By Conor Sen / Bloomberg Opinion
The Federal Reserve has been reminding investors that it intends to keep raising rates until it cools inflation closer to its 2 percent target and restores balance to the economy. But it is focused on the national picture. What will a more balanced U.S. economy look like at the metro level?
Some places will always do better than others, and the post-pandemic economy is no different. The Silicon Valley Bank failure has underscored how local economic conditions can ripple through a region in unexpected ways.
Job openings and housing data provide a window into how another step-down in the pace of economic activity might play out across the country, city by city. As SVB — a bank focused on technology startups — is signaling, the worst trends at the moment are showing up in the tech-heavy cities along the West Coast, the same places that were among the biggest winners in the 2010s: San Francisco, San Jose and Seattle. The SVB crisis will likely mean less credit availability for startups and private tech companies in the future, creating even more headwinds for the tech economy concentrated in the region.
Even if the U.S. economy manages to pull off a soft landing, the best those three metros can probably hope for is a mild recession, so people and public officials there should start planning for that now.
One way to see how out of balance the labor market has become is to compare the current level of job openings with the pre-pandemic market. This is what the Federal Reserve is doing as it considers how to set monetary policy. Last week we got the Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics for the month of January, which showed that there were 10.8 million openings for workers compared with just over 7 million before the pandemic; a 50 percent increase. The employment website Indeed, which tracks job postings in real time, shows that as of early March there were 33 percent more postings than in January 2020.
Indeed, data is especially useful because it tracks postings at the metro level. And while most cities look comparable to the national numbers, San Francisco and Seattle have 6.5 percent fewer job postings than they did prior to the pandemic, and San Jose has 12 percent fewer. Even among Western peers they stand out; Phoenix, Los Angeles, Sacramento and Denver still have job posting levels well above pre-pandemic levels.
Home price data tells a similar story. According to the S&P CoreLogic Case-Shiller Index, among the top 20 metro areas for which they publish data, only San Francisco and Seattle saw home prices fall in December compared with a year earlier.
There’s no secret about what has happened in these cities. The tech industry is going through a downsizing after a hiring blitz during the pandemic turned out to be excessive. In many cases, tech companies are pivoting to focus more on profitability than growth. With some of the highest home prices in the country, 7 percent mortgage rates make housing affordability even worse.
The problem these tech metros will face over at least the next year is that while their economies might still fall within in the realm of a “soft landing,” the overall U.S. economy remains hotter than the Federal Reserve will tolerate. And if national growth needs to decelerate, conditions are likely to get worse for the Bay Area and Seattle, pushing them into recession territory.
If there’s a silver lining for this West Coast region, it’s an opportunity to reshape economies that most people agree had become skewed too far toward the “haves” (mostly tech workers and real estate owners) versus the “have nots.” Inequality was rampant as housing scarcity pushed people out. Local governments seemed unwilling or unable to address the problems. Booming job growth, well-occupied office buildings and rising stock and real estate values allowed difficult decisions to be avoided.
Uncertainty is the rule now. The tech industry is in a period of transition, the future of office buildings and central business districts is in question, real estate values are falling, and while unemployment remains low, one wonders what the labor market will look like when severance packages in the tech sector run out.
Whatever frustration people had with the economies of the Bay Area and Seattle over the past decade, the downturn they’re heading toward will be no picnic either. But if it helps spur reforms related to housing and governance and diversifies economies that were overly dependent on the tech sector, perhaps it will be worth it.
Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments.
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