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
Dr. Kim Tan Professor, Accounting ACFI Department Chair
Gina Donahue Interim Director, MBA Programs
Soto
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 Director of Marketing & Digital Strategy
Donna Birch Trahan Senior Writer and Content Specialist
Caballero Senior Graphic Designer
Katie Dowling Graphic Designer
Erik
Steve
Emily Molina Hani Ekpokai
The Federal Reserve’s aggressive rate cut in September, along with another rate cut scheduled to take place before the year ends, led to an improvement in the Valley’s economic outlook. While the effect on financial markets was immediate, the effect on slow-adjusting goods markets will likely be felt with a lag, the earliest being the second half of 2025 as existing contracts expire, and new ones are signed with lower rates. The downward trend in core inflation will likely continue, hitting the much-anticipated 2 percent target rate in the coming months. One important impediment, however, is the price of oil spiking from regional conflicts escalating at times around the world.
Valley total employment registered declines in June and July 2024, the first time since the first quarter of 2021. These declines will likely continue into the first half of 2025 until falling rates begin to take their full effect on the Valley economy. The decline in July 2024 was significant considering July is the month during which total employment usually registers a seasonal peak, being the harvest month. These declines were more apparent in some individual categories of employment even as early as the third quarter of 2022.
Valley retail trade employment declined at about the same pace in 2024 as it did in 2023, being one of the worst-performing categories of employment in the Valley. The categories that displayed declining employment numbers or stagnant performance in 2024 were Valley trade, transportation and utilities, information and financial activities employment. Valley wholesale trade employment did not post any growth in 2024 but performed better than the previous year when the declines in employment were much faster. The decline in Valley information employment accelerated in 2024. Conversely, Valley education and health services employment, a category comprised of highly skilled workforce, grew at the same pace in 2024 as it did in 2023, registering performance above the 25-year benchmark growth rate of the series. Construction employment recovered from declining levels in 2023 and posted fast growth in 2024, growing more than the typical growth rate of the series. This impressive performance in Valley construction employment is indicative of the extent of the demand resulting from the shortage of housing, overcoming the decline in supply due to generationally high interest rates. Government employment, a lagging category, grew at a faster rate in 2024 than in 2023, but is expected to grow slower over the next two years. Valley leisure and hospitality services grew much slower in 2024 compared to 2023, a category that is more vulnerable to changes in interest rates. Manufacturing employment, which has been losing its historical seasonal pattern due to increasing number of distribution centers in the Valley, displayed faster in 2024 than in 2023. It is expected to revert to the benchmark growth rate in 2025 before showing a faster increase in 2026. Projections indicate a continued decline in employment levels in 2025 before rate cuts begin to take their full effect on the Valley economy in the second half 2025.
Valley building permits were another indicator displaying the strong resilience of the Valley in an environment of high gas prices, inflation and interest rates. Valley housing permits for single family units increased 25.3 percent in 2024 after posting a decline of 1.07 percent in 2023. Because workers largely held onto their jobs and remained employed, foreclosures in 2024 were virtually nonexistent, as in prior years. The Freddie Mac 30-year rate began falling at a steeper pace from its 20-year high recorded in October 2023 and is likely to decline further, given the recent rate cuts by the Federal Reserve. Considering that the
inventory shortage on the supply side outweighs the effect on demand from rate hikes, home values are expected to rise at rates closer to the long-term benchmark rate of 5.99 percent in the months ahead.
The rate of inflation continued its downward trajectory in 2024 toward the target rate of 2 percent, which was a major reason behind the Federal Reserve’s aggressive rate cuts in September to avoid a recession. Average weekly wages rose at a slower pace in 2024 than the rate of inflation, resulting in a decrease in real wages and loss of purchasing power in the Valley. Projections
In all, there is still a minimum 35 percent chance of recession by the first half of 2025, with the maximum odds estimated at 61 percent, according to the Federal Reserve Bank of New York.
indicate lower growth in average weekly wages as inflation continues to fall over the next two years. The yearly average real rate of increase in home values was reduced after factoring in the effect of inflation in 2024. Increases in tariffs and resulting labor shortages from deportations may cause inflation to spike again in the next two-year interval potantially resulting in stagflation.
Valley community bank total deposits continued to increase as rates remained below the long-term benchmark rate, in line with a slowing economy and the negative effects of interest-accruing debt, such as automobile purchases. Net loans and leases grew at rates consistent with bank deposits in 2024, but at a pace slower than the long-term benchmark of the series following significant data revisions made by the Federal Deposit Insurance Corporation. Community bank assets in default for 30 to 89 days, and assets in default for 90-plus days, began to increase in 2024, possibly reflecting the state of the car market along with other interest payments. In the first half of 2024, non-accruals also began displaying signs of an increase, perhaps indicative of an oncoming recession.
In all, there is still a minimum 15 percent chance of recession by the first half of 2025, with the maximum odds estimated at 35 percent, according to the Federal Reserve Bank of New York. The odds of a recession persist due to the prevailing perception that the Federal Reserve took too long to cut rates in 2024. Leading indicators, such as the yield curve and the Sahm rule, also point to a possible recession during the same interval. The Valley’s impressive resilience, despite high oil prices, inflation and interest rates, was strongly demonstrated by the region’s employment, housing permits and banking indicators in 2024. Given that rate cuts are likely to continue, we recommend renting for a bit longer and delaying home purchases until rates fully align with long-term benchmark rates. Valley residents can defend against changing economic conditions by taking out flexible-rate loans, adjustable-rate mortgages and taking advantage of relatively cheap student loans to acquire skills if laid off from work. For investors who bought bonds, with the Federal Reserve’s pivot, now would be a good time to plan for selling bonds as rates fall further.
Introduction
Time series data spans from January 2001 to October 2024. The two-year medium-term forecasts extend from November 2024 to December 2026. 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 is considered accurate.
The remainder of this report is structured as follows: Section B analyzes labor market conditions in 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 and indicators from local banking and capital markets are discussed in Section E. Section F concludes.
San Joaquin Valley
Kings
Merced
Stanislaus
San Joaquin
Madera
Fresno
Tulare
Kern
employment indicators
Significant revisions were made to the employment numbers by the Bureau of Labor Statistics in 2024. The revised data revealed that the Valley total employment continued to slow for five consecutive months starting in January 2024, then began to decline in June and July. In August 2024, however, there was an increase in Valley total employment. These different dynamics, along with the relatively smaller agriculture-led seasonal spikes, reflected the impact of increasing diversification into other sectors of the economy besides agriculture. The higher the degree of diversification, the lower the impact from external shocks, such as policy shifts, making the Valley economy more robust. Valley total employment registers a seasonal peak every year in July and August, and these seasonal peaks are progressively becoming smaller as the economy continues to expand into sectors beyond agriculture.
Total employment dynamics were mixed at the county level. Madera County grew the fastest, followed by Merced, Stanislaus and San Joaquin counties in 2024. Employment growth in Tulare and Kings counties slowed in 2024, while employment in Kern and Fresno counties declined.
The employment categories that reported a decline in the Valley were retail trade, information, trade, transportation and utilities and financial activities. Categories that reported growth included education and health services, construction, wholesale trade, manufacturing, government and leisure and hospitality services.
Valley total employment registers a seasonal peak every year in July and August, and these seasonal peaks are progressively becoming smaller as the economy continues to expand into sectors beyond agriculture.
In total, Valley total employment grew by 0.56 percent, a slower pace in 2024 compared to 2023. With the change in policy toward rate cuts in September 2024, Valley total employment is expected to grow at a faster pace after a six-month lag as further rate cuts begin to take their effect on the Valley economy. Projections first point to a decline of 0.27 percent in 2025, resulting from the hysteresis of lagged goods market adjustment, which is conditional on how aggressively interest rates are cut, followed by growth of 0.81 percent in 2026.
An important leading indicator that predicts the direction the economy is likely to head is the Consumer Confidence Index. A value above 100 often points to an expansion, while a value below 100 indicates a contraction. Despite remaining mostly stable at just above 100 in the previous months, the September of 2024 reading dipped significantly below 100, signaling that concerns of a contraction were not yet over and that the consumer expectations had worsened despite the Federal Reserve’s initial rate cut in September.
Labor force growth continued to exceed employment growth in the Valley in 2024. Such a pattern is similar to earlier episodes observed during the recessionary years of 2008 and the pandemic years of 2020, indicating increases in the rate unemployment. In 2021, the labor force growth rate intersected with the declining employment growth rate, forming crossing patterns. We have not yet observed the reverse, where employment growth exceeds the labor force growth, which keeps concerns of a contraction in place for now. Such a crossing pattern would serve as an indicator of expanding economic activity for the Valley economy.
A coincidental indicator for our Valley economy is the pattern between Valley and state employment growth. Valley employment growth mostly stayed below the state employment growth in 2024, a pattern observed during contractions. The hyperbolic pattern observed in the Valley employment growth and state employment growth, although more pronounced for the former than latter may, may point to a slowing that may gradually lend itself to an expansionary phase. In the coming months, the two series may continue to converge and then intersect following the Federal Reserve’s further rate cuts again pointing an expanding regional economy.
employment indicators
Another leading indicator for the economy, the yield curve, also points to a contraction, along with the Sahm rule. The Sahm rule signals the start of a recession when the unemployment rate increases by 0.5 percent or more relative to its lowest point in the previous year. In August 2024, the reading was 0.57 percent, increasing slighty from the prior month. The yield curve has remained inverted since October 2022 and is one of the steepest inversions since the 1960s. Projections initially point to a contraction in the first half of 2025, only to enter an expansionary phase in the second half of 2025, provided that the Federal Reserve continues to lower rates further in the coming months.
In 2024, Valley education and health services employment fully recovered from all job losses incurred during the pandemic. The trend line after the pandemic appears steeper than before, partly due to the priority placed by the state government on education, which positively impacted employment levels in this category more than any other in the Valley. Employment in this category grew by 6.21 percent in 2024, nearly matching the previous year’s growth of 6.22 percent, reflecting increased investment in high-skill education and health careers in the Valley. Growth in education and health services employment is expected to continue at this faster pace in 2025 and 2026.
Employment levels in education and health services employment are projected to surpass 315,000 by the end of 2026. The linear trend observed in this series reflects the relatively recession-proof careers that require high skills that are much needed in the Valley and are among the last to be affected during a long-lasting contraction. Projections indicate growth at an average yearly rate of 5.28 percent in 2025 and at a slightly faster pace of 6 percent in 2026.
In 2024, Valley education and health services employment fully recovered from all job losses incurred during the pandemic.
At a yearly average rate of 2.57 percent, Valley manufacturing employment growth was stronger in 2024 than in 2023, which saw growth at 1.61 percent. During the past three years, growth in the employment category has been significantly faster than the long-term benchmark rate of 0.49 percent, reflecting a structural shift driven by the continued emergence of warehouse distribution centers in the Valley. Employment levels in this category are projected to exceed 125,000 by the end of 2026.
As the growth of warehouse distribution centers becomes satiated and slows, employment growth in this category is also expected to slow and revert toward the historical rate of 0.49 percent. Projections indicate an average yearly growth of 0.53 percent in 2025. As further rate cuts begin to take their effect on the economy, employment growth in this category is projected to pick up speed and reach 1.38 percent in 2026.
An important leading indicator of economic activity, the Institute of Supply Management’s (ISM) Purchasing Managers Index (PMI), has remained below 50 points since March 2024. Furthermore, the reading in October 2024 was slightly lower than the year before. A value below 50 points indicates that an economy is likely to contract. The gradual upward trend observed in 2023 has shifted to a downward, pointing to worsening expectations for economic activity.
At a yearly average rate of 2.57 percent, Valley manufacturing employment growth was stronger in 2024 than in 2023, which saw growth at 1.61 percent.
employment indicators
Valley leisure and hospitality services employment growth continued to slow in 2024, as in prior years. Employment growth declined from 2.05 percent in 2023 to 0.58 percent in 2024, as persistent inflation and generationally high interest rates took their toll on demand for goods and services in this category. Valley leisure and hospitality services employment growth is expected to shift from positive to negative territory in 2025 before returning to growth in 2026. Employment in this category is projected to exceed 150,000 by the end of 2026.
Valley leisure and hospitality services, together with the retail trade category, appear to be the most vulnerable categories of employment during economic downturns due to the existing skills gap. Employment categories that require lower skill levels are the first to lay off workers during a contraction. Projections indicate an average annual decline of 0.13 percent in 2025, followed by 3.44 percent growth in 2026.
Valley trade, transportation and utilities employment was one of the categories that posted a decline in 2024. However, the decline in 2024 occurred at a slower speed than in 2023. Growth is expected to shift from negative to positive territory in 2025. The 0.10 percent decline in 2024, compared with the 0.57 percent decline in 2023, suggests that a turning point was reached in 2023. Employment in trade, transportation and utilities is projected to exceed 350,000 by the end of 2026.
Valley leisure and hospitality services, together with the retail trade category, appear to be the
most vulnerable categories of
employment
during economic downturns due to the existing skills gap.
As rate cuts begin to take full effect on the Valley economy, employment in trade, transportation and utilities is expected to grow faster due to the relatively early turning point in 2023. This category is projected to grow at an average yearly rate of 1.60 percent in 2025 and pick up further pace in 2026, growing at 2.79 percent, which is above the historical rate of 1.97 percent.
Valley retail trade employment was another category that posted a decline in 2024. The 0.34 percent average yearly decline in 2024 was comparable to the 0.38 percent decline in 2023. Retail trade employment in the Valley was the first to report a decline among all other categories as early as the second half of 2022. Employment levels in this category are expected to stay below 160,000 until the end of 2026.
The long-term benchmark growth in retail trade employment continued to fall in 2024. The Federal Reserve’s rate cuts are expected to aid in recovery, but not significantly in this sector, due to the competition from online sales. This online competition is the structural reason for struggling retail trade employment in the Valley, a trend that has persisted since 2011. Online sales now account for 15 percent of total sales in the Valley. Projections indicate a further decline of 0.23 percent in 2025, followed by a turning point, with growth of 0.41 percent in 2026.
As rate cuts
full effect on the Valley economy trade, transportation and utilities is expected to grow faster due to the relatively early turning point in 2023.
employment indicators
Wholesale trade employment growth slowed considerably in 2023 to 1.47 percent after growing by 5.42 percent in 2022 — a pace more than three times the historical rate of 1.58 percent. In 2024, however, employment in this category declined slightly by 0.04 percent, indicative of warehouse distribution growth coming to a standstill in the Valley. With further rate cuts, Valley wholesale trade employment growth is expected to shift from negative to positive territory as the more structural growth pattern resumes. Employment levels in the Valley wholesale trade category are projected to exceed 50,000 by the third quarter of 2026.
With the growth in warehouse distribution centers now becoming satiated in the Valley, it will be more difficult for local workers to find employment in this category compared to prior years. Average yearly growth over the next two years is expected to occur below the long-term benchmark growth rate of 1.58 percent, which also declined from 1.62 percent from a year ago. Projections indicate 0.77 percent growth in 2025, followed by slightly faster growth of 1.10 percent in 2026, as continued rate cuts are expected to support employment growth in this category.
Valley information employment has been structurally on a declining trend since 2008, as digitalization increasingly replaces traditional methods of news consumption, such as newspaper deliveries. After recovering by about 1,000 employees since 2022, the decline worsened in 2023 and 2024, at 3.95 percent and 8.81 percent, respectively — both exceeding the long-term benchmark decline of 2.96 percent.
Valley information employment has been structurally on a declining trend since 2008, as digitalization increasingly replaces traditional methods of news consumption, such as newspaper deliveries.
Information employment declined the fastest in 2024 among all employment categories in the Valley. In the coming months, the decline in information employment is expected to be less severe than the historical rate of decline of 2.96 percent. Projections point to a decline of 2.54 percent in 2025. As the continued rate cuts take full effect on the economy, the rate of decline is projected to slow to 0.41 percent in 2026.
Growth in construction employment shifted from negative to positive territory in 2024. Growth at 2.09 percent, which exceeded the typical growth rate of 1.39 percent, was remarkable given that long-term rates have been at generational highs in 2024. At this pace of growth, employment levels in this category are expected to exceed. 85,000 by the fourth quarter of 2026.
Construction employment was the fourth fastest growing category of employment in the Valley. This pace of growth reflects the significant positive effect of the inventory shortage, which is much greater than the negative impact of generationally high interest rates, keeping demand strong despite their negative influence. With home values already very high, rate cuts are expected to increase home values even further. To avoid home buyers being burdened with high interest payments, it is advisable to purchase homes with adjustable-rate mortgages (ARM) to lower payments as rates continue to fall. Projections indicate an increase of 3.21 percent in 2025, followed by a faster increase at 5.13 percent in 2026.
Growth in construction employment shifted
negative to positive territory in 2024.
from
employment indicators
Government employment is a category in the Valley that responds to changes in economic conditions with a lag of about 18 months. This sector is an important economic driver in the Valley, comprising about 22 percent of total employment. Valley government employment grew by 4.23 percent in 2024, exceeding the 3.47 percent growth in 2023. The trend after 2020 is clearly steeper than in previous years, reflecting greater investment in education and health in the Valley.
Government employment is projected to exceed 335,000 by the fourth quarter of 2026 as the Federal Reserve’s rate cuts gradually take effect on the Valley economy, erasing the 15,000 job losses that have persisted since the recessionary years of 2008. In each of 2022, 2023 and 2024, average yearly growth in government employment has been more than three times the long-term benchmark growth rate of 1.03 percent, reflecting priority placed by the state government on education and health. Projections indicate an average yearly growth of 2.93 percent in 2025, followed by a faster pace of 3.18 percent in 2026.
Financial activities employment continued to decline in 2024, but the pace of decline was not as fast as the 2.20 percent decrease observed in 2023. Online banking has significantly affected employment in this category causing the longbenchmark rate to display a structural worsening, now at a decline of 0.40 percent. With the decline in 2024, financial activities employment has registered three years of decline in the Valley.
Valley government employment grew by 4.23 percent in 2024, exceeding the 3.47 percent growth in 2023. The trend after 2020 is clearly steeper than in previous years, reflecting greater investment in education and health in the Valley.
Valley financial activities employment is projected oscillate around a value of 40,000 by the fourth quarter of 2026. The loss of about 2,000 employees during the pandemic is not expected to be recovered within the coming two-year interval. However, employment in this category appears to display a flatter declining trend beginning in the first quarter of 2024. Financial activities employment is projected to decline 0.27 percent in 2025 and then shift from negative to positive territory, posting 0.20 percent growth in 2026.
With the long-awaited Federal Reserve rate cuts in September 2024 and in november with more to follow, Valley economy is projected to grow at a faster pace but only after continuing to slow until the first half of 2025 due to hysteresis coming from the effect preexisting high rates on the goods market. As existing contracts expire and new contracts are signed at lower rates, Valley total employment is expected grow faster starting in the second half of 2025. After all, Valley total employment registered three years of gradual slowdown, from 4.55 percent in 2022 to 0.79 percent in 2023 and to 0.52 percent in 2024.
Financial activities employment is projected to decline 0.27 percent in 2025 and then shift from negative to positive territory, posting 0.20 percent growth in 2026.
Housing Sector
The Bureau of Labor Statistics lists eight Metropolitan Statistical Areas (MSAs) in the San Joaquin Valley. These MSAs are Fresno, BakersfieldDelano, Hanford-Corcoran, Madera-Chowchilla, Merced, Modesto, Stockton and Visalia-Porterville. The total value from these eight MSAs comprises the total single-family building permits in the Valley.
Valley single-family housing permits rose at an impressive rate of 25.34 percent in 2024. This phenomenal increase occurred at a time when longterm interest rates were the highest they had been in the past 25 years. As the Federal Reserve continues to cut rates in the future, Valley housing permits are projected to increase at an average of 1,250 permits per year.
Fresno took the lead with 2,357 permits in 2024, while Stockton came in second with 2,133 housing permits. Bakersfield fell from second to third in 2024 with 1,791 single-family building permits. Merced ranked fourth with 398 housing permits, followed by Hanford with 283. Madera had the fewest, issuing only 65 singlefamily building permits in 2024. With further rate cuts anticipated, projections indicate increases of 13.71 percent in 2025 and 17.65 percent in 2026.
Because declines in employment were not observed to a significant scale in the Valley and most people continued to hold onto their jobs, the foreclosure start series remain at its lowest levels in 2024. As the Valley economy begins to respond to rate cuts, foreclosures are expected to remain unchanged in the coming years, maintaining their previous all-time low values from 2024 and 2023.
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.
Valley single-family housing permits rose at an impressive rate of 25.34 percent in 2024.
Single-Family Building Permits
The pace of increase was very quick and at a pace never seen With the Federal Reserve’s rate cuts in September 2024 and more cuts to follow, 30-year rates are expected display a declining pattern in 2025 and 2026. Despite the cut in rates, the overall odds of a recession remain at 15 percent as of the fourth quarter of 2024, while recession odds calculated by some instiutions, such as the New York Federal Reserve, are as high as 61 percent until the second half of 2025. These recession odds persist because it will take some time for rates to come down from their 23-year highs, which corresponds to one generation. During this time, as interest rates gradually decrease, the Valley economy is expected to slow further, especially in the first half of 2025.
Single-family home values rose at an average annual rate of 5.20 percent in 2024, which was more than twice the rate observed in 2023. After factoring in the average yearly inflation of 3.09 percent in 2024, the real appreciation in home values was 2.11 percent during the same period. The mean reversion from double-digit increases materialized as expected in 2023 and 2024, although the appreciation in 2024 was higher than in 2023 but remained in single digits.
The 5.20 increase in home values in 2024 occurred at nearly the same pace as the longterm benchmark rate of 5.91 percent, reflecting the stronger impact of higher demand relative to the effect of lower supply. To avoid facing higher rates, homeowners are still holding onto their homes and choosing not to sell, even as values continue to reach new highs. The Federal Reserve’s rate cuts announced in the second half og 2024 are not expected to change this trend any time soon, as home values will likely continue to climb as rates fall further.
Madera led with an 8.09 percent increase in home values in 2024. This was followed by Bakersfield at 6.59 percent and VisaliaPorterville at 6.03 percent. Home values in the Stockton-Lodi MSA rose at an average yearly rate of 5.97 percent, and Merced MSA saw a 5.74 percent increase. Modesto MSA reported a 4.22 percent increase in 2024. Fresno MSA reported a 2.22 percent increase, followed by HanfordCorcoran MSA, which reported a 2.27 percent increase in 2024. As rates continue to fall, home values are expected to appreciate faster with projections indicating an 8.28 percent increase in 2025 and a 5.73 percent increase in 2026.
Inflation and Prices
Consumer Price Index (CPI) inflation fell further to a yearly average of 3.09 percent in 2024, down from 4.32 percent in 2023. The main driver of this decline in inflation appears to be the decrease in oil prices from previous levels. The rate cuts in the third quarter of 2024 indicate that the target rate of inflation is being reached nationwide, as announced by the Federal Reserve.
Inflation, along with oil prices, generally runs higher in the West then nationwide. When inflation in the West is compared with nationwide inflation, the two tend to converge during economic slowdowns, and there is some evidence of this occurring in 2024. The long-term trend, however, suggests further declines in both, approaching the target value of 2 percent before the economy begins to overheat from a series of rate cuts expected in 2025 and 2026.
The average yearly inflation rate dropped to 4.32 percent in 2023, from 8 percent in 2022, and continued to decline in 2024, mainly due to two factors: wage growth and the rising price of oil, both being cost-push factors. Demand-pull factors, such as aggregate demand management through policy variables such as the Federal Funds rate, did not appear to have the same impact as cost-push factors. Given this, inflation will likely mimic the dynamics of oil prices, tending to rise at times along with oil prices during flare-ups in regional conflicts but continuing to decline over the longterm.
When inflation in the West is compared with nationwide inflation, the two tend to converge during economic slowdowns, and there is some evidence of this occurring in 2024.
There is some empirical evidence suggesting that sustained interest rates at 25-year highs did not cool the economy fast enough to attain a soft-landing before the Federal Reserve decided to cut rates in September 2024. Inflation rates appeared to decrease on their own due to changing economic conditions, rather than as a result of the Federal Reserve’s policy stance, which included rate hikes, balance sheet reduction and tapering to fight inflation. Projections for the inflation rate in the Western region indicate an average yearly increase of 2.68 percent in 2025 and 2.25 percent in 2026, conditional on the economy not overheating before then and effects coming from tariffs and deportations.
Valley average weekly wages rose by 1.78 percent in 2024, down from 4.04 percent in 2023. The 2024 increase in average weekly wages was below the long-term benchmark rate of 3.27 percent, indicating a cooling labor market cooling in the Valley. Given these dynamics and the anticipated effects of rate cuts, average weekly wages are projected to exceed $1,150 a week in the Valley by the third quarter of 2026.
The reservation wage of a representative worker in the Valley decreased in 2024 compared to the previous year. Average weekly wages in 2023 rose by 4.04 percent, exceeding the long-term benchmark rate of 3.27 percent. Projections indicate an average yearly increase of 2.38 percent in 2025, followed by a slowdown to 2.17 percent in 2026. This includes 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 2024, the average yearly rate of inflation stood at 3.09 percent. In the same period, average weekly wages rose by 1.78 percent, resulting in a decrease in real wages and a fall in purchasing power of 1.31 percent. These losses in real wages are likely to extend into 2025 and 2026 as the Valley economy resumes its structural pattern.
Banking and Capital Markets
The Federal Deposit Insurance Corporation (FDIC) significantly revised banking data in 2024. To address this, our econometric estimations had to be conducted using both interpolation and extrapolation techniques at times. With the revised FDIC data, the discrepancy between total deposits and net loans and leases, which we highlighted in our previous report, has now narrowed but still persists.
Valley total bank deposits grew by 5.85 percent in 2024, slower than the 6.70 percent growth in 2023. The pace of growth in 2024 was also below the7.02 percent long-term benchmark growth, indicating a slowdown consistent with other indicators of the Valley economy, especially considering that growth in 2023 was also below the long-term benchmark. Projections indicate a below- benchmark growth rate of 4.96 percent in 2025 and faster growth at 6.97 percent in 2026, as the effect of the rate cuts begins to stimulate economic activity.
Consistent with foreclosures starts, there was essentially no change in Valley community bank assets in nonaccrual, as most workers maintained their jobs and the unemployment rate, despite gradually ticking up, is still considered relatively low as of the fourth quarter of 2024. This pattern is likely to continue into the first half of 2025 and thereafter reflects the positive impact of falling rates on Valley employment growth. A
A similar flat pattern was observed in community bank assets in default 30 to 89 days and 90plus days, which was also consistent with the foreclosure started series, reflecting the current dynamics of the unemployment rate, resembling a ping pong ball bouncing as it drops. These dynamics will likely continue until the second half
Valley total bank deposits grew by 5.85 percent in 2024, slower than the 6.70 percent growth in 2023.
of 2025 for the same reasons mentioned above related to falling interest rates. After the second half of 2025, these two indicators will likely increase a bit as rate cuts begin to have a greater effect on Valley economic activity and employment growth.
Valley net loans and leases grew at a slower pace than total bank deposits growth in 2024, a pattern also observed in 2023. Growth in net loans and leases reached 2.79 percent in 2024, significantly below the series’ long-term benchmark growth of 7.02 percent and less than the 3.75 percent growth recorded in 2023. Moreover, the slowdown in net loans and leases occurred consecutively in 2022, 2023 and 2024, displaying a pattern consistent with other indicators pointing to a slowdown in the Valley economy. There appears to be a clear imbalance between the total bank deposits and net loans and leases in the Valley, which is not sustainable in the long run.
The slower dynamics in net loans and leases were consistent with the Federal Reserve’s balance sheet reduction and tapering efforts to bring inflation down to the 2 percent target rate. However, with the rate cuts announced in the second half of 2024, these dynamics are likely to shift to faster growth in net loans and leases in 2026, reducing the existing discrepancy with total bank deposits. Projections indicate net loans and leases will increase at an average yearly rate of 5.83 percent in 2025, followed by a 7.47 percent increase in 2026.
As rates continue to decline and the target rate of inflation is reached in the coming months, the two series are expected to move in a more sustainable pattern. Falling rates will likely bring an end to the crisis occurring in the car market and provide relief to some community banks, as the decline in rates will likely help mitigate stress from such sectors of the economy. Both community bank deposits and net loans and leases are expected to grow at rates more consistent with their benchmark growth rates in 2025 and 2026, particularly with improvements becoming more noticeable from the second half of 2025.
Loans and Leases (in $ Thousands)
Concluding Remarks
As we pointed out in our previous reports, the Valley economy has shown remarkable resilience in an environment of persistent inflation, high interest rates, rising oil prices and wage growth. The rate cuts announced by the Federal Reserve in the second half of 2024 are expected to have a positive impact on the Valley in the second half of 2025. However, the Valley economy was disproportionately affected by rate cuts hurting the Valley economy more than the national economy.
Two of the eight Metropolitan Statistical Areas (MSAs) in the Valley reported declines in 2024, while two others experienced a slowdown in total employment. The remaining four MSAs reported faster growth in their respective total employment. Madera County reported the fastest growth followed by Merced, Stanislaus and San Joaquin counties. Tulare and Kings counties reported slowing growth in 2024, while Kern and Fresno counties reported declines in total employment.
Valley employment categories that reported a decline in 2024 included retail trade, information, trade, transportation and utilities. Employment categories that reported growth in 2024 were education and health services, construction, wholesale trade, manufacturing, government and leisure and hospitality services.
Home values increased at a faster pace in 2024 despite long-term interest rates reaching 23-year highs. Homeowners continued to hold on to their homes to avoid facing the highest interest rates, contributing to the existing inventory shortage and putting further upward pressure on home values. As noted in our previous report, double-digit increases seen in prior years were not sustainable in 2024. There was a smaller real gain in home values when accounting for the inflation rate in 2024. With the long-awaited rate cuts first announced in the third quarter of 2024, home values are expected to rise at a faster pace starting in the second half of 2025.
The main drivers of inflation appear to be the high price of oil and wage growth, both of which showed signs of a decreasing in 2024, along with the rate of inflation. Valley average weekly wages rose in 2024, but at rates much slower than in 2023 and below the long-term benchmark rate of increase. This resulted in a loss in purchasing power of the Valley consumer in 2024, and this loss was greater than in 2023.
There was a significant data revision in banking figures by the FDIC, which required data interpolation and extrapolation methods in this year’s report. Valley net loans and leases grew at a slower rate than total bank deposits, reflecting the Federal Reserve’s balance sheet reduction and tapering in 2024. Such an imbalance between total deposits and net loans and leases in the Valley is not sustainable in the long run and will likely disappear as the rate cuts begin to have their full effect on the Valley economy. As rates continue to decline, Valley community bank assets in nonaccrual are expected to display a different pattern and begin to decrease from the second half of 2025. Community bank assets in default for 30 to 89 days and for 90-plus days are expected to display the same pattern as assets in nonaccrual.
The Valley economy continued to slow in 2024, and this slowdown will likely extend into the first half of 2025, after which an expansionary phase is expected to follow. Valley residents can avoid being burdened with high mortgage payments by borrowing at adjustable-rate mortgages (ARMs) to reduce interest payments as rates continue to decline. Residents may also choose to remain overweight in cash, delay borrowing and postpone purchasing homes until the second half of 2025, waiting for rates to fall further. For those invested in bonds, this is a good time to consider selling bonds to take advantage of the inverse relationship between rates and bond prices.
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Although information in this document has been obtained from sources believed to be reliable, we do not represent or warrant its accuracy, and such information may be incomplete or condensed. This document does not constitute a prospectus, offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument which may be discussed in it. All estimates and opinions included in this document constitute our judgment as of the date of the document and may be subject to change without notice. This document is not a personal recommendation, and you should consider whether you can rely upon any opinion or statement contained in this
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