Bruce Norris is joined again this week by Dr. John Husing. Dr. Husing is a leading authority on the Inland Empire economy, an area he has been studying since he wrote his doctoral thesis on the region in 1964. His influence on the business and political landscape has been so extensive that the LA times named him one of the 100 most powerful people in Southern California in 2006. He is the writer of the Quarterly Economic Report, an economic newsletter now in its 20th year. His company, Economics and Politics, Inc, provides consulting services for municipalities and counties with economic strategies, statistical data packages, recommendations for public policy and presentations to businesses and political leaders about the nature of growth and economic trends in Southern California. His website includes copies of his newsletter, Power Point presentations of various speeches and photographic glimpses of his exotic travel adventures.
Bruce and John had just been discussing the scope of logistics jobs when he mentioned it was a big player in the Inland Empire. The sector itself represents over 140,000 jobs in the Inland Empire, which is a little under 11% of all the jobs in the region. If you talk to ten people working around here, one of them is in logistics. What they represent are people who are driving trucks, people who are working in warehouses, and people who are managing warehouses and trucking operations. In 2013, the direct job growth, which was 46,833 jobs, saw 18.8% of it in logistics. It is by far the most important sector in terms of creating jobs where people can get into them and move up into the middle class since the median pay is $44,000. For example, drivers’ pay is $43,500. This is why it is a very important sector. This last year, it looks like it created about the same number of jobs and would not be quite as big a share because some other parts of the economy began to recover. Altogether, in two years we have added about 16,000 jobs in that sector.
Bruce asked if the industrial part of commercial real estate has also benefited and leading the way back for construction. John said they were really stuck and that it slowed for a bit during the downturn. However, it has been booming for the last couple of years. For the last four quarters we had about 16 million square feet of space under construction. In context, this is more than the entire area from Houston, around Florida, and all the way up to Maine. We had more than this under construction in the area last year for four quarters. This is huge and has helped construction as well as the commercial brokers who specialize in industrial since the sector is red hot. It is being driven by two phenomenon. One is the e-commerce since there is nowhere else to put the big facilities. The typical building requires 50 acres of flat land, which does not really exist anywhere else in Southern California except out where John is.
The other thing is the imported containers that are handled in warehouses. Things are then distributed across the country; and anything this side of the Appalachian Mountains is conserved easily. Bruce asked if the industrial part of commercial real estate usually the leading component that leads back to successful office space construction. With the way the economy unfolds, step one is residential moves into the area where it occurred. In step two the industrial moves because they have big needs for large plots of land to build their facilities. Step three only occurs when you see higher-end housing developed in large quantities. In the last housing cycle, you began to see Rancho, Upland, Chino Hills, Chino, and Norco where they began to implement a labor force that was more highly educated. The office sector tends to come with it and is the last phase of the maturing of a region. Once the region matures, it is a very important piece of it.
Southern California works the way they do because of their ports in LA and Long Beach as well as LAX, all who handle large amounts of cargo. The huge driver is here, more than anywhere else in the state. Industrial usually means manufacturing, but it does not mean this in Southern California. This is because of both the importance of the ports and the fact that California’s regulatory environment has practically killed off manufacturing as a source of growth. They had talked about logistics being a big driver and construction jobs, as far as residential construction, still being a big lag.
John said he was anxious to see the revised data they will get the first week of the month to see what has happened. If you look at the number of jobs lost between 2007 and 2011, we lost 68,433 construction jobs. So far we gained back about 13,286. We are still down about 55,100 jobs in the sector. Most of that is because residential has not come back yet. The thing that may be affecting that is the fear factor that is holding up people taking advantage of low interest rates and prices in this region, which are a fraction of what they are in the coastal counties. Bruce asked about the cost of construction and getting a yes answer from the powers that be for development. John said one of the things that has really hurt the industry has been the fact that the financial sector as a whole was really the reason for the Great Recession.
In order to make sure it does not happen again, there needs to be an adjustment period for people to figure out what makes sense and what is too crazy in terms of tightness. We are still working our way out of it, but importantly it looks like FHA, in terms of loans they are willing to guarantee, is now lowering the PMI insurance required on low down-payment loans. It looks like Fannie Mae and Freddie Mac will now be able to handle these with somewhat lower down payments that will free up another part of the market to be able to afford to get into it. The question regards the risk preference of the banks to make those loans. This has changed ever so slowly since they are quite worried about the regulatory environment and what it might do to them. They are afraid they might have to buy back a perfectly reasonable loan they have found.
One of the things that Fannie Mae and Freddie Mac have been working on is the relationship between themselves and the banks that may send them a loan that has been taken out somewhere else. This looks like something that may start changing in a positive direction. Clawback, which they have called it, has been a definite problem. We have gone seven years without any major single-family construction, so Bruce was curious what happens to the skilled labor pool here. Do they go to logistics, or do they go to North Dakota? According to Husing, they went to both. There is not a developer he has spoken with that has not said he cannot find workers who can do the skills, particularly amongst jobs that are not union jobs. This means jobs that do not have the government involved in setting the wages and where the unions are strong.
In the best of it, you have lost a labor force. If you lose 68,000 jobs, those 68,000 people have not been sitting on their hands for the last 6-7 years. They have had to go find income. He imagines you will find a lot of them driving trucks or working inside a warehouse. One of the things they had already that was very important to the business sector was they already knew how to work hard since people in construction work hard. This was something employers were really hungry, so this is why he is sure this is where they are at this point. John had recently had a discussion up in the High Desert about how they were going to start training up people to work in the construction sectors as well as whether or not Victor Valley College was going to work with the BIA to start helping meet that need.
Bruce had a granddaughter in Texas who was working for free in a program at a school. In the area she was living there were no rentals available and the town was completely packed with people. For this reason people would stay in hotels until they could find something. Bruce thought it was because of a construction boom, but he was told it was not. Every time you have a construction job, the people in the oil rigs say you can make twice as much going over there, even if you don’t know anything. This is about to change because with oil having done what it has done, known as the Texas economic miracle, we are now going to see how much of that was simply because of petroleum. Texas, Oklahoma, North Dakota are really the places that benefited from this.
Bruce is familiar with some of this because of his experience at Grand Junction. He bought a lot of real estate here after shale crashed. To have an area where everything is dependent on something is a bad risk. Bruce asked if fracking here is here to stay or if it will take a pause as long as shale did. John said from what he understands, the price of oil, even at $50 a barrel for a West Texas intermediate, is sufficient for them to be able to make money. It is the exploring and drilling process that has been slowed down, which actually has a lot of jobs tied to it.
The Saudis are making a bet that the demand will start to increase as the world economy starts to recover. The key will be to watch not so much us, but Europe, Japan, and China. What is interesting about these large numbers is like migration into California where you have a state with 35 million people. If you have 100,000 people not show up, it is a big deal. It is the same with the oil fields in that you sit there and see they have a glut of supply, but then you later found out they have four extra days instead of four less days. This can come as a surprise as to how this caused everything.
Bruce asked about the millennial generation and if it is true that the Inland Empire would naturally have a greater percentage of young adults than in other areas. John said this is definitely true and is one of their long-term potential advantages. One of the things that is going on is the oldest baby boomer was born in 1946 and the youngest was 1964. The first group will now be 70 next year and the youngest will go up to 2024. This entire generation will have retired. The problem that it is creating is this is a huge portion of the older and more experienced part of our labor force disappearing. One of the things you find out when you are talking to executives is you have a real difficult time of finding skilled workers to fill in for those older workers who are moving out. It is a huge education challenge with which we are only now coming to grips.
The fact that we have a lot of millennials is a good thing. The problem that we face is their educational level since they are not well educated. In the Inland Empire as a whole, 46% of our adults who are 25 and over have a high school or less education. The younger they are, the less education we are seeing. There is going to be an enormous challenge that will help sectors like construction. However, if you are looking at manufacturing and need machinists and welders, they are not out there.
The generation happened to come along in a county that got hit the most. You have household formation that really did not occur on target. Regarding just getting a job, Bruce looked at one statistic that said the percentage of millennials with a full time job is around 35%. John was not sure about this number since it seems awfully low. However, he does agree that they came into the labor force at the wrong moment. We are starting to see the labor force tighten and the unemployment rate down to 7.2. It is beginning to draw people into the labor force the way it dropped out. They just were not looking anymore. For this reason the unemployment rate has been going down despite people going out looking for jobs. This is what you really need to see. However, their skill sets and experience levels are not there because they have not been working all this time.
We will not get back to feeling normal until another 2-3 years, even as unemployment goes down and job creation increases since you still have this large group. On the other hand, they are an advantage for us since other parts of the country don’t have the large numbers of younger people in their population. Bruce asked if there are an exorbitant number of part-time jobs that exist now than in years prior. John said it is not that much different from a typical time. The way he measures this is to look at the number of jobs in part-time agencies and the number on their payroll rather than the company’s payroll. This gives you an index on how bad it is going. Looking at it, it has not gone up as much as he would have expected. Generally in a recovery that number gets higher as employers want to test workers before putting them on their regular payroll. It has not moved as much as he would have expected, although we should be seeing data revisions soon.
John said he receives data monthly from the Employment Development Department in the state of California, which is based on surveys. Those tend to be pretty inaccurate during a time when the economy is going through a major change. Once a year it is all revised and based not on surveys, but on actual payments of employment insurance taxes when the companies have to report how many employees are on their payroll and how much they paid out. Once we get that, we have a firm view of exactly what occurred, which we received on March 6 this year. Once they have these, they will have a better feel for the answer to these questions.
One of the things Bruce always found interesting was John’s take on the journey of a city, including primary tier versus secondary tier. Riverside County is pretty mature as well as San Bernardino County. Bruce asked what the primary and secondary tiers are as well as how mature we are in either one. John said the way he explains this is interestingly comparing it to the Clint Eastwood movie Gold Mining Town. Originally, nothing was here. You find gold and cannot do anything with it, so you ship it away. That brings money, so you now have a lot of people who have the base of the economy and an income. That creates a demand for things that the miners want. They want tools, so you have a general store. They want entertainment, so you have a saloon. One these see growth, it is still the same money that came to the miners that is being reused.
The primary tier of any economy are the sectors that are the gold mines that bring money from the outside world. The secondary tier is where it is reused, but it is not where the money is brought in. If you think of the Inland Empire, one of the sectors at the fundamental tier of the economy bringing the money in is logistics, construction, manufacturing, health care, and technology such as what ESRI in Redlands offers. These are the sectors that are bringing the money to us. This same money circulates through Stater Bros, hair stylists, and people taking care of lawns and other consumer services. It also circulates through the local bank branches.
What you look at is the base: what it is and what the competitive advantages are to having what is needed to succeed. For example, there is success in the blue collar sectors and in health care but not as much in the higher end tier because there is no labor force for it. It generally does not go there, and the companies that are here struggle since they have to pull the labor force in from someplace else. The other issue you have that is part of the economic base of the area is people who go away and work someplace else and then bring their money to us, or commuters. That represents about 21% of our workforce. These are the ones who leave, go somewhere else, and then come back. That has been a stationary number for about 25 years. When he looked at 1990, it was 21%. It did not change in 2000, 2010, or now. However, who they are has changed. There is so much blue collar work out here, and it is more and more people that wear a suit and tie and work in offices. They are the ones doing the commuting now, and there has been a shift in the makeup of it.
The way we measure how we are doing in terms of being at least relatively self-sufficient is if you are west of the 15 freeway, that area has a good balance between the population who lives there and the jobs that are there. There are a lot of commuters because the jobs do not necessarily match up to the high end folks who were recently moved. However, it does have jobs housing balance, which means 1.25 jobs for every occupied home. As you move east down the freeway into Rialto, Fontana, and San Bernardino as well as Riverside and Moreno Valley, that ratio goes down and you do not have enough jobs for the population that lives there. However, it is improving. When you move up into the High Desert or down the 215 towards San Jacinto, Hemet, Perris, Menifee, or down into Temecula and Murrieta you will see almost every major worker is a commuter. You have all three tiers of that going on in the region, and it matches the way the regions grow up.
Bruce asked about the passage of an immigration bill and what the impact would be for the Inland Empire. John said it would be very positive because it would take our invisible labor force and make it available. In the United States we are always a labor short economy, and this is why technology has always been at the cutting edge going all the way back to when the first people were arriving. We have always had a labor shortage that had to be filled by technology, allowing every worker to be able to do more. When you think about the baby boomers retiring out, who will be the labor force that will be taking social security taxes to support them? The answer is the younger labor force. By taking that labor force and making it legal and able to work more often, what you are doing is expanding the base of tax payers who are putting money into things like Social Security and Medicare payments that will support that huge number of people that are retiring.
John recently attended a speech made by a demographer at USC, and he said one of the scary facts in the US economy going forward is the balance between the baby boomer generation and the labor force that will be supporting them going forward.
For more information, you can visit John Husing on his website at www.johnhusing.com. He is also the chief economist of the Inland Empire Economic Partnership, and their website is www.ieep.com. Tune in next week as Bruce continues his discussion with John Husing.