillion increase in four years.
For households at the bottom 40% of the income distribution, however, wealth has risen just $1.8 trillion since 2019. “That’s the lowest in one generation,” Farka said. “They are worst off today than they were compared to the pre-pandemic.”
Also see: 56% of California renters slammed by housing costs vs. 35% of homeowners
The wealthy have carved out $41 trillion in income. “These are people who are actually going to Taylor Swift concerts,” Farka said.
The economists noted that potential economic hurdles include the outcome of the presidential election, the pace of future interest rate cuts, persistent inflation, labor costs and minimum wage jitters in California.
Housing out of reach
Housing affordability is a frontline issue in Orange County, where median-priced homes sell for more than $1.2 million.
“Orange County is seeing the worst housing affordability in history,” said Puri.
More on housing: 123% more Californians are paying $3,000-plus for rent
The county is ranked last in California for housing affordability, he said. As of August 2024, median home prices stood at $919,000 for Los Angeles County, $630,000 for Riverside County, $515,000 for San Bernardino County and $888,700 for California.
In Orange County, the qualifying income to buy a home is $251,100 for a monthly payment of $8,370 on a median-priced home of $1.2 million. In comparison, the qualifying income in California is $158,400 for a monthly payment of $5,280 on a median-priced home of $900,000.
Meanwhile, for those who already own a home, their equity has risen 50% from pre-pandemic levels. On average, equity rose about $520,000 since 2020, underscoring the widening gap between the haves and have-nots, Puri said.
“People can’t afford to live here, or even rent a place,” he said. “It costs over $3,000 to rent a one-bedroom apartment in some parts of Orange County. Housing is critical to job growth.”
Challenging jobs picture
Since the Federal Reserve began raising interest rates, Puri noted regional labor markets in California mostly trailed the U.S.
Orange County’s employment rate between 2022-23 grew 3.2% compared with 5.1% for the U.S. The Inland Empire and Los Angeles County grew 3% and 1.7%, respectively over the same period.
“The labor market has deteriorated faster in Orange County and California than the U.S.,” he said.
A closer look of the jobs picture comes from California’s high technology sector, which has suffered job losses since January 2021. Orange County bucked that trend, registering a 1.1% uptick. The state has seen a 2.2% decline in tech jobs, while Los Angeles County has reported a 1% drop.
Statewide, California’s share of high-tech employment has fallen to 16% from 19% since January 2021, pointing to the high-costs of doing business in the state and the migration of certain high-paying positions elsewhere.
A year ago, the CSUF economists at the Woods Center for Economic Analysis and Forecasting delivered a more bearish outlook on the local and national economies. They predicted a mild recession in the second half of 2024. That never materialized, perhaps, Puri said, because the Fed launched its efforts to tame inflation, at least for the moment.
Both Puri and Farka expressed concerns over a business slowdown, should the minimum wage in California continue to rise. The state’s hourly wage floor rises to $16.50 from $16 hourly on Jan.1.
“If wages keep growing at the rate they are, we’re never going to get this inflation rate down to 2%,” Farka said. “It’s inflationary and will increase youth unemployment.”
Also see: How inflation concerns could doom California’s proposition to increase minimum wage
On an annualized basis, unemployment rates have risen across the board to 4% this year from 3.2% in 2022.
Other forecast highlights include:
— The Woods Center index of Orange County business sentiment — based on a quarterly survey of Orange County executives — shows business confidence improving in the last quarter of 2024, reflecting a more positive outlook. Despite the improvement, the index — which rose to 73.4 from 66 in the previous quarter on a 100 point scale — is still below its long-term average, indicating that Orange County business executives remain cautious about the economic environment.
— The survey, conducted in late September, found that one in four Orange County business respondents rated inflation as their most important concern, followed by government deficits, interest rates, geopolitical risks, labor shortages and insurance costs.
— A majority of 58.5% of business leaders surveyed said that their business had not been affected by the uncertainty surrounding the November election, 22% had postponed some plans and 17.1% indicated that they had scaled back on their expansions.
