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Economist Christopher Thornberg says San Diego’s overall economy remains on solid footing but nationally, the Federal Reserve needs to tighten the nation’s money supply to avoid stumbling into a recession.

“People are out, they’re enjoying their lives again (as the pandemic recedes) and San Diego’s economy is on fire,” Thornberg said Wednesday at a virtual economic forum hosted by Torrey Pines Bank. “The only major issue in San Diego is the issue — also that California is facing — of the lack of workers, driven by the lack of housing.”

Job openings are up but Thornberg, founding partner of Los Angeles-based Beacon Economics, pointed to recent state employment statistics showing 29,300 fewer people working in the San Diego area in January compared to January 2020, just before the onset of the pandemic.

“In all these counties, whether you’re talking San Diego County, Orange County or the Inland Empire, it’s still (the) leisure and hospitality (sector) that’s still struggling to come back,” Thornberg said.

Christopher Thornberg, founder of Beacon Economics.

Christopher Thornberg, founder of Beacon Economics.

(Beacon Economics)

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Employment in San Diego’s leisure and hospitality sector is off by 14,200 jobs.

When the economy reopened, Thornberg said, the sector intended to re-hire the employees they had let go but “they’re not there.” Where have they gone? Many moved to administrative support jobs, which is has seen an increase of 10,600 jobs in San Diego.

At the same time, housing prices in San Diego — already tight before the pandemic — have taken off, up 31.7 percent in the last 15 months, according to the National Association of Realtors and S&P Global. On Wednesday, the median price for a home in San Diego County hit a record high of $805,000, according to a report from CoreLogic/DQNews.

“This is an expensive market but it’s also an incredibly tight market — we’re talking less than two months’ supply,” Thornberg said. “This isn’t a market that’s going to break anytime in the near future, although I think it’s going to start cooling with rising interest rates.”

U.S. inflation reached a 41-year high in March, 8.5 percent compared to a year earlier, with prices for gasoline and groceries walloping consumers. In the San Diego metropolitan area, the inflation rate was slightly lower, coming in at 7.9 percent.

To try to curb inflation, the Federal Reserve in March raised interest rates for the first time in more than three years. A recent poll by Reuters of more than 100 economists predicted the Fed will raise rates by a half-point in May and then follow up with another half-point increase in June.

But instead of focusing on interest rate increases, Thornberg said Fed governors need to tackle inflation by tightening the money supply in the aftermath of the federal government’s response to the financial effects of the pandemic.

“By my calculations, Americans lost about $820 billion in income over the course of (the pandemic), for which the federal government gave us back $2.1 trillion, a ratio of 2.6 to 1,” Thornberg said. “That’s preposterous … We overdid it and now we’re inflating.”

Since the pandemic, the central bank has printed trillions through a process called quantitative easing, in which the Federal Reserve buys U.S. Treasuries and mortgage-backed securities to signal to markets that it intends to keep financing conditions loose. The Fed’s balance sheet has zoomed to nearly $9 trillion.

Thornberg said it’s time for quantitative tightening.

“Until they start to yank (about) $5 trillion dollars in cash in quantitative easing out of the money supply, inflation is only going to heat up,” he said, adding he believes the longer the central bank waits, the chances of a full-blown recession increase.

“Yes, (tightening) will drive interest rates up, it’s going to pop the financial bubble,” Thornberg said. “It’s going to make us feel worse right now but ultimately it will help the economy in the long run.”

John Maguire, Torrey Pines Bank CEO, said many of his customers are worried about inflation but at the same time, financing for residential and commercial real estate deals in San Diego keeps growing.

“You have industrial properties that are in high demand for distributing goods and services,” Maguire said, “And Amazon’s a good example, but Amazon’s not the only example out there.”

Thornberg said California’s economic fundamentals are “fantastic” and “the fundamentals for San Diego are even better.”

“It’s an amazing place to live,” he said. “You got core industries — biotech, defense, tourism — all of which have a stellar future in front of them. San Diego locally is fine. The mess we’re in right now is not about San Diego … These problems start in D.C.”

Globally, the International Monetary Fund released a report Tuesday that reduced expectations for an improving world economy — predicting 3.6 percent growth in both 2022 and 2023, compared to 6.1 percent growth that occurred in 2021.

The IMF blamed the more pessimistic outlook on “severe overlapping crises,” such as the Russian invasion of Ukraine that has roiled energy markets, the lingering effects of the pandemic and inflation.

Source: This post first appeared on sandiegouniontribune.com

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