2019
VOL 8 | ISS 2

San Joaquin Valley

BUSINESS FORECAST

emerging trends in thevalley’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 ........................................................................................... 22External Sector .................................................................................................................... 24
Concluding Remarks .......................................................................................................... 26

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

2 | Stanislaus StateWe wish to thank Foster Farms
for generously providing theendowment for this project.
Cover photo credit and data:
Port of Stockton

Contributors
Faculty

Student Assistants

Gökçe
Soydemir, Ph.D.

Tomas
Gomez-Arias, Ph.D.

Tyra Hampton

Justin Clark

AnnhenrieCampbell, Ph.D.

David
Lindsay, Ph.D.

Eugene Kim

Chair, Department of
Accounting and
Finance

Professor,
Accounting
and Finance

Christopher
GuzmanScott Davis, Ph.D.

Katrina Kidd

AbdullaMammadsoy

Noah Wells

Foster Farms Endowed
Professor of BusinessEconomics

Professor, English

College of Business
Administration Staff

Carmen Garcia

Diamelle Abalos

Joshua Hanks

Mandeep
KhairaAdministrative Analyst

Dean, Collegeof Business
Administration

Director, MBA Programs

Administrative Support
Coordinator

Communications and Public Affairs

Rosalee Rush

Senior Associate
Vice President forCommunications,Marketing and Media
Relations

Kristina Stamper
Director forCommunications andCreative Services

Brian
VanderBeek

Senior Writer andContent Specialist

Steve Caballero
Senior Graphic
Designer

Graphic Designer

Senior Web
and Electronic
Communications
Developer

San Joaquin Valley Business Forecast, 2019 | Volume VIII • 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 thenational 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 asa percentage of GDP peaking in 2019 — further point toslowdowns 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. Educationand 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 Instituteof 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 quarterof 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 slowedfrom 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 growthincreased from 1.84 to 2.91 percent.
Overall in 2018, more employment categories exhibited aslowdown 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 pacematched 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 Kerncounties 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 paceas last year.

4 | Stanislaus State

Following the decline in oil prices in the third quarterof 2018, the yearly inflation rate began to decrease andregistered 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 anannual average growth rate of 3.03 percent, wage growthin the Valley fell behind the inflation rate in 2018, showing
a decline in real wages of 0.32 percent. This means that in2018, Valley consumers were able to purchase fewer goods
and services than they did in 2017. A similar pattern ofgradual decline in real wages is projected to prevail in the
coming two-year interval.
Acceleration in the Valley’s total bank deposits slowed in2018, 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 andleases is a category projected to grow at a slower pace in thenext 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 otherproduce. The decline in liquid fertilizer imports were dueto the end of the drought in 2018. Because the economy isbased 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 theValley 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 theupper 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 Chapterof the Appraisal Institute to establish a publicly available online databasefor real estate and related indicators belonging to San Joaquin Valley.
The database is later to be expanded to the Bay Area and other regionsof California to serve as a source for researchers and practitioners whowish to study our region relative to other regions in California and thenation. 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 tomake Stanislaus State the go-to center in terms of data procurement
and research related to the economy of the San Joaquin Valley and otherregions 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 thena conclusion.

San Joaquin
MaderaFresnoMercedTulareKings

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 to0.25 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 observedin wholesale trade employment — from1.84 percent to 2.91 percent. In 2018, justas there were a greater number of counties
that reported a decline in pace of growth,
there were more categories of employmentthat exhibited a slowdown than those thatexhibited 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
2009M032009M10
2010M05
2010M12
2011M07
2012M02
2012M09
2013M04
2013M11
2014M06
2015M01
2015M08
2016M03
2016M10
2017M05
2017M12
2018M07
2019M02
2019M09
2020M04
2020M111,300,000

MonthsActualProjected

Total employment in the Valley has exceeded 1.75 million following aseasonal 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 firsthalf of 2020, and 1.29 percent from the second half of 2020 to the firsthalf of 2021.

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

Total employment in the Valley grew at thesame pace in 2018 as in the previous year.
Kings, Madera, Merced and San Joaquincounties reported a slow-down in total
employment growth in 2018 compared
to a year before, while Kern, Stanislaus
and Tulare counties reported a faster rateof growth. Fresno County grew at the usame pace as last year. Even though total
employment growth slowed for Merced and
San Joaquin counties, at 2.44 percent and2.23 percent, these two counties reported
the fastest growth in 2018, while Kings andKern 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%

SampleAverage

2016
Average

2017
Average

2018
Average

ActualOptimistic

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 thebusiness cycles of the state economy butwith a delayed response of about four to six
months. Given this pattern between the twoseries, it would not be surprising to observe
lower employment growth numbers in theValley 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

0MonthsConference 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 thanthe 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 theirconsumption patterns in the near future. At
a steady upward trend, the index registereda turning point in the third quarter of 2018
and started displaying a different pattern
than the prevailing upward trend thatexisted 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, suchas 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 thepast several years and all started flashing inthe same quarter of 2019.

MonthsLabor Force

Employment

San Joaquin
San Joaquin
ValleyValley
Business
Business
Forecast
Forecast,
Report,20192017| 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 ofeducation and health services employment fell
short of the long-term benchmark growth rateof 3.41 percent. Projections point to averageannual growth of 2.87 percent from thesecond 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. ubenchmark 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
2012q42013q3
2014q2
2015q1
2015q4
2016q32017q2
2018q1
2018q42019q32020q22021q1-8.0-10.0

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

MonthsActualProjected

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%
SampleAverage

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 in2017, the sharp decline in the pace becomesvery clear. As other employment categories
adjust to a cooling economy, education
employment growth rises above other ucategories’ growth rates particularly during
times of slowing economic activity due tothe relatively more robust nature of thisseries. This employment category is notaffected 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 directionof a slowdown. For instance, governing
dynamics of the Consumer Confidence u
Index and Purchasing Managers Index havesimultaneously shifted in favor of a cooling
economy. Institutional investors have begun
to change the composition of portfolios fromstocks 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 growthforecasts are now scaled back to an average
yearly growth rate of 2.13 percent from thesecond 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
2005M032005M08
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
2018M022018M07
2018M12
2019M05
2019M10
2020M03

90,000MonthsActualProjected

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%

0.06%
0.03%-0.01%-0.01%

0.01%

SampleAverage

2016
Average

2017
Average

2018
Average

ActualOptimistic

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-02Jan-03
Jul-03Jan-04
Jul-04Jan-05Jul-05Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13Jan-14Jul-14Jan-15
Jul-15Jan-16
Jul-16
Jan-17
Jul-17Jan-18The Purchasing Managers Index of theInstitute 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 reachinga peak level that had not occurred since2004, the series clearly began displaying afalling pattern indicative of future slowing
economic activity. Following a policy uchange, there will always be winners andlosers in society, and under the new tariffstructure, the steel industry on the East
Coast stands to gain while the Valley
stands to lose because of the resulting
retaliation. Subsidies ultimately comeout 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 inthe Valley and nationwide. The Valley’s
average annual growth of 0.25 percent in2018 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 thesecond half of 2020. As trade negotiations
remain unresolved between China andthe United States, the effect of tariffs andretaliation are to be felt more heavily in this
sector, with projections pointing to average
yearly growth of 0.21 percent through thenext two years. u

Manufacturing Employment

Index ValueThe Valley’s manufacturing employment
long-term benchmark rate became u
positive in 2017 for the first time since
the end of the recessionary years, andthat pattern was maintained in 2018.
Manufacturing employment in the Valley
displayed the fastest growth since 2015,
as more distribution centers opened incounties such as San Joaquin and Fresno.
Such dynamics were also consistent withthose of the Purchasing Managers Indexof the Institute of Supply Management,
an important leading indicator in the
manufacturing industry.

MonthsInstitute of Supply Management

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

Employment Indicators

TRADE, TRANSPORTATIONAND UTILITIESEMPLOYMENT WAS THE
THIRD-FASTEST GROWINGCATEGORY 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 firsthalf of 2020. Growth in 2018 and 2017 were
almost identical at 2.30 percent. In both ofthese 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
2005M032005M08
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
2018M022018M07
2018M12
2019M05
2019M10
2020M03

80,000MonthsActualProjected

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 leisureand 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 andhospitality services employment moved downfrom the second-fastest growing category to
the fifth from last. Projections point to an
average annual growth of 1.59 percent in thenext 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%

1.79%
1.52%
1.26%

2018
Average

2019-20
Forecast

1.00%

2.72%
2.44%
2.15%

0.50%
0.00%

SampleAverage

Actual

2016
Average

Optimistic

2017
Average

Most Likely

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 wassignificantly less than the 2017 growth of 2.71
percent. Consistent with this slowing activity,
the series began displaying a concave patternin 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 theValley. Because a higher proportion of Valley
consumers’ income is spent on leisure andhospitality services, the demand for these
services is generally more susceptible tochanges in interest rates and prices.

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

2001M01
2001M06
2001M11
2002M04
2002M09
2003M02
2003M07
2003M12
2004M05
2004M10
2005M032005M08
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
2018M022018M07
2018M12
2019M05
2019M10
2020M03

190,000

MonthsActual10 | 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 ucategory of employment surpassed theValley’s rate. Retail trade is one of the mostvulnerable sectors to increases in interest
rates, and Valley trade employment is moresensitive to interest rate increases than thestate and the nation. Projections point tostagnant behavior of -0.03 percent averageannual decline in the next two-year interval.

5.04%

Average Growth

5.00%
4.00%

3.32%

3.00%
2.00%

1.70%

1.48%

2.26%
1.96%
1.66%

2018
Average

2019-20
Forecast

2.79%
2.46%
2.13%

1.00%
0.00%

SampleAverage

Actual

2016
Average

2017
Average

Most Likely

Optimistic

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
2005M032005M08
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
2018M022018M07
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 in2018 was half the growth of 2017, which
was 0.71 percent. Growth in 2018 camein second-from-last, pointing to the uextent of the slowdown in this category of
employment. At this very slow pace, thetrend in total retail trade employment is notexpected to exceed 160,000 in the next twoyear interval.

6.00%

Number of Employees

GROWTH IN RETAILTRADE EMPLOYMENTGRADUALLY SLOWEDFROM YEAR TO YEAR

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

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 shortageof 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%

SampleAverage

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 in2018. The decline in 2016 and 2017 was 6.32
percent and 4.18 percent. Employment levelsin this category are expected to oscillate
around 10,000 in the coming months.
Although information employment grew
statewide, consistent with the uactivity observed in the Valley, there
was a nationwide decline in information
employment in 2018.

Number of Employees

50,00045,00040,00035,000

2001M01
2001M06
2001M11
2002M04
2002M09
2003M02
2003M07
2003M12
2004M05
2004M10
2005M032005M08
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
2018M022018M07
2018M12
2019M05
2019M1030,000MonthsActualProjected

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%

SampleAverage

Actual

2016
Average

Optimistic

2017
Average

Most Likely

2018
Average

2019-20
Forecast

2020-21
Forecast

Pessimistic

Information Employment
17,00016,00015,00014,00013,00012,00011,00010,0009,000MonthsActual12 | Stanislaus State

2.39%
2.23%
2.07%

2001M01
2001M06
2001M11
2002M04
2002M09
2003M02
2003M07
2003M12
2004M05
2004M10
2005M032005M08
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
2018M022018M07
2018M12
2019M05
2019M10
2020M03

VALLEY INFORMATIONEMPLOYMENTCONTINUED TODECLINE IN 2018

55,000

Annual Growth

Wholesale trade employment was one of
the few categories of employment that grewfaster in 2018 than 2017. Wholesale trade
employment is projected to pass 50,000
by the second half of 2020. A growth rateof 2.91 percent in 2018 was faster than thelong-term benchmark growth rate of 2.01
percent. Although the drought has officiallyended, 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 wholesaletrade employment. u

Wholesale Trade Employment

Number of Employees

As the drought years gradually came toan end, the dynamics of Valley wholesaletrade employment began to change. During
the drought, wholesale trade employment
was one of the slowest-growing categories of
employment, even growing less than retailtrade 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 fasterthan retail trade employment. u

Projected

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

0.21%

0.00%

Annual GrowthValley 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 inthis series has slowed quite significantly
in 2018, but more improvement is neededon 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

SampleAverage

Optimistic

2020-21
Forecast

Construction Employment

85,00075,00065,00055,00045,00035,000

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

95,000MonthsActualProjected

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 thestate and nation. Low inventory, alongwith attractive home values here in theValley relative to the Bay Area, keeps
demand for housing vibrant. Added tothis is the recent decline in the long-term
rates resulting from a pause by the Federal
Reserve on rate hikes. Projections point toan average annual growth of 5.52 percent
from the second half of 2019 to the firsthalf of 2020 and 3.37 percent from thesecond half of 2020 to the first halfof 2021. u

2017Average-2.16%

ActualConstruction employment picked up
speed later than most indicators when
the recession ended and continues
to lag behind the current state of theregional economy. In 2018, construction
employment continued to be the fastestgrowing category of employment in theValley. The annual average growth of
construction employment reached7.67 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 EMPLOYMENTWAS 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%

SampleAverage

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 halfof 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 theregional economy.

MonthsActualGOVERNMENT EMPLOYMENTAS A PERCENTAGE OF OVERALLVALLEY 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 thepart 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%

SampleAverage

Actual

2016
Average

Optimistic

2017
Averge2018
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 and2017, consistent with a variable that tends tolag 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

49,00047,00045,00043,00041,00039,000

2001M01
2001M08
2002M03
2002M10
2003M05
2003M12
2004M07
2005M02
2005M09
2006M04
2006M11
2007M06
2008M01
2008M08
2009M032009M10
2010M05
2010M12
2011M07
2012M02
2012M09
2013M04
2013M11
2014M06
2015M01
2015M08
2016M03
2016M10
2017M05
2017M12
2018M07
2019M02
2019M09
2020M04
2020M112021M06

37,000MonthsActual16 | Stanislaus State

Projected

Financial activities employment is projected to exceed 43,000 by the first halfof 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. 

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%
SampleAverage

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 forthe first time in a long while, in the first quarter of 2019. There was a greaternumber 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
2005M032005M10
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
2020M120MonthsActualProjected

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%
SampleAverage

ActualNEW FORECLOSURE
FILINGS IN CALIFORNIACONTINUE TO REMAINAT VERY LOW LEVELS

2016
Average

Optimistic

2017
Average

2018
Average

Most Likely

Pessimistic

2019-20
Forecast

2020-21
Forecast

Foreclosure Starts in California
2.5
2Percentage

The number of new foreclosure filings in
California continues to remain at very
low levels, particularly after the Federal
Reserved halted rate hikes pending thestate of the national economy. Undoubtedly,
unemployment rates at historic lows contributesignificantly to minimum levels of foreclosures.
There will, however, likely be a turning point inforeclosures 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
2017M022017M11

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 camein 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 theseyears. 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 inbuilding 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 endof the first half of 2020.

Single-Family Building Permits

Annual Growth

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

Quarters
Mortgage Bankers Association of America

If the expectation of “soft landing” theeconomy (cooling the economy without
dipping into a recession) materializes,
there will likely be no further rate hikes.
The rising price of oil since the firstquarter 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 andusher-in a recession rather than a createa 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
2014M032014M10
2015M05
2015M12
2016M07
2017M022017M09
2018M04

4

MonthsFreddie 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
2012q42013q3
2014q2
2015q1
2015q4
2016q32017q2
2018q1
2018q42019q32020q22021q1

The fastest increases in home prices wereobserved 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 withthe 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, homeprices 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 homevalues are projected to increase at an
average annual rate of 5.65 percent in thenext 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 atnearly the same rates in 2018 as in2017 — 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 tothe increase in home prices in the Valley.
Appreciation in home values is projected toslow a little but continue to increase overthe coming months. u

30-Year Fixed Rate

Quarters
ActualProjected

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 priceof oil in the second half of 2018, the u
inflation rate began to decrease. Similiarly,
as the price of oil started to trend upwardagain beginning with the first quarterof 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%

SampleAverage

Actual

2016
Average

Optimistic

2017
Average

2018
Average

Most Likely

Pessimistic

2019-20
Forecast

2020-21
Forecast

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 averagereading for the first quarter of 2019 was
2.73 percent. As the price of oil continues toincrease in 2019, overall price increases in theWest 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

MonthsWest

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

MonthsActualProjected

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%

SampleAverage

Actual20 | Stanislaus State

National

2001M01
2001M08
2002M03
2002M10
2003M05
2003M12
2004M07
2005M02
2005M09
2006M04
2006M11
2007M06
2008M01
2008M08
2009M032009M10
2010M05
2010M12
2011M07
2012M02
2012M09
2013M04
2013M11
2014M06
2015M01
2015M08
2016M03
2016M10
2017M05
2017M12
2018M07
2019M02
2019M09
2020M04
2020M112021M06

The rate of inflation in the West continued toremain above the national rate in 2018. Sucha pattern of higher inflation rates in the Westhas been observed since the third quarterof 2014. Price stability appears to have beenachieved by the Federal Reserve for now, andif the economy is able to avert a recession in
the coming years the objective of creating asoft landing on the part of the Federal Reserve
will have been met. u

5.5Yearly Percentage Change

THE RATE OF INFLATION
IN THE WEST CONTINUEDTO 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 uFederal Reserve’s decision to halt interest rates
temporarily, pending the future course of thenational economy.

Optimistic

Most Likely

2018
Average

Pessimistic

2019-20
Forecast

2020-21
Forecast

Quarterly Average Weekly Wages
1050

Average Weekly Wage

750
650

2021q2

2020q32019q42019q1

2018q2

2017q3

2016q4

2016q1

2015q2

2014q32013q42013q1

2012q2

2011q3

2010q4

2010q1

2009q2

2008q3

2007q4

2007q1

2006q2

2005q3

2004q4

2004q1

2003q2

2002q3

2001q4

2001q1450

Quarters

ActualProjected

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%

SampleAverage

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 ofpurchasing power on the part of the Valley
consumer of about 0.32 percent. Projectionsof the inflation rate and wages point to acontinuation of this trend of gradual loss inpurchasing 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-pushside have not subsided as of 2018. In both2017 and 2018 wage increases were fasterthan 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 beingat historic lows, wages have not been
increasing any further to reflect tightconditions in the labor market. However,
the median number of weeks people haveremained unemployed has been increasing
recently, signaling that individuals are notfinding jobs as easily as before. In line withhistorical patterns, wages are projected to
grow more slowly than the inflation rate in
the coming months. Projections point toan increase in average weekly wages at anannual 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
2012q32013q1
2013q3
2014q1
2014q32015q1
2015q3
2016q1
2016q32017q1
2017q3
2018q1
2018q3For the past two years, the rate of inflationis coming in higher than the long-term
benchmark rate. Thus, the Valley consumer
is likely to feel a further decline in theirpurchasing power in the months ahead.
Projections point to average yearly inflationof 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 halfof 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

2018q42018q1

2017q2

2016q32015q42015q1

2014q2

2013q3

2012q42012q1

2011q2

2010q3

2009q42009q1

2008q2

2007q3

2006q4

2006q1

2003q1

2005q24,000,000

2004q36,000,000

Quarters
ActualProjected

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%

SampleAverage

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 toslope upward since the all-time low point
reached in the third quarter of 2017. u

12,000,000

8,000,000

THE TAX CUTS SHOULDHAVE A POSITIVE IMPACT
ON THE GROWTH RATEOF COMMUNITY BANKTOTAL DEPOSITSThe tax cuts should have a positive impact
on the growth rate of community banktotal deposits in the Valley, but the slowing
economy is expected to dampen the rate of
growth in total bank deposits along with thepause 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 growthof 8.01 percent, mostly reflecting the impact
of rate hikes in the first three quarters of
2018. In both 2017 and 2018 the growth intotal bank deposits surpassed the typical u
growth of 7.39 percent. Since rate hikes aretemporarily 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
50,0002003q2
2003q4
2004q2
2004q4
2005q2
2005q4
2006q2
2006q4
2007q2
2007q4
2008q2
2008q42009q2
2009q4
2010q2
2010q4
2011q2
2011q42012q2
2012q42013q2
2013q42014q2
2014q42015q2
2015q4
2016q2
2016q42017q2
2017q42018q2
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 increasein net loans and leases is likely to become
consistent with the increase in total bankdeposits — both growing at rates more inline with the long-term benchmark rates.

Thousand Dollars

70,00060,00050,00040,00030,00020,000-2003q2
2003q4
2004q2
2004q4
2005q2
2005q4
2006q2
2006q4
2007q2
2007q4
2008q2
2008q42009q2
2009q4
2010q2
2010q4
2011q2
2011q42012q2
2012q42013q2
2013q42014q2
2014q42015q2
2015q4
2016q2
2016q42017q2
2017q42018q2
2018q410,000Quarters
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

2018q42018q1

2017q2

2016q32015q42015q1

2014q2

2013q3

2012q42012q1

2011q2

2010q3

2009q42009q1

2008q2

2007q3

2006q4

2006q1

2005q2

2004q33,300,000

2003q44,300,000

2003q1

In 2018, banks in the Valley extended loansthat far exceeded their deposits. Valleybanks have therefore used their reserves
to extend these loans at higher rates toincrease their profitability. In the coming
months, in line with a cooling economy,both deposits and loans will likely grownear 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 fasterrate 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 aretaking in deposits, net loans and leases
growth is expected to slow in the coming
months. The increase in net loans andleases at 13.60 percent is not sustainablegiven that the increase in total bankdeposits is 8.62 percent. u

Assets in Default 30+ Days

Quarters
ActualProjected

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 moresignificantly than assets in non-accrual.
Assets in default 90-plus days appears tohave the same steep trend upward as theassets in default 30-to-89 days. Assets indefault 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%

SampleAverage

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 ofStockton. The Port handles bulk items
only and not containers. The main import
items at the port are cement, steel andliquid fertilizer, while main export items arerice, sulfur and tire chips. When the numberof observations satisfies the minimum
requirement, forecasts will be generated forexports 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 to753,396 in 2018. Noteworthy is that cement
imports had been consistently increasing
since 2014. When domestic cement thathas a higher price than imported cement isused for construction, the purchase price ofhomes 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 since2014. 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 priceto purchase homes in the Valley given thehigher cost of steel and cement.
The rains of the past several years haveofficially ended the drought. Importationof liquid fertilizer — in higher demand in
drought years — is expected to decrease dueto 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)
2014

2015

2016

2017

2018

JanuaryYear019,00032,09848,302

28,086

February

19,00022,84957,18029,94033,497

049,81719,00039,25977,112April

15,000024,238111,167

75,474May

053,47531,39048,748106,062

June

19,000076,157

102,850

66,571July

054,27063,33986,705

120,649

18,05031,00077,15073,27656,292031,525095,51831,881

18,27049,85942,34386,58337,605

November

032,60070,560104,60959,280December

24,991

29,60337,03075,35360,888

Total

114,311

373,997

530,486

902,310753,396

2016

2017

2018

March

AugustSeptember
OctoberSteel Imports (by tonnage)
Year

2014

2015

January

6,357

9,190

43,03941,25033,015February

10,561

46,96724,505

16,626

9,170

March

2,965

44,22833,72020,76629,451

April

25,89519,802

5,413

5,787

26,904May

25,03017,503

20,39940,598June

11,12521,75816,982

14,904July

20,314

21,48521,02638,049August12,37638,98775,413

17,6585,877

September

4,439

3,957

24,301

21,246

13,629October

25,74843,042

42,105

13,044

13,514

November

11,29911,314

12,295

22,7708,779

December

30,943

15,643

7,219

2,035

27,049Total

187,052

293,877

326,416

254,731

197,865

30,477

Liquid Fertilizer (by tonnage)

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 tradedisputes costing the Valley in terms offorgone jobs and revenues. Firms do not
like uncertainty from unresolved tradedisputes and generally tend to refrain frominvesting in uncertain times to minimize
risk to their operations.
Exports of rice have decreased from
159,071 tons in 2016 to 89,040 in 2017and 86,023 in 2018. The resulting decreaseis not from retaliation, since most exports
go to Japan. Demand for almonds has
decreased 47 percent, wine exports havefallen by 15 percent and cherry exports
have fallen by 36 percent and are likely todecrease further, adversely affecting theValley economy. u
Sulfur comes in liquid form to the Port ofStockton, is processed at the port into abulk 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 theglobal 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 thestore due to higher tariffs, and consumers
become poorer when they are able toafford fewer goods and services. No
country gains under protectionist
measures. The outcome of retaliation issuboptimal for all involved countries.

Year

2014

2015

2016

2017

2018

January

11,60557,41922,04762,361

46,160February

23,027

24,61562,02773,33527,929March

41,946

120,300

29,046

49,10073,753April

18,515

66,15995,40843,752

19,103

May

76,01640,036

139,119

118,362

146,210

June

43,22579,49379,444

81,62070,681July

046,50065,44958,04718,187

August95,781

13,74917,51032,60460,956

September

22,204

48,11522,401

56,993

14,935October

17,02818,52336,03837,25974,093

November

72,75341,43868,056

12,39839,800December

075,931

21,57574,72337,330422,100

632,279

658,120

700,555

629,137

Total

Rice (by tonnage)
Year

2014

2015

2016

2017

2018

January0

13,00025,001

26,0010

February

0

0

0

0

12,000March

12,89313,001

24,0010

12,000April

21,395

12,07413,001

25,037

13,005May0025,001

13,001

12,000June

24,001

12,00023,002

13,001

12,016July

027,0000013,001

August0

12,00011,06500September

0

12,0000

00

October0

12,000000November00

26,001

12,00012,000December

12,00049,006

12,000

0

0

Total

70,289162,083

159,071

89,04086,02320172018

Sulfer (by tonnage)
Year

2014

2015

2016

January

27,08839,722

23,607

February

27,69924,97825,046

16,331

18,768

March
April

15,199May
June

38,79264,457

19,50011,997

August22,78821,414September

22,50027,766

October

20,43534,41627,49911,076

13,26731,43623,99838,092

14,027

19,53029,56334,99732,168

11,195

21,16016,032

November

6,601

27,46028,152

December

12,095

16,50130,177

205,642

223,429

229,189

Total

200,166

56,87036,707
25,236

July

29,995

237,912San 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 fromstocks 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 thefastest in 2018 and was followed
by wholesale trade employment.
Information employment continued toworsen in 2018 but at a slower decline
than in previous years. Manufacturing
and retail trade employment grew theslowest in 2018.
Housing prices grew at virtually thesame 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 Statethe increases are not likely to maintainthis pace in the coming months.
The rate of inflation, which registered3.35 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 firstquarter of 2019. Consequently,
inflation is likely to remain above
the long-term benchmark rate in the
coming two-year interval. Further, therate of inflation stayed above wage
growth, making 2018 another year inwhich Valley consumers’ purchasing
power decreased.
Valley net loans and leases increased
at a much faster rate than totalbank deposits, displaying a patternunsustainable in the long run. Banks
were extending loans from theirreserves to take advantage of higher
rates to increase their profitability.
After a turning point in the third
quarter of 2017, bank assets innonaccrual 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 beenobtained from sources believed to be reliable, we
do not represent or warrant its accuracy, and suchinformation 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 andopinions included in this document constituteour judgment as of the date of the document andmay be subject to change without notice. This
document is not a personal recommendation, andyou should consider whether you can rely upon any
opinion or statement contained in this document
without seeking further advice tailored for yourown 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 priorwritten permission. Law or regulation in certain
countries may restrict the manner of distributionof this document, and persons who come intopossession of this document are required to informthemselves of and observe such restrictions. We,or our affiliates, may have acted upon or havemade 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