Episode Show Notes
Episode 3 features Christopher Thornberg, Ph.D., Founding Partner at Beacon Economics LLC. Christopher explains how the COVID-19 pandemic has affected different parts of the economy and offers his predictions about what the economy will look like as we return to “normalcy.”
Christopher Thornberg, Ph.D., Founding Partner, Beacon Economics LLC, founded Beacon Economics LLC in 2006. Under his leadership, the firm has become one of the most respected research organizations in California, serving public and private sector clients across the United States. In 2015, Dr. Thornberg also became Director of the UC Riverside School of Business Center for Economic Forecasting and Development and an Adjunct Professor at the school. An expert in economic and revenue forecasting, regional economics, economic policy, and labor and real estate markets, Dr. Thornberg has consulted for private industry, cities, counties, and public agencies. He became nationally known for forecasting the subprime mortgage market crash that began in 2007, and was one of the few economists on record to predict the global economic recession that followed. Dr. Thornberg holds a Ph.D. in Business Economics from The Anderson School at UCLA and a B.S. degree in Business Administration from the State University of New York at Buffalo.
00:00:00 - Introductions
00:01:18 - The state of the manufacturing economy before and after the pandemic
00:02:35 - Whether some people were surprised by the shifts and how the recovery has played out so far
00:08:27 - Signs that industries are recovering
00:11:23 - Timeline until things smooth out
00:14:16 - Why finding skilled workers is more difficult now than a few years ago
00:16:06 - Effect of companies incentivizing high school students to work rather than continued education
00:17:35 - Manufacturers and manufacturing workers leaving California
00:20:19 - Discussion regarding workers moving away from the coast
00:21:57 - Economic indicators to help determine whether or not to invest in growth over the next year or two
00:23:38 - How the current economic climate might affect demand and inflation
Gregg Profozich [00:00:02] In the world of manufacturing, change is the only constant. How are small- and medium-sized manufacturers, SMMs, to keep up with new technologies, regulations, and other important shifts let alone leverage them to become leaders in their industries? Shifting Gears, a podcast from CMTC, highlights leaders from the modern world of manufacturing from SMMs to consultants to industry experts. Each quarter we go deep into topics pertinent to both operating a manufacturing firm and the industry as a whole. Join us to hear about manufacturing sectors' latest trends, groundbreaking technologies, and expert insights to help SMMs in California set themselves apart in this exciting modern world of innovation and change. I'm Gregg Profozich, Director of Advanced Manufacturing Technologies at CMTC. I'd like to welcome you. In this episode I am joined by Christopher Thornberg, Ph.D., Founding Partner at Beacon Economics LLC, to discuss the economic outlook in the wake of the COVID-19 pandemic. Chris explains how weaknesses in demand created by COVID in one part of the economy have created excess demand in other parts of the economy. Chris closes with his predictions about what the economy will look like as we return to normalcy and readjust the old spending patterns. Welcome, Chris. It's great to have you here.
Chris Thornberg [00:01:16] Great to be back, Gregg.
Gregg Profozich [00:01:18] Chris, I think it's fair to say that last year can be characterized as a year that was full of disruptions and surprises, from lockdowns and shifts in individuals' daily routines to business closures, travel restrictions. The list goes on and on. We're here today to talk a little bit about the impact of the pandemic on manufacturing. So, for context, let's talk about the manufacturing economy in general. Before the pandemic, what was the state of the manufacturing economy, and how did the pandemic impact it?
Chris Thornberg [00:01:42] Well, actually, despite, of course, all this, if you will, stories about the imminent decline of manufacturing in the United States, much of that rhetoric is untrue. In fact, coming into the pandemic, US industrial production was at an all-time high. Admittedly, it's a different kind of manufacturing relative to, say, what we were doing 10, 20 years ago. International trade has, of course, caused a situation whereby the US has specialized in some parts of manufacturing, whereas other parts of the world are specializing in other things. That's one of the reasons, for example, here in California, and really across the United States, you continue to see declines in apparel output, whereas things like chemicals and petrochemicals and, of course, electronic equipment are all up, up, up, as the case may be. So, parts of US manufacturing we’re doing very, very well.
Gregg Profozich [00:02:35] So, the economic shifts that happened, should anybody have been surprised by some of the shifts that happened and how the recovery has played out so far? I think there have been some people who are surprised.
Chris Thornberg [00:02:44] Yeah, and well they should be, although I'll tell you at the center, we were a little less surprised. Although I would say the aggressiveness of the rebound we've seen in manufacturing was really not something even we had predicted. To take a step back, let's think a little bit about how this recession differs from the last recession. I understand that's a big question. When you think about the Great Recession, it, of course, came at the back end of the massive subprime bubble that it so overheated the US economy in the early years of last decade. When it hit, we had households with record amounts of income. There were too many homes; there were too many cars; and then all that wealth they thought they had in terms of their home equity or their stock market portfolio, well, a lot of that went away very quickly. As a result of that balance sheet problem, a general malaise had gone across the economy. A lot of people didn't have jobs. Even if you did have a job, you were seeing declines in your income. The economy was weak for years. Now you come to the pandemic, you heard a lot of really dire predictions about this being a depression-like crisis. But the pandemic hit, there was a panic. People just stopped everything. But within a couple months people got a sense of what was happening. They understood the risks they were dealing with. We had more clarity from our public health folks. As a result of that, people learned how to live with the virus. How do I run my business? How do I live my life?
That's really important, because what happened was this. You think about the parts of the economy that were substantially impacted by COVID. It's the service part of the economy. I can't go to my favorite restaurant. I can't take my family to Disneyland. I can't take that honeymoon to Paris. But people, for the most part, a lot of people kept working. They had money, and they wanted to spend it. They wanted to live their life. So, what do they do? Well, let's change the conversation a little bit because what they said was, "Wow, we can't take our family to Disneyland. Let's go buy a camper." That was the key. People didn't appreciate that the weaknesses created by COVID in one part of the economy have created excessive demand in other parts of the economy.
Within a couple of months after the beginning of the pandemic, retail sales began to shoot up in the United States; durable goods sales began to shoot up in the United States. Indeed, for the second half of 2020, they were well above long-run trend. This, of course, caused a lot of manufacturing to start surging back. We went from having in April, when everybody was in the midst of that panic, a record high inventory to sales ratio in American business to three months later having a record low level of inventories to sales. Demand came rocketing back for these products; warehouses were emptied. It wasn't just toilet paper, folks; it was across the board. Even towards the end of last year, if anybody tried to buy a bicycle for your kid in the run-up to Christmas 2020, forget about it. There was nothing available.
Now, what that meant is portions of the manufacturing industry, particularly those portions that were attached to consumer durables, have been just busy, busy, busy. They're running full steam. They're producing. The biggest problem they have wasn't just manufacturing that was caught off guard; logistics was caught off guard; global logistics was caught off guard. You have a situation right now where ports are record busy. They're still trying to catch up from that head fake in the economy. There's supply chain problems across the board in a lot of major parts of the manufacturing industry.
Now, the good news there is offset by bad news other places. For example, as much as consumer durables bounce back, which cause part of manufacturing to bounce back with it, at the same time, investment, obviously airplanes, there's still tons of airplanes parked in deserts across the United States. The airplane manufacturing industry, which is enormous, it's amazing the amount of the manufacturing sector that's devoted to building airplanes in this country. They're still not even moving, very little happening there. Or perhaps the parts of the manufacturing industry that supplies goods for the oil industry. Remember, people stopped driving, and we already had an oil glut in the United States. That turned into an oil rout. Remember, we had negative prices for oil at one period of time, because they were producing more than they had capacity to hold. They were paying people to take oil from them for a brief period of time. So, it's very much a winner/loser type economy right now. We have parts of our manufacturing sector which are still suffering, waiting for the economy to get back to normal, but a lot of other parts of the manufacturing sector are making record profits.
Gregg Profozich [00:07:40] So, if I'm hearing you right, it wasn't that the economy tanked and stayed tanked; it's just that consumption shifted.
Chris Thornberg [00:07:46] Exactly.
Gregg Profozich [00:07:47] For things we couldn't do, we didn't do, and the things that we could do, we spent on, and really drove unexpected demand in those areas. So, the economy is doing much better than perhaps a lot of people... People are surprised by how well it's doing. But there are isolated pockets, where there are highly sensitive industries to something like the pandemic and the shutdown that are still suffering.
Chris Thornberg [00:08:07] Absolutely. Absolutely. If anybody wants to see a part of the economy that isn't suffering, go try to buy a hot tub. Seriously.
Gregg Profozich [00:08:16] Yes. I've talked to a few people, and I'm guilty of it myself. My house has never looked better. My yard has never looked better. Home Depot was my favorite place during the pandemic. I go there as much as the grocery store.
Chris Thornberg [00:08:26] Yep, you got it.
Gregg Profozich [00:08:27] We have to do something with our time. We're going to do something with our money. We found ways to spend it and just adjusted and adapted. So, it's a really interesting effect. So, looking ahead as we come out of the pandemic, what are some of the macroeconomic trends that would impact how we come out of this? When will those industries that are down begin to see some recovery? What are some of the signs to look for? What are some of the things you see needing to happen before the recovery is across the board, not just in the sectors that worked well within the pandemic?
Chris Thornberg [00:08:55] Right. Well, obviously, number one is getting control of the virus. We are well on our way to doing that. I saw a report from Goldman Sachs not too long ago that suggests close to 50 percent of Americans now have resistance to the vaccine, either acquired because they've been exposed to it or acquired through a vaccine. That puts us just weeks away from reaching that, of course, herd immunity level that we've heard so much about. Now, I anticipate we're going to see outbreaks of the virus here and there. But at least from my read on things, the second half of 2021 should be a time and place where we no longer have to think about the virus in the context of living our lives and going to work on a daily basis. That would suggest that we're going to see manufacturing also getting back to a more normal level. You see signs of that here and there. For example, we're finally starting to see upticks in plane travel. Now again, we got a ways to go before global travel takes off again, and you start to see the airlines yet again unmothballing their planes, and all that kind of stuff. So, that'll be a little bit more of a lagging sector.
On the other side of it, I can also tell you this. As people do start going to Disneyland, as they do start going back to their favorite restaurant, when they start doing global tourism again, you may find those folks that were in the sectors that were being benefited by this big shift in consumption finding themselves a little ahead, if you will, where they should be at this point in time. There may be some slowing of demand that they weren't anticipating if they thought the current trends were sustainable, which, really, they're not. They're only sustainable inasmuch as a big part of the service economy has been closed down as a result of the pandemic. So, again, a little bit of a shift, as the case may be. But our anticipation is, for the most part, getting to the beginning of 2022, US manufacturing and, indeed, most of global manufacturing should be pretty much back on the basis they were at pre-pandemic.
Gregg Profozich [00:10:53] So, the folks who are doing well for the pandemic may see a little softening as things shift back to the more balanced, right?
Chris Thornberg [00:10:59] Right.
Gregg Profozich [00:11:00] I bought a camper, but I still want to take the all-inclusive vacation to Mexico now that I can finally do it again. So, I leave my camper in the driveway, and I go do that. So, I'll start spending and allocating funds back to where they were, and it'll slowly readjust.
Chris Thornberg [00:11:13] Yeah, and we're all going to realize there's no more space left in our basement or our garage. There's only so much stuff you can buy, right?
Gregg Profozich [00:11:23] True. What do you think that timeline looks like as things start to shake out for the global supply chain because there are some disruptions there that may take longer? We could hit herd immunity, and all the government agencies at every level announce, "Hey, it's okay. No masks. Go out." But there's still — what? — I think something like, last I saw, 40-something freighters sitting off Long Beach in LA. They're actually sitting out there so long they're starting to send them up to Oakland to unload, because they can't get berths, because, well, there's disruptions in the workforce, there's disruptions and backlogs in the trucking, and the supply chain, everything else. How long will that take before that smooths out? I think that impacts a lot of small and midsize manufacturers, too.
Chris Thornberg [00:11:59] Again, 8, 9, 10 months till things shake out again. Now, mind you, if you were in this place, this is nothing new for you. Remember, they were all dealing with the disruptions from the trade war with China that we were dealing with pre-pandemic.
Gregg Profozich [00:12:13] Before that was a strike at the docks.
Chris Thornberg [00:12:15] You got it. So, one thing about global logistics in general, it keeps you on your toes. You have to have multiple vendors, multiple channels to move products around. That is only really the safe way of doing things nowadays. The thing to keep in mind — yes, it's true, those boats are important. Yeah, you want to talk about the cheapest way of moving stuff around, there's nothing better than one of those giant container ships. But if you need it and you need it now, you can put it on a plane. California isn't just home to, of course, these incredibly important ports; we're also home to these amazing logistics airports of which, of course, the Inland Empire is home to two or three of the giant ones. You got the logistics airport right outside of the city of San Bernardino. Ontario does a lot of freight. You got the airport up in the high desert, and you even have March Air Force Base. So, there's plenty of air capacity to move stuff around, as well. Sometimes you just got to pay a few bucks to get those products to keep your production line from shutting down.
Gregg Profozich [00:13:17] Right. So, nearshoring or onshoring are options. When you discount for the disruption, sometimes it's almost even in terms of cost.
Chris Thornberg [00:13:24] Yeah, exactly. Yeah. Nearshoring, I think, more so than onshoring. One of the things about manufacturing in the United States is — actually, right through this — they've been one of the sectors that has never seen a massive number of layoffs. Some sectors have seen some. It's a sector that still has a lot of job openings. Right in the middle of this, the Philadelphia Fed did a manufacturing survey near the end of 2020. Manufacturing said one of my biggest challenges in the middle of the pandemic is finding the skilled workforce I need to be successful. Right in the middle of the pandemic. So, it tells you that the challenges are a little different in the United States than the typical business climate conversation would have you believe. As such, I think, the kind of onshoring we're talking about doesn't seem truly sustainable in the near term.
Gregg Profozich [00:14:16] Yeah, we do a lot of survey work ourselves with the clients that we work with. One of the questions we asked was about strategic challenges. For California and across the nation, the list of strategic challenges, there are nine things. Number one and number two are always cost reduction and new product introduction, new product development. Then number three used to be sales. Finding skilled workers was number eight. Three years ago it was number four; now it's number three. It's the thing that everybody is impacted by.
Chris Thornberg [00:14:43] We did a survey not too long ago right here in California on a very similar topic. We were looking at rural manufacturing in the state. Actually, one of the things we found was their inability to get the skilled workforce. But we also saw another disturbing trend, which I'm sure you've run into, which is the aging of the manufacturing workforce.
Gregg Profozich [00:14:59] Yes.
Chris Thornberg [00:15:00] Young folks are not going into the factory, and that's going to be a big issue.
Gregg Profozich [00:15:04] There was a point in time when you were in high school, you had the choice. Do I want to take woodshop or metal shop? Do I want to take some kind of vocational-technical training or not? Then that disappeared a couple decades ago.
Chris Thornberg [00:15:14] Not missing. Let's say it's underinvested it. As an economist, I tend to like data, but in this one I actually have a good anecdote. One of my best friends from my childhood is now a principal of a trade school in the middle of Pennsylvania. He has high school juniors and seniors. These are kids coming out of rural Pennsylvania. They are getting scholarships to go to tech colleges, or they're getting guaranteed three years of paid internships when they're not in school. They're coming out making high five-figure salaries, which goes a long way in Central Pennsylvania because the manufacturing sector there needs those skills. California, I think, is behind on that particular front. This is one of the big challenges in our state right now. We haven't made those same kind of investments.
Gregg Profozich [00:16:06] At the middle school, high school level to start people in that pipeline. We've got a lot of great community colleges and a lot of great programs at the community college level. As you were talking about people having a three-year guaranteed internship, we work with a couple of community colleges around. El Camino was one of our good partners. Talking to some folks at El Camino a couple years back, they were having trouble graduating people, and they were starting to get in trouble with the state because they weren't conferring associate's degrees. The problem was in March of the year when you're about to finish in May, you are getting poached for $65,000, or $80,000, or $90,000 a year. "I don't want somebody else to take that job. I'll quit school now and go to work." That was the problem. There was such a demand for it, people were literally poaching kids out of tech schools for great jobs. So, yeah, it's an interesting effect. It's going to affect our economy as we go forward. We have to find a way to do that, to make up for that gap, because there are millions of jobs that are going to be open.
Chris Thornberg [00:16:59] To your point, it needs to start before community college. Those kids into that pathway, particularly kids who are at risk of not finishing high school at all. There's a phenomenal opportunity there, particularly in the center part of the state. For example, if you want to take this the next step and talk about California, California's business climate, how are we dealing with manufacturing? Yes, some heavy industries have moved out, but there's a lot of other industries filling in. Manufacturing output in the state of California has actually looked better than national trends over the course of the last 15 years or so, driven, again, by the sectors that are successful out there.
Gregg Profozich [00:17:35] Manufacturers leaving California talked about that, and workers leaving California. Let's take them separately. What are some of the statistics? You said one of the drivers is clearly workforce. Are there other drivers besides workforce? What are the trends there? Do you have any data you can share on that?
Chris Thornberg [00:17:47] I pay attention to jobs; I pay attention to establishments; I pay attention to output. These are numbers that we have that are hard. They tell us. What they tell us is California has been and continues to be a manufacturing powerhouse. There are plenty of successful sectors in this state. Some of the ones you would expect like electronic components and computer parts, gee, not a big surprise, given that we're obviously the home of Silicon Valley. But it's not just that. There are other parts. Fabricated metals are doing well. Parts that go into various sorts of transportation stuff, whether it's cars or airplanes, again, doing very, very well. Food manufacturing continues to do very well in the state. So, there's lots of sectors doing lots of interesting things out there. We have a vibrant manufacturing sector. But in the last couple of years in the run up to the pandemic, you finally start to see that trend starting to fade.
Now again, it's not that business climate just became a big issue. Business climate's always been a big issue. I appreciate that. But as your surveys have shown as well as mine, business climate, tax rates are actually pretty low on what makes one region more or less desirable than another. You need access to energy; you need access to logistics chains; you need access to consumer base. Well, there's no richer consumer base in the United States than California. By the way, you have access to some of the ports, both air and sea, in the nation. We're very close to, of course, the incredibly vibrant Pacific economic rim, which is one of the hottest parts of the global economy. There's all sorts of reasons to want to be in California. From my perspective, if you think about the big challenges — labor force — you're absolutely right, both in terms of the skills they have as well as just the sheer availability. Our labor force has been barely growing. We have massive outmigration of people, particularly in the mid-skill level because of the lack of housing. That's an enormous challenge for manufacturing. Then when it comes to regulations, we have a bigger green agenda than the rest of the United States. But history still says that where California goes, eventually the rest of the United States follows. The green issues that we're dealing with are national and global in scale in a lot of ways. I think companies at some level are okay dealing with that.
Gregg Profozich [00:20:19] Okay. So, you mentioned a few minutes ago... You talked a little bit about the cost of housing and the housing problem. I think we're definitely losing some folks to out-of-state, but are we losing folks internally, inside state? Are they moving further from the coast? Are they moving to the inland? Are there trends there about how manufacturers are moving around? You're right. Those workers will define capability of manufacturers and the health of the manufacturing economy, ultimately.
Chris Thornberg [00:20:40] Right. When you think about it, the biggest, by far and away, manufacturing base for decades in the United States was right here in Los Angeles. In 1990 there were close to a million people working in manufacturing in the LA basin, a million. Yeah, I know. Now it's down to about 300,000. It's dropped a lot. When you think about the housing issues, we know they're more acute along the coasts. For me in a lot of ways, the inland parts of the state are obviously some of the best opportunities for manufacturers. The state has a very coastal focus. We tend to pass policies that are great for LA and San Francisco. They don't acknowledge the incredible economic dynamo that's the center part of the state, whether we're talking Riverside, up to and including Sacramento, how dynamic, how important, how rapidly growing. The center part of the state has an enormous population, a lot of people, a lot of land. There needs to be a more statewide, if you will, aggressive effort to help the inland part of the state really go that next step and be for the state what it can be in terms of being the new home of California's industrial might.
Gregg Profozich [00:21:57] If you were a business owner facing a decision whether to invest in growth or not over the next year or two, what would you say? What are the economic indicators you would look at? I think we probably have to ask that question in the context of those who have been going gangbusters through the pandemic and those who haven't. So, there's probably two different answers. What are the economic indicators you're looking for? What are the things you would see as “okay, now it's time”?
Chris Thornberg [00:22:19] If you're on the outside looking in, the answer is things are going to get back to normal remarkably quick; be prepared. This economy is roaring. We are so loaded with dry powder. There's two and a half-trillion dollars of excess deposits in the US commercial banking system. Every metric says the economy is already roaring to go, and they're just dumping another 2 trillion in stimulus on it. So, be prepared. We're about to see some serious acceleration in our economy. With that in mind, if you have seen, particularly if you're involved in that consumer durables sector, there probably is going to be a soft spot up in front of you, whereas things readjust back to their normal patterns of spending, some of those sales are pulled from the future if you will. You got to be prepared. Don't invest in a ton of new infrastructure capacity thinking that that's going to be sustainable. Think about going back to where you were in 2019 relatively quickly. That'll give you a good basis of things. The third thing I think everybody needs to be aware of is, again, global trade issues have not gone away. So, you need to continue to think about other places, other ways, other sources of the supplies that you might need to keep your operation moving. Continue to diversify.
Gregg Profozich [00:23:38] So, you mentioned the $2 trillion in the banking system plus additional stimulus coming. What are your thoughts on how that's going to play out in terms of demand, in terms of inflation?
Chris Thornberg [00:23:48] Yeah. This is going to be a quick recovery regardless just because of the nature of the shock to the system was inherently short-term. Yeah, you're going to see an economy that could actually become overheated in the next couple years, the new Roaring 20s, if you will. Where does that go? Well, our new Roaring 20s could presage the new collapse out there at some point in the future — financial bubbles, potential for inflation. All these things are something that could happen in the next expansion. You got to keep your wits around you and understand what's sustainable and what's not. But it's going to be a couple good years. There's no doubt about it. These problems that we're talking about are a few years out there. You're not going to see them in 2022; you're not going to see them in 2023. Yeah, I think the goods part of the economy, the manufacturing base in the US, is going to do well.
Gregg Profozich [00:24:38] Okay. So, are there any other points that you'd like to bring up before we bring our discussion to a close, anything important we haven't covered that you want to share about manufacturing, manufacturing economy, and how manufacturers should respond to what's going on?
Chris Thornberg [00:33:00] Again, I want to reiterate that we have this idea that as a nation we don't make anything anymore. That's not true. We have a vibrant, successful manufacturing space. I don't expect that's going to change.
Gregg Profozich [00:25:05] Okay. So, I think that in summary, I think the message I'm taking away, and I'd like to share with our listeners, are the economy was, to some people, unexpectedly strong. We all went through a really quick adjustment. April of last year, the sky was falling. By June of last year, people had adjusted and pivoted. Certain industries were very soft because they were very susceptible to the fact that the stay-at-home orders caused people to stop doing certain behaviors. Now the scale is going to tip the other way, it sounds. The folks who have been buying campers, and buying bicycles, and all those things we mentioned, we've got those now. So, we're going to go back to our other patterns of behavior. Where we can go out to a restaurant, I'm going to go out to a restaurant; I'm going to take my family on a vacation, etc., etc. Those are the things we're going to see. So, there's going to be a drop-off and a leveling now.
Chris Thornberg [00:25:50] When people get back on those planes, it's going to get that airplane manufacturing industry up and running. People are driving more. You're going to see more work in the energy industry, which, again, is very important here in the state of California.
Gregg Profozich [00:26:02] Okay. Well, Chris, thank you so much for joining me today and for sharing your perspectives, insights, and predictions with me and our listeners.
Chris Thornberg [00:26:09] My pleasure.
Gregg Profozich [00:26:10] To our listeners, thank you so much for joining us for this conversation with Chris Thornberg on the economic outlook in the wake of the pandemic. Thank you so much for being here. Have a great day. Stay safe and healthy. Thank you for listening to Shifting Gears — a podcast from CMTC. If you enjoyed this episode, please share it with others and post it on your social media platforms. You can subscribe to our podcast on Apple Podcast, Spotify, or your preferred podcast directory. For more information on our topic, please visit www.cmtc.com/shiftinggears. CMTC is a private nonprofit organization that provides technical assistance, workforce development, and consulting services to small- and medium-sized manufacturers throughout the state of California. CMTC's mission is to serve as a trusted advisor, providing solutions that increase the productivity and competitiveness of California's manufacturers. CMTC operates under a cooperative agreement for the state of California with the Hollings Manufacturing Extension Partnership Program (MEP) at the National Institutes of Standards and Technology within the Department of Commerce. For more information about CMTC please visit www.cmtc.com. For more information about the MEP National Network, or to find your local MEP center visit www.nist.gov/mep.