2015 Business Forecast Report, Volume V-Issue 1

SAN JOAQUIN VALLEY

BUSINESS FORECAST REPORT 2015 | Volume V • Issue 1

Table of Contents Contributors ............................................................................................................................. 1 Executive Summary .............................................................................................................. 2 Introduction ............................................................................................................................ 3 Employment Indicators........................................................................................................ 4 Housing Sector ......................................................................................................................14 Inflation and Prices...............................................................................................................16 Banking and Capital Markets ............................................................................................18 Concluding Remarks ..........................................................................................................20

Contributors BUSINESS FORECAST REPORT 2015 SAN JOAQUIN VALLEY California State University, Stanislaus One University Circle Turlock, CA 95382 Volume V, Issue 1 Gรถkรงe Soydemir, Ph.D

Dr. Nael Aly

Dr. Gรถkรงe Soydemir

Dr. David Lindsay

Dr. Annhenrie Campbell

Jack Doo

Haider Al-kaabi

Sandra Assaker

Joseph Sada

Carmen Garcia

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

Communications & Public Affairs Team Tim Lynch Janice Curtin Brian VanderBeek Steve Caballero Monica Teicheira

Nancy Mardakis

San Joaquin Business Forecast Report, 2015 | 1

Executive Summary The San Joaquin Valley’s economy has adapted exceptionally well to the drought.

Total employment in the San Joaquin Valley in 2015 grew by 1.95 percent, higher than the 14-year average rate of 1.19 percent, and exceeding the 1.71 percent growth of 2014.

Projections point to 1.67 percent annual total employment growth in 2016 and 2017.

Unlike previous years, employment grew in all counties at varying speeds. Fresno County’s employment growth was the fastest in 2015, followed by Merced, San Joaquin and Tulare counties. Stanislaus and Kings counties grew at speeds close to the Valley average, while employment growth in Madera and Kern counties was much slower relative to the historic average and to their neighbors.

The drought has underscored the essential need to increase water storage capacity in the Valley. But even as storage systems have threated to go dry, above-average employment growth has been the rule in all previous drought years.

Individual counties – Madera, for example – reported employment declines in some drought years. Had there been no drought, employment levels in the Valley undoubtedly would have grown faster.

2017. A similar pattern is expected for single-family housing permits. One area to watch is the 30-year Freddie Mac interest rate, which would be expected to increase should the Federal Reserve follow through with its anticipated interest rate hike in 2016.

The continued appreciation of the U.S. dollar deepened the trade deficit and hurt Valley exports. While consumers benefitted from the lower prices for imported goods, the stronger dollar made Valley exports less competitive in international markets.

The yearly inflation rate of 1.0 percent was heavily influenced by the absence of cost (push) factors and weak demand (pull) factors, combined with the low price of gasoline and other fuels. The low rate also deterred the Federal Reserve from raising interest rates, given the Fed’s mission to achieve and maintain price stability.

In all, economic growth in 2015 further demonstrated the Valley’s adaptability to the four-year drought.

As overall employment gained, the sectors that previously paced the growth no longer led the charge. For the first time since the recession, construction was no longer the Valley’s leading category of employment growth, falling from 4.65 percent in 2014 to 3.08 percent in 2015. Trade, transportation and utilities employment registered 5.01 percent growth to outpace all sectors. Financial activities employment, a suffering area of growth since the recession, rebounded in 2015. The Valley’s manufacturing employment outperformed state and national averages. Incoming actual values for 2015 mostly fell between the optimistic and most likely projections, providing ample evidence that the forecasts tended to be more realistic than optimistic in nature.

The increase in Valley home prices remained above the longrun average, but was not as strong as in recent years, and projections point to a further decline in growth in 2016 and

2 | California State University, Stanislaus

With the labor market tightening relative to recent years, average weekly wages trended upward and are expected to continue on that path in the next two years, outpacing inflation. The tighter labor market also led to an increase in attrition and job turnover.

Vibrant retail activity, combined with the growth in total employment, resulted in a growth in the Valley’s total bank deposits. Accruals maintained their lowest levels in eight years, while foreclosure starts were minimal relative to recession years. Increases in net loans and leases kept pace with the boost in bank deposits and were at the highest levels since the end of the recession.

In all, economic growth in 2015 further demonstrated the Valley’s adaptability to the four-year drought. Aside from the risks emanating from the dollar’s appreciation and other associated elements of the external account, as well as the political risks in the Middle East, Russia and China, projections point to further growth in 2016 and 2017.

Introduction This report assesses the past, current and future business trends in the San Joaquin Valley relative to the state and the nation. Time series data spans from January 2001 to August 2015. Two-year medium-term forecasts span from September 2015 to December 2017. The yearly average figure for 2015 is from the first eight months of the year including preliminary values for August, whereas the figure for 2014 is from the full 12 months.

The remainder of this report is structured as follows: Section B provides a discussion of San Joaquin Valley labor market conditions; Section C reports the region’s real estate market; Section D reports prices and inflation; and Section E reports banking and capital market indicators.

San Joaquin Business Forecast Report, 2015 | 3

Employment Indicators

Construction employment had recorded the fastest growth in employment year-afteryear since the end of the recession, but this dynamic changed in 2015, when trade, transportation and utilities employment surpassed construction as the fastest category of employment in the Valley. Unlike previous years, construction employment posted the fourth-fastest growth. Financial activities employment halted its decline since the end of the recession and posted growth in 2015.

Manufacturing employment growth in the Valley performed better than the state and national averages in the same category. Retail trade employment posted another year of strong growth relative to the wholesale trade employment.

4 | California State University, Stanislaus

Number of Employees

1,750,000 1,700,000 1,650,000 1,600,000 1,550,000 1,500,000 1,450,000 1,400,000 1,350,000 1,300,000

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

As predicted in previous reports, Valley total employment exceeded 1.65 million in 2015, and is on route to reaching 1.70 million by the first half of 2017. Oceans limit California’s westward growth. The only direction California can grow is eastward. Thus, regions such as the San Joaquin Valley are situated at an advantageous position, offering abundant land, labor and capital. However, future expansion in these regions means finding ways to store more water to sustain both agriculture and urban growth. Without finding sustainable ways to store more water to meet increasing demand, the Valley’s economic development would be more difficult. u

Total Employment 1,800,000

Months Actual

Projected

As of the third quarter of 2015, Stanislaus County had the lowest unemployment rate in the Valley at 8.5 percent, followed by Fresno and San Joaquin counties at 8.9 percent and 9.1 percent, respectively. Tulare County had the highest unemployment at 12.0 percent. The Valley’s average rate of unemployment during the same quarter was 10.07 percent, significantly down from the previous years.

Total Employment: Historical vs. Projected Average Yearly Growth 2.50%

Average Percentage Change

Valley total employment, despite the drought’s four-year impact, posted higher growth numbers in 2015 than 2014. Unlike 2014, employment numbers grew in all counties, albeit at varying intensities. Fastest growth occurred in Fresno County, with employment growing 2.90 percent in 2015, followed by 2.33 percent growth in Merced County. San Joaquin, Stanislaus, Kings and Tulare counties grew at rates close to the Valley average, while Madera and Kern counties posted the least yearly growth. u

2.20%

2.00% 1.50%

2.04%

1.95%

2.00% 1.68% 1.36%

1.19%

2.06% 1.73% 1.39%

1.00% 0.50% 0.00%

Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

2016 Forecast

2017 Forecast

Pessimistic

In 2015, Valley total employment grew 1.95 percent. Considering the series’ sample benchmark growth is 1.19 percent, 2015 employment growth was quite significant when factoring the drought’s negative impact.

Projections point to 1.68 percent average yearly growth in 2016 and 1.73 percent in 2017.

Average weekly wages have increased more than the inflation rate, allowing the Valley consumers to enjoy more purchasing power.

140

Index Value

120 100 80 60 40

3/1/2015

5/1/2014

7/1/2013

9/1/2012

11/1/2011

1/1/2011

3/1/2010

5/1/2009

7/1/2008

9/1/2007

11/1/2006

1/1/2006

3/1/2005

5/1/2004

7/1/2003

9/1/2002

11/1/2001

1/1/2001

3/1/2000

5/1/1999

7/1/1998

9/1/1997

1/1/1996

3/1/1995

5/1/1994

7/1/1993

9/1/1992

0

11/1/1996

20

Months Conference Board

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

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

The Valley’s employment continued to grow faster than the labor force. Faster employment growth puts upward pressure on wages and salaries. From a structural standpoint, in areas like the Valley, labor force growth normally would exceed employment growth.

However, since 2011, the discrepancy between employment and labor force growth has seemed to stay constant. With demand for labor growing faster than supply, the price of labor would increase. This indeed is the case for the Valley economy as upward wage pressures build up. Average weekly wages have increased more than the inflation rate, allowing the Valley consumers to enjoy more purchasing power. u

Consumer Confidence Index 160

Percent Change from Previous Year

After rising above 80 points in 2014, consumer confidence kept its increasing pattern until the first quarter of 2015, after which the series exhibited a flat pattern, then fell to 91 points in July from 103.8 in January. The incoming index following July, however, showed that consumer confidence was poised to increase further as the index posted 101.3 and 103 for August and September, respectively. u

Months Labor Force

Employment

Employment Growth: State vs. San Joaquin Valley 4 3 2 1 0 -1 -2 -3 -4

2015M07

2015M01

2014M07

2014M01

2013M07

2013M01

2012M07

2012M01

2011M07

2011M01

2010M07

2010M01

2009M07

2009M01

2008M07

2008M01

2007M07

2007M01

2006M07

2006M01

2005M07

2005M01

2004M07

2004M01

2003M07

2003M01

-6

2002M07

-5 2002M01

Annual Percent Change

In the fourth quarter of 2014, the Valley’s employment growth briefly exceeded that of the state, as would be expected from a regional economy that has plenty of room for growth.

This was the first time since the second half of 2013 that the Valley’s employment growth exceeded the state’s employment growth.

The drought certainly had a role to play in forming such an unusual pattern. In the next two years, however, labor force growth should exceed employment growth in the Valley consistent with the structural pattern observed in the past during expansionary phases of the business cycle. u

5

Months

Valley

State

San Joaquin Business Forecast Report, 2015 | 5

Employment Indicators U.S. Real GDP Annual Growth 9.0 7.0 5.0

Percentage Change

3.0 1.0 -1.0 -3.0 -5.0

2017q2

2013q3

2016q3

2012q4

2013M09

2015q4

2012q1

2013M01

2015q1

2011q2

2012M05

2014q2

2010q3

2011M09

2009q4

2011M01

2009q1

2008q2

2007q3

2006q4

2006q1

2005q2

2004q3

2003q4

2003q1

2002q2

2001q3

-9.0

2000q4

-7.0

2000q1

When the very long-run business cycles had begun to reverse, capital flew from emerging markets back to the United States. As a consequence, emerging markets began to suffer. The continuously appreciating dollar had a negative impact on the international competitiveness of domestically produced goods. As a result, the worsening trade balance took a greater bite of the U.S. gross domestic product, lowering real economic growth u forecasts. A struggling manufacturing sector also had an impact on the real economic growth forecasts. Nationwide, the industrial production index began to decline during the first quarter of 2015. Projections for 2016 and 2017 now point to 2.56 percent average annual growth in real economic growth.

Quarters Actual

Projected

Education and Health Services Employment

The sample benchmark growth rate u of the Valley’s education and health care services employment is 3.42 percent.

Employment growth in 2015 was less than the benchmark rate, increasing at an average yearly rate of 2.76 percent. Yearly growth in this category of employment is projected to exceed the benchmark rate in 2017. Average yearly growth in education and health care 6 | California State University, Stanislaus

Number of Employees

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

2017M09

2017M01

2016M05

2015M09

2015M01

2014M05

2010M05

2009M09

2009M01

2008M05

2007M09

2007M01

2006M05

2005M09

2005M01

2004M05

2003M09

2003M01

2002M05

2001M09

115,000

2001M01

Education and health services employment u in the Valley exceeded 195,000 in 2015 despite the slowdown in growth over the previous years. It took only two and a half years to gain 20,000 jobs in the sector – the fastest such increment growth observed since 2001.

Projections show that it will take only two years for the next 20,000 increment increase, an even faster rate of growth than the one observed from July 2012 to January 2015.

Employment growth in education and health services in the Valley has been quite robust, even increasing, albeit at a slower rate, during the recessionary years.

Months Actual

Projected

Education and Health Services Employment: Historical vs. Projected Average Yearly Growth 8.00%

Average Percentage Growth

The continuously appreciating dollar had a negative impact on the international competitiveness of domestically produced goods.

235,000

7.16%

7.00% 6.00% 5.00% 4.00%

3.42%

3.12%

3.00%

2.76%

2.00%

2.97% 2.31% 1.65%

4.04% 3.58% 3.13%

1.00% 0.00%

Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

Pessimistic

2016 Forecast

2017 Forecast

Manufacturing Employment

education and health services employment in the next two years is projected to hover around 2.94 percent.

Number of Employees

115,000 110,000 105,000 100,000

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

90,000

Months Actual

Projected

Manufacturing Employment: Historical vs. Projected Average Yearly Growth 4.50% 4.00%

4.05%

3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% -0.50%

1.67% 0.99%

1.82% 1.54% 1.25%

1.91% 1.72% 1.52%

-0.06% Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

2016 Forecast

2017 Forecast

Pessimistic

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

Weakness in nationwide manufacturing can be depicted from the Institute of Supply Management’s purchasing managers index.

After reaching 60 points in July 2014, well above 50 points, the required minimum level for economic expansion, the index began to decline steadily. As of August 2015, the index stood at 51.1 points. Any further decline in the index would correspond to contraction in the national economy.

National manufacturing employment grew 1.4 percent in 2015. Statewide, growth in this category of employment was only 0.31 percent. The Valley performed better than the state and national average in manufacturing activity. u

120,000

95,000

Average Percentage Change

The 10-year benchmark growth u in manufacturing employment will switch from negative to positive territory in 2016.

Distribution centers such as Amazon, serving as a magnet, will continue to attract others to relocate in the Valley.

Manufacturing companies increasingly are becoming aware of the Valley’s cheap labor and abundant land when considering relocating in the Valley. Projections point to 1.54 percent average yearly growth in 2016 and 1.72 percent in 2017.

125,000

Index Value

The trend line formed post-recession began to steepen as new numbers arrived in 2015.

Valley manufacturing employment u performed better than the nationwide trends, posting 1.67 percent yearly growth, significantly better than the sample benchmark average of -0.06 percent.

Distribution centers in Patterson and elsewhere contributed to the Valley’s manufacturing activity in 2015.

Manufacturing employment had exceeded 120,000 before the recession. Projections show that employment in this category will reach the same numbers by the third quarter of 2017.

130,000

Months Institute of Supply Management

San Joaquin Business Forecast Report, 2015 | 7

Employment Indicators

Number of Employees

120,000 110,000 100,000

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

80,000

Months Actual

Projected

Leisure and Hospitality Services Employment: Historical vs. Projected Average Yearly Growth 7.00%

5.94%

6.00%

5.15%

5.00%

4.22%

4.00% 3.00% 2.00%

4.84% 4.26% 3.67%

2016 Forecast

2017 Forecast

2.19%

1.00% 0.00%

Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

Pessimistic

Trade, Transportation and Utilities Employment 310,000 290,000 270,000 250,000 230,000 210,000 190,000

Months Actual

8 | California State University, Stanislaus

5.07% 4.51% 3.96%

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

Trade, transportation and utilities employment climbed from being the third-best-performing category of employment in 2014 to the fastest-growing category in 2015. Employment growth continued to display a steeper trend post-recession. Trade, transportation and utilities is one category of employment in which the Valley has a competitive edge. The year 2015 was exceptional for this category of employment, growing at three times the series’ sample benchmark rate of 1.55 percent. u

130,000

90,000

Annual Growth

The fastest growth in leisure and hospitality services employment occurred in 2014 at 5.94 percent, while the 2015 growth u was at 4.22 percent. Growth in previous years was significantly greater than the series’ sample benchmark growth of 2.19 percent, underscoring robust employment in this sector. Such strong performance year-after-year classifies the leisure and hospitality services employment as another category of employment in which the Valley now maintains a competitive advantage.

Projections in this category of employment point to an annual average growth of 4.51 percent in 2016 and 4.26 percent in 2017, about the same pace as in 2015.

Leisure and Hospitality Services Employment 140,000

Number of Employees

Leisure and hospitality services employment in the Valley reached 120,000 in 2015 and is projected to reach 130,000 by the second half of 2017. The trend that has formed postrecession is now the steepest since 2001. u Leisure and hospitality services employment was the second-fastest-growing category of employment in 2015, surpassing construction employment, which had led all categories of employment since the end of recession.

Leisure and hospitality services employment’s 4.22 percent growth in 2015, although less than 2014, still was high enough to exceed all other categories of employment except trade, transportation and utilities.

Projected

Trade, Transportation and Utilities Employment: Historical vs. Projected Average Yearly Growth 6.00%

3.00% 2.00%

2.44% 1.55%

1.00%

Sample Average

Actual

2013 Average

2014 Average

Most Likely

Optimistic

2015 Average

2016 Forecast

2017 Forecast

Pessimistic

Retail Trade Employment 180,000

Number of Employees

170,000 160,000 150,000 140,000 130,000 120,000 110,000

...growth in retail activity is visible to the eye in almost every city in the Valley.

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

100,000

Months Actual

Projected

Retail Trade Employment: Historical vs. Projected Average Yearly Growth 4.00%

3.60%

3.50%

Annual Growth

Retail trade employment grew slightly faster in 2015 than 2014. In the coming two years, average annual growth in this category will continue to remain above 3.0 percent.

The diversity of retail establishments also is widening, permitting Valley consumers to enjoy greater choices than before. The Valley now faces increased competition among retail establishments, which benefits consumers in the form of lower prices and higher quality. Projections point to growth of 3.33 percent in 2016 and 3.04 percent in 2017. u

4.01% 3.67% 3.52% 3.32% 3.20% 2.88%

3.76%

4.00%

0.00%

Retail trade employment continued to perform strongly in 2015. Each year, growth in this sector was more than the sample benchmark growth rate of 1.55 percent.

This was not an exception in 2015. In fact, growth in retail activity is visible to the eye in almost every city in the Valley. The postrecession trend continues to remain steeper than what prevailed before the recession.

Employment in this category likely will reach 160,000 by the first half of 2017. u

5.00%

5.00%

Average Growth

Projections point to slightly slower growth in the next two years, more in line with the structural growth rate. However, strong growth in this category of employment will continue into 2016 and 2017. Trade, transportation and utilities employment is projected to grow at 3.67 percent in 2016 and 3.20 percent in 2017 as other costs associated with this sector, such as the price of oil, begin to rise. u

3.00%

3.12%

3.18%

2014 Average

2015 Average

3.69% 3.35% 3.33% 3.04% 2.98% 2.73%

2.50% 2.00% 1.50% 1.00%

1.13%

0.50% 0.00%

Sample Average

Actual

2013 Average

Optimistic

Most Likely

2016 Forecast

2017 Forecast

Pessimistic

San Joaquin Business Forecast Report, 2015 | 9

Employment Indicators Wholesale Trade Employment 55,000 50,000

Number of Employees

45,000 40,000 35,000 30,000

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

Wholesale trade employment was the fifthfastest-growing category of employment u in 2015. Employment in this category is projected to reach 50,000 by the first quarter of 2017. Wholesale trade employment grew less than retail trade employment in 2015.

From a structural standpoint, however, wholesale trade employment normally grows faster than the retail trade employment.

Because of the negative impact of drought, the picture was reversed. Farm-related wholesale trade employment performed less than retail trade employment.

Months Actual

Wholesale trade employment grew less than retail trade employment in 2015.

Projected

Wholesale Trade Employment: Historical vs. Projected Average Yearly Growth 4.50%

4.27%

4.00%

3.50%

10 | California State University, Stanislaus

2.50%

2.46%

2.19%

2.00%

2.48%

3.22% 2.68% 2.13%

1.71%

1.50% 0.50% 0.00%

Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

2016 Forecast

2017 Forecast

Pessimistic

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

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

As predicted in previous reports, growth in information employment switched from negative to positive territory in 2015. The turning point that occurred in the third u quarter of 2014 now appears to be permanent.

Information employment most likely will reach 11,500 in the Valley by the third quarter of 2016 as back-to-back declines of previous years are replaced by improvements in this category.

The hyperbolic pattern that has existed in the past is now replaced by steepening trend following the fourth quarter of 2014.

2.99%

3.00%

1.00%

Number of Employees

At 2.46 percent, wholesale trade employment grew faster in 2015 than the previous year, during which the average yearly growth was only 1.71 percent. The fastest growth u in the last three years occurred in 2013, when the series posted a 4.27 percent average yearly growth. The growth in 2015 however, was slightly above the series’ sample average yearly growth rate of 2.19 percent. Given these oscillations, wholesale trade employment is projected to grow at a yearly average rate of 2.99 percent in 2016 and 2.68 in 2017.

Annual Growth

3.50%

Months Actual

Projected

An active rental market and limited supply puts upward pressure on rents. At the same time, higher demand for rentals means u demand for buying homes is relatively low.

Projections point to 2.83 percent average yearly increase in construction employment during 2016 and 2.21 percent during 2017.

2.50%

1.80% 1.56% 1.31%

2.00%

Annual Growth

1.50% 1.00% 0.50% 0.00%

2.10% 1.83% 1.56%

0.56% -1.98%

-1.16%

-1.25%

-0.50% -1.00% -1.50% -2.00% -2.50%

Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

2016 Forecast

2017 Forecast

Pessimistic

Construction Employment 95,000 85,000

Number of Employees

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

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

Until 2015, construction employment u was the fastest-growing category of employment in the Valley. Construction employment, however, fell from 4.65percent growth in 2014 to 3.08 percent in 2015.

When compared with post-recession activity, the Valley’s overall construction employment growth is now displaying much more subtle growth. Noteworthy is the dispersion in growth by county. Kern County reported a -3.68 percent decline in construction employment, while Tulare and San Joaquin Counties reported 16.50 and 10.46 percent average yearly growth, respectively. Nationwide, construction employment increased 4.39 percent in 2015.

The increase in construction employment statewide was 6.73 percent.

Information Employment: Historical vs. Projected Average Yearly Growth

Months Actual

Projected

Construction Employment: Historical vs. Projected Average Yearly Growth

Annual Growth

When compared with the sample benchmark growth rate of -1.98 percent, the 0.56 percent growth registered in 2015 appears to be quite significant. Further, the two previous years also posted significant declines at -1.16 percent and -1.25 percent, respectively. Information employment u had been continuously declining since 2008, with the exception of 2015. To observe such a turning point becoming now permanent is encouraging for future growth. Given this turn of events in information employment, projections point to more significant growth at 1.56 percent in 2016 and 1.83 percent in 2017.

8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00%

7.32% 4.65% 3.08%

3.74% 2.83% 1.93%

3.03% 2.21% 1.40%

-0.11% Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

2016 Forecast

2017 Forecast

Pessimistic

San Joaquin Business Forecast Report, 2015 | 11

Employment Indicators Government Employment 290,000 280,000

Number of Employees

270,000 260,000 250,000 240,000 230,000 220,000 210,000

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

Government employment grew in 2015 at about the same rate as the previous year.

Employment in this category is projected to reach pre-recession levels by the second half of 2017, totaling 280,000 for the Valley. As such, government employment carves up a larger chunk of total employment at about 17.1 percent. Thus, government employment and spending is one of the main drivers of the Valley economy. u

Months

...government employment and spending is one of the main drivers of the Valley economy.

2.50%

2.02%

2.00%

1.96%

1.99% 1.81% 1.63%

1.50%

1.71% 1.54% 1.37%

1.00% 0.50%

0.49%

0.00%

-0.13% Sample Average

Actual

12 | California State University, Stanislaus

Projected

Government Employment: Historical vs. Projected Average Yearly Growth

Annual Growth

The post-recession trend in government employment is almost identical to the trend that prevailed before the recession. Although many categories of employment completely recovered after the recession, exceeding employment levels that existed before the recession, this is not the case for government employment, which in the Valley is deficient by about 20,000. Government employment is projected to grow 1.81 percent in 2016 and 1.54 percent in 2017. u

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

Pessimistic

2016 Forecast

2017 Forecast

The sample benchmark yearly growth rate of the series still remains negative at -0.33 percent. In 2013, financial activities employment grew at a very trivial rate of 0.51 percent, then in 2014 posted a decline at -0.95 percent. When compared with these rates, the 1.30 percent growth in 2015 was noteworthy. Projections point to faster growth in financial activities employment at an average rate of 1.58 percent in 2016 and 1.79 percent in 2017. u Valley total employment grew faster in 2015 than the previous year. Unlike 2014, all counties grew, but at varying speeds.

Fresno County employment grew the fastest.

Merced County no longer led employment growth in the Valley, posting the secondfastest growth. Madera and Kern counties grew the least. Stanislaus and San Joaquin counties grew at about the Valley average.

Construction no longer was the leading category of employment in 2015, being surpassed by leisure and hospitality services.

Construction fell from the first to the fourth spot among all other categories of employment growth. Financial activities employment was the only category of employment that had continued to suffer since the end of the recession, but it posted significant growth in 2015, therefore ending the classification as a suffering category of employment. All categories of employment grew in 2015.

Financial Activities Employment

Number of Employees

51,000 49,000 47,000 45,000 43,000 41,000 39,000

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

37,000

Months Actual

Projected

Financial Activities Employment: Historical vs. Projected Average Yearly Growth 2.50% 2.00%

Annual Growth

The decline in financial activities employment came to a halt in 2015 when the series posted a 1.30 percent average yearly growth. When compared with previous years, 2015 growth was quite significant. Financial activities employment was the only category of employment that continued to suffer since the end of the recession. Given the growth in 2015, employment in this category does not appear to be suffering any longer. The turning point that has formed in 2015 seems to be permanent. Employment in this category most likely will reach 43,000 by the first quarter of 2017. u

1.50%

1.30%

1.00%

1.80% 1.58% 1.36%

1.96% 1.79% 1.62%

0.51%

0.50% 0.00% -0.50%

-0.33%

-1.00% -1.50%

-0.95% Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

2016 Forecast

2017 Forecast

Pessimistic

San Joaquin Business Forecast Report, 2015 | 13

Housing Sector

Foreclosure starts are at their lowest occurrence since 2005. The increase that occurred in the fourth quarter of 2014 turned out to be only temporary, as foreclosure starts in the following quarters continued to decline in response to the drop in long-term interest rates. Low interest rates that have continued to prevail since the end of the recession have caused foreclosure starts to decline year-over-year.

Given the expected increases in interest rates, however, foreclosure starts are expected to rise only slightly from their new lows, not to reach the exceptional levels of the recession years. u The Freddie Mac 30-year fixed rate fell below 4.0 percent in the summer of 2014 and stayed low until the end of the second quarter of 2015. In the summer of 2015 the market’s expectation of a hike in interest rates negatively affected U.S. stock markets, which

Number of Permits

2,500 2,000 1,500 1,000

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

500

Months Actual

Projected

Single Family Building Permits: Historical vs. Projected Average Yearly Growth 40.00%

33.51%

35.00% 30.00% 25.00% 20.00% 15.00% 10.00%

5.78%

5.66%

2014 Average

2015 Average

5.00% 0.00% -5.00% -10.00%

-7.47% Sample Average

Actual

2013 Average

Optimistic

Most Likely

2017 Forecast

Foreclosure Starts in California 2.5 2 1.5 1 0.5 0

Bankers Association of America

14 | California State University, Stanislaus

2016 Forecast

Pessimistic

Months

posted a serious fall in global market indexes in

7.67% 6.03% 5.25% 3.87% 2.84% 1.71%

1993M11 1994M08 1995M05 1996M02 1994M11 1997M08 1998M05 1999M02 1999M11 2000M08 2001M05 2002M02 2002M11 2003M08 2004M05 2005M02 2005M11 2006M08 2007M05 2008M02 2008M11 2009M08 2010M05 2011M02 2011M11 2012M08 2013M05 2014M02 2014M11

At 5.66 percent in 2015, the growth in housing permits was almost identical to the u 5.78 percent increase in 2014. These singledigit rates reflect sustainable growth, as opposed to the 33.51 percent spike in 2013.

Because interest rates are expected to increase in the near term, growth in Valley housing permits is projected to be lower than the previous two years. Projections point to 5.25 percent and 3.87 percent growth in 2016 and 2017, respectively.

3,000

Annual Growth

Fresno led the Valley with the most housing permits issued in 2015, totaling 1,414, followed

by Bakersfield-Delano and Stockton at 1,114 and 974 newly issued housing permits, respectively. Hanford-Corcoran had almost no housing permits issued, while Modesto and Merced had only 31 and 50 newly issued permits, respectively, by August 2015. Valleywide, single-family building permits stayed mostly above 500 per month. There were 4,543 Valley permits issued by August 2015.

Single Family Building Permits 3,500

Percentage

The Valley aggregate for single-family building permits is composed of the eight Metropolitan Statistical Areas (MSAs) of the San Joaquin Valley: Bakersfield-Delano, Fresno, Hanford-Corcoran, Madera-Chowchilla, Merced, Modesto, Stockton and Visalia-Porterville. u

August 2015 as those worries were coupled with concerns about a recession hitting China and other emerging markets. u

9 8

Percentage

5

1993M10 1994M06 1995M02 1995M10 1996M06 1997M02 1997M10 1998M06 1999M02 1999M10 2000M06 2001M02 2001M10 2002M06 2003M02 2003M10 2004M06 2005M02 2005M10 2006M06 2007M02 2007M10 2008M06 2009M02 2009M10 2010M06 2011M02 2011M10 2012M06 2013M02 2013M10 2014M06 2015M02

3

Months Freddie Mac

Percentage Change Over the Previous Year

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

Actual

Projected

Quarters

Yearly Growth in Housing Prices: Historical vs. Projected Average Yearly Growth 16.00%

Annual Yearly Growth

The long-term benchmark rate of appreciation for Valley homes stands at an average yearly rate of 4.62 percent.

Growth in housing prices approached this rate when the series posted a 6.51 percent gain during the first eight months of 2015.

Such a pattern in housing prices is likely to continue into 2016 and 2017, settling to a steady rate consistent with the benchmark growth rate more representative of what the growth in this series will be like in the long term. Valley home values are projected to grow at an average yearly rate of 4.80 and 5.11 percent in 2016 and 2017, respectively, as interest rates slowly begin to rise in the forecast interval and housing prices adjust accordingly. u

6

4

Given that inflation remains very low at the moment, modest economic growth and the added worries of deflation combine to dissuade the Federal Reserve from increasing interest rates in the next couple of months. However, upward pressures may mount in the first half of 2016, when new data on inflation may alter the Federal Reserve’s decision to keep interest rates low.

Home prices continued to increase in 2015, u but at rates lower than 2014. Valley home prices appreciated 6.51 percent in 2015, less than half the rate of the appreciation in 2014, which was at 15.17 percent. This growth in housing prices was in line with our prediction of slower but more sustainable growth in Valley home values to take place over the next couple of years. Home values gained the most in Stanislaus County at 8.78 percent in 2015, followed by Merced County at 7.57 percent and San Joaquin County at 7.17 percent. All counties posted greater than 5.0 percent growth in 2015.

7

2000q1 2000q3 2001q1 2001q3 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

The Federal Reserve’s ultimate objective is price stability. Maintaining stable prices minimizes business uncertainty and as a result investors can look to the future and make investment plans. This, in turn, creates a positive business environment that leads to maximization of economic growth.

30 -Year Fixed Rate 10

13.76%

14.00%

15.17%

12.00% 10.00% 8.00% 6.00% 4.00%

6.51% 4.62%

5.79% 4.80% 3.81%

5.96% 5.11% 4.26%

2016 Forecast

2017 Forecast

2.00% 0.00%

Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

Pessimistic

San Joaquin Business Forecast Report, 2015 | 15

Inflation and Prices

4.5 3.5 2.5 1.5 0.5 -0.5

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

-1.5 -2.5

Months

West

National

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

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

The lowest increase in the overall level of prices since the first quarter of 2013 was registered in 2015. Given the low price of oil that has continued to prevail for some time, the benchmark inflation over the entire sample has dropped to 2.24 percent.

Yearly inflation rates since 2013 all registered below this long-term inflation rate, creating deflationary fears. However, the price of oil is expected to rise in the latter part of 2016. u

5.5

Yearly Inflation Rate

Noteworthy is the increase in inflation u in the West Coast relative to the national average. The discrepancy was the widest since 2001. During 2015, inflation rates in the West stayed above 1.0 percent, while nationwide they were near zero. Such a pattern provides strong evidence that the aggregate demand is expanding much faster in California than the rest of the nation.

Inflation Rate: Nationwide vs. West

Yearly Percentage Change

Inflation continued to stay at very low rates in 2015, which was the main reason the Federal Reserve delayed the decision to raise interest rates. Cost-push factors on inflation were not all present due to the low price of oil.

Demand-pull factors also were absent in 2015, further keeping inflation from increasing.

Months Actual

Noteworthy is the increase in inflation in the West Coast relative to the national average.

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

16 | California State University, Stanislaus

Yearly Percentage Change

2.50%

Appreciation in the domestic currency also partially has an affect on inflation rates remaining low, as imported goods become cheaper to purchase by Valley consumers.

Because appreciation has a negative effect on Valley exports, appreciation in the dollar also takes away the impact of demand-pull factors on inflation. Projections point to an average annual increase in overall level of prices on the West Coast of 1.61 percent in 2016 and 1.95 percent in 2017. u

Projected

2.24%

2.00%

1.86%

1.83% 1.61% 1.39%

1.50%

1.50%

2.12% 1.95% 1.79%

1.07%

1.00% 0.50% 0.00%

Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

Pessimistic

2016 Forecast

2017 Forecast

Average Weekly Wage

850 800 750 700 650 600 550 500

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 3.50%

3.27%

3.00%

2.78%

2.72% 2.54% 2.36%

2.48%

2.50%

3.16% 3.08% 3.00%

2.00% 1.50% 1.00%

0.43%

0.50% 0.00%

Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

2016 Forecast

2017 Forecast

Pessimistic

Yearly Wage Growth vs. Inflation 8.0 6.0 4.0 2.0 0.0

2015q1

2014q3

2014q1

2013q3

2013q1

2012q3

2012q1

2011q3

2011q1

2010q3

2010q1

2009q3

2009q1

2008q3

2008q1

2007q3

2007q1

2006q3

2006q1

2005q3

2005q1

2004q3

2004q1

2003q1

2002q3

-4.0

2003q3

-2.0

2002q1

Following the second quarter of 2014, average weekly wages began to grow faster and the average yearly inflation rate began to fall. The difference was at a maximum in the fourth quarter of 2014, when average weekly wages posted 3.95 percent yearly growth. The yearly inflation rate registered 1.3 percent, causing real wages to go up by 2.65 percent. The increase in real wages was the highest registered in the past seven years. In 2015, wages grew at a slightly slower rate and inflation continued to fall.

Due to the absence of cost-push factors and tightening labor markets, such a pattern in favor of wages likely will continue in the coming months. u

900

Average Yearly Growth

The discrepancy between average weekly wage growth and the inflation rate turned in favor of wages in 2014. In 2015, this discrepancy widened when the average yearly rate of inflation turned out to be lower than 2014. The Valley’s average weekly wages are likely to increase further in the following two years, staying above the inflation rate. Average weekly wages are projected to increase 2.54 percent in 2016 and 3.08 percent in 2017. u

Quarterly Average Weekly Wages 950

Average Percentage Change

Nominal average weekly wages u in the Valley grew faster than the rate of inflation in 2014 and 2015. As real wages rose, Valley consumers were able to afford more bundles of goods than they did before, and in proportion to the increase in real wages and salaries. Low inflation also helped maintain purchasing power. Because employment growth exceeds labor force growth in the Valley, labor markets have tightened further in 2015, putting upward pressure on wages and salaries. Average weekly wages will continue to rise slightly above the inflation rate in 2016 and 2017.

Quarters Inflation

Wage Growth

San Joaquin Business Forecast Report, 2015 | 17

Banking and Capital Markets

Total Deposits

14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000

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

The Valley’s total bank deposits in 2015 registered twice the growth rate observed in 2014, at an average annual growth of 10.29 percent in 2015 and 5.41 percent in 2014.

Strong growth in the Valley’s total bank deposits is expected to continue in the coming two-year period. The increase in financial activities employment in 2015 likely was the result of increased demand for jobs in this category caused by significant increases in total bank deposits and net loans and leases in 2015 relative to previous years. Valley total bank deposits are projected to grow at an average annual rate of 7.62 percent in 2016 and 5.48 percent in 2017. u

Total Bank Deposits (in $ Thousands) 16,000,000

Actual

Quarters

Projected

Total Deposits: Historical vs. Projected Average Yearly Growth 12.00%

Average Yearly Growth

Above-average employment growth in the Valley, combined with rising real wages, increased total bank deposits quite significantly in 2015 relative to the previous years. Increasing retail trade activity also was consistent with the Valley’s increase in total bank deposits. u

8.00%

8.44% 7.62% 6.80% 6.31% 5.48% 4.65%

6.96%

6.00%

4.56%

4.00%

5.41%

2.00% 0.00%

Strong growth in the Valley’s total bank deposits is expected to continue in the coming two-year period.

10.29%

10.00%

Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

2016 Forecast

2017 Forecast

Pessimistic

Assets in Nonaccrual

18 | California State University, Stanislaus

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

2003q2 2003q3 2003q4 2004q1 2004q2 2004q3 2004q4 2005q1 2005q2 2005q3 2005q4 2006q1 2006q2 2006q3 2006q4 2007q1 2007q2 2007q3 2007q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 2009q3 2009q4 2010q1 2010q2 2010q3 2010q4 2011q1 2011q2 2011q3 2011q4 2012q1 2012q2 2012q3 2012q4 2013q1 2013q2 2013q3 2013q4 2014q1 2014q2 2014q3 2014q4 2015q1 2015q2

In response to the increase in 30-year interest rates during the fourth quarter of 2014, assets in default 30 to 89 days spiked temporarily.

Naturally, assets in default 90-plus days responded with a longer lag to the rise in long-term interest rates during the same period. However, both came down

Thousand Dollars

In 2015, bank assets in nonaccrual continued to fall despite significantly higher net loans and leases in the Valley. The small blip in nonaccruals was due to a temporary increase in interest rates during the same time interval, which corresponded to the fourth quarter of 2014 and first quarter of 2015, reflecting the lagged response of defaults to an increase in interest rates. Nonaccruals have returned to the levels that existed in 2007. u

250,000

Quarters Federal Deposit Insurance Corporation

Assets in Default 30 + Days

following the drop in the 30-year rates in the following quarters.

Valley net loans and leases increased 10.14 percent in 2014. Yearly growth in net loans and leases was even higher in 2015 at 16.35 percent. However, average growth over the long run for the Valley in this category stands at 6.36 percent. Projections point to growth more in line with the long-run average rate, at 11.38 percent in 2016 and 8.87 percent in 2017. u

80,000

Thousand Dollars

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

2014q4

2014q2

2013q4

2013q2

2012q4

2012q2

2011q4

2011q2

2010q4

2010q2

2009q4

2009q2

2008q4

2008q2

2007q4

2007q2

2006q4

2006q2

2005q4

2005q2

2004q4

2004q2

2003q2

-

2003q4

10,000

Quarters Assets in Default 30-89 Days

Assets in Default 90+ Days * 10

Net Loans & Leases (in $ Thousands) 10,300,000 9,300,000

Net Loans & Leases

Valley net loans and leases exhibited u exceptional growth together with total bank deposits in 2015. Strong growth in two categories by community banks is indicative of bank deposits being increasingly channeled into loans and leases in the Valley. Further, the pattern observed in these two series is consistent with the view that the funds deposited in the Valley appear to be staying in the Valley, as they should.

An outflow of these funds otherwise would jeopardize the Valley’s economic growth.

90,000

As the Federal Reserve begins to increase

8,300,000 7,300,000 6,300,000 5,300,000 4,300,000

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

3,300,000

Valley bank profits are expected to rise following the increase in interest rates.

Projected

Net Loans & Leases: Historical vs. Projected Average Yearly Growth 18.00%

16.35%

16.00% 14.00%

Yearly Growth

interest rates in 2016, nonaccruals along with assets in default are expected increase a bit. Valley bank profits are expected to rise following the increase in interest rates.

Total bank deposits and net loans and leases are projected to post yearly growth at above long-run average rates. u

Quarters Actual

12.00% 10.00% 8.00% 6.00%

12.73% 11.38% 10.03% 9.86% 8.87% 7.87%

10.14% 6.36%

7.13%

4.00% 2.00% 0.00%

Sample Average

Actual

2013 Average

Optimistic

2014 Average

Most Likely

2015 Average

2016 Forecast

2017 Forecast

Pessimistic

San Joaquin Business Forecast Report, 2015 | 19

Concluding Remarks Valley total employment grew at a higher rate in 2015 than the previous year. Despite drought, total employment grew significantly above average. Unlike 2014, all counties posted employment growth in 2015. Employment in Fresno and Merced counties grew the fastest. Madera County employment also grew in 2015, but it was quite small compared with other counties.

In 2015, inflation rates nationwide were near zero, but on the West Coast the rise in the average level of prices was about 1.2 percent. Average weekly wages posted a significant increase above the inflation rate in 2015, consistent with tightening labor markets. Average weekly wages are projected to increase faster than the inflation rate in the next two years.

Dynamics in employment growth changed in 2015. The growth in construction employment was the fourth fastest.

Trade, transportation and utilities employment grew the fastest, followed by leisure and hospitality services employment and retail trade employment. Financial activities employment improved significantly from the year before. Manufacturing employment grew above national and state growth rates.

Unlike previous years, 2015 was a year in which all categories of employment improved from the previous year.

Valley bank deposits and net loans and leases posted exceptional growth in 2015. Nonaccruals in 2015 declined to the levels that existed in 2007 despite a temporary blip in the first quarter of 2015, resulting from an increase in 30-year rates from the previous quarter that proved to be only temporary. However, as the Federal Reserve begins to increase interest rates in 2016, nonaccruals and accruals past due are expected to increase, depending on the extent of the increase in interest rates. Nevertheless, 2015 was a strong year for the financial sector, whereby despite the strong increases in net loans and leases accruals kept on decreasing further.

Unlike 2014, all counties posted employment growth in 2015.

Housing prices increased further, but at a slower rate than previous years and more in line with the long-run average growth rate of the series. Projections point to growth in housing values in single digits, about the same rate as the long-run average rate in the next two years. Housing permits also began to increase at rates more consistent with the 10year benchmark rates, thus exhibiting more balanced growth.

Overall, the Valley economy adapted exceptionally well to the four-year drought and displayed above-average performance.

The projections point to the prevalence of similar upbeat economic dynamics in the two-year forecasting interval. ly

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 Š 2015 California State University, Stanislaus

20 | California State University, Stanislaus

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.

San Joaquin Business Forecast Report, 2015 | 21