“We have seen an unprecedented purposeful turning-off of an economy,” UCLA Ziman Center’s Stuart Gabriel said this week in a virtual conversation organized by the Los Angeles Business Council. The hour-long webinar, conducted via Zoom, included Emile Haddad, the chairman and CEO of FivePoint and Victor Parker, Los Angeles district director for the US Small Business Administration, who each gave their commentary on the current market and a forecast for recovery.
Gabriel, who serves as director of the UCLA Ziman Center for Real Estate, did not mince words about the toll the pandemic is taking on the economy. “The economic carnage is severe. It is unlike anything that we have ever seen or known, and it is outside of any statistical range,” he said. The school’s most recent forecast predicts GDP to fall 30% to 40% in the second quarter, but anything more specific is a challenge due to the sheer singularity of this economic event. “The expectation for the current quarter, the quarter of most severe disease incidents, is that real GDP in the US will fall on order of magnitude by 30% to 40%. It is difficult for us to narrow between 30% to 40%, and it could be worse. Any historical guidance is out the window,” he said.
At the close of the first quarter, the economy contracted by 3.4%, according to Gabriel, with retail sales in the last month falling by an unprecedented 9%—the deepest drop on record. In addition, 26 million people have claimed unemployment benefits, and UCLA expects 17 million real jobs lost in 2020, indicating a forecast on jobs that will not be recovered once the economy reopens. “As a result, we are expecting the unemployment rate both nationally and in California to jump to the 20% range—levels not seen since the Great Depression,” he added.
Southern California is acutely exposed to the hospitality market and could outpace the national employment loss as a result. Gabriel noted some forecasts predicting 30% unemployment in the region. “I am not sure if [our team] got to that level, but it is not outside the bounds of reasonableness,” he said. “We are anticipating 1.7 million jobs lost in L.A. County, which is consistent with a sharp drop in GDP.” The hotel activity in Los Angeles and Orange County has already declined, with revenue down 90% in the last month.
Beyond the second quarter, Gabriel’s outlook improved. He forecasts only 5% GDP loss in the third quarter and growth in the fourth quarter. “By the fourth quarter, we are going to see the US economy growing again by 4% to 5%,” he said. “In the first quarter of 2021, we expect a surge in real GDP onward of magnitude of 15%. We are in the severity of virus incidents, but we expect to emerge within the next three to six months.”
Much of the potential damage has been mitigated by the Fed’s quick action, Gabriel added at the end of his presentation. “Our Federal Reserve and Congress have gone into action quickly and aggressively with respect to monetary and fiscal policy. The Fed has taken every page out of its 2008 playbook and it has added pages,” he said. Those “pages” include pushing the yield curve to nearly zero, aggressively lending to financial institutions through the discount window and reducing reserve requirements for lending platforms.
Gabriel called the Fed’s action necessary and expects it will continue to take action to offset economic damage. “The Fed has almost unlimited firepower when it comes to provision of liquidity, and the US economy cannot run without liquidity. Liquidity is in desperate need at the moment, and the US government and the Fed are in the business of providing that liquidity. That is very important locally, nationally and globally.”
The economy won’t be closed forever. Gabriel predicts it will reopen incrementally, guided by epidemiological evidence and needs.