Economist Christopher Thornberg Shares Optimistic Outlook

May 17, 2023

News outlets portray an economy in dire straits, but according to economist Dr. Christopher Thornberg, peeling back the layers reveals that consumer spending is up, and American households have more than three times the amount of cash on hand as they did before the COVID-19 pandemic swept the globe.

It’s what Thornberg calls the gap between narrative and reality, which he cautions can lead to bad decisions and macroeconomic danger.

“When the stories we tell each other are highly aligned with basic economic realities, this is when our models work,” Thornberg said at a recent Los Angeles and Orange County economic forum hosted by Torrey Pines Bank. “Too often, we’re in a different place … where the narrative and reality are not on base. This is when households are making weird decisions, when policymakers are pursuing the wrong goals and when businesses are making bad investment decisions.”

While today’s headlines may spell doom and gloom, Thornberg said the reality is quite different.

The pandemic forced the economy into its deepest recession on record, with a 30% decline in gross domestic product (GDP) during the second quarter of 2020, but it was also the shortest recession ever, with the GDP bouncing back 30% in the third quarter.

In the last quarter of 2019, American households had about $1.3 trillion cash on hand. Today, it’s about $4.5 trillion. And it’s not the world’s billionaires alone who control it — the bottom 50% of households are up 100% in terms of cash on hand.

Consumer spending rose 50% from the beginning of 2022 to the middle of the same year and continues to increase, growing 2.5% in the first quarter of 2023.

“For all this pessimism, the U.S. economy is clearly not in a recession right now, nor are we even close to one,” Thornberg said. “This is an economy that’s running at full blast.”


The biggest problem businesses have today is the same as it was two years ago: They can’t hire enough people, which is one of the reasons business investments remain strong.

“Businesses are being forced to invest to deal with shortages of people,” Thornberg said.

The national unemployment rate is at 3.4% — the lowest since 1968 — and job openings are up across the country, including in California, where the unemployment rate is 2.5%.

As a result, Thornberg said, cities that want to grow their economies must increase their labor force.

“The places that have grown — Inland Empire, Sacramento, San Diego, Fresno, Bakersfield — they all have growing labor forces,” he said.

Labor shortages were happening before the pandemic as overall population growth began to slow, particularly for people — primarily baby boomers — in their prime working years. The pandemic exacerbated the problem by causing people to retire early.

“Labor shortages are here to stay unless we figure out how to fix our immigration system,” Thornberg said.


California can take a step toward solving its labor shortage by building more housing. The state has the lowest housing vacancy rate it’s ever experienced, and the crunch is encouraging more people to move out of the state.

Although people are leaving, it doesn’t mean the vacancy rate is rising. For a divorcing couple, for example, one person must find another place to live, and professionals who had a roommate when they were younger may be looking for a place of their own now.

“Someone somewhere gets bumped,” Thornberg said. “They get bumped out of the economy and are leaving because there is simply nothing to live in.”

But building more housing when the market is undergoing a correction is challenging. Sales are declining and prices are dropping, but the pandemic saw a phenomenal 40% increase in housing prices over the course of the pandemic, and interest rates shot up from 3% to 7%.

“But this isn’t a meltdown; this isn’t a Great Recession-type scenario,” Thornberg said. “The Great Recession meltdown was not driven by interest rates. In fact, interest rates fell from 2006 to 2009. It didn’t matter because it wasn’t a cost conversation. It was a bad debt conversation. It was a lack of equity conversation.”

Homeowners were underwater in their mortgages, and builders were building too much housing — problems that don’t exist today. Foreclosures and bankruptcies are the lowest they’ve ever been.

“There are no foreclosures because, with all this equity, there’s no reason to be foreclosed on,” Thornberg said. “The problem in housing is very simply a lack of supply.”

Homeowners who are paying 3% interest are reluctant to relocate and take on a mortgage with a 7% rate, so they’re asking higher prices for their properties. That’s one of the reasons apartments are so hot and rents are rising — and likely not dropping as the market corrects.

Commercial Real Estate

The commercial real estate market is reasonably healthy. Nonresidential construction spending was up over the past year, retail vacancy rates haven’t changed and industrial vacancies are down. 

Office is an area of commercial real estate that is struggling because many people, primarily in the tech sector, aren’t returning to the office. That’s impacting markets like San Francisco, Portland and Seattle, while people are going back to the office in places like Fresno and San Diego.

But Thornberg views the empty office space as an opportunity to change zoning rules, tear down buildings and build new condo towers.

No one should be surprised by the state of the U.S. economy, Thornberg said, noting that rising interest rates, surging inflation and declining asset values are the result of what happened three years ago in response to the pandemic.

“The Federal Reserve wildly overstimulated our economy, and everything that you’ve seen over the last three years in terms of asset prices, inflation and interest rates was 1,000% predictable on the basis of understanding how wildly overreactive Fed policy has been over the course of the past couple of years.”

Thornberg predicts asset prices will continue to decline because they got too high over the past few years. Otherwise, he said, the fundamentals of those assets will be fine.

“While there’s obviously going to be weakness in real estate and finance, consumers and businesses can more than offset that,” he added.

View the 2023 L.A. Economic Forum Presentation 


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