From the CalChamber: Tourism Spending in California Reaches Record High-Travel spending in California reached a new record in 2023 as visitors from around the world flocked to the Golden State. According to a new report released by Visit California, the state’s tourism economy generated $150.4 billion in travel spending last year, surpassing the prior record $144.9 billion spent in 2019 before the pandemic halted travel.
From the Financial Times: US inflation falls to 3.4% in April-US inflation edged down to 3.4 per cent in April, in data released a day after the US Federal Reserve warned it may have to keep interest rates higher for longer to tame price pressures.
Inflation: from the LA Times: Inflation remains high, fueled by housing costs-Overall rate dipped in April, but just barely. Fed policy to keep lid on prices has opposite effect in a key area. By Don Lee
Government data released Wednesday show that inflation eased a bit in April, but remains at a relatively high level. The latest report isn’t likely to lift the grim mood that much of the public has toward an otherwise solid economy.
Though incomes have generally risen more than consumer prices, the overall rate of inflation remains stubbornly high. It dropped a notch in April but was up 3.4% from a year ago, the Bureau of Labor Statistics said.
And unexpectedly, the biggest culprit is housing.
The Federal Reserve’s textbook-perfect policy of fighting inflation by pushing up interest rates has worked in large parts of the economy. The higher interest rates have helped slow growth in consumer prices for items such as food, gas, clothes and cars. Today, the inflation rate for those products is back down to, or even below, the central bank’s 2% target.
But the Fed’s same policy has paralyzed housing, an important segment of the economy, and sabotaged efforts to bring down overall inflation faster.
What the higher interest rates have done is freeze both homeowners and renters in place, discouraging either group from moving. The effect has been strong in California, where housing — what economists call the cost of “shelter” — was already very expensive.
And, in a complicated chain of cause and effect, the fact that both homeowners and renters are staying put has worked to keep inflation high.
“For two years we’ve been waiting for shelter inflation to drop enough to have an effect on the overall inflation rate. It’s constantly disappointing,” said G.U. Krueger, a longtime housing economist in Los Angeles.
For homeowners, inflation is helping make their homes more valuable. But selling isn’t an option for many because they don’t want to give up their lower mortgage rates. Today the average 30-year fixed rate is more than 7%. Higher home prices also mean they could lose whatever gains they’d made when they replaced the house they’d sold.
For renters, there isn’t even the appearance of gains: They’re frozen in place because rent prices have failed to come down even though many new rental properties have come on the market. The typical rent for apartments and houses combined last month was about $2,920 in Los Angeles, making it one of the least affordable regions in the country, according to Zillow.
With more renters forced to stay put, there’s greater demand for, and lower vacancy at, many rental properties. That’s tended to keep pressure on prices even as more supply has come on line. Builders and landlords also are pricing rents to recoup higher costs for construction and maintenance.
Last month, consumer spending for shelter accounted for about 36% of the basket of goods and services that made up the government’s consumer price index, or CPI.
Fed policymakers track a different inflation measure in which housing isn’t given as much weight in figuring overall inflation. But both tell the same story: Housing inflation is running a lot hotter than for most other consumer goods and services.
In April, consumer prices overall rose 0.3% from March, seasonally adjusted, to an annual inflation rate of 3.4%, compared with 3.5% the previous month. While that’s a dramatic decline from a 40-year high of 9.1% in June 2022, the improvement has been slowed by sticky inflation in housing.
Shelter prices in April also nudged down a bit over the month, but they were up 5.5% from a year ago, compared with 2.2% for all other goods and services combined, according to data from the Bureau of Labor Statistics.
Earlier this year, economists were expecting that a bigger decline in overall inflation would prompt the Fed to begin the first of a series of interest rate cuts this spring. But now, with prices for housing and some other services remaining high, many analysts aren’t so sure.
The Fed’s benchmark interest rate, which influences borrowing rates on homes, cars and credit cards, is at a 23-year high of about 5.3%. Higher interest rates have been felt especially hard in California’s economy, given the importance of interest-sensitive sectors such as high tech, entertainment and real estate.
One result is that job growth in the state has lagged; California’s latest unemployment rate, 5.3% in March, is the highest in the land. The state’s employment report for April comes out Friday.
Experts had been more optimistic about inflation falling faster after seeing signs of declining rents last year. But average rents have begun creeping higher again in recent months, thanks in part to bigger increases for rental houses.
U.S. rents for all housing rose on average 0.6% in April from March, and now stand at a whisker below $2,000 per month, according to Zillow. That’s up 31% since the start of the COVID-19 pandemic.
In high-priced markets such as California, steep home prices and high mortgage rates have made homeownership more elusive and soured people’s mood about the economy, with much of the blame falling on President Biden. Surveys indicate renters are among the least happy in the state and that many are considering moving out of Los Angeles.
Why is housing inflation so sticky?
One factor is that most people sign yearlong leases, so there’s a lag and it takes time for changes in rents to show up. When home prices plummeted during the Great Recession, it took about 18 months for the shelter component in the CPI to moderate, said Chris Rupkey, chief economist at Fwdbonds, a financial research firm.
CPI figures on shelter also tend to understate what many consumers are experiencing. The data show that rents for primary residences in Los Angeles and Orange counties rose 4.4% in 2022, even though prices for all other goods and services combined jumped 9.3% that year. Since then, the trend has reversed: Inflation for rents and shelter have been growing much faster than for all other items.
Experts say the recent upturn in rents may be due partly to apartment owners trying to recoup their higher costs, as the broader inflationary climate has meant they’re paying more for maintenance, supplies and labor.
Some experts say that one possible answer to housing inflation is for the Fed to cut rates. While it may seem counterintuitive for policymakers to take such action when the economy and job market are still strong, lowering interest rates could spur mobility and also make it easier for builders to start more projects and thus boost supply.
But boosting demand for home purchases could also add more juice to home prices, at least in the short term, increasing risks of creating housing bubbles.
Commercial Insurance Rates: An opinion piece from the Pasadena Star-News by Tom manzo: As California business owners grapple with rising operational costs, predatory labor codes, and the highest unemployment rate in the nation, there’s yet another challenge squeezing their budgets: skyrocketing commercial property insurance rates. Business owners are seeing their commercial property insurance rates double, triple, and, in some extreme cases in Southern California, increase by as much as 400 percent.
Why are insurance prices out of control? It’s a combination of bad luck and bad policy. California’s vulnerability to natural disasters like wildfires exacerbates the issue. But rising retail theft is also driving up costs, leaving businesses in a lurch.
I have heard their stories firsthand. Kerry Jablonski, President of Hydroform USA Inc., shared that her business was recently forced to pay three times more for building insurance compared to last year—with much less coverage. Mike Acevedo, who owns and manages multiple companies in the agriculture and commercial industries in California, shared that his businesses have suffered from a more than 400 percent increase in building and liability insurance costs.
The state has exacerbated these problems by initially refusing to let insurers price for the appropriate risk. Jamie Reid, chairman of the board at C3 Risk and Insurance Services, said the state’s “not approving rate increases, so instead of selling at a loss, insurance companies are saying we’re not going to sell the product at all.” Thankfully, state regulators are attempting to fix their earlier errors to address soaring insurance premiums.
On the natural disaster front, a proposed solution by California’s insurance commissioner Ricardo Lara would require providers to write several policies in fire-prone areas. By distributing risk more evenly across a larger pool of insured properties, the plan would mitigate the financial impact on insurance companies when a natural disaster occurs. This promotes competition among insurers, as more companies writing policies in a given area would lead to more competitive pricing, driving down premium costs in the process.
Lara’s plan would also give insurers the ability to determine their rates based on future losses instead of solely relying on past data. By using forward-looking data, insurers can better assess the true risk of insuring properties, particularly in regions susceptible to wildfires. This can prevent drastic price spikes following catastrophic events, as insurers would no longer have to raise rates significantly to cover unexpected losses from such events.
When it comes to combating retail theft, tough-on-crime solutions are in the works.
In January, Governor Newsom met with community leaders to discuss rising retail theft in the state, including Oakland Metropolitan Chamber of Commerce President Barbara Leslie. Leslie warned of small businesses losing their insurance policies after dealing with several instances of retail theft and property crime, a surge that is partly fueled by homelessness and drug addiction.
In November, an initiative to improve this situation will be on the ballot. The Homelessness, Drug Addiction, and Theft Reduction Act, introduced by Californians for Safer Communities, would reform Proposition 47 by instituting stricter penalties for repeat offenders of certain crimes, including theft. By targeting repeat offenders—who contribute significantly to the overall crime rates—this act aims to deter persistent shoplifting.
But for struggling small businesses, the time between now and Election Day could feel like a lifetime. Retail theft climbed by nearly 30 percent in 2022 compared to the previous year and it’s only getting worse. In 2023, Los Angeles police say there was an 81 percent increase in shoplifting compared to 2022.
The exponential rise in insurance premiums places California businesses at a severe competitive disadvantage—both locally and nationally. Hundreds of businesses have already fled California, and according to a recent report, 67 percent of employers want to move their headquarters out of the state.
California’s job creators need meaningful solutions today. The legislature should make tackling crime — and by extension, out-of-control insurance rates — a priority.
Tom Manzo is the president and founder of the California Business and Industrial Alliance.
From the Financial Times: UK exits recession with 0.6% first-quarter growth-The UK economy has exited last year’s technical recession with above expectations growth of 0.6 per cent for the first quarter, providing welcome economic news for Rishi Sunak ahead of the election expected later this year.
Bank of England holds interest rates at 5.25%. The Bank of England has kept interest rates on hold at 5.25 per cent, despite growing evidence that inflation is under control.
From the New York Times: Bank of England Signals Rate Cuts as Inflation Eases. A cut in interest rates could come as soon as this summer as the central bank forecast that inflation would drop to its 2 percent target.
After a long stretch of high inflation, the Bank of England finally has its 2 percent inflation target firmly within its sights.
The central bank said on Thursday that it expected inflation to reach its target in two years, and then go even lower, a forecast that comes as policymakers inch toward cutting interest rates.
The majority of the bank’s nine-person rate-setting committee voted this week to hold rates at 5.25 percent, the highest since early 2008 and where they have been for nine months. But two members voted to cut rates, compared with just one at the previous meeting in March. And Andrew Bailey, the bank’s governor, added that, although it was too soon to cut interest rates this week, the slowdown in inflation had been “encouraging.”
Inflation has been in line with expectations recently, which is “an indication that we are now getting back to more normal times — at least compared to the highly unusual period we have been living through with a global pandemic and a major war in Europe,” Mr. Bailey said at a news conference.
Before they cut rates, policymakers are waiting for more data to determine if they are “sufficiently confident” that inflation is on track.
From the LA Times: Home market gaining better supply- Housing inventory improves in many corners of Southland, providing some relief to would-be buyers.
By Andrew Khouri
For much of the last year, the Southern California housing market has been defined by an extreme shortage of homes for sale.
The abnormal scarcity — compounded by the region’s long-running underproduction of housing — emerged when homeowners chose not to sell and give up pandemic-era mortgage rates. The so-called seller strike helped pushed home values to new records, despite rising borrowing costs.
Now the inventory picture might be changing.
To be sure, the availability of homes remains at historically low levels. But as it rises, it opens the possibility that prospective buyers will have an easier time making the largest purchase of their lives.
Jordan Levine, chief economist with the California Assn. of Realtors, said more homes are coming onto the market because owners are increasingly accepting that the new normal is interest rates in the 6%-7% range.
Levine said he expects inventory levels to increase and home prices to be lower than they would have been if inventory continued to shrink. However, he and other experts said home prices are unlikely to decline. That’s because though more owners are coming to terms with high rates, many will probably choose to keep their sub-4% mortgages — a phenomenon known as the lock-in effect.
Other factors are at play. The economy is growing, and while most Southern California households can’t afford to buy, there’s a sizable population of techies, Hollywood types and other white-collar workers who can funnel excess cash into large down payments that offset high mortgage rates.
The rise in inventory is providing opportunities for buyers with means, but the market is still tough.
Interest rates are above 7%, and even if home prices rise at a slower pace, they will set records.
In Los Angeles County, the average home price in April was $890,516, an increase of 1.4% from March and surpassing the previous record, set in June 2022.
The six-county Southern California region climbed above its 2022 average home price record in March. It set another all-time high last month, reaching $875,388.
If mortgage rates noticeably decline, the lock-in effect could lessen and bring more homes onto the market. Falling mortgage rates would immediately make housing more affordable.
Whether falling rates provide much relief is another question. Lower borrowing costs may bring a flood of additional buyers who quickly gobble up new listings and supercharge price growth.
California Budget: From the CalChamber: May Budget Revision Released-Governor Newsom announced his strategy to address an estimated $27.6 billion deficit for the upcoming budget year, and a $28.4 billion projected deficit for 2025–26.
The Administration normally updates its revenue estimates and spending plan in May to reflect final income tax payments and new economic data. One of the reasons for the large budget deficit was the lack of access to this data last year because federal and state income tax deadlines were postponed to accommodate taxpayers affected by natural disasters.
The Governor’s strategy comprises a mix of spending reductions and delays, the elimination of frequently used tax credits, fund shifts and dipping into rainy day reserves. Recognizing the multi-year dimension of the budget shortfalls, he tagged many of his proposed revenue increases and spending reductions to solve for two or more years of anticipated budget deficits.
The Governor’s major proposed solutions to eliminate budget deficits include:
Withdrawing about $13.1 billion from various budget reserve accounts, and another $8.4 billion from the public schools reserve account.
Potentially increasing revenues by $5.5 billion by suspending Net Operating Losses (NOL) deductions and limiting tax credits that businesses currently rely upon to manage costs. The change would affect tax years 2025, 2026 and 2027, unless revenues are sufficient without the suspension.
Tens of billions in additional program reductions and delays, such as cutting $510 million for the middle class scholarship program, $500 million for preschool and kindergarten facilities, $80 billion from correctional facilities by closing housing units, reducing health care workforce programs by $846 million over the next five years, and delaying child care program expansions, totaling $1.3 billion over two years, and $60 million from the extension of the California Competes grant program for next year.=
An across-the-board reduction in state operations of about eight percent, affecting nearly all departments.
Shifting billions in General Fund obligations to special funds.
Proposed Suspension of Important NOL Tax Credit
The Governor resisted proposing general tax increases to address the multi-year budget shortfalls, but resurrected a temporary, targeted tax strategy affecting businesses. Similar to a proposal adopted by the Legislature for the pandemic-stricken budget in 2020, the Governor has proposed suspending the carryover of net operating loss tax deductions for businesses with California income greater than $1 million, and limiting business credit usage to $5 million in tax years 2025, 2026 and 2027.
A “trigger” would be included to restore these tax strategies if sufficient revenues are available next year. The carryover periods for NOLs and credits would be extended by three years, and the credit limitation would not apply to the Low-Income Housing and Pass-through Entity Elective tax credits.
After these tax incentive suspensions were enacted in 2020, the anticipated budget shortfalls did not materialize. As a result, the Legislature and Governor terminated the suspensions one year early.
Addressing Revenue Volatility
Buoyed by the success of the Rainy Day Reserve, approved by voters as Proposition 2 in 2012, the Governor will be proposing amendments to allow even more excess revenues be added to the reserve during years with windfall capital gains tax revenues, which are notoriously volatile. Receipts from capital gains taxes that soared to $349 billion in 2021–22 dropped to $137 billion in 2023–24. This would both provide a cushion for state spending when revenues decline, and prevent the Legislature from spending those excess revenues in the first place.
What’s Next?
The next move is the Legislature’s, which will negotiate an overall compromise to meet the June 15 deadline to approve a budget. The Governor must give his final approval before July 1, the beginning of the fiscal year. Further action on many of these budget items will doubtlessly transpire throughout the summer.