The Southern California Association of Governments (SCAG) and the Southern California Leadership Council co-hosted the 10th annual Southern California Economic Summit on Thursday, Dec. 5, in Los Angeles to discuss the economic outlook for Southern California.
More than 400 leaders from throughout the region participated in discussions focused on the region’s economic challenges and opportunities, the housing crisis and SCAG’s newest regional transportation plan, designed to provide cleaner, healthier and more prosperous future.
According a SCAG report on the Inland Empire, an important consideration in looking at the status and future of the Riverside and San Bernardino County economy is to understand the conditions that affect the region as a whole. The U.S. Office of Management and Budget (OMB) delineates metropolitan regions based on a population nexus, a high degree of economic and social integration, and commuting patterns. Like many U.S. metropolitans, the Riverside-San Bernardino-Ontario, Calif. metropolitan statistical area (MSA) is made up of more than one county. In this case, Riverside and San Bernardino counties largely respond to the same set of economic forces. Both are inland from coastal counties that are largely built out. They are thus subject to the outward migration of demographic and economic activity from those areas as Southern California expands. This has affected the nature of their residents, companies, commuting and educational levels.
Growth in each county started with single family housing entering and accelerating, gradually spreading deeper inside of it. This has been followed by the movement of industrial activity (manufacturing, logistics) first into their western edges and now deeper to the east. The workers in the region move internally across their county lines in large numbers with over 90,000 Riverside workers going to San Bernardino and over 60,000 San Bernardino workers going the other way. A significant share of workers in each case, however, are forced to migrate outside the region (Riverside 22.6 percent; San Bernardino 20.7 percent) with those patterns remaining largely stable going back to 1990. Of the total commuters from the area, the shares are nearly even with Riverside at 49.9 percent and San Bernardino at 50.1 percent.
General Status of the Economy
Most of the basic data available on the Inland Empire economy is for the two-county metropolitan area. Looking at the most reliable sources for 2019, it appears that the region is on track to add roughly 38,000 jobs. This sets up the potential for a good start to 2020. Any forecast for next year, however, is subject to the potential difficulties impacting the U.S. economy. The nation and the local area are already in a manufacturing slowdown as the president’s tariff policies impact the ability of employers to determine demand for their products. This goes along with a general downward trend occurring in global economic growth. Another issue is the existence of an inverted interest rate yield curve. For several months, short-term rates that financial institutions pay to aggregate funds have been higher than the long-term rates that they earn when they lend 5-30 years. This means these institutions may become reticent to lend capital to firms needing it. Historically, this situation has forecasted the coming of a recession. Meanwhile, the president’s tariff policies are a particular problem for the Inland Empire’s near-term future since a good deal of its economic growth comes from processing imports with 2019 port volumes running below 2018 highs.
It appears that 2019 is on track to surpass its 2007 pre-recession high of 1,306,700 by 250,000 jobs or 19.1 percent, reaching an estimated 1,556,800. This occurred because job growth has surged for the past several years. If 2019 holds, the area will have created 390,300 jobs in the 2011-2019 period of recovery and expansion, nearly tripling the number of jobs lost (-140,200) in the Great Recession. Looking at the rest of 2018, there is every reason to anticipate growth levels will be sustained given the forces impacting the key sectors that make up the inland region’s economic base (logistics, construction, health care, manufacturing, high-end).
Unemployment in the inland area has remained low, averaging 4.2 percent in both 2018 and 2019. The unadjusted unemployment rate for September 2019 was 3.6 percent. The latest figure, however, was a little above the unadjusted levels for California (3.5 percent) and the United States (3.3 percent).
Importantly, the continuing rise in the Inland Empire’s employment markets has led to significant declines in poverty. In 2010, the share of children under 18 living in poverty was 24.1 percent. In 2018, that figure had jumped down to 19.1 percent. Poverty for all people dropped from 17.1 percent to 13.7 percent. A key metric dictating the nature of the Inland Empire’s economy is the fact that a combined 46.3 percent of adults 25 and over had high school or less education in 2018. That compares to 39.2 percent for the rest of the SCAG region. Those with AA degrees or higher were 30.2 percent, well below the 41.6 percent for the rest of the six-county area. The share with BA’s or higher was 21.9 percent versus 34.2 percent in the balance of the SCAG region. These facts limit the kinds of firms for which the area is competitive. These shares have improved from 50.3 percent (high school or less), 23.1 percent (AA or higher) and 16.3 percent (BA or higher) in 2000, respectively.
Like all regional economies, the key for growth in Riverside and San Bernardino counties is the expansion of the economic base sectors for which it has competitive advantages. This is the group of activities bringing money to it from the outside world. Fundamentally, there are five key sectors:
• Logistics firms have located in the Inland Empire in response to its available land and the need to handle both the huge flow of goods moving in and out of the U.S. via the ports of Los Angeles and Long Beach plus the rapid expansion of fulfillment centers that handle the explosive expansion of e-commerce. They are on track to be responsible for 23.5 percent of the area’s direct job growth in the 2011-2019 period (95,748). Based upon the U.S. Bureau of Labor Statistics (BLS) growth rate in early 2019 (6.1 percent), the sector’s total should reach 204,248 jobs in all of 2019.
• Health Care firms are expanding in part because the average worker in the sector is already serving 22.8 percent more people than California’s average. Meanwhile, the Affordable Care Act has cut the share of local residents without health insurance from 20.5 percent in 2012 to 8.4 percent in 2018, though the 2017 share was 7.8 percent. Health care providers are also responding to the fact that 24.5 percent of the population was 55 years or older in 2017. The area’s population growth was 366,042 people or 8.7 percent from 2010-2018. Based upon the BLS growth rate in early 2019 (4.1 percent), the sector’s total should reach 148,351 jobs in all of 2019.
• Construction has historically been the major driver of the Inland Empire’s economy given its undeveloped land and Southern California’s need for single family homes, apartments, industrial facilities, and infrastructure. The mortgage crisis upset the first of these needs and was largely responsible for the local sector losing -68,400 jobs from 2006-2011 (-53.6 percent). From 2012-2018, it has gained back 46,495 jobs. In 2019, the sector has slowed. Based upon the BLS job growth rate (1.3 percent), it is estimated that the sector will add 1,353 jobs to reach 106,195 positions. That would still be -21,300 jobs or -16.7 percent below the 2006 peak.
• Manufacturing has been the economic base sector with sub-par performance in the Inland Empire. This stems from California’s punishing regulatory environment plus energy policies that in May 2019 had put the state’s industrial electrical cost at 12.65 cents/kW-h. That was 140.0 percent above Nevada (5.27 cents/kW-h) and 98.3 percent above Arizona (6.38 cents/kW-h). As a result, the state has created only 86,300 manufacturing jobs (6.9 percent growth) since January 2011, and accounted for only a 7.0 percent of the 1,232,000 jobs (10.6 percent growth) created in the U.S. A good deal of job openings occur in the sector due to the need to replace aging baby boomer technicians. Based upon the BLS job growth rate in 2019, it is unfortunately estimated that the sector will add only 1,461 jobs in the Inland Empire to reach 102,764 positions. That would remain -20,836 jobs or -16.9 percent below the 2006 peak of 123,600 positions before the Great Recession.
For the first time, a high-paying sector is showing signs of starting to add to the economic base of Riverside and San Bernardino metro:
• Professional, management and scientific work has recently started expanding. This appears to be a reaction to three factors. First, it has seen a doubling in the absolute number of residents with bachelors or higher degrees from 2000-2017 (100.5 percent). Even though the inland area’s population is less well educated than its coastal county competitors, in this period its overall percentage of college graduates grew from 16.3 percent to 21.9 percent. The percent of those with AA degrees or higher went from to 23.1 percent to 30.2 percent. Second, the growth of the Riverside-San Bernardino metropolitan area economy requires increasing levels of professional service providers, given its 4.63 million people and 123,565 firms. Third, the re-emergence of the construction sector creates a need for engineers and other such specialists. Based upon the BLS job growth in 2019 (3.6 percent), it is estimated that the sector will add 1,816 jobs to reach 52,282 positions.
Given the high levels of poverty in the area, it is important to find sectors that offer workers median incomes at middle class levels. Provided families have a secondary wage earner in a lower paying sector, the data show that this is possible in several sectors due to their median pay levels over $45,000. In particular, it is important for this to be the case in sectors requiring minimal educational requirement given the 46.3 percent of adult workers with high school or less schooling. Looking at the economic base sectors and one related to them, the following is the situation:
• Logistics (2019 median pay: $49,106). In 2017, 78.4 percent of workers were in jobs requiring high school or less schooling. The sector is the fastest growing in the Inland Empire.
• Health Care (2019 median pay: $65,757). In 2017, 33.7 percent of workers were in jobs with minimal educational requirements. The sector has provided significant upward mobility for those with AA degrees or post-secondary training (30.2 percent). It grows continuously with those obtaining technical certifications finding good jobs and the ability to move up within the sector.
• Construction (2019 median pay: $52,482). In 2017, 82.2 percent of workers were in jobs requiring minimal levels of formal education, though apprenticeship is necessary for some types of work. The sector has become the second fastest growing in the inland area though firms continue having trouble finding workers.
• Manufacturing (2019 median pay $54,438) offers little job growth. Industry leaders, however, indicate that a large share of existing technicians are starting to retire. Of workers in the sector in 2017, 66.5 percent needed only high school or less training.
• Professional, management & scientific (2019 median pay $72,431). In 2017, a relatively small share of workers were in jobs for marginally educated workers (34.5 percent). Another 9.2 percnet, however, can step up to better paying jobs with AA degrees or post-secondary training.
• Finance, Insurance & Real Estate (2019 median pay: $51,231) is still in declining mode. In this sector, 65.6 percent of workers during 2017 were in jobs requiring minimal entry level educations though many require specific state certifications. Its growth requires more home sales and construction activity plus bank expansions.
Growth in these sectors for 2019 is anticipated to cause the area to add a total of 38,123 jobs in 2018 or 2.5 percent, fastest among major California metropolitan areas.
The need for change in the Riverside-San Bernardino metropolitan area’s economy is underscored by the fact that when inflation is taken into account, the estimated 2018 median household income ($65,512) has only exceeded its 1990 level by 0.6 percent. Per capita income has fared similarly in that period, up 0.5 percent from 1990-2018. Meanwhile, the two-county area continues to have an imbalance in its income distribution. Thus in 2018, the 14.1 percent of households making over $150,000 a year captured 35.8 percent of all income. And, the 16.4 percent of households receiving $100,000-$149,999 a year earned 24.8 percent of the region’s income. These two groups together constituted 30.5 percent of households but had 60.5 percent of the Inland Empire’s income. By contrast, the 38.5 percent of households earning below $50,000 received only a 12.1 percent share of the area’s income.