2019 Business Forecast, Volume 8 - Issue 2

2019 VOL 8 | ISS 2

San Joaquin Valley

BUSINESS FORECAST

emerging trends in the

valley’s economy

Table of Contents Contributors ............................................................................................................................ 3 Executive Summary .............................................................................................................. 4 Introduction ............................................................................................................................ 5 Employment Indicators........................................................................................................ 6 Housing Sector ......................................................................................................................18 Inflation and Prices..............................................................................................................20 Banking and Capital Markets ........................................................................................... 22 External Sector .................................................................................................................... 24 Concluding Remarks .......................................................................................................... 26

SAN JOAQUIN VALLEY BUSINESS FORECAST 2019 Volume VIII, Issue 2 csustan.edu/sjvbf Gรถkรงe Soydemir, Ph.D. Stanislaus State One University Circle Turlock, CA 95382

2 | Stanislaus State

We wish to thank Foster Farms for generously providing the endowment for this project.

Cover photo credit and data: Port of Stockton

Contributors Faculty

Student Assistants

Gรถkรงe Soydemir, Ph.D.

Tomas Gomez-Arias, Ph.D.

Tyra Hampton

Justin Clark

Annhenrie Campbell, Ph.D.

David Lindsay, Ph.D.

Eugene Kim

Chair, Department of Accounting and Finance

Professor, Accounting and Finance

Christopher Guzman

Scott Davis, Ph.D.

Katrina Kidd

Abdulla Mammadsoy

Noah Wells

Foster Farms Endowed Professor of Business Economics

Professor, English

College of Business Administration Staff

Carmen Garcia

Diamelle Abalos

Joshua Hanks

Mandeep Khaira

Administrative Analyst

Dean, College of Business Administration

Director, MBA Programs

Administrative Support Coordinator

Communications and Public Affairs

Rosalee Rush

Senior Associate Vice President for Communications, Marketing and Media Relations

Kristina Stamper Director for Communications and Creative Services

Brian VanderBeek

Senior Writer and Content Specialist

Steve Caballero Senior Graphic Designer

Graphic Designer

Senior Web and Electronic Communications Developer

San Joaquin Valley Business Forecast, 2019 | Volume VIII โ ข Issue 2 | 3

Executive Summary Total employment in the San Joaquin Valley in 2018 grew at about the same rate as in the previous year, but slowing in the Valley’s overall economic activity is projected to become more visible over the next two years and is expected to be more than the slowdown at the national level.

This is due to the relatively fragile structure of the Valley economy, a result of higher unemployment rates, a higher ratio of unskilled-to-skilled workers and lower educational attainment levels. The change in behavior of certain recession indicators — such as the yield curve temporarily inverting in the first quarter of 2019, the institutional investors switching their portfolio holdings from stocks to bonds and the value of U.S. household investments as a percentage of GDP peaking in 2019 — further point to slowdowns in economic activity in the next two years.

As is usual, the slowdown is manifesting at different rates among the Valley’s key employment categories. Education and health services employment growth declined from 4.79 to 2.96 percent in 2018, while manufacturing employment growth fell from 0.52 percent to 0.25 percent. The Institute of Supply Management’s (ISM) Purchasing Managers’ Index, an important indicator, reached above 60 points in the third quarter of 2018 before falling to 55 points in the first quarter of 2019, predicting further slowdown in the coming months.

The same slowing pattern was also observed in the consumer confidence index, a leading indicator for future consumption activity.

Leisure and hospitality services employment growth slowed from 2.71 to 1.84 percent, while retail trade employment growth also exhibited a significant slowdown, from 0.71 percent to 0.34 percent.

There were some upticks in other categories. Construction employment growth increased from 5.32 percent to 7.67 percent in 2018, while wholesale trade employment growth increased from 1.84 to 2.91 percent.

Overall in 2018, more employment categories exhibited a slowdown than a gain in speed.

Among the eight counties of the San Joaquin Valley, total employment grew at a slower pace in Kings, Madera, Merced and San Joaquin counties while Kern, Stanislaus and Tulare grew at a faster rate than in 2018, and Fresno’s growth pace matched the 2017 rate. Even though total employment growth slowed for Merced and San Joaquin counties, at 2.44 percent and 2.23 percent respectively, these two counties reported the fastest growth in 2018, while Kings and Kern counties grew at the slowest pace, at 1.08 percent and 1.21 percent respectively. Average yearly growth in other counties was 2.04 percent in Fresno, 2.03 percent in Tulare, 1.31 percent in Stanislaus and 1.43 percent in Madera.

After a very significant increase in building permits, a slower increase is projected in 2019, in line with the series’ multiyear pattern. Foreclosure starts, which exhibited a short-lived increase as the Federal Reserve hiked rates, assumed a flat pattern when those rate hikes were paused, spurring a fall in long-term interest rates. At a yearly average of 8.57 percent, home values in the Valley increased at about the same pace as last year.

4 | Stanislaus State

Following the decline in oil prices in the third quarter of 2018, the yearly inflation rate began to decrease and registered 3.35 percent over the 12-month period. However, the price of oil increased the first quarter of 2019, putting further pressure on the inflation rate. Driven by increased oil prices, the rate of inflation is projected to increase in the coming months before settling around the long-term rate of 2.31 percent by the second quarter of 2020.

Meanwhile, wages are not keeping up with inflation. At an annual average growth rate of 3.03 percent, wage growth in the Valley fell behind the inflation rate in 2018, showing a decline in real wages of 0.32 percent. This means that in 2018, Valley consumers were able to purchase fewer goods and services than they did in 2017. A similar pattern of gradual decline in real wages is projected to prevail in the coming two-year interval.

Acceleration in the Valley’s total bank deposits slowed in 2018, but remained relatively strong, with deposits growing 8.01 percent in 2018 compared to 8.62 percent in 2017. Bank deposits are projected to grow at a slower pace in the months ahead, which would be consistent with other indicators.

Valley bank assets in non-accrual began to increase gradually over the last 12 months, even though there was a decline in the fourth quarter of 2018. The lowest point in assets in nonaccrual was attained in the third quarter of 2017. The same pattern prevailed in assets in default 30-89 days and 90-plus days. Along with total deposits, Valley total net loans and leases is a category projected to grow at a slower pace in the next two years.

Valley imports, such as cement, steel and liquid fertilizer, continued to decline in 2018 as trade talks between China and the U.S. failed to reach resolution. The resulting retaliation in the form of trade wars negatively impacted exports in the Valley such as almonds, wine, grapes and other produce. The decline in liquid fertilizer imports were due to the end of the drought in 2018. Because the economy is based in agriculture, the Valley stands to lose from trade wars as other regions of the U.S., such as the Steel Belt, stand to gain. Consequently, wealth redistribution effects from the new tariff structure work to decrease real incomes in the Valley in favor of those regions which stand to have income gains as a direct result of these tariffs and retaliation.

Introduction This year’s update examines data from January 2001 to April 2019.

Two-year medium-term forecasts are from May 2019 to June 2021.

Forecasting a range rather than a point provides a more realistic assessment of likely future values. When actual numbers fall within the upper and lower forecast bands, the forecast is deemed accurate.

Because of the institutional capabilities the business forecast project created, we were able to procure three new grants this year, totaling close to $90,000. One of the grants was from the Northern California Chapter of the Appraisal Institute to establish a publicly available online database for real estate and related indicators belonging to San Joaquin Valley.

The database is later to be expanded to the Bay Area and other regions of California to serve as a source for researchers and practitioners who wish to study our region relative to other regions in California and the nation. The second grant involves conducting a commuter survey to be directly compared with surveys done in 2000 and 2006 to investigate how commuting behavior has changed over time. The third grant involves undertaking a study to improve economic growth and prosperity in the Copperopolis region and Calaveras County. The ultimate goal is to make Stanislaus State the go-to center in terms of data procurement and research related to the economy of the San Joaquin Valley and other regions of California.

The remainder of this report is structured as follows: labor market conditions for the San Joaquin Valley; a look at the real estate market in the eight metropolitan statistical areas of the Valley; a discussion of prices and inflation; an examination of indicators from local banking and capital markets; a look at the flow of goods through the Port of Stockton and then a conclusion.

San Joaquin Madera

Fresno

Merced

Tulare Kings

Kern

San Joaquin Valley San Joaquin Valley Business Forecast, 2018 | Volume VIII • Issue 1 | 5

Employment Indicators

The slowdown in several key categories of employment was more visible in 2018, particularly in education and health services employment growth, which declined from 4.79 to 2.96 percent. Manufacturing employment growth fell from 0.52 percent to 0.25 percent. Leisure and hospitality services employment growth slowed from 2.71 to 1.84 percent. Another continued slowdown occurred in retail trade employment, which went from a 0.71 percent growth rate to 0.34 percent in 2018. u Construction employment growth increased from 5.32 percent to 7.67 percent in 2018, and a faster pace of growth was also observed in wholesale trade employment — from 1.84 percent to 2.91 percent. In 2018, just as there were a greater number of counties that reported a decline in pace of growth, there were more categories of employment that exhibited a slowdown than those that exhibited faster growth.

6 | Stanislaus State

Total Employment

Number of Employees

1,900,000 1,800,000 1,700,000 1,600,000 1,500,000 1,400,000

2001M01 2001M08 2002M03 2002M10 2003M05 2003M12 2004M07 2005M02 2005M09 2006M04 2006M11 2007M06 2008M01 2008M08 2009M03 2009M10 2010M05 2010M12 2011M07 2012M02 2012M09 2013M04 2013M11 2014M06 2015M01 2015M08 2016M03 2016M10 2017M05 2017M12 2018M07 2019M02 2019M09 2020M04 2020M11

1,300,000

Months Actual

Projected

Total employment in the Valley has exceeded 1.75 million following a seasonal spike in the fourth quarter of 2018. The trend line is expected to reach this number by the first quarter of 2020. Projections point to an average growth of 1.41 percent from the second half of 2019 to the first half of 2020, and 1.29 percent from the second half of 2020 to the first half of 2021.

Total Employment: Historical vs. Projected Average Yearly Growth Average Percentage Change

Total employment in the Valley grew at the same pace in 2018 as in the previous year.

Kings, Madera, Merced and San Joaquin counties reported a slow-down in total employment growth in 2018 compared to a year before, while Kern, Stanislaus and Tulare counties reported a faster rate of growth. Fresno County grew at the u same pace as last year. Even though total employment growth slowed for Merced and San Joaquin counties, at 2.44 percent and 2.23 percent, these two counties reported the fastest growth in 2018, while Kings and Kern counties grew at the slowest pace, 1.08 percent and 1.21 percent respectively. Average yearly growth in other counties includes 2.04 percent in Fresno, 2.03 percent in Tulare, 1.31 percent in Stanislaus and 1.43 percent in Madera.

1.80%

1.68%

1.60% 1.40% 1.20%

1.23%

1.59%

1.10%

1.49% 1.39% 1.28%

1.00%

1.17% 1.04% 0.92%

0.80% 0.60% 0.40% 0.20% 0.00%

Sample Average

Actual

2016 Average

Optimistic

2017 Average

2018 Average

Most Likely

Pessimistic

2019-20 Forecast

2020-21 Forecast

In 2018, Valley employment growth mainly exceeded that of the state. The Valley’s economy is not as developed as the overall economy of the state and there often appears to be a lag between emerging trends in the state and a response in the Valley.

Typically, the Valley economy follows the business cycles of the state economy but with a delayed response of about four to six months. Given this pattern between the two series, it would not be surprising to observe lower employment growth numbers in the Valley in the months ahead.

160 140

Index Value

120 100 80 60 40 20

9/1/1992 6/1/1993 3/1/1994 12/1/1994 9/1/1995 6/1/1996 3/1/1997 12/1/1997 9/1/1998 6/1/1999 3/1/2000 12/1/2000 9/1/2001 6/1/2002 3/1/2003 12/1/2003 9/1/2004 6/1/2005 3/1/2006 12/1/2006 9/1/2007 6/1/2008 3/1/2009 12/1/2009 9/1/2010 6/1/2011 3/1/2012 12/1/2012 9/1/2013 6/1/2014 3/1/2015 12/1/2015 9/1/2016 6/1/2017 3/1/2018 12/1/2018

0

Months Conference Board

Labor Force vs. Employment Growth 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6

2002M01 2002M07 2003M01 2003M07 2004M01 2004M07 2005M01 2005M07 2006M01 2006M07 2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01 2011M07 2012M01 2012M07 2013M01 2013M07 2014M01 2014M07 2015M01 2015M07 2016M01 2016M07 2017M01 2017M07 2018M01 2018M07

Valley total employment grew faster than the labor force although the discrepancy between the two series narrowed in 2018 compared to a year before. This pattern is consistent with the view that labor force growth is catching up with employment growth. If the growth in the labor force exceeds employment growth, it would indicate that unemployment rates also would be rising in the Valley. u

Consumer Confidence Index

Percentage Change from Previous Year

The Consumer Confidence Index tells us how consumers feel about their consumption patterns in the near future. At a steady upward trend, the index registered a turning point in the third quarter of 2018 and started displaying a different pattern than the prevailing upward trend that existed in the earlier months. It appears the consumer index is now displaying a downward and at best a flat trend u consistent with other key indicators, such as the inverted yield curve that happens when short-term rates exceed long-term rates. Yet, two other recession indicators began flashing in 2019; the institutional investors switching their portfolio holdings from stocks to bonds and the value of U.S. household investments as a percentage of GDP peaking in the first quarter of 2019.

All of these indicators were dormant in the past several years and all started flashing in the same quarter of 2019.

Months Labor Force

Employment

San Joaquin San Joaquin ValleyValley Business Business Forecast Forecast, Report,2019 2017| Volume | VolumeVIII VII• •Issue Issue21|| 7

Employment Indicators

Education and health services employment registered the second-fastest growth in 2018, after construction employment. Employment in this category is projected to reach 235,000 by the second half of 2020. At 2.96 percent, the 2018 annual average growth rate of education and health services employment fell short of the long-term benchmark growth rate of 3.41 percent. Projections point to average annual growth of 2.87 percent from the second half of 2019 to the first half of 2020 and 2.31 percent from the second half of 2020 to the first half of 2021. u benchmark growth rate was maintained in 2018. Manufacturing employment in the

10.0 8.0

Percentage Change

6.0 4.0 2.0 0.0 -1.0 -2.0 -6.0

2000q1 2000q4 2001q3 2002q2 2003q1 2003q4 2004q3 2005q2 2006q1 2006q4 2007q3 2008q2 2009q1 2009q4 2010q3 2011q2 2012q1 2012q4 2013q3 2014q2 2015q1 2015q4 2016q3 2017q2 2018q1 2018q4 2019q3 2020q2 2021q1

-8.0 -10.0

Quarters Actual

235,000 215,000 195,000 175,000 155,000 135,000

2001M01 2001M09 2002M05 2003M01 2003M09 2004M05 2005M01 2005M09 2006M05 2007M01 2007M09 2008M05 2009M01 2009M09 2010M05 2011M01 2011M09 2012M05 2013M01 2013M09 2014M05 2015M01 2015M09 2016M05 2017M01 2017M09 2018M05 2019M01 2019M09 2020M05 2021M01

115,000

Months Actual

Projected

Education and Health Services Employment: Historical vs. Projected Average Yearly Growth 6.00% 5.00% 4.00%

4.79% 3.41%

3.00%

3.32%

2.96%

3.12% 2.87% 2.63%

2.00%

2.50% 2.31% 2.11%

1.00% 0.00% Sample Average

Actual

8 | Stanislaus State

Projected

Education and Health Services Employment

Number of Employees

In 2018, education and health services employment grew 2.96 percent. When compared to the 4.79 percent growth rate in 2017, the sharp decline in the pace becomes very clear. As other employment categories adjust to a cooling economy, education employment growth rises above other u categories’ growth rates particularly during times of slowing economic activity due to the relatively more robust nature of this series. This employment category is not affected as much from business cycles as are other categories.

U.S. Real GDP Annual Growth

Average Percentage Growth

Beginning in the first quarter of 2019, an increasing number of leading indicators have begun flashing in the direction of a slowdown. For instance, governing dynamics of the Consumer Confidence u Index and Purchasing Managers Index have simultaneously shifted in favor of a cooling economy. Institutional investors have begun to change the composition of portfolios from stocks to an increasing reliance on bonds.

Another important indicator of slowing economy, the yield curve, temporarily inverted for the first time since 2006. Real GDP growth forecasts are now scaled back to an average yearly growth rate of 2.13 percent from the second half of 2019 to the first half of 2020 and 1.83 percent from the second half of 2020 to the first half of 2021.

2016 Average

Optimistic

2017 Average

Most Likely

2018 Average

Pessimistic

2019-20 Forecast

2020-21 Forecast

Number of Employees

125,000 120,000 115,000 110,000 105,000 100,000 95,000

2001M01 2001M06 2001M11 2002M04 2002M09 2003M02 2003M07 2003M12 2004M05 2004M10 2005M03 2005M08 2006M01 2006M06 2006M11 2007M04 2007M09 2008M02 2008M07 2008M12 2009M05 2009M10 2010M03 2010M08 2011M01 2011M06 2011M11 2012M04 2012M09 2013M02 2013M07 2013M12 2014M05 2014M10 2015M03 2015M08 2016M01 2016M06 2016M11 2017M04 2017M09 2018M02 2018M07 2018M12 2019M05 2019M10 2020M03

90,000

Months Actual

Projected

Manufacturing Employment: Historical vs. Projected Average Yearly Growth 0.60%

0.52%

0.50%

0.43% 0.38% 0.34%

0.40% 0.30%

0.25%

0.20% 0.10% 0.00% -0.10%

-0.01%

0.01%

Sample Average

2016 Average

Actual

Optimistic

0.06% 0.03% -0.01% 2017 Average

2018 Average

Most Likely

Pessimistic

2019-20 Forecast

2020-21 Forecast

Purchasing Managers Index 65 60 55 50 45 40 35 30 25 20

Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

The Purchasing Managers Index of the Institute for Supply Management is a critical leading indicator. Since the second half of 2018, there has been a clear shift in the pattern of this series. After reaching a peak level that had not occurred since 2004, the series clearly began displaying a falling pattern indicative of future slowing economic activity. Following a policy u change, there will always be winners and losers in society, and under the new tariff structure, the steel industry on the East Coast stands to gain while the Valley stands to lose because of the resulting retaliation. Subsidies ultimately come out of consumers’ pockets, including those who live in the Valley.

130,000

Average Percentage Change

Manufacturing is another employment category that displays signs of slowing in the Valley and nationwide. The Valley’s average annual growth of 0.25 percent in 2018 was half the rate of the 0.52 percent registered in 2017. Valley manufacturing employment is projected to reach 112,500 and oscillate around that level through the second half of 2020. As trade negotiations remain unresolved between China and the United States, the effect of tariffs and retaliation are to be felt more heavily in this sector, with projections pointing to average yearly growth of 0.21 percent through the next two years. u

Manufacturing Employment

Index Value

The Valley’s manufacturing employment long-term benchmark rate became u positive in 2017 for the first time since the end of the recessionary years, and that pattern was maintained in 2018.

Manufacturing employment in the Valley displayed the fastest growth since 2015, as more distribution centers opened in counties such as San Joaquin and Fresno.

Such dynamics were also consistent with those of the Purchasing Managers Index of the Institute of Supply Management, an important leading indicator in the manufacturing industry.

Months Institute of Supply Management

San Joaquin Valley Business Forecast, 2019 | Volume VIII • Issue 2 | 9

Employment Indicators

TRADE, TRANSPORTATION AND UTILITIES EMPLOYMENT WAS THE THIRD-FASTEST GROWING CATEGORY IN 2018 Trade, transportation and utilities employment maintained its standing as the third-fastest growing category in 2018.

Employment levels in this category are projected to exceed 300,000 by the first half of 2020. Growth in 2018 and 2017 were almost identical at 2.30 percent. In both of these years the average annual growth was higher than the long-term benchmark growth of 1.70 percent. u

Number of Employees

140,000 130,000 120,000 110,000 100,000 90,000

2001M01 2001M06 2001M11 2002M04 2002M09 2003M02 2003M07 2003M12 2004M05 2004M10 2005M03 2005M08 2006M01 2006M06 2006M11 2007M04 2007M09 2008M02 2008M07 2008M12 2009M05 2009M10 2010M03 2010M08 2011M01 2011M06 2011M11 2012M04 2012M09 2013M02 2013M07 2013M12 2014M05 2014M10 2015M03 2015M08 2016M01 2016M06 2016M11 2017M04 2017M09 2018M02 2018M07 2018M12 2019M05 2019M10 2020M03

80,000

Months Actual

Projected

Leisure and Hospitality Services Employment: Historical vs. Projected Average Yearly Growth 4.50%

4.00%

4.00%

Annual Growth

The long-term benchmark growth for leisure and hospitality services employment stands at 2.17 percent. Employment in this category grew less than this benchmark rate in 2018 for the first time since 2015. Leisure and hospitality services employment moved down from the second-fastest growing category to the fifth from last. Projections point to an average annual growth of 1.59 percent in the next two-year interval. u

Leisure and Hospitality Services Employment

3.50% 2.71%

3.00% 2.50% 2.00%

2.17%

1.50%

1.31%

1.00%

1.79% 1.52% 1.26%

2.72% 2.44% 2.15%

0.50% 0.00%

Sample Average

Actual

2016 Average

Optimistic

2017 Average

Most Likely

2018 Average

2019-20 Forecast

2020-21 Forecast

Pessimistic

Trade, Transportation and Utilities Employment 310,000 290,000

Number of Employees

Leisure and hospitality services employment grew 1.31 percent in 2018, which was significantly less than the 2017 growth of 2.71 percent. Consistent with this slowing activity, the series began displaying a concave pattern in 2018. Leisure and hospitality services u employment is expected to reach 130,000 by the first half of 2020. The slowdown statewide was not as significant as the slowdown in the Valley. Because a higher proportion of Valley consumers’ income is spent on leisure and hospitality services, the demand for these services is generally more susceptible to changes in interest rates and prices.

270,000 250,000 230,000 210,000

2001M01 2001M06 2001M11 2002M04 2002M09 2003M02 2003M07 2003M12 2004M05 2004M10 2005M03 2005M08 2006M01 2006M06 2006M11 2007M04 2007M09 2008M02 2008M07 2008M12 2009M05 2009M10 2010M03 2010M08 2011M01 2011M06 2011M11 2012M04 2012M09 2013M02 2013M07 2013M12 2014M05 2014M10 2015M03 2015M08 2016M01 2016M06 2016M11 2017M04 2017M09 2018M02 2018M07 2018M12 2019M05 2019M10 2020M03

190,000

Months

Actual

10 | Stanislaus State

Projected

The average yearly growth of retail trade employment in 2017 was 0.71 percent, lower than the 1.22 percent benchmark growth rate. Statewide growth in this u category of employment surpassed the Valley’s rate. Retail trade is one of the most vulnerable sectors to increases in interest rates, and Valley trade employment is more sensitive to interest rate increases than the state and the nation. Projections point to stagnant behavior of -0.03 percent average annual decline in the next two-year interval.

5.04%

Average Growth

5.00% 4.00%

3.32%

3.00% 2.00%

1.48%

1.70%

2.26% 1.96% 1.66%

2.79% 2.46% 2.13%

1.00% 0.00%

Sample Average

Actual

2016 Average

2017 Average

Most Likely

Optimistic

2018 Average

2019-20 Forecast

2020-21 Forecast

Pessimistic

Retail Trade Employment 190,000 180,000 170,000 160,000 150,000 140,000 130,000 120,000 110,000 100,000

2001M01 2001M06 2001M11 2002M04 2002M09 2003M02 2003M07 2003M12 2004M05 2004M10 2005M03 2005M08 2006M01 2006M06 2006M11 2007M04 2007M09 2008M02 2008M07 2008M12 2009M05 2009M10 2010M03 2010M08 2011M01 2011M06 2011M11 2012M04 2012M09 2013M02 2013M07 2013M12 2014M05 2014M10 2015M03 2015M08 2016M01 2016M06 2016M11 2017M04 2017M09 2018M02 2018M07 2018M12 2019M05 2019M10 2020M03

In earlier years, growth in retail trade employment was as high as the secondfastest sector in the Valley, but as interest rates climbed upward, growth in retail trade employment gradually slowed from year to year. The growth rate of 0.34 percent in 2018 was half the growth of 2017, which was 0.71 percent. Growth in 2018 came in second-from-last, pointing to the u extent of the slowdown in this category of employment. At this very slow pace, the trend in total retail trade employment is not expected to exceed 160,000 in the next twoyear interval.

6.00%

Number of Employees

GROWTH IN RETAIL TRADE EMPLOYMENT GRADUALLY SLOWED FROM YEAR TO YEAR

Trade, Transportation and Utilities Employment: Historical vs. Projected Average Yearly Growth

Months Actual

Projected

Retail Trade Employment: Historical vs. Projected Average Yearly Growth 3.00%

2.72%

2.71%

2.50%

Annual Growth

Growth in transportation and utilities u employment in the state and nation was faster than growth in the Valley in 2018.

There appears to be an ongoing shortage of truck drivers that keeps employment growth numbers in this category relatively high. Projections point to an average yearly growth of 2.14 percent from the second half of 2019 to the first half of 2020 and 1.98 percent from the second half of 2020 to the first half of 2021. In both intervals, projections point to a pace of growth higher than the typical growth of 1.70 percent.

2.00% 1.50%

1.32%

1.22%

1.00%

1.17% 1.03% 0.89%

0.93% 0.82% 0.71%

0.50% 0.00%

Sample Average

Actual

2016 Average

Optimistic

2017 Average

Most Likely

2018 Average

2019-20 Forecast

2020-21 Forecast

Pessimistic

San Joaquin Valley Business Forecast, 2019 | Volume VIII • Issue 2 | 11

Employment Indicators

Valley information employment continued to decline in 2018, but the decline was not as steep as in 2016 and 2017. Information employment declined by 1.05 percent in 2018. The decline in 2016 and 2017 was 6.32 percent and 4.18 percent. Employment levels in this category are expected to oscillate around 10,000 in the coming months.

Although information employment grew statewide, consistent with the u activity observed in the Valley, there was a nationwide decline in information employment in 2018.

Number of Employees

50,000 45,000 40,000 35,000

2001M01 2001M06 2001M11 2002M04 2002M09 2003M02 2003M07 2003M12 2004M05 2004M10 2005M03 2005M08 2006M01 2006M06 2006M11 2007M04 2007M09 2008M02 2008M07 2008M12 2009M05 2009M10 2010M03 2010M08 2011M01 2011M06 2011M11 2012M04 2012M09 2013M02 2013M07 2013M12 2014M05 2014M10 2015M03 2015M08 2016M01 2016M06 2016M11 2017M04 2017M09 2018M02 2018M07 2018M12 2019M05 2019M10

30,000

Months Actual

Projected

Wholesale Trade Employment: Historical vs. Projected Average Yearly Growth 3.00%

2.64%

2.50% 2.00%

2.01%

2.01%

2.74% 2.59% 2.44%

1.50% 1.00%

0.51%

0.50% 0.00%

Sample Average

Actual

2016 Average

Optimistic

2017 Average

Most Likely

2018 Average

2019-20 Forecast

2020-21 Forecast

Pessimistic

Information Employment 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 9,000

Months Actual

12 | Stanislaus State

2.39% 2.23% 2.07%

2001M01 2001M06 2001M11 2002M04 2002M09 2003M02 2003M07 2003M12 2004M05 2004M10 2005M03 2005M08 2006M01 2006M06 2006M11 2007M04 2007M09 2008M02 2008M07 2008M12 2009M05 2009M10 2010M03 2010M08 2011M01 2011M06 2011M11 2012M04 2012M09 2013M02 2013M07 2013M12 2014M05 2014M10 2015M03 2015M08 2016M01 2016M06 2016M11 2017M04 2017M09 2018M02 2018M07 2018M12 2019M05 2019M10 2020M03

VALLEY INFORMATION EMPLOYMENT CONTINUED TO DECLINE IN 2018

55,000

Annual Growth

Wholesale trade employment was one of the few categories of employment that grew faster in 2018 than 2017. Wholesale trade employment is projected to pass 50,000 by the second half of 2020. A growth rate of 2.91 percent in 2018 was faster than the long-term benchmark growth rate of 2.01 percent. Although the drought has officially ended, more storage is needed to overcome water problems in the long-run. Two-year projections point to an average annual growth of 1.64 percent in wholesale trade employment. u

Wholesale Trade Employment

Number of Employees

As the drought years gradually came to an end, the dynamics of Valley wholesale trade employment began to change. During the drought, wholesale trade employment was one of the slowest-growing categories of employment, even growing less than retail trade employment. This trend is contrary to the historical pattern in which wholesale trade growth tends to exceed retail trade growth.

With the end of the drought, wholesale trade employment once again began to grow faster than retail trade employment. u

Projected

Information Employment: Historical vs. Projected Average Yearly Growth 1.00%

0.21%

0.00%

Annual Growth

Valley information employment growth of -1.05 percent in 2018 came above the longterm benchmark rate of -2.16 percent for the first time since 2015. The decline in this series has slowed quite significantly in 2018, but more improvement is needed on a consistent basis for the growth rates to switch from negative to positive territory. Projections point to a slower decline of -0.79 percent in the coming two-year interval. u

-1.00% -2.00% -3.00%

2018 Average

2019-20 Forecast

Most Likely

Pessimistic

-0.29% -0.78%

-4.18%

-5.00% -6.00%

-6.32% 2016 Average

Sample Average

Optimistic

2020-21 Forecast

Construction Employment

85,000 75,000 65,000 55,000 45,000 35,000

2001M01 2001M09 2002M05 2003M01 2003M09 2004M05 2005M01 2005M09 2006M05 2007M01 2007M09 2008M05 2009M01 2009M09 2010M05 2011M01 2011M09 2012M05 2013M01 2013M09 2014M05 2015M01 2015M09 2016M05 2017M01 2017M09 2018M05 2019M01 2019M09 2020M05 2021M01

Number of Employees

95,000

Months Actual

Projected

Construction Employment: Historical vs. Projected Average Yearly Growth 9.00%

7.67%

8.00%

Annual Growth

The Valley’s growth in construction employment was faster than in both the state and nation. Low inventory, along with attractive home values here in the Valley relative to the Bay Area, keeps demand for housing vibrant. Added to this is the recent decline in the long-term rates resulting from a pause by the Federal Reserve on rate hikes. Projections point to an average annual growth of 5.52 percent from the second half of 2019 to the first half of 2020 and 3.37 percent from the second half of 2020 to the first half of 2021. u

2017 Average

-2.16%

Actual

Construction employment picked up speed later than most indicators when the recession ended and continues to lag behind the current state of the regional economy. In 2018, construction employment continued to be the fastestgrowing category of employment in the Valley. The annual average growth of construction employment reached 7.67 percent, more than sevenfold u the long-term benchmark rate of growth.

Employment levels in this category are expected to exceed 75,000 by the second half of 2019.

-0.67% -1.12% -1.58%

-4.00%

-7.00%

THE VALLEY’S GROWTH IN CONSTRUCTION EMPLOYMENT WAS FASTER THAN BOTH THE STATE AND NATION

-1.05%

7.00% 6.00%

6.07% 5.52% 4.98%

5.32%

5.00%

3.87% 3.37% 2.88%

4.00% 3.00% 2.00% 1.00% 0.00%

2.28% 1.03%

Sample Average

Actual

2016 Average

Optimistic

2017 Average

Most Likely

2018 Average

2019-20 Forecast

2020-21 Forecast

Pessimistic

San Joaquin Valley Business Forecast, 2019 | Volume VIII • Issue 2 | 13

Employment Indicators Government Employment 315,000 305,000

Number of Employees

295,000 285,000 275,000 265,000 255,000 245,000 235,000

2001M01 2001M09 2002M05 2003M01 2003M09 2004M05 2005M01 2005M09 2006M05 2007M01 2007M09 2008M05 2009M01 2009M09 2010M05 2011M01 2011M09 2012M05 2013M01 2013M09 2014M05 2015M01 2015M09 2016M05 2017M01 2017M09 2018M05 2019M01 2019M09 2020M05 2021M01

Government employment is another lagging indicator in the Valley. Government employment is projected to reach 305,000 by the first half of 2020. After several years of accelerating u growth, government employment grew at a slower pace in 2018 than the year before.

Government employment is an important category of employment in the Valley since it makes up 20 percent of the Valley’s overall employment, significantly contributing to the regional economy.

Months Actual

GOVERNMENT EMPLOYMENT AS A PERCENTAGE OF OVERALL VALLEY WORKFORCE

Valley financial activities employment grew 1.03 percent in 2018, slower than the 1.40 percent growth in 2017. In both years, however, yearly growth was faster than the long-term benchmark rate of -0.13 percent. Refinancing activity, along with home buying, peaked as long-term interest rates started coming down again following the pause of rate hikes on the part of the Federal Reserve. u

Government Employment: Historical vs. Projected Average Yearly Growth 4.00%

3.60%

Annual Growth

3.50% 3.00% 2.50%

2.36%

2.00%

2.07%

2.41% 1.75%

2.09% 1.49%

1.50% 1.00%

1.09%

0.96%

0.88%

0.50% 0.00%

Sample Average

Actual

2016 Average

Optimistic

2017 Averge

2018 Average

Most Likely

Pessimistic

2019-20 Forecast

2020-21 Forecast

Financial Activities Employment 51,000

Number of Employees

Growth in government employment was slower in 2018 than 2017, but 2018 growth remained faster than the typical long-term growth of 0.96 percent. This was also the case for 2016 and 2017, consistent with a variable that tends to lag when most indicators report yearly growth below the long-term benchmark. Projections point to an average yearly growth of 1.62 percent over the next two years. u

Projected

49,000 47,000 45,000 43,000 41,000 39,000

2001M01 2001M08 2002M03 2002M10 2003M05 2003M12 2004M07 2005M02 2005M09 2006M04 2006M11 2007M06 2008M01 2008M08 2009M03 2009M10 2010M05 2010M12 2011M07 2012M02 2012M09 2013M04 2013M11 2014M06 2015M01 2015M08 2016M03 2016M10 2017M05 2017M12 2018M07 2019M02 2019M09 2020M04 2020M11 2021M06

37,000

Months Actual

16 | Stanislaus State

Projected

Financial activities employment is projected to exceed 43,000 by the first half of 2020. The long-term benchmark rate continued to increase in 2018 but failed to switch from negative to positive territory. At this slower speed of growth, it might take more than a year for the financial activities employment long-term benchmark rate to switch to the positive territory.

In line with a cooling economy, employment in financial activities is projected to grow slower, at an average annual rate of 0.55 percent in the coming two-year period. ď ą

Annual Growth

Financial Activities Employment: Historical vs. Projected Average Yearly Growth 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% -0.20% -0.40%

1.26%

1.40% 1.03%

0.82% 0.71% 0.59%

0.50% 0.39% 0.28%

-0.13% Sample Average

Actual

2016 Average

Optimistic

2017 Average

Most Likely

2018 Average

2019-20 Forecast

2020-21 Forecast

Pessimistic

Several important slowdown indicators began flashing simultaneously, and for the first time in a long while, in the first quarter of 2019. There was a greater number of employment categories displaying slowing growth in the Valley relative to the year before. This was also true for most of the eight counties of the San Joaquin Valley in 2018. Despite the slower pace of growth, Merced and San Joaquin counties, at 2.44 percent and 2.23 percent respectively, reported the fastest growth in 2018, while Kings and Kern counties grew at the slowest pace, at 1.08 percent and 1.21 percent respectively. Construction employment grew the fastest, followed by wholesale trade employment in the Valley.

Information employment again was the only category that posted a decline in employment, but the decline was much less than previous years.

San Joaquin Valley Business Forecast, 2019 | Volume VIII • Issue 2 | 17

Housing Sector

2,500

18 | Stanislaus State

1,500 1,000 500

2004M01 2004M08 2005M03 2005M10 2006M05 2006M12 2007M07 2008M02 2008M09 2009M04 2009M11 2010M06 2011M01 2011M08 2012M03 2012M10 2013M05 2013M12 2014M07 2015M02 2015M09 2016M04 2016M11 2017M06 2018M01 2018M08 2019M03 2019M10 2020M05 2020M12

0

Months Actual

Projected

Single-Family Building Permits: Historical vs. Projected Average Yearly Growth 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00%

13.50%

13.08%

1.87% 0.85%

4.94% 3.80% 2.66%

-0.17%

0.71% -3.83% Sample Average

Actual

NEW FORECLOSURE FILINGS IN CALIFORNIA CONTINUE TO REMAIN AT VERY LOW LEVELS

2016 Average

Optimistic

2017 Average

Most Likely

2018 Average

2019-20 Forecast

2020-21 Forecast

Pessimistic

Foreclosure Starts in California 2.5 2

Percentage

The number of new foreclosure filings in California continues to remain at very low levels, particularly after the Federal Reserved halted rate hikes pending the state of the national economy. Undoubtedly, unemployment rates at historic lows contribute significantly to minimum levels of foreclosures.

There will, however, likely be a turning point in foreclosures rising as the economy cools further in the coming months, after which the series will begin to display an increasing pattern. u

2,000

1.5 1 0.5 0

Q1 1999 Q4 1999 Q3 2000 Q2 2001 Q1 2002 Q4 2002 Q3 2003 Q2 2004 Q1 2005 Q4 2005 Q3 2006 Q2 2007 Q1 2008 Q4 2008 Q3 2009 Q2 2010 Q1 2011 Q4 2011 Q3 2012 Q2 2013 Q1 2014 Q4 2014 Q3 2015 Q2 2016 Q1 2017 Q4 2017 Q3 2018 2014M02 2014M11 2015M08 2016M05 2017M02 2017M11

Merced issued 250 permits in 2018, as opposed to 172 in 2017. Stockton issued 1,923 against 1,670 in 2017. Madera issued 462 housing permits in 2018, up from 389 the year before.

With 2,193 single-family building permits issued in 2018 and 1,900 in 2017, Fresno came in first, followed by Stockton and Bakersfield.

Bakersfield issued 2,046 housing permits in 2018. Visalia issued 1,201 housing permits, slightly more than the 1,138 issued in 2017.

Modesto issued only 50 permits, compared to 27 a year before. Hanford-Corcoran MSA did not issue any building permits in both of these years. Projections point to average annual u growth of 2.31 percent in the coming two-year interval.

3,000

Number of Permits

The spike in growth of 13.50 percent that occurred in 2018 was the fastest growth in building permits in the past several years.

However, consistent with the historical u behavior of the series, 2019 growth in single family building permits is naturally expected to be much slower. Valley housing permits are expected to exceed 700 per month by the end of the first half of 2020.

Single-Family Building Permits

Annual Growth

As in previous reports, San Joaquin Valley’s eight Metropolitan Statistical Areas (MSAs); Fresno, Bakersfield-Delano, HanfordCorcoran, Madera-Chowchilla, Merced, Modesto, Stockton and Visalia-Porterville are analyzed for consistency. The data from these MSAs are aggregated to arrive at the overall number of single-family building permits issued in the Valley.

Quarters Mortgage Bankers Association of America

If the expectation of “soft landing” the economy (cooling the economy without dipping into a recession) materializes, there will likely be no further rate hikes.

The rising price of oil since the first quarter of 2019 is putting added pressure on the overall price level and at the moment is a worry for the Fed. Indeed, further rate hikes along with increasing oil prices may overshoot the goal and usher-in a recession rather than a create a soft landing.

9

Percentage

8 7 6 5

3

1993M10 1994M05 1994M12 1995M07 1996M02 1996M09 1997M04 1997M11 1998M06 1999M01 1999M08 2000M03 2000M10 2001M05 2001M12 2002M07 2003M02 2003M09 2004M04 2004M11 2005M06 2006M01 2006M08 2007M03 2007M10 2008M05 2008M12 2009M07 2010M02 2010M09 2011M04 2011M11 2012M06 2013M01 2013M08 2014M03 2014M10 2015M05 2015M12 2016M07 2017M02 2017M09 2018M04

4

Months Freddie Mac

Yearly Percentage Change in Housing Prices 40 30 20 10 0 -10 -20 -30 -40

2000q1 2000q4 2001q3 2002q2 2003q1 2003q4 2004q3 2005q2 2006q1 2006q4 2007q3 2008q2 2009q1 2009q4 2010q3 2011q2 2012q1 2012q4 2013q3 2014q2 2015q1 2015q4 2016q3 2017q2 2018q1 2018q4 2019q3 2020q2 2021q1

The fastest increases in home prices were observed in Madera and Merced at 10.21 and 10.16 percent respectively. Modesto, at 9.76 percent, and Stockton and Lodi, at 9.71 percent, were the next two MSAs with the fastest increases in 2018. Home prices increased at the slowest pace in HanfordCorcoran and Bakersfield at 5.41 percent and 6.30 percent in 2018. In Fresno, home prices increased by 8.54 percent while Visalia-Porterville home values increased by 6.42 percent. Madera saw a 9.41 percent increase in home prices. Valley home values are projected to increase at an average annual rate of 5.65 percent in the next two years, in line with the long-term benchmark rate of growth. u

10

Percentage Change Over the Previous Year

Home values in the Valley increased at nearly the same rates in 2018 as in 2017 — 8.57 percent in 2018 and 8.16 percent in 2017. The shortage in housing inventory, along with the recent fall in long-term interest rates, contributes to the increase in home prices in the Valley.

Appreciation in home values is projected to slow a little but continue to increase over the coming months. u

30-Year Fixed Rate

Quarters Actual

Projected

Yearly Growth in Housing Prices: Historical vs. Projected Average Yearly Growth 9.00%

Annual Yearly Growth

Thirty-year rates have begun to come down after almost reaching the critical 5 percent rate, and the major reason was the Federal Reserve’s decision to pause rate hikes temporarily. Refinancing and home buying activity increased as a result of decreasing long-term rates. With the fall in the price of oil in the second half of 2018, the u inflation rate began to decrease. Similiarly, as the price of oil started to trend upward again beginning with the first quarter of 2019, it put upward pressure on the inflation rate. Higher inflation rates may prompt the Federal Reserve again to resort to rate hikes.

8.16%

8.00%

5.00%

6.78% 6.27% 5.75%

6.58%

7.00% 6.00%

8.57%

5.06%

5.52% 5.04% 4.55%

4.00% 3.00% 2.00% 1.00% 0.00%

Sample Average

Actual

2016 Average

Optimistic

2017 Average

Most Likely

2018 Average

2019-20 Forecast

2020-21 Forecast

Pessimistic

San Joaquin Valley Business Forecast, 2019 | Volume VIII • Issue 2 | 19

Inflation and Prices

The average yearly rate of inflation in 2018 was 3.35 percent, or about 1.01 percent above the long-term benchmark rate of 2.31 percent.

The inflation rate has been coming down since the third quarter of 2018, and the average reading for the first quarter of 2019 was 2.73 percent. As the price of oil continues to increase in 2019, overall price increases in the West are likely to remain above the long-term benchmark rate. u

Yearly Inflation Rate

4.5 3.5 2.5 1.5 0.5 0 -0.5 -2

2001M01 2001M07 2002M01 2002M07 2003M01 2003M07 2004M01 2004M07 2005M01 2005M07 2006M01 2006M07 2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01 2011M07 2012M01 2012M07 2013M01 2013M07 2014M01 2014M07 2015M01 2015M07 2016M01 2016M07 2017M01 2017M07 2018M01 2018M07 2019M01

-2.5

Months West

U.S. West Inflation Rate 6 5 4 3 2 1 0 -1 -2 -3

Months Actual

Projected

U.S. West Inflation Rate: Historical vs. Projected Average Yearly Growth 4.00% 3.50%

3.35%

3.00% 2.50%

2.31%

2.00%

1.93%

2.82%

2016 Average

2017 Average

3.16% 2.93% 2.70%

2.94% 2.69% 2.44%

1.50% 1.00% 0.50% 0.00%

Sample Average

Actual

20 | Stanislaus State

National

2001M01 2001M08 2002M03 2002M10 2003M05 2003M12 2004M07 2005M02 2005M09 2006M04 2006M11 2007M06 2008M01 2008M08 2009M03 2009M10 2010M05 2010M12 2011M07 2012M02 2012M09 2013M04 2013M11 2014M06 2015M01 2015M08 2016M03 2016M10 2017M05 2017M12 2018M07 2019M02 2019M09 2020M04 2020M11 2021M06

The rate of inflation in the West continued to remain above the national rate in 2018. Such a pattern of higher inflation rates in the West has been observed since the third quarter of 2014. Price stability appears to have been achieved by the Federal Reserve for now, and if the economy is able to avert a recession in the coming years the objective of creating a soft landing on the part of the Federal Reserve will have been met. u

5.5

Yearly Percentage Change

THE RATE OF INFLATION IN THE WEST CONTINUED TO REMAIN ABOVE THE NATIONAL RATE IN 2018

Inflation Rate: Nationwide vs. West

Yearly Percentage Change

The yearly rate of inflation came down from 3.6 percent in July 2018 to 2.4 percent in February 2019. The fall in the rate of inflation was one of the main reasons behind the u Federal Reserve’s decision to halt interest rates temporarily, pending the future course of the national economy.

Optimistic

Most Likely

2018 Average

Pessimistic

2019-20 Forecast

2020-21 Forecast

Quarterly Average Weekly Wages 1050

Average Weekly Wage

750 650

2021q2

2020q3

2019q4

2019q1

2018q2

2017q3

2016q4

2016q1

2015q2

2014q3

2013q4

2013q1

2012q2

2011q3

2010q4

2010q1

2009q2

2008q3

2007q4

2007q1

2006q2

2005q3

2004q4

2004q1

2003q2

2002q3

2001q4

2001q1

450

Quarters

Actual

Projected

Weekly Wage Growth: Historical vs. Projected Average Yearly Growth Average Yearly Growth

4.00% 3.50% 3.00%

3.38%

3.03%

2.83%

2.50%

2.94% 2.75% 2.55%

2.59%

2.00%

2.71% 2.52% 2.32%

1.50% 1.00% 0.50% 0.00%

Sample Average

Actual

2016 Average

Optimistic

2017 Average

2018 Average

Most Likely

Pessimistic

2019-20 Forecast

2020-21 Forecast

Yearly Wage Growth vs. Inflation Average Percentage Change

Once again in 2018, the rate of inflation surpassed the increase in wages. Wages increased 3.03 percent in 2018 but trailed the 3.35 percent inflation rate. The resulting discrepancy corresponded to a loss of purchasing power on the part of the Valley consumer of about 0.32 percent. Projections of the inflation rate and wages point to a continuation of this trend of gradual loss in purchasing power.

850

550

Average weekly wages rose 3.03 percent in 2018, faster than 2.59 percent in 2017.

Wage pressures coming from the cost-push side have not subsided as of 2018. In both 2017 and 2018 wage increases were faster than the long-term benchmark rate of 2.83 percent. As the rate of inflation continues to decrease, wages are projected to grow at a slower pace in the coming months. u Despite unemployment rates being at historic lows, wages have not been increasing any further to reflect tight conditions in the labor market. However, the median number of weeks people have remained unemployed has been increasing recently, signaling that individuals are not finding jobs as easily as before. In line with historical patterns, wages are projected to grow more slowly than the inflation rate in the coming months. Projections point to an increase in average weekly wages at an annual rate of 2.63 percent in the coming two-year interval. u

950

8.0 6.0 4.0 2.0 0.0 -2.0 -4.0

2002q1 2002q3 2003q1 2003q3 2004q1 2004q3 2005q1 2005q3 2006q1 2006q3 2007q1 2007q3 2008q1 2008q3 2009q1 2009q3 2010q1 2010q3 2011q1 2011q3 2012q1 2012q3 2013q1 2013q3 2014q1 2014q3 2015q1 2015q3 2016q1 2016q3 2017q1 2017q3 2018q1 2018q3

For the past two years, the rate of inflation is coming in higher than the long-term benchmark rate. Thus, the Valley consumer is likely to feel a further decline in their purchasing power in the months ahead.

Projections point to average yearly inflation of 2.75 percent from the second half of 2019 to the first half of 2020 and 2.52 percent from the second half of 2020 to the first half of 2021. u

Quarters Inflation

Wage Growth

San Joaquin Valley Business Forecast, 2019 | Volume VIII • Issue 2 | 21

Banking and Capital Markets Total Bank Deposits (in $ Thousands) 18,000,000 16,000,000

Total Deposits

10,000,000

2021q1

2020q2

2019q3

2018q4

2018q1

2017q2

2016q3

2015q4

2015q1

2014q2

2013q3

2012q4

2012q1

2011q2

2010q3

2009q4

2009q1

2008q2

2007q3

2006q4

2006q1

2003q1

2005q2

4,000,000

2004q3

6,000,000

Quarters Actual

Projected

Average Yearly Growth

Total Bank Deposits: Historical vs. Projected Average Yearly Growth 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%

9.08% 7.39%

Sample Average

Actual

2016 Average

Optimistic

8.62%

8.01%

2017 Average

Most Likely

2018 Average

7.83% 7.23% 6.64%

2019-20 Forecast

5.88% 5.28% 4.69%

2020-21 Forecast

Pessimistic

Assets in Nonaccrual 250,000

Thousand Dollars

The turning point reached at the third quarter of 2017 in bank assets in non-accrual continues to be permanent. The decrease observed since the last quarter of 2018 was the result of the pause in rate hikes favorably affecting the long-term interest rates.

However, the trend of the bank assets in non-accrual series appears to continue to slope upward since the all-time low point reached in the third quarter of 2017. u

12,000,000

8,000,000

THE TAX CUTS SHOULD HAVE A POSITIVE IMPACT ON THE GROWTH RATE OF COMMUNITY BANK TOTAL DEPOSITS The tax cuts should have a positive impact on the growth rate of community bank total deposits in the Valley, but the slowing economy is expected to dampen the rate of growth in total bank deposits along with the pause in rate hikes. Community bank deposits in the Valley are projected to increase at an average annual rate 6.25 percent in the next two years. u

14,000,000

2003q4

Community bank deposits grew 8.62 percent in 2018, faster than the 2017 growth of 8.01 percent, mostly reflecting the impact of rate hikes in the first three quarters of 2018. In both 2017 and 2018 the growth in total bank deposits surpassed the typical u growth of 7.39 percent. Since rate hikes are temporarily halted by the Federal Reserve, total deposits are likely to increase at a slower rate in the months ahead.

200,000 150,000 100,000 50,000

2003q2 2003q4 2004q2 2004q4 2005q2 2005q4 2006q2 2006q4 2007q2 2007q4 2008q2 2008q4 2009q2 2009q4 2010q2 2010q4 2011q2 2011q4 2012q2 2012q4 2013q2 2013q4 2014q2 2014q4 2015q2 2015q4 2016q2 2016q4 2017q2 2017q4 2018q2 2018q4

-

Quarters Bankers Association of America

22 | Stanislaus State

Long-term interest rates have fallen, following the pause in rate hikes. Higher default rates will likely persuade bankers to become more prudent in extending loans in the near future. Consequently, the increase in net loans and leases is likely to become consistent with the increase in total bank deposits — both growing at rates more in line with the long-term benchmark rates.

Thousand Dollars

70,000 60,000 50,000 40,000 30,000 20,000

-

2003q2 2003q4 2004q2 2004q4 2005q2 2005q4 2006q2 2006q4 2007q2 2007q4 2008q2 2008q4 2009q2 2009q4 2010q2 2010q4 2011q2 2011q4 2012q2 2012q4 2013q2 2013q4 2014q2 2014q4 2015q2 2015q4 2016q2 2016q4 2017q2 2017q4 2018q2 2018q4

10,000

Quarters Assets in Default 30-89 Days

Assets in Default 90+ Days * 10

Net Loans and Leases (in $ Thousands) 12,300,000 11,300,000 10,300,000 9,300,000 8,300,000 7,300,000 6,300,000 5,300,000

2021q1

2020q2

2019q3

2018q4

2018q1

2017q2

2016q3

2015q4

2015q1

2014q2

2013q3

2012q4

2012q1

2011q2

2010q3

2009q4

2009q1

2008q2

2007q3

2006q4

2006q1

2005q2

2004q3

3,300,000

2003q4

4,300,000

2003q1

In 2018, banks in the Valley extended loans that far exceeded their deposits. Valley banks have therefore used their reserves to extend these loans at higher rates to increase their profitability. In the coming months, in line with a cooling economy, both deposits and loans will likely grow near historical benchmark rates. Projections point to an increase in net loans and leases at an average yearly rate of 9.10 percent in the next two-year interval. u

80,000

Net Loans & Leases

Net loans and leases grew at a much faster rate than total bank deposits in 2018. Banks began extending loans much later when the recession ended and it appears that net loans and leases is following the economy with a lag of about one year. Because banks are lending at a faster rate than they are taking in deposits, net loans and leases growth is expected to slow in the coming months. The increase in net loans and leases at 13.60 percent is not sustainable given that the increase in total bank deposits is 8.62 percent. u

Assets in Default 30+ Days

Quarters Actual

Projected

Net Loans and Leases: Historical vs. Projected Average Yearly Growth 16.00% 14.00%

Yearly Growth

A consistent pattern is observed in u assets in default 30-to-89 days, but more significantly than assets in non-accrual.

Assets in default 90-plus days appears to have the same steep trend upward as the assets in default 30-to-89 days. Assets in default 90-plus days have already exceeded 16,000 and assets in default 30-to-89 days have exceeded 24,000 on the vertical axis.

13.60%

11.93%

12.00% 10.00% 8.00%

7.51%

11.13% 10.31% 9.50%

6.92%

6.00%

8.69% 7.89% 7.09%

4.00% 2.00% 0.00%

Sample Average

Actual

2016 Average

Optimistic

2017 Average

Most Likely

2018 Average

2019-20 Forecast

2020-21 Forecast

Pessimistic

San Joaquin Valley Business Forecast, 2019 | Volume VIII • Issue 2 | 23

External Sector San Joaquin’s only port is the Port of Stockton. The Port handles bulk items only and not containers. The main import items at the port are cement, steel and liquid fertilizer, while main export items are rice, sulfur and tire chips. When the number of observations satisfies the minimum requirement, forecasts will be generated for exports and imports the port handles.

According to the export and import numbers, the Valley continues to be u negatively impacted from the unresolved trade dispute. With the imposition of new tariffs, the total of cement imports decreased from 902,310 tons in 2017 to 753,396 in 2018. Noteworthy is that cement imports had been consistently increasing since 2014. When domestic cement that has a higher price than imported cement is used for construction, the purchase price of homes in the Valley increases further.

Steel is another construction material imported at the Port of Stockton that u suffered a decrease — from 254,731 tons in 2017 to 197,865 in 2018. Steel imports had consistently been increasing since 2014. Imports of this material have now gone back to the levels that existed in 2014. The domestic price of steel is also naturally much higher than imported steel, which would further increase the cost of construction in the Valley. Consumers therefore would have to pay a higher price to purchase homes in the Valley given the higher cost of steel and cement.

The rains of the past several years have officially ended the drought. Importation of liquid fertilizer — in higher demand in drought years — is expected to decrease due to the size of the Sierra snowpack. Liquid fertilizer imports have decreased from 700,555 tons in 2017 to 629,137 in 2018.

More water storage is needed during rainy years to help farmers manage their produce efficiently during the drought years.

24 | Stanislaus State

Cement Imports (by tonnage) Year

2014

2015

2016

2017

2018

0

19,000

32,098

48,302

28,086

19,000

22,849

57,180

29,940

33,497

0

49,817

19,000

39,259

77,112

April

15,000

0

24,238

111,167

75,474

May

0

53,475

31,390

48,748

106,062

June

19,000

0

76,157

102,850

66,571

0

54,270

63,339

86,705

120,649

18,050

31,000

77,150

73,276

56,292

0

31,525

0

95,518

31,881

18,270

49,859

42,343

86,583

37,605

November

0

32,600

70,560

104,609

59,280

December

24,991

29,603

37,030

75,353

60,888

Total

114,311

373,997

530,486

902,310

753,396

January February March

July August September October

Steel Imports (by tonnage) Year

2014

2015

2016

2017

2018

January

6,357

9,190

43,039

41,250

33,015

February

10,561

46,967

24,505

16,626

9,170

March

2,965

44,228

33,720

20,766

29,451

April

25,895

19,802

5,413

5,787

26,904

May

25,030

17,503

20,399

40,598

June

11,125

21,758

16,982

14,904

July

20,314

21,485

21,026

38,049

August

12,376

38,987

75,413

17,658

5,877

4,439

3,957

24,301

21,246

13,629

October

25,748

43,042

42,105

13,044

13,514

November

11,299

11,314

12,295

22,770

8,779

December

30,943

15,643

7,219

2,035

27,049

Total

187,052

293,877

326,416

254,731

197,865

September

30,477

Liquid Fertilizer (by tonnage) Year

Those firms that handle bulk and liquid fertilizers are expanding in the Port of u Stockton in terms of operation and storage.

Some multinational companies, however, are holding off from expanding given the new tariff structure and ongoing trade disputes costing the Valley in terms of forgone jobs and revenues. Firms do not like uncertainty from unresolved trade disputes and generally tend to refrain from investing in uncertain times to minimize risk to their operations.

Exports of rice have decreased from 159,071 tons in 2016 to 89,040 in 2017 and 86,023 in 2018. The resulting decrease is not from retaliation, since most exports go to Japan. Demand for almonds has decreased 47 percent, wine exports have fallen by 15 percent and cherry exports have fallen by 36 percent and are likely to decrease further, adversely affecting the Valley economy. u Sulfur comes in liquid form to the Port of Stockton, is processed at the port into a bulk item and then is exported to many countries. Exports of sulfur have increased steadily, from 200,166 tons in 2014 to 237,912 tons in 2018. Sulfur exports are expected to rise further in the coming twoyear interval but at a slower pace as the global economy slows. u If tariffs were the solution to correcting a trade deficit, then every country would resort to tariffs. Valley consumers are now paying a higher price for items at the store due to higher tariffs, and consumers become poorer when they are able to afford fewer goods and services. No country gains under protectionist measures. The outcome of retaliation is suboptimal for all involved countries.

2014

2015

2016

2017

2018

January

11,605

57,419

22,047

62,361

46,160

February

23,027

24,615

62,027

73,335

27,929

March

41,946

120,300

29,046

49,100

73,753

April

18,515

66,159

95,408

43,752

19,103

May

76,016

40,036

139,119

118,362

146,210

June

43,225

79,493

79,444

81,620

70,681

0

46,500

65,449

58,047

18,187

95,781

13,749

17,510

32,604

60,956

22,204

48,115

22,401

56,993

14,935

October

17,028

18,523

36,038

37,259

74,093

November

72,753

41,438

68,056

12,398

39,800

December

0

75,931

21,575

74,723

37,330

422,100

632,279

658,120

700,555

629,137

July August September

Total

Rice (by tonnage) Year

2014

2015

2016

2017

2018

January

0

13,000

25,001

26,001

0

February

0

0

0

0

12,000

March

12,893

13,001

24,001

0

12,000

April

21,395

12,074

13,001

25,037

13,005

May

0

0

25,001

13,001

12,000

June

24,001

12,000

23,002

13,001

12,016

July

0

27,000

0

0

13,001

August

0

12,000

11,065

0

0

September

0

12,000

0

0

0

October

0

12,000

0

0

0

November

0

0

26,001

12,000

12,000

December

12,000

49,006

12,000

0

0

Total

70,289

162,083

159,071

89,040

86,023

2017

2018

Sulfer (by tonnage) 2014

2015

2016

January

Year

27,088

39,722

23,607

February

27,699

24,978

25,046

16,331

18,768

March April

15,199

May June

38,792

64,457

19,500 11,997

August

22,788

21,414

September

22,500

27,766

October

20,435

34,416

27,499 11,076

13,267

31,436

23,998

38,092

14,027

19,530 29,563

34,997

32,168

11,195

21,160 16,032

November

6,601

27,460

28,152

December

12,095

16,501

30,177

205,642

223,429

229,189

Total

200,166

56,870

36,707 25,236

July

29,995

237,912

San Joaquin Valley Business Forecast, 2019 | Volume VIII • Issue 2 | 25

Concluding Remarks

For the first time in a long while, several slowdown indicators started flashing in the first quarter of 2019.

The yield curve temporarily inverted, the ISM Purchasing Managers Index began declining from all-time highs along with the Consumer Confidence Index, while institutional investors converted their portfolio holdings from stocks to bonds.

Total employment grew the fastest at the county level in Merced and San Joaquin with Kern and Kings showing the slowest growth. Construction employment continued to grow the fastest in 2018 and was followed by wholesale trade employment.

Information employment continued to worsen in 2018 but at a slower decline than in previous years. Manufacturing and retail trade employment grew the slowest in 2018.

Housing prices grew at virtually the same rate in 2018 as the year before.

Given the shortage in inventory, home values are likely to continue increasing but at a slightly slower pace in the coming two-year interval.

In 2018, there was a very big spike of 13.50 percent in single-family building permits, but given the historical pattern

26 | Stanislaus State

the increases are not likely to maintain this pace in the coming months.

The rate of inflation, which registered 3.35 percent in July 2018, softened to 2.4 percent by February 2019.

However, wages and oil prices once again continued to add pressure on the inflation rate beginning from the first quarter of 2019. Consequently, inflation is likely to remain above the long-term benchmark rate in the coming two-year interval. Further, the rate of inflation stayed above wage growth, making 2018 another year in which Valley consumers’ purchasing power decreased.

Valley net loans and leases increased at a much faster rate than total bank deposits, displaying a pattern unsustainable in the long run. Banks were extending loans from their reserves to take advantage of higher rates to increase their profitability.

After a turning point in the third quarter of 2017, bank assets in nonaccrual continued to increase in 2018. Bank assets in default 30-to-89 days and assets in default 90-plus days continued to increase at a faster rate than bank assets in nonaccrual in 2018.

Disclaimer 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 document without seeking further advice tailored for your own circumstances. This document is confidential and is being submitted to selected recipients only.

It may not be reproduced or disclosed (in whole or in part) to any other person without our prior written permission. Law or regulation in certain countries may restrict the manner of distribution of this document, and persons who come into possession of this document are required to inform themselves of and observe such restrictions. We, or our affiliates, may have acted upon or have made use of material in this document prior to its publication. You should seek advice concerning any impact this investment may have on your personal tax position from your own tax adviser.

Appendix Error

Accuracy

Turning Point

Total Employment

-0.48%

99.52%

Yes

Real GDP Growth

-7.52%

92.48%

Yes

Construction

-0.61%

99.39%

Yes

Education & Health

-0.63%

99.37%

Yes

Government

0.34%

99.66%

Yes

Financial Services

0.89%

99.11%

No

Information

1.23%

98.77%

Yes

Leisure & Hospitality

1.12%

98.88%

Yes

Manufacturing

1.85%

98.15%

No

Retail Trade

1.66%

98.34%

Yes

Trade, Transportation

-1.13%

98.87%

Yes

Wholesale Trade

-0.17%

99.83%

Yes

Inflation

0.39%

99.61%

No

Quarterly Average Wage -0.52%

99.48%

Yes

Housing Permits

27.20%

72.80%

No

Change in Housing Price

-1.24%

98.76%

Yes

Total Bank Deposits

-1.32%

98.68%

Yes

Net Loan/Leases

-4.56%

95.44%

Yes

Total Employment

Error

Accuracy

2.93%

97.07%

csustan.edu/sjvbf