Economic Update
(Monday, June 14, 2021)

For a period of time between 2018 and the beginning of 2020, the “Real House Price Index” (which calculates inflation in the Housing Sector) was falling, because Americans’ buying power was rising faster than home prices. But that’s certainly not the case anymore. Deflation has turned into inflation, not because interest rates have gone up (they’ve only gone up a little bit), but because house prices are out of control. The reason home prices are rising so fast is fairly simple. After the Great Recession, home-building all but drew to a standstill as the construction industry worked to recover. As a result, the construction of new homes did not keep pace with population growth. That left the housing market with a serious shortage of homes, just as millennials began getting married and having kids (traditional hallmarks of home-buying interest). With the pandemic, the shift to remote working and low interest rates have only exacerbated the shortage and inflation. The primary solution to address runaway inflation in housing will be to build more homes — something that’s easier said than done. That’s because some of the challenges that we face on the supply side of the residential construction industry are going to persist well into 2022. These challenges run the gambit from the high cost of lumber to the lack of skilled workers to complete construction projects. Another factor: Zoning regulations across the country prevent the construction of more dense housing in many cities (including Los Angeles), effectively driving up home prices and rents in the process. Finally, new-home construction alone won’t make matters easier for all Americans. Because of the high costs, it’s easier for builders to construct more expensive homes, even though the demand is for entry-level properties. So ironically, the increased demand in the bottom-tier of the housing market is driving up prices for those who can least afford it. With this challenging housing market in mind, let’s wash our hands, put on our face masks (until tomorrow), social distance, get vaccinated, and let’s look under the hood…

Consumer Price Index (“CPI”). Consumer prices continued a rapid ascent in May, rising 0.6% for the month and pushing the 12-month increase for the CPI to a shocking 5.0%. This is like knowing that normal body temperature is 97.6 degrees, but the thermometer says you’re at 105! Worse, the May rise of 0.6% comes after increases of 0.8% in April and 0.6% in March, bringing the three-month change to an 8.4% annual rate, the fastest increase for any three months in more than a decade! Usually, when we get a sudden sharp spike in inflation, it's because of energy prices, but not this time. Energy prices were flat in May, while food prices (also sometimes a source of volatility) was also flat. Instead, it was "core" prices (which exclude food and energy), that led overall consumer prices higher in May. Core prices rose 0.7%, the second largest monthly increase since 1982. The index for used cars and trucks continued to drive core prices higher in May, rising 7.3% after a 10.0% increase in April. Housing rental costs were another main contributor (despite still being artificially subdued by the moratorium on evictions). The costs for housing rose 0.3% in May after increases of 0.4% and 0.3% in April and March, respectively, bringing the three-month change to a 4.1% annual rate. Of course, the Federal Reserve is going to claim these increases are "transitory," which is its way of saying there is no need to change monetary policy. They say there is no need to worry, that recent inflation is just a bounce back from lower prices during the COVID shutdown disaster. I don’t know if they’re right – but they better be! I say this because consumer prices are up 3.0% annualized versus February 2020, which was pre-COVID. Core prices are up 2.6% annualized during the same timeframe. In other words, this is not just a bounce back from temporary COVID deflation. This, I fear, is more fundamental. The M2 measure of the money supply is up 30% from February 2020, the federal government has ramped up "stimulus" efforts, and employers need to lift wages to compete with abnormally high unemployment benefits. But math always wins, and today the math says inflation above the Fed's 2% target is likely to be with us for some time.


Jobless Claims Drop to Pandemic Low. Initial weekly jobless claims, my favorite barometer of our economy, fell by 9,000 to 376,000 in the week ended June 5, according to the U.S. Labor Department. That’s the lowest level of claims since March 2020. The number of people already collecting state jobless benefits, meanwhile, fell by 258,000 to a seasonally adjusted 3.5 million in the week ended May 29. These are known as “continuing claims.” This is also the lowest level since the onset of the pandemic early last year. Fortunately, jobless claims have been on a clear downtrend as our economy recovers from the pandemic. Claims are starting to be “within sight” of more normal levels. (Claims were in the low 200,000 levels just before the pandemic.) Another 71,292 applications for jobless benefits were filed last week through a temporary federal relief program, down 1,957 from the prior week. These claims had peaked last year at well over 1 million a week. Some 5.2 million people who have exhausted state compensation were still getting extra $300 a week in federal benefits as of May 22. The federal program ends in September and more than two dozen states are going to end the program early starting in the middle of this month. Altogether, the number of people reportedly receiving benefits from eight separate state and federal programs totaled 15.34 million as of May 22. Last year, 30 million Americans were receiving these extra benefits.

Local Hotels Slowly Recovering. A brand-new hotel, Pentry West Hollywood (which has nearby competition from big brand names like Sunset Tower and Andaz West Hollywood), is open, booking rooms and filling up its bars and restaurants. Another of many signs that the hotel industry in Los Angeles is sputtering back to life. L.A. hotel operators say the resurgence is fueled in large part by “staycations.” Vaccinated Southern Californians who are taking advantage of deals and discounted room rates and booking short weekend stays. Guests in search of mild weather and a bounty of outdoor activities and patio dining options are also streaming in from places that are within a few hours’ drive of Los Angeles. L.A. occupancy rates jumped up to 62% in May, from 43% in January, and closer to pre-pandemic averages of 80%. For nine weekends in a row, hotels in Los Angeles County have been at least 70% full, according to the Los Angeles Tourism and Convention Board. And several new properties are readying to make their debut, including The Shay at Ivy Station in Culver City, a new downtown outpost of Proper and the revamped Fairmont Century Plaza in Century City. Guests are coming from all over California, along with Las Vegas, Arizona and Texas, and they’re pretty much all staying for fun and relaxation, not business. They are what hoteliers affectionately call “vaccicationers.” To capitalize on the surge in local travelers and the “drive market” of people within a seven-hour drive of L.A., the tourism board dropped $10 million on its first national advertising blitz — a TV ad that launched in mid-April with the tagline “L.A. is a comeback story.” The spot is airing in 20 markets, including six cities where the tourism board has never advertised before and that are just a short flight away: Dallas; Denver; Houston; Portland, Ore.; Salt Lake City; and Seattle. L.A.’s famously good weather is paying off for the hotel industry.



710 Freeway is a Key Link in Our Local Economy. It’s one of the country’s main commercial corridors, linking the ports of Los Angeles and Long Beach to America’s consumer economy. But the 710 Freeway is a congested and creaky relic straining to keep up with modern expectations. The southern portion of the 710 Freeway, a roughly 20-mile stretch that runs from Long Beach to Alhambra, is congested with diesel-spewing trucks that deliver imported furniture, auto parts, electronics and clothing across the country. Together, the ports of Los Angeles and Long Beach handle more than 30% of the nation’s waterborne containerized shipping traffic. Currently, 50,000 diesel-fueled freight trucks and 165,000 other vehicles travel the 710 freeway each day; bottlenecks, breakdowns, and horrendous traffic jams are common. And with port traffic expected to nearly triple between 2012 and 2035, the situation is only expected to worsen. For more than two decades, Southern California transportation officials have pondered how to accommodate the roadway’s swelling truck and automobile traffic, and they’ve always come to the same conclusion: We need a bigger freeway. But their plans always run into the same obstacles. A wider 710 Freeway would likely mean even worse pollution for neighboring communities — including Long Beach, Lynwood and Bell Gardens — that already suffer some of the nation’s worst air quality. And it would require gobbling up surrounding homes and businesses from predominantly low-income, Latino residents. Now the project faces another, potentially even greater, complication. Federal environmental regulators recently found that the latest $6-billion proposal to expand the 710 Freeway might violate Clean Air Act standards, forcing state and local transportation officials to consider scrapping the effort and starting over with an entirely new approach. Balancing the demands of expanding commercial traffic against the health needs of people living in homes near the freeway has long been a challenge. In addition to the concerns about air quality and evictions, the project has long faced funding shortfalls. Sales tax hikes approved by county voters in 2008 and 2016 allowed Metro to budget $1 billion toward the expansion, leaving a $5-billion deficit.

State Senate Approves Returning Bruce's Beach Property to Descendants. Willa and Charles Bruce purchased waterfront property in Manhattan Beach in 1912 for $1,225.00. They eventually added other parcels and created a beach resort catering to Black residents (who had few options at the time for enjoying the California coast). Complete with a bath house, dance hall and cafe, the resort attracted other Black families who purchased adjacent land and created what they hoped would be an ocean-view community. But the resort quickly became a target of the area's white populace, leading to acts of vandalism, attacks on vehicles of Black visitors and even a 1920 attack by the Ku Klux Klan. The Bruces were undeterred and continued operating their small enclave, but under increasing pressure, the city moved to condemn their property and other surrounding parcels in 1924, seizing it through eminent domain under the pretense of planning to build a city park. The resort was forced out of business, and the Bruces and other Black families ultimately lost their land in 1929. The public seizure of the Bruce's Beach property has long stained the history of Manhattan Beach, particularly in the past year amid a nationwide reckoning on racial injustice. But it was not until 2006 that the city agreed to rename the park "Bruce's Beach'' in honor of the evicted family. That honor, however, has been derided by critics as a hollow gesture toward the family. A bill to return a scenic beachfront property to their descendants was unanimously approved Wednesday by the state Senate. The Bruce's Beach bill now goes to the state Assembly for approval. The long-awaited legislation would return the property to the Bruce family after nearly a century.


Slice of L.A. Architecture. Patrick Martinez’s “Defeat and Victory” is a painted sculpture at El Museo del Barrio in New York City. Defeat and Victory is part of “Estamos Bien,” El Museo’s first national survey of Latinx contemporary art. I highlight this incredible sculpture because Martinez lives and works here in Los Angeles. Even better, Martinez is inspired by our city’s urban landscape, which he collaged together in this painted sculpture that looks like it could have been sliced right off a downtown building. The stucco wall and the metal window bars, the faded portrait of Malcolm X, the Mexican mural, the Filipino market sign, the segment of a “FOR LEASE” banner, and the neon sign advertising face masks and hand sanitizer tell a deep story of L.A.’s past and present as well as Martinez’s own biography. Unless you’re heading to New York any time soon, you can see more of Martinez’s sculptures at the El Museo’s website.

Disney Collection to be Auctioned as Collector Sells Home. Most people just visit Disneyland. Scott and Terry Rummell LIVE Disneyland. The Rummells just sold their four-bedroom Yorba Linda home that they spent 23 years transforming into their very own “Happiest Place on Earth.” Assorted ride vehicles, hand-silkscreened attraction posters, and other objects from their 25,000-piece Disneyland and Walt Disney World’s Magic Kingdom collection infuse almost every corner of their 4,569-square-foot house. But none of it comes with the sale — the house fetched $2.24 million with multiple offers six days after listing on April 23. It closed 12% over the asking price on May 17. Excluded from the sale was “all the big stuff,” including four vintage ride vehicles; a Rocket Jets rocket, an Autopia racer car and a Mr. Toad’s Wild Ride buggy from Magic Kingdom. Another is the Skyway gondola, similar to one recently sold at auction for $600,000. The gondola anchors the upstairs bonus room where it shares space with a 70-pound Monstro the Whale tooth, “Pirates of the Caribbean” pinball machine and hand-painted attraction signs once attached to the side of the Disneyland Omnibus. A 1955 Disneyland opening day pennant hangs among the hundreds of narrow pointed flags covering a plank ceiling. Also displayed are various props from movies whose trailers Rummell voiced in that deep, resonant style he slips into so easily. Other times he will go into the announcer voice he used during a brief stint as the Voice of Disneyland in the early ’90s. A lifelong Disney enthusiast, Rummell began building the collection with his Donald Duck collector wife after they married in the early 1980s. They must make one hell of a couple. The pieces create designated Disney themes in their home, from a Main Street USA living room to a formal dining room designed after the Mark Twain Riverboat and Sailing Ship Columbia (which Rummell’s grandfather helped build).



California Is Close to Decriminalizing Mushrooms, LSD, and Ecstasy. High times ahead! (I’m going to report this story straight – I don’t want this to be just another puff piece). It looks like drugs are finally breaking the grass ceiling. A bill to decriminalize psychedelic drugs in California has passed a major “acid” test this week as the State Senate approved it in a 21-16 vote. In a joint effort, Senate Bill 519 still needs to get the Assembly high. But if it becomes law, it would decriminalize the possession and sharing of psychoactive agents such as psilocybin mushrooms, LSD, ketamine, MDMA (ecstasy), and ibogaine for people 21 and older. The measure, however, would not decriminalize the sale of those hallucinogens. Wait a minute, you can use it but you can’t buy it? Would someone please explain to me how that works? SB 519 would direct the California Department of Public Health to create a task force to study the drugs and advise the state legislature on how to regulate them, the ultimate buzzkill. One of the bill’s authors, stoned-out San Francisco Democrat Scott Wiener, celebrated the passage as a major step toward ending law enforcement’s decades-old narcotics quagmire. His royal highness, Wiener, has endorsed the medical benefits of psychedelics, which studies indicate can improve general mental well-being and even alleviate depression in people battling cancer. After all, you can’t spell “Healthcare” without “thc.” Still, SB 519 has a long trip to go before fully implemented.

LA County May Ban Feeding Peacocks. If you live in sections of the San Gabriel Valley, San Fernando Valley, and Palos Verdes, you already know that peacocks roam your streets, squawking at the top of their lungs, defecating all over the place, and causing a general nuisance. Chapman Woods is a good example. Somewhere between 50 to 100 peacocks (and their mating calls) live in Chapman Woods. Neighbors say peacocks have lived in the area for more than 100 years and were originally brought to the community to liven it up in the 1920s. However, the beautifully colorful birds have become a nuisance to neighbors. "They sound like babies being tortured a close-up microphone. It's very shocking," said Chapman Woods resident Kathleen Tuttle. "There's no way you can sleep through it, and it's extremely distracting." They may look pretty, but they make a lot of noise. "They are beautiful, but there's too many of them, and they leave a mess," said Chapman Woods resident Mary Bassel. "So far my car hasn't gotten hit, but I watch them pecking at people's cars and so they create havoc in our midst." Some neighbors have taken to feeding the birds, something a wildlife specialist says makes the peafowl dependent on the food source, and the birth numbers actually increase (as compared to if they were left in the wild). The cities of Arcadia and Pasadena already prohibit the feeding of peafowl in their municipal codes. In response, Los Angeles County is considering prohibiting the feeding of peacocks as the sheer amount of the birds roaming the streets is causing trouble for residents, a problem that's only gotten worse during the pandemic. L.A. County Supervisor Kathryn Barger has drafted a motion that would create an ordinance that, "... prohibits the feeding of wildlife because it disrupts an animal's normal behavior pattern.” The plan for now is that animal control will humanely capture the peacocks and then relocate them to farms in San Diego or Bakersfield. But another neighbor who's lived in the community for 21 years says the peacocks were born in the area and deserve to stay there. One resident was seen wearing a t-shirt saying “Peacocks Matter.”



This Week. Looking ahead, investors will continue watching global Covid case counts and vaccine distribution. Beyond that, Retail Sales will be released on Tuesday (6/15). Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of the strength of the economy. Housing Starts will come out on Wednesday (6/16). Most importantly, the next Fed meeting will also take place on Wednesday (6/16). No change in the federal funds rate is expected, but investors will be looking for more detailed guidance on the pace of future bond purchases (which of course affects interest rates).

Weekly Changes:
10-year Treasuries: Fell 008 bps
Dow Jones Avg: Fell 300 points
NASDAQ: Rose 200 points

Calendar:
Tuesday, 6/15: Retail Sales
Wednesday, 6/16: Fed Meeting
Wednesday, 6/16: Housing Starts

For further information, comments, and questions:

Lloyd Segal