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Top economists believe a recession is coming and it would have a major impact on The City's economic recovery from the pandemic, especially on the tech workforce.

A recession is probably coming, and top economists believe it would have a major impact on San Francisco’s economic recovery from COVID, on the tech workforce and on remote work.

Seventy percent of economists and 75% of Fortune 500 CEOs are predicting a recession next year, and that is backed up by the federal government’s tracker of gross domestic product, a key measure of economic activity. 

What’s behind recession fears is the raising of interest rates by the Federal Reserve, the central bank of the United States. The Fed is raising rates to address inflation that has driven up prices of goods like gas, which has reached around $6.60 a gallon in The City, according to American Automobile Association.

But raising interest rates, which is designed to slow down the economy by discouraging big purchases like a home or car, can easily go too far, leading to job cuts and increasing debt for consumers. 

Here in San Francisco and Silicon Valley, a cryptocurrency crash has brought down tech stocks, and companies have laid off workers. The question is whether a recession will be brief, like the one in 2020 caused by COVID-19 impacts on the economy, or long-term like the 2008-2009 economic collapse spurred by the mortgage crisis. 

The Examiner asked San Francisco’s top economist and a respected UC Berkeley economist for their answers to three key questions for San Francisco as it faces a possible recession.

Will The City’s downtown continue to recover?

In The City, the economy has been slowly recovering. Restaurants and tourism, which were walloped by COVID, have just started to get back on track. Sales tax shows business is coming back, and unemployment in The City is still just 3%. 

“The story of San Francisco in the last few months is that the economy is doing a bit better,” says San Francisco’s chief economist Ted Egan. “But nationally storm clouds are gathering.” 

High prices are driving some consumers away, and an economic slowdown would make a comeback of downtown more difficult.

“San Francisco has a huge challenge,” says longtime Bay Area economist Ken Rosen, the chairman of the Fisher Center for Real Estate & Urban Economics at the Haas School of Business at UC Berkeley. “There's a real possibility we go into a recession, and the recovery gets stalled just as it was starting to look good.”

That will affect businesses in the Financial District and South of Market neighborhoods already struggling because so many workers are now working remotely, Rosen believes.

“The ecosystem requires people to be in the office more than three days a week,” Rosen says. “The real question is whether startups and other companies in those areas lay more people off.” 

Is the tech sector in trouble?

The San Francisco cryptocurrency company Coinbase rescinded job offers, then laid off 1,100 workers this month. A crypto meltdown has led to tech stocks dropping. Some fear a recession in tech. But both Egan and Rosen say there are actually two tech sectors, and only one of them is in trouble. 

“There's a bifurcation between things where there's a real need and a real business model that works, and cryptocurrency,” says Rosen. Cybersecurity, cloud computing and automation companies should be stable and continue to hire, he believes. Cryptocurrency “was purely a Ponzi scheme. We knew it was going to collapse. Most economists agree on that. But the bubble was bigger than we saw. The tech industry loves all that free money and loves the speculative bubble, but bubbles never end well, and this is not going to end well,” the UC Berkeley economist believes.

Egan also sees two tech sectors. 

“Unprofitable tech, if you can call that a sector, has been hit very hard. In crypto and other developing sectors is where you're seeing most of the layoffs happen. But if you look at tech job listings, we still have three or four listings for every hire they make, as a whole.”

A tech talent gap continues, despite some layoffs. For that reason, Egan thinks it’s important to view tech layoffs in context. “You shouldn't look at announcements of layoffs of individual companies and say we're in a tech recession.”

How would a recession affect remote work? 

There has been great debate as COVID has slowly lifted about tech workers returning to the office. Many companies are bringing employees back to work midweek. But hybrid may no longer be the norm, as some companies bring workers nearly full time, while others go fully remote. 

“What we have now is Tuesday. Wednesday, Thursday,” Rosen says. “That’s the hybrid model that many companies are following. But I think they will go back to a more traditional model.”

In a recession, employees will lose bargaining power that has allowed them to work from home, Rosen believes. “Right now, there's such a labor shortage that employers really can't insist. But that changes if people start losing their jobs.”

A recession is likely to increase office attendance for many companies, Rosen believes. “In San Francisco, we only see about a third of the people in every day. A recession would encourage people to come back. If they don't see their boss, they're more likely to be fired,” Rosen says. Some research shows managers have a better opinion of in-person workers.  

Egan also believes employers will have added leverage to get workers back into the office. But he says other companies will see the cost savings in scaling back office space in a recession, and go with the other extreme.

“If companies are really serious about wanting employees back in the office, a cooler labor market is certainly going to take leverage away from employees,” Egan says. “But other companies are saying they don’t want a central headquarters and are looking at cost savings and they are not going to change that approach in a possible recession.”

Political impact of a recession 

While a recession isn’t here yet, the impact could be significant in San Francisco and nationally. A recession could lead to political change at the highest level, some economists believe. “A mild recession in 2023 could put (an end) to Joe Biden’s beleaguered presidency, perhaps helping usher Donald Trump back into the White House,” The Economist wrote earlier this month. 

Rosen says that is possible. “The powers to be are often blamed for the recession. We've seen that happen, and that could happen again.”

jelder@sfexaminer.com

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