During the first quarter of 2023, several indicators — including regional bank runs, short-term rates not seen at this level since 2007, gradually rising unemployment rates and low demand for mortgages — signal a significant slowing in the Central Valley’s overall economic activity if there is no rate cut by the end of the year.
Given the economic landscape that lies ahead, as summarized in the sections below, it is increasingly important for Valley businesses and consumers to consider:
- Deleveraging by reducing debt,
- Be overweight in cash,
- Purchase bonds if investment is an option,
- Switch from flexible interest rates to fixed,
- Rent instead of purchasing a home,
- If laid off, consider going to school to increase skills by obtaining student loans, and
- Take advantage of introductory credit cards that offer no interest charges for 18 months or longer.
This is the outlook for the coming year according to the biannual San Joaquin Valley Business Forecast produced by Gökçe Soydemir, the Foster Farms endowed professor of business economics at Stanislaus State.
Among the report’s highlights:
Total employment grew for all counties in 2022 at rates much faster than their sample averages. However, labor markets have begun to respond to the federal interest rate hikes, and unemployment rates have been gradually increasing since the first quarter of 2023, adding to the worries of a hard landing. Valley total employment is likely to decline in 2023, only to display some growth in 2024.
Housing permits rose by 12.30 percent in 2022, following a 35.65 percent rise in 2021. Home values increased exponentially, and the average yearly increase in 2022 was 21.65 percent, bringing worries of a housing market bubble. Any pullback will not likely be to the degree seen in the 2008 recession, simply because lenders were stricter in 2022 than the prior year. The double-digit increases seen in 2022 and 2021 are not sustainable, and a correction back to the rates more in line with benchmark growth rates is expected.
Inflation and Prices
Inflation is coming down but at a much slower speed than preferred by the Federal Reserve, mainly because the main driver of inflation is the price of oil. OPEC’s decision in April to cut output will likely prolong inflation. Valley average weekly wages rose about 5 percent less than the inflation rate in 2022. Thus, there was a significant fall in purchasing power of the Valley consumer in 2022. This loss in purchasing power is expected to continue in the coming months.
Banking and Capital Markets
For the first time since the forecast has tracked banking indicators, there was a change in the dynamics of bank total deposits and net loans in Valley community banks in 2022. Typically, net loans and total deposits grow at roughly the same rate. However, in 2022, net loans grew at a much slower pace compared to total deposits. Valley community bank assets in nonaccrual began trending upward much more steeply in 2022 and are more likely to increase further with the gradual increases in the unemployment rate. Valley total bank deposits rose by 8.67 percent in 2022, which was about half the rate seen in 2020 and 2021.
About the Report and Author
Gökçe Soydemir’s biannual Business Forecast provides projections for the Valley’s labor market, regional housing conditions, prices and inflation, banks and other depositary institutions and capital markets. Soydemir and his team use a unique forecasting model that produces lower and upper statistical confidence bands with results that are expected to fall within this range. Soydemir joined Stanislaus State as the Foster Farms endowed professor of business economics in 2011. He brings strong expertise and experience in business analysis and forecasting and has published extensively on applied econometrics, regional economics, financial forecasting, market analysis and international finance.