2024 Business Forecast, Volume 13 - Issue 2

San Joaquin Valley

BUSINESS FORECAST

Emerging Trends in the Valley’s Economy

Contributors

Faculty

Gökçe Soydemir, Ph.D. Foster Farms Endowed Professor of Business Economics

Terence Pitre, Ph.D. Dean, College of Business Administration

College of Business Administration Staff

Diamelle Abalos Administrative Support Coordinator

Carmen Garcia Administrative Analyst

Annhenrie Campbell, Ph.D. Professor, Accounting and Finance

David Lindsay, Ph.D. Professor, Accounting and Finance

Student Assistants

Fadi Echek

STRATEGIC COMMUNICATIONS AND MARKETING

Rosalee Rush

Interim Vice President for University Advancement

Senior Associate Vice President for Strategic Communications & Marketing

Kristina Stamper Director for Communications and Creative Services

Mandeep Khaira Associate Director of Marketing & Digital Strategy

Tan Professor, Accounting ACFI Department Chair

Gina Donahue Interim Director, MBA Programs

Hani Ekpokai

Emily Molina

Donna Birch Trahan Senior Writer and Content Specialist

Steve Caballero Senior Graphic Designer

Dowling Graphic Designer

Katie

Dr. Kim

The gradual decline in Valley total employment, akin to a bouncing ping-pong ball, continued in the second half of 2023 and the first quarter of 2024. Given the delay in the three rate cuts announced by the Federal Reserve in December of 2023 and persistent inflation above the target rate, these dynamics are likely to continue in 2024 until the target rate of 2 percent inflation is reached. Core inflation near 2.2 percent in the first quarter of 2024 signals that we are much closer to that target than a year ago; however, the March reading, which came in above expectations, dampens hopes of a rate cut in 2024. One important impediment is the high price of oil resulting from regional conflicts around the world, which is keeping inflation from falling. Valley total employment registered eight consecutive months of decline since July of last year, except for January and March 2024, where growth was minimal. The decline in July and August 2023 was significant, considering these months typically register a seasonal peak in total employment due to the harvest. Furthermore, signs of a decline were apparent in some individual employment categories even before, as early as the second quarter of 2022.

Valley employment in retail trade, transportation and utilities, construction, information and financial activities declined in 2023. Wholesale trade employment grew in 2023 but at much slower rates than the previous year. Conversely, education and health services, categories least affected by business cycles, grew faster in 2023 than in 2022. Government employment, a lagging category, grew about the same pace in 2023 as in the previous year. Leisure and hospitality services experienced a significant drop in the growth rate from 13.15 percent in 2022 to 2.05 percent in 2023. Manufacturing employment displayed a similar drop in the growth rate, from 4.82 percent in 2022 to 1.61 percent in 2023, reflecting activity from distribution warehouses emerging around the Valley. Projections point to a continued decline in employment levels in 2024, followed by growth in 2025, given the Federal Reserve’s delay in rate cuts in the first half of 2024.

Valley building permits declined 1.09 percent in 2023, indicating a continued decline into 2024. Since people mostly held on to their jobs in 2023, there were no foreclosures, unlike in prior years. The Freddie Mac 30-year rate began falling from the all-time high registered in October 2023 but remained high at 6.87 as of the second quarter of 2024. Valley home values rose by 1.33 percent in 2023. Considering the inventory shortage on the supply side outweighs the effect on rate hikes on demand, home values are expected to rise at rates closer to the long-term benchmark rate of 5.99 percent once the Federal Reserve begins to cut rates.

The average rate of inflation halved from 8 percent in 2022 to 4.32 percent in 2023 but still is about 2 percent higher than the Federal Reserve’s target rate of 2 percent. Average weekly wages rose 3.92 percent in 2023, below the overall price growth of 4.32 percent, corresponding to a fall in real wages and an annual loss in purchasing power of 0.4 percent in the Valley. Projections point to lower wage growth rates in the coming two years, suggesting further declines in the purchasing power of Valley consumers. Valley community bank total deposits fell from 10.1 percent growth in 2022 to a percent decline of 1.44 percent in 2023.

Overall, the Valley economy has shown remarkable resilience against the backdrop of generationally high interest rates, rising oil prices and persistent inflation in 2023.

Conversely, net loans and leases grew from 4.9 percent in 2022 to 6.55 percent in 2023. This imbalance between total deposit growth and net loans and leases in 2023, like that observed in 2008, raises concerns for sustained growth in the long run, as such a discrepancy between the two is unsustainable. Community bank assets in default for 30 to 89 days and assets in default for 90-plus days remained the same in the first half of 2023 as in 2022. In the second half of 2023, nonaccruals began displaying signs of an increase as the unemployment rate gradually increased.

Overall, the Valley economy has shown remarkable resilience against the backdrop of generationally high interest rates, rising oil prices and persistent inflation in 2023. Given the high interest rates, investing in bonds is advisable since rates are more likely to fall than rise during the next two years. Renting and delaying home purchases are some ways Valley residents can cope with changing economic conditions. Taking out flexible-rate loans and leveraging relatively cheap student loans to acquire skills if laid off from work are also beneficial, as higher skills reduce the likelihood of being displaced. Additionally, Valley businesses can defend against a potentially contracting economy by maintaining a cash-heavy position.

Introduction

Time series data spans from January 2001 to April 2024. The two-year medium-term forecasts are from May 2024 to June 2025. Forecasting a range rather than a point provides a more realistic assessment of future values. When actual numbers fall within the upper and lower forecast bands, the forecast becomes accurate.

The remainder of this report is structured as follows: Section B analyzes labor market conditions for the San Joaquin Valley. The region’s real estate market, based on eight metropolitan statistical areas, is examined in Section C. Section D reviews trends in prices and inflation. Indicators from local banking and capital markets are examined in Section E. Section F concludes.

San Joaquin Valley

Kings

Merced

Stanislaus

San Joaquin

Madera

Fresno

Tulare

Kern

Total employment registered eight consecutive months of decline since July 2023, not counting the very trivial growth in January 2024. Valley total employment registers a seasonal peak every year in the months of July and August. In these seasonal peak months, Valley total employment declined consecutively at 0.94 and 1.39 percent, a first since the recession of 2008. Given the Federal Reserve’s postponement of three rate cuts in 2024, the gradual declines in employment levels will likely continue a bit more in the coming months.

Employment declined in five of the eight counties in the San Joaquin Valley. Kings County reported the fastest decline at 1.97 percent in 2023, followed by Tulare at 0.41 percent and Madera at 0.23 percent. The remaining two counties that reported a decline in employment were San Joaquin County at 0.21 percent and Stanislaus County at 0.15 percent. The three counties which reported growth in 2023 were Merced at 0.99 percent, Fresno at 0.64 percent and Kern at 0.42 percent.

The employment categories that reported a decline in the Valley were construction, retail trade, financial activities, trade, transportation and utilities and information employment. Those categories that reported growth in 2023 were education and health, wholesale trade, manufacturing, government and leisure and hospitality services employment.

Valley total employment declined at a very trivial rate of 0.07 percent in 2023. Considering the growth in 2022 was 5.85 percent, this fall in total employment is noteworthy and likely to register further declines in the coming months as the Federal Reserve’s 2024 rate cuts are delayed. Valley total employment is expected to fall to about 1.73 million in 2024 before beginning to grow again in 2025. Given that high interest rates are likely to be around for a while, projections point to a 0.54 percent decline from the second half of 2024 to the first half of 2025 and growth of 0.59 percent from the second half of 2025 to the first half of 2026, below the benchmark rate of 1.12 percent. Employment in the Valley was a mere 0.45 percent in 2023. Considering the growth rate was 5.85

percent in 2022, this significant drop in total employment is noteworthy and likely to lead to a decline in the coming months. Total employment in the Valley is projected to decrease to about 1.73 million in 2024 before rebounding in 2025. Projections suggest a 0.42 percent decline in 2024 and a growth of 0.57 percent in 2025, which is below the benchmark rate of 1.12 percent.

Those

categories that reported growth in 2023 were education and health, wholesale trade, manufacturing, government and leisure and hospitality services employment.

The Consumer Confidence Index is an important leading economic indicator that foretells the direction the economy is heading in the coming months. The index has been falling since 2021 and oscillating around a value of 100 in the third quarter of 2023 and the first quarter of 2024. This is consistent with the view that consumers' expectations have not changed for the better or worse since October 2023. This flat pattern in the Consumer Confidence Index also reflects the very gradual employment decline in the Valley since July 2023.

Once again, labor force growth has exceeded employment growth in the Valley, similar to earlier episodes observed during the recession of 2008 and the pandemic in 2020. The anticipated growth rate has intersected with the falling employment growth, creating crossing patterns. It also reflects significant movement in the labor market as employees look for higher pay due to inflation. In line with our prediction from previous reports, this crossing pattern appears to serve as a leading indicator of economic activity for the Valley economy.

Yet another leading indicator for our Valley is the pattern between Valley and state employment growth. Valley employment growth exceeded state employment growth in the fourth quarter of 2023 and the first quarter of 2024, pointing once again to a similar pattern observed during the Great Recession and the pandemic in 2020. Employment growth is slowing for both the Valley and the state. However, in the fourth quarter of 2022, a similar pattern emerged, only to converge in the third quarter of 2023. The emerging pattern will not likely persist when the Federal Reserve begins to implement rate cuts now expected to happen sometime in the second half of 2024.

The inversion of the yield curve has continued into 2024, a very reliable leading indicator of an oncoming economic contraction. However, the shape of the yield curve has changed, becoming flatter than before. A flattening yield curve signals investors are worried about the economy's direction and are expecting a slowdown. As indicated in our previous reports, the impact is slowly taking place on the job market beginning from the second half of 2023, because rates have not been cut in 2024 as announced by the Federal Reserve. Projections point to a contraction in 2024, only to enter an expansionary phase in 2025, provided that the Federal Reserve begins to lower rates in the coming months. If high rates linger, the contraction phase can take longer.

Due to the skills required and the necessity of services provided in education and health, employment in this category is the least vulnerable to changing economic conditions, displaying very robust behavior even during recessionary cycles. Employment in this category grew 6.22 percent in 2023, faster than the previous year’s 4.70 percent. Considering this is also a lagging series relative to other categories of employment in the Valley, growth in education and health services employment will likely begin to slow in the second half of 2024.

Employment levels in education and health services are projected to surpass 280,000 by the end of 2025. The almost linear trend observed in this series is reflective of the robust growth pattern relatively independent of the fluctuations in the level of economic activity. Projections point to growth at an average yearly rate of 4.06 percent from the second half of 2024 to the first half of 2025 and at a slightly slower pace of growth of 3.34 percent from the second half of 2025 to the first half of 2026.

Valley manufacturing employment grew 1.61 percent in 2023, about a third of 4.62 percent growth in 2022, but still significantly above the long-term benchmark rate thanks to the warehouse distribution centers popping up around the Valley. Employment levels in this category will likely oscillate at around 120,000 until the end of the first half of 2026. Considering that Valley manufacturing employment’s long-term benchmark growth is 0.45 percent, average yearly growth was more than three times this rate in 2023.

As the growth of warehouse distribution centers slows, and given high rates are likely to stick around a bit longer to bring inflation to the Federal Reserve’s target rate, growth in manufacturing employment will most likely slow further in the coming months. Projections point to an average annual growth of 0.30 percent in the oneyear ahead forecasting interval, followed by an increase of 1.14 percent in the two-years forecasting interval.

The Institute of Supply Management’s (ISM) Purchasing Managers Index, an important leading indicator foretelling economic activity, fell below an index value of 50 points in the second half of 2023. However, there has been an increasing trend since then, mostly observed in the first quarter of 2024, signaling a pattern unlike that of the Consumer Confidence Index and other regional leading indicators. A value below 50 points indicates that an economy is likely to contract, and currently, the index value is slightly below this threshold, displaying an upward trend. The ISM Purchasing Managers Index reached a minimum in the first quarter of 2023. The very gradual increase, flatter than previous upward trends observed by the series, appears to be stemming from worries of a contraction in the second half of 2024.

Valley leisure and hospitality services employment growth significantly slowed, dropping from the fastest growth category to the third fastest in 2023, coming after education and health and government employment categories, as the positive effect from “revenge travel” from the pandemic years began to subside. Leisure and hospitality services employment grew 2.05 percent in 2023 and is expected to slow further, staying below 150,000 by the end of the first half of 2026.

Hiring mostly unskilled workers, leisure and hospitality services, together with the retail trade category, are the most sensitive categories of employment to economic downturns. In the Valley, there are 20 percent more individuals aged 19 and up than in the nation. However, of those, 20 percent fewer than nationwide are seeking college degrees, affecting categories such as leisure and hospitality services employment where unskilled workers mostly find jobs. In 2023, however, the demand began to slide as conditions slowly normalized. Demand also began to decrease, though in a delayed manner, following the rate hikes. Projections point to an average annual growth of 1.52 percent in the first forecasting interval, followed by a faster rate of 3.63 percent in the second forecasting interval.

After posting growth even during the pandemic years, Valley trade, transportation and utilities employment, a category that requires workers physical presence, began to slow in 2023, together with gradually declining economic activity. Some truck drivers had difficulty finding loads in 2023 relative to 2022, particularly with the high price of oil making loads more unprofitable to transport. The pace of growth came to a standstill and switched from positive to negative territory in 2023. The rate of growth fell from 5.45 percent growth in 2022 to a decline of 0.57 percent in 2023. Trade, transportation and utilities employment is projected to stay below 340,000 by the first half of 2026.

Leisure and hospitality services employment grew 2.05 percent in 2023 and is expected to slow further, staying below 150,000 by the end of the first half of 2026.

As rate hikes began to take their toll on the Valley economy, a coincidental regional indicator, Valley trade, transportation and utilities employment growth also began to slow in 2023. The truck driver shortage decreased in 2023 relative to 2022, but the shortage is structural and is likely to continue to exist more in the Valley relative to the nation in the coming months. Trade, transportation and utilities employment is projected to grow much slower than the benchmark pace of growth of 2.01 percent, at an average yearly growth rate of 0.76 percent in the first 12-month forecasting interval and increase to 1.00 percent in the second 12-month forecasting interval.

Valley retail trade employment declined 0.38 percent in 2023 from 1.95 percent growth in 2022. Retail trade employment in the Valley was the first to report a decline among all other categories of employment as early as the second half of 2022. Further, this declining pattern was first observed since the pandemic years, given that retail trade employment hires unskilled workers and is one of the most sensitive categories in the Valley to changes in interest rates. Employment levels in this category are expected to stay below 155,000 until the first half of 2026.

The long-term benchmark growth in retail trade employment fell further in 2023 to 0.90 percent. Considering that high rates are likely to last a bit longer due to the Federal Reserve’s postponement of three rate cuts in 2024, employment in this category will likely decline at a faster pace in the coming months. Online competition is the structural reason for the concave pattern observed since 2011. Nevertheless, online sales still make up 15 percent of total sales in the Valley. Projections point to a decline of 0.98 percent from the second half of 2024 to the first half of 2025 and growth from the second half of 2025 to the first half of 2026.

As the growth in warehouse distribution centers began to reach their capacity in the Valley, wholesale trade employment growth slowed considerably in 2023. The slow growth in 2023 came after strong growth in the previous year’s 5.42 percent. With rate hikes being another factor slowing economic activity, this was reflected in job numbers in this category. Employment levels in the Valley wholesale trade category are expected to remain slightly below 52,500 until the end of 2025.

Although many local workers were able to find employment from warehouse development, many made below subsistence wages in the Valley due to low pay. Growth at 1.47 percent in 2023 fell below the long-term benchmark rate of 1.62 percent and is likely to slow further due to the delay in the Federal Reserve’s rate cuts. Projections point to 0.68 percent growth from the second half of 2024 to the first half of 2025 and faster growth of 1.42 percent from the second half of 2025 to the first half of 2026.

Valley information employment declined on a sustained basis until the pandemic. Surprisingly, after that, employment in this category began to increase and exhibited a stable flat pattern until the third quarter of 2023. Information employment began to fall sharply in the fourth quarter of 2023, extending into the second quarter of 2024. Employment in this category declined 3.95 percent in 2023. After the pandemic, employment in this category increased by about 1,000 employees, only to lose all those gains in 2023.

Although many local workers were able to find employment from warehouse development, with low pay, many made below subsistence wages in the Valley.

Information employment declined the fastest in 2023 among all categories of employment in the Valley. In the coming months, information employment is expected to fall to a level of about 7,200. The long-term benchmark rate fell to a faster decline of 2.81 percent in 2023. Information employment has suffered from the increased use of digitalization and social media, lowering demand for employment. Information employment requires skills such as college degrees, but the falling demand from digitalization appears to have a greater negative effect on employment levels in the long run. Projections point to a decline of 5.18 percent in the first 12-month forecast horizon.

Growth in construction employment began slowing as early as the third quarter of 2022. A decline in employment levels began in January 2023, registering consecutive declines for 10 months and then exhibiting growth again in November 2023. In the coming months, employment is expected to remain below 85,000 until the end of the first half of 2026. Not counting the pandemic years, the last time such consecutive monthto-month declines were observed was back in the third quarter of 2006. Employment in this category declined the fastest at 1.94 in 2023.

Given that 30-year interest rates hit 8 percent in the third quarter of 2023 and still remain high at 6.89 percent as of the second quarter of 2024, employment in this category is expected to decline in the coming months, particularly after the Federal Reserve’s decision to defer rate cuts until the inflation rate hits the target rate of 2 percent. Projections point to a decline of 1.83 percent from the second half of 2024 to the first half of 2025 and growth of 0.32 percent from the second half of 2025 to the first half of 2026.

Growth in the second 12-month period is expected to stay below the 1.39 percent long-term benchmark growth rate.

Valley government employment generally responds to economic and policy variables such as rate hikes later than other categories of employment. The City of San Francisco receives 56 percent of social assistance from government, while some parts of the Valley, such as the tri-county region of Merced, San Joaquin and Stanislaus, receive about 16 percent. While demographic characteristics may be cited for this difference, it is important that more social workers are needed for the Valley to make up for this disparity. Valley government employment grew 3.47 percent in 2023, slightly less than the 3.60 percent growth in 2022. Government employment makes up a significant portion of total employment in the Valley, about 20 percent, and is an important economic driver.

Government employment is likely to remain below 325,000 in the coming two-year interval. A discrepancy of about 15,000 employees remains as a result from the Great Recession and another 12,500 employees resulting from the from the pandemic years. Projections point to an average yearly growth of 2.14 in the first 12-month forecasting interval, reflecting the lagged response of government employment to business cycles in the Valley.

Financial activities employment was the second fastest declining category in the Valley. Some of this decline was structural. Digitalization and increased use of online banking have significantly affected employment in the banking sector, causing the long-term benchmark rate to display a structural decline. Financial activities employment declined 2.20 percent, posting three consecutive years of decline after the pandemic. Some community banks in the Valley have closed or merged with banks that operate out of the Valley. The gradual decline in economic activity also negatively affected employment levels in this category.

Some community banks in the Valley have closed or merged with banks that operate out of the Valley.

Financial activities employment in the Valley are projected to be below 41,000 by the end of the first half of 2026. The loss of about 2,000 employees during the pandemic was not recovered. Employment in this category seems to display a flatter declining pattern beginning from the first quarter of 2024.

Financial activities employment is projected to decline 0.35 percent from the second half of 2024 to the first half of 2025 then improve at 0.72 percent from the second half of 2025 to the first half of 2026.

Freddie Mac 30-year interest rates avoiding a recession for now, have declined from their peak rates but are still very high at 6.89 percent as of the second quarter of 2024.

The Federal Reserve holding off on the three rate cuts announced for 2024 has created the expectation of further contraction of the economy until the target inflation rate is attained. Valley total employment registered consecutive declines during the seasonal peak months, lasting into the second quarter of 2024. If rates do not decrease in the second half of 2024, the decline may extend into 2025. The expectation, however, is that once the Federal Reserve attains the target rate of inflation, interest rates will come down at an accelerated rate and growth will resume in 2025.

Financial activities employment is projected to decline 0.35 percent from the second half of 2024 to the first half of 2025 then improve at 0.72 percent from the second half of 2025 to the first half of 2026.

Housing Sector

The eight Metropolitan Statistical Areas (MSAs) of the Bureau of Labor Statistics that make up the San Joaquin Valley are Fresno, Bakersfield-Delano, Hanford-Corcoran, Madera-Chowchilla, Merced, Modesto, Stockton and Visalia-Porterville. The aggregate of these eight MSAs constitute the total single-family building permits in the Valley.

Housing permits declined at the revised rate of 1.09 percent in 2023, a steep drop from 12.30 percent growth in 2022. As the Federal Reserve is on hold for longer than expected to cut rates, Valley housing permits are projected to decline to about an average of 700 and rise back to 1,000 per month by the first half of 2026.

Fresno took the lead with 2,266 permits in 2023, while Stockton was second with 2,176 housing permits. Bakersfield fell from second to third in 2023 with 2,143 single-family building permits. Madera was a surprise with 1,140 permits, followed by Visalia with 985 permits in 2023. Modesto and Hanford came next with 737 and 571 permits, respectively. Merced came last with 394 permits in 2023. As high interest rates are likely to be around longer than previously thought, and even a rate hike is possible if the target rate is not reached, projections point to further declines of 3.25 percent in the first 12-month interval, followed by an increase of 7.12 percent in the second 12-month interval.

Because people are still holding on to their jobs, the foreclosures start series continued to remain at their lowest levels ever in 2023, as it did in 2022. It is still early for foreclosures to begin displaying a rising trend since declines in employment levels are happening very gradually. As the unemployment rate continues to increase incrementally and the three-month moving average moves half a percent above a 12-month low, there will likely be an upward movement in the foreclosure start rate.

As the Federal Reserve is on hold for longer than expected to cut rates, Valley housing permits are projected to decline to about an average of 700 and rise back to 1,000 per month by the first half of 2026.

Single-Family Building Permits

As stated in our previous report, perhaps the most concerning indicator to watch is the 30-year fixed rate, which reached 7.2 percent in the third quarter of 2023, the highest rate since 2000. Interest rates have fallen since then but are still very high as of the second quarter of 2024. The pace of increase was very quick and at a pace never seen before. Such a drastic pattern is the underlying concern in the economy. The Federal Reserve is looking to steer inflation back down to 2 percent, but a resilient labor market, along with inflation running above 3.2 percent, is keep rates from being cut and bringing back the view that another rate hike may be needed.

Valley home values rose at an average annual rate of 1.33 percent at the nominal level, which corresponded to 2.99 percent real appreciation after factoring in the effect of inflation. We reported previously that the double-digit increases were clearly not sustainable. Mean reversion to the long-term benchmark rates would likely occur in the coming months. The steep drop from 21.61 percent in 2022 to 1.33 percent growth in 2023 was indicative of this correction.

The rise in home values in 2023 was much slower than the long-term benchmark growth rate of 5.99, as expected. However, the effect on supply coming from inventory shortages will likely outweigh the effect on demand coming from high interest rates, bringing back faster increases in home values much sooner. Homeowners are still hanging on to their homes rather than selling and facing very high rates when purchasing. Once the Federal Reserve begins to cut rates, the increase in demand will push prices closer to the longterm benchmark growth rate, which is based on the 22-year average yearly growth rate.

Hanford took the lead in the fastest increase in home values in 2023. Hanford reported a 4.69 percent increase in 2023, followed by a 3.84 percent increase in Visalia at 1.78 percent. Madera took third place with a 2.78 percent appreciation in 2023. Fresno reported a 2.26 percent increase in home value, while Merced reported a 0.67 percent increase. Home values fell 5.07 percent in Stockton and 0.21 percent in Bakersfield for the first time since the Great Recession. These two MSAs were the first to report declines in home values in 2023. At this pace, projections point to a 2.84 percent average annual increase in the Valley in the first 12-month period, followed by a 3.23 percent increase in the second 12-month forecast interval.

Inflation and Prices

The Consumer Price Index (CPI) inflation has settled around an index value of 3.2 since the third quarter of 2023. Inflation is mainly driven by the price of oil. The price of oil remained high due to regional conflicts around the world. The Federal Reserve announced in December 2023 that three rate cuts would be coming in 2024. Because inflation has not yet moved to the target rate, the Federal Reserve decided not to cut rates as of the second quarter of 2024.

Because of the higher cost of living, inflation generally runs higher in the West than nationwide. The two display a converging pattern during recessions, similar to the recessionary years of 2008 and the pandemic years. The same pattern has formed since the third quarter of 2023 and has remained that way as of the second quarter of 2024. Despite this pattern, however, employment numbers for March 2024 displayed growth. This may be due to the dynamics resembling a ping-pong ball bouncing when dropped, since the February 2024 employment numbers had declined.

The inflation rate in 2023 at 8 percent came down to about half the rate in 2022, but the decline was not enough for the Federal Reserve to end the policy of rate hikes to contain inflation. At a yearly average of 4.32 percent, inflation was still higher than the targeted rate of 2 percent in 2023. Nevertheless, it was a significant fall from 8 percent the prior year. Geopolitical conflicts are likely to put more pressure on the inflation rate from the cost-push side. One piece of good news, however, is that core inflation in the first quarter came down to 2.2 percent, a very encouraging number showing that the attainment of the target rate may be very close.

The

Federal Reserve announced in December 2023 that three rate cuts would be coming in 2024. Because inflation has not yet moved to the target rate, the Federal Reserve decided not to cut rates as of the second quarter of 2024.

vs. West

Cost push inflation from oil prices was the main culprit behind persistent inflation numbers in the fourth quarter of 2023 and the first quarter of 2024. Wage-push inflation was another factor. Generationally high interest rates have not cooled the economy enough to attain the target rate since the labor market at times shows an increase. There are some definitive signs of a contracting economy, as seen from the core inflation numbers. Projections of the inflation rate for the Western region point to an average yearly increase of 2.84 percent in the first 12-month forecast interval and 2.20 percent for the second 12-month interval that extends into the first half of 2026.

Valley average weekly wages rose 3.92 percent in 2023, up from 2.96 percent in 2022. The resilient labor market, despite rate hikes, contributed to the wage-push inflation. The increase in 2023 was about the same rate as the long-term benchmark rate of 3.23 percent. Average weekly wages will likely remain below $1,150 a week for the Valley until the end of the first half of 2026.

There was a lot of movement in the labor market as workers searched for higherpaying jobs to protect against purchasing power loss resulting from the high rate of inflation. The reservation wage of a typical worker in the Valley increased in 2023 and in the first quarter of 2024 as workers demanded higher compensation to return to work. Those workers who were not counted in the unemployment rate earlier were counted as many returned to the labor market looking for work, another factor behind the simultaneously increasing unemployment rate and employment, which occurred at times. Projections point to an average yearly increase of 2.48 percent from the second half of 2024 to the first half of 2025 and a 2.07 percent increase from the second half of 2025 to the first half of 2026 as the economy cools and inflation subsides.

During 2023, the average rate of inflation stood at 4.32 percent. During the same time, average weekly wages rose at a revised rate of 3.92 percent, resulting in a decrease in real wages and a fall in purchasing power of 0.40 percent. This loss in real wages will likely extend into 2025 and 2026 as the economy is steered toward the target rate of inflation.

Banking and Capital Markets

In 2023, there was a discrepancy in the growth of Valley community bank deposits and loans. The discrepancy emerged in the first half, continued in the second half of 2023 and subsided a bit in the first quarter of 2024. This change in the dynamics of each series most likely resulted from the Federal Reserve’s rate hikes, balance sheet reduction and tapering, which began in the first quarter of 2021.

There was basically no growth in Valley total bank deposits in 2023. Some of this may be attributed to bank closures, mergers and acquisitions. The overhaul of the Federal Deposit Insurance Corporation’s (FDIC) online database might also be attributed to this change. The growth rate in 2023 was very negative, pointing to a decline of 1.44 percent for the first time since the Great Recession. Given the prior year’s growth stood at 10.10 percent, this drop in 2023 was a significant concern. Further considering that the benchmark rate of growth is 8.41 percent, the decline in 2023 was quite worrisome. Projections point to a below benchmark growth rate of 4.25 percent in the first 12-month forecast interval, followed by a reversion to the long-term benchmark rate at 8.08 percent in the second 12-month period as interest rates are expected to come down from their generational highs.

Like the no change in foreclosures starts, there was no change in bank assets in nonaccrual as people held on to their jobs and the unemployment rate, despite ticking up gradually, is still considered relatively low as of the second quarter of 2024. This trend might end in the coming months given the flat upward trend seen in the last quarter of 2023 and the delay in rate cuts by the Federal Reserve. Declines in unemployment might become more significant, causing more job displacements and hampering the payment of debt obligations. A

A similar flat pattern to the bank assets in nonaccrual was displayed by community bank assets in default 30 to 89 days and 90-plus days. This flat pattern was also consistent with the foreclosures starts series reflective of the current dynamics in the unemployment rate resembling

a ping-pong ball bouncing as it drops. However, these two might trend upward as declines in employment levels become more significant and the Federal Reserve holds off on cutting rates in 2024.

Unlike the decline in Valley community bank total deposits, net loans and leases grew at 6.55 percent in 2023, pointing to a clear imbalance between the two indicators. Such an imbalance did not exist in prior years. Valley community banks cannot continue extending loans indefinitely without growth in total deposits, and at some point, such a pattern will become unsustainable, causing great financial stress. Net loans and leases grew faster than the rate of the prior year’s growth of 4.90 percent. The 2023 growth at 6.55 percent was also higher than the longterm benchmark growth of 7.73 percent, another pattern that was the opposite of bank deposits.

With long-term interest rates at their highest since the 2000s, along with the Federal Reserve’s balance sheet reduction and tapering, the 2 percent target rate of inflation is a lot closer to reach than the prior year. One impediment to reaching this goal may be the high price of oil, which puts cost-push pressure on inflation. With the expectation of reaching the target inflation rate and rate cuts to come sooner, projections point to net loans and leases increasing at an average yearly rate of 6.84 from the second half of 2024 to the first half of 2025, and at 7.90 percent faster growth from the second half of 2025 to the first half of 2026.

As the rates come down and the target rate of inflation is reached in the coming months, the two series are expected to move in a more sustainable pattern. The crashing car market is not helping some community banks, but the decline in rates would help avoid the stress coming from parts of the economy that require interest payments to make purchases, such as the car market. Both community bank deposits and net loans and leases are likely to grow less than their benchmark growth rates in 2024, with a faster rate of improvement beginning from the second half of 2025.

Concluding Remarks

The Valley economy has been extremely resilient in an environment of persistent inflation, high interest rates and wage growth. The three rate cuts announced by the Federal Reserve for 2024 were delayed as of the second quarter of 2024. This delay was attributed to the rate of inflation not yet reaching the target rate of 2 percent. The Valley economy has been disproportionately affected by resulting fluctuations in economic activity and was able to avoid a recession. However, there were some signs of weakness. Valley total employment began declining during the seasonal peak months of July and August, which normally register the fastest growth rates during a normal year, and employment has been declining month after month except for January and March of 2024. Such a pattern can be attributed to an economy moving like a ping-pong ball bouncing as it drops.

Five of the eight counties in the Valley reported declines in 2023, whereas more had reported growth in 2022. Kings County reported the fastest decline, followed by Tulare and Madera as the second and third fastest declining counties in employment.

The remaining two counties which reported a decline in employment were San Joaquin and Stanislaus. The three counties that reported employment growth in 2023 were Merced, Fresno and Kern counties.

The employment categories that reported a decline in the Valley were construction, retail trade, financial activities, trade, transportation and utilities and information employment. Those categories that reported growth in 2023 were education and health, wholesale trade, manufacturing, government and leisure and hospitality services employment.

Home values increased in 2023 but at rates much slower than in prior years. Homeowners are holding on to their homes to avoid facing the highest interest rates, creating an inventory shortage that is putting upward pressure on home values. As noted in our previous report, double-digit increases seen in previous years did not become sustainable in 2023 and there was a real loss in home values when the inflation rate is factored in. A reversion back to the rates more in line with benchmark growth rates is expected in the coming months.

Core inflation in the first quarter of 2024 was 2.2 percent, signaling that reaching the target rate is much closer than the year before. Valley average weekly wages, another contributor to high inflation, rose in 2023, but when persistent inflation is considered, there was a loss in the purchasing power of the Valley consumer in 2023.

There was a decline in Valley community bank total deposits similar to the recessionary years of 2008. However, Valley net loans and leases grew at a much faster rate, reflecting an imbalance between the two. Such an imbalance is not sustainable and cannot last in the long run. As rates are expected to go down, the two series are expected to display a more sustainable pattern in the two years ahead. Valley community bank assets in nonaccrual remained flat in 2023, similar to prior years, as people held on to their jobs as of the second quarter of 2024. Community bank assets in default 30 to 89 days and assets in default 90-plus days displayed a similar pattern to bank assets in nonaccrual.

The economy continued to give mixed signals in 2024. Valley residents can defend against a possible contraction by choosing to be overweight in cash, delay purchasing homes and renting instead. They can borrow at flexible rates in 2024 and consider buying bonds, if they can, since interest rates are likely to drop in 2024, given that they are very high at the moment.

Disclaimer

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