2021 Business Forecast, Volume 11 - Issue 1

2021

VOL XI | ISS 1

San Joaquin Valley

BUSINESS FORECAST Emerging Trends in the Valley’s Economy

Table of Contents Contributors ............................................................................................................................ 3 Executive Summary .............................................................................................................. 4 Introduction ............................................................................................................................ 5 Employment Indicators........................................................................................................ 6 Housing Sector ......................................................................................................................16 Inflation and Prices...............................................................................................................18 Banking and Capital Markets ...........................................................................................20 Concluding Remarks .......................................................................................................... 22

SAN JOAQUIN VALLEY BUSINESS FORECAST 2022 Volume XI, Issue 1 csustan.edu/sjvbf Gökçe Soydemir, Ph.D. Stanislaus State One University Circle Turlock, CA 95382

2 | Stanislaus State

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

Contributors College of Business Administration Staff

Faculty

Gökçe Soydemir, Ph.D.

Foster Farms Endowed Professor of Business Economics

Tomas Annhenrie Gomez-Arias, Ph.D. Campbell, Ph.D. Dean, College of Business Administration

Professor, Accounting and Finance

David Lindsay, Ph.D. Professor, Accounting and Finance

Katrina Kidd

Student Assistants

Communications and Public Affairs

Abdulla Mammadsoy

Rosalee Rush

David Yohanan

Senior Associate Vice President for Communications, Marketing and Media Relations

Kristina Stamper

Director for Communications and Creative Services

Diamelle Abalos

Director, MBA Programs Administrative Support Coordinator

Steve Caballero Senior Graphic Designer

Mandeep Khaira Senior Web and Electronic Communications Developer

Carmen Garcia

Administrative Analyst

Katie Dowling Graphic Designer

San Joaquin Valley Business Forecast, 2022 | Volume XI • Issue 1 | 3

Executive Summary With the seeking of emergency authorization for COVID-19 oral medications, and with vaccine booster shots now being widely administered, key economic indicators - including falling interest rates, easy monetary policy, and low tax rates - are beginning to reverse course. Though the Federal Reserve announced no rate hikes for 2022, long-term rates have begun to rise. In addition, home values in the Valley registered a whopping 14.43 percent increase in the second quarter of 2021. Given the structurally disadvantaged position of our region’s economy and the ongoing drought, the consequent combined impact on the Valley most certainly will be disproportionate to the rest of the country. The data suggests no immediate downturn in economic activity, but it is important to note that the future course of the economy will very much depend on how fast and how high interest rates rise. A sudden panic of homeowners rushing to sell all at once may bring about a sudden correction in the housing market, which would greatly impact the Valley.

Every category of employment in the Valley continued to recover with the exception of government employment, which posted the same decline as in the previous year - 3.91 percent in 2020 and 3.92 percent in 2021. Despite recovering from the previous year, a few categories continued to post declining rates, albeit at slower paces. Farm-related Valley wholesale trade employment, negatively affected by the drought, declined at an average yearly rate of 1.13 percent in 2021, less than the 2020 decline of 4.75 percent. Education and health services employment declined at a slower rate of 0.16 percent in 2021, compared to 0.76 percent decline in 2020.

Another category of employment that declined less than the previous year was financial activities employment, which posted a decline of 4.09 percent in 2020 and 2.43 percent in 2021. Structurally problematic information employment declined 9.12 percent in 2021, still notably less than the 19.06 percent decline in 2020.

Retail trade, at an average annual rate of 5.93 percent, was the fastest-growing category of employment in 2021, followed by trade, transportation and utilities employment growing at 5.56 percent. The third-fastest was leisure and hospitality services employment, posting 4.62 percent growth in 2021. Manufacturing employment grew 2.05 percent in 2021, its fastest pace since 2015. Among the categories that switched from negative to positive territory, Valley construction employment grew the slowest at 1.99 percent in 2021, still a significant jump back from a decline

4 | Stanislaus State

of 3.01 percent in 2020. Despite an increase in employment growth projections for 2022, changing policy variables should compel employment levels to grow at a much slower rate in 2023.

Valley building permits increased at a phenomenal rate of 35.65 percent in 2021. This is similar to the pace observed in 2018 and it reflects the supply side trying to catch up with the excess demand caused by a shortage of inventory.

Because of the extension of the Biden administration’s relief package and the Federal Reserve’s continued deployed tools to mitigate the negative effects of the pandemic, there were basically no foreclosures in 2021 - similar to 2020. Freddie Mac 30-year rates continued to fall in the third quarter of 2021, after the Federal Reserve's signal of no rate hikes through 2022. Because of the rising price of oil and wages along with increased demand and liquidity injection, the yearly inflation rate increased very significantly in 2021 and is likely to stay high through the first quarter of 2022. Home values continued to increase in 2020, registering a 5.42 percent average yearly increase – outpacing the long-term benchmark growth of 5.07 percent. The increase in home values was much greater in 2021 than 2020 but some of it was due to inflation. Controlling for inflation, real growth in home values was a bit lower, yet still very significant. Home values are expected to grow at much slower rates in the coming months, particularly in real terms. As in the case of the previous housing crisis of 2008, an increase in interest rates to very high levels and at very fast rates may very well mean another correction. Homeowners looking at nominal growth rates may panic and try to sell all at once in an attempt to take advantage of home value appreciations, triggering a another significant correction in the housing market. It is therefore important to watch the rate of increase in the Federal Funds rate along with the pace of change in home values closely as we move forward.

To fight the negative effects of the pandemic, tremendous liquidity was injected into the economy both in 2021 and 2020. However, the Federal Reserve clearly signal that tapering began in November. Liquidity injection was an important factor behind the very high inflation rates of the past two quarters. Another reason was wage inflation, a result of a labor shortage that pressured employers to create monetary incentives for people to return to work. The rise in labor costs was passed on to consumers in the form of higher prices for goods and services.

Introduction Average weekly wages rose 4.93 percent in 2021, still very fast but not as fast as the rate observed in 2020 at 8.48 percent, the fastest increase since the report began tracking this indicator. Bottlenecks in supply chain as a cost-push factor was another main cause of high inflation. The average yearly inflation rate during 2021 was 3.66 percent, corresponding to a real wage increase of 1.27 percent.

President Biden’s stimulus plan and the Federal Reserve’s continued intervention again spurred bank activity in 2021. Valley total deposits grew 25.71 percent in 2021, which was a faster rate than the 21.19 percent rate observed in 2020 and just shy of three times the long-term benchmark rate of 8.68 percent.

Net loans and leases grew 11.36 percent in 2021, slower than the 17.63 percent growth in 2020. Valley net loans growth fell significantly below the rate of growth in bank deposits, indicating the community banks did not extend loans as they did in pre-pandemic years. Valley bank non-accruals began to trend more significantly upward, relative to 2020, creating a serious concern for the coming months. Community bank assets in default 30-to-89 days and assets in default 90-plus days also displayed a steepening trend as banks continued to keep a tab on unpaid loans. As relief programs such as eviction moratoriums end, nonaccruals are projected to rise much faster in the coming months. Data does not point to any immediate significant downturn in economic activity, but rising yields, Federal Reserve tapering, steep increases in home values and tax increases may be triggers of an oncoming correction. As a precaution, Valley residents and business should consider refinancing while interest rates are still low, moving into rental property, reducing leverage and increasing cash holdings.

This report examines data from January 2001 to October 2021. Twoyear medium-term forecasts are from November 2021 to December 2023. Forecasting a range rather than a point provides a more realistic assessment of likely future values. When actual numbers fall within the upper and lower forecast bands, the forecast becomes accurate.

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; and a conclusion.

San Joaquin Valley San Joaquin Madera

Fresno

Merced

Tulare Kings

Kern

San Joaquin Valley Business Forecast, 2021 | Volume XI • Issue 1 | 5

Employment Indicators Total Employment 1,900,000

Number of Employees

6 | Stanislaus State

1,600,000 1,500,000 1,400,000

Months Actual

Projected

Financial activities employment was yet another category that declined less in 2021, at 2.43 percent, than in 2020, at 4.09 percent.

Average yearly growth in Valley total employment grew 3.84 percent in 2021. Valley total employment will likely continue to stay below 1,800,000 through 2023. Projections point to an average growth of 3.51 percent in 2022 and slower growth of 0.88 percent in 2023 as several policy variables are expected to reverse course.

Total Employment: Historical vs. Projected Average Yearly Growth 6.00%

Average Percentage Change

All categories of employment, with the exception of government employment, are clearly in recovery phases but some have not yet begun to report positive growth. The historically problematic sector of information employment reported a decline of 9.12 percent in 2021, but even this was an improvement over the faster decline of 19.06 percent during the worst months of the pandemic in 2020. Government employment declined at a near-identical rate in 2021 at 3.92 percent as it did in 2020 at 3.91 percent. A few other categories continued to post declining rates, albeit slower than the previous year. Farmrelated Valley wholesale trade employment, negatively affected by the drought, declined at an average yearly rate of 1.13 percent in 2021, slower than the 4.75 percent decline in 2020.

Education and health services employment declined at a slower rate of 0.16 percent in 2021 compared to a 0.76 percent decline in 2020.

1,700,000

1,300,000

MERCED COUNTY TOTAL EMPLOYMENT GREW

3.56%

1,800,000

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 2021M09 2022M05 2023M01 2023M09

Total employment grew in all counties except Kings County in 2021. However, Kings County is on the way to posting significantly positive average yearly growth numbers beginning from December 2021 as the incoming growth numbers begin to outweigh the negative rates reported earlier in the year. Merced County total employment grew 3.56 percent, the fastest among the eight counties of the San Joaquin Valley.

Stanislaus County total employment grew the third fastest at 3.04 percent. Fresno County grew 1.98 percent, followed by Kern County at 1.84 percent. Tulare County reported 1.48 percent growth in 2021. Growth numbers for all counties switched from declining rates in the negative territory to growing in the positive territory beginning in April 2021, and employment levels have been growing steadily since then. Overshooting followed by undershooting is a regular phenomenon of any series trying to find steady rate of growth following a significant economic impact.

4.16% 3.51% 2.86%

4.00% 2.00% 0.00%

0.85%

3.84%

1.11%

1.47% 0.88% 0.29%

-2.00% -4.00% -6.00% -8.00%

-6.85% Sample Average

Actual

2019 Average

Optimistic

2020 Average

2021 Average

Most Likely

Pessimistic

2022 Forecast

2023 Forecast

Index Value

120 100 80 60 40 20

9/1/1992 9/1/1993 9/1/1994 9/1/1995 9/1/1996 9/1/1997 9/1/1998 9/1/1999 9/1/2000 9/1/2001 9/1/2002 9/1/2003 9/1/2004 9/1/2005 9/1/2006 9/1/2007 9/1/2008 9/1/2009 9/1/2010 9/1/2011 9/1/2012 9/1/2013 9/1/2014 9/1/2015 9/1/2016 9/1/2017 9/1/2018 9/1/2019 9/1/2020

0

Months Conference Board

Labor Force vs. Employment Growth 15 12 9 6 3 0 -3 -6 -9 -12 -15 -18

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

Just as in the in 2008 recession, statewide employment growth fell below the employment growth of the Valley during the pandemic. But with the recovery well underway, employment growth of the state now exceeds the Valley employment growth. This pattern during the recovery is different than the pattern observed after the 2008 recession, perhaps reflecting the negative effects of the ongoing drought impacting the Valley to a greater degree than the rest of the state.

140

Months Labor Force

Employment

Employment Growth: State vs. San Joaquin Valley 12.00% 7.00% 2.00% -3.00% -8.00% -13.00% -18.00%

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 2019M07 2020M01 2020M07 2021M01 2021M07

ALL CATEGORIES OF EMPLOYMENT, WITH THE EXCEPTION OF GOVERNMENT EMPLOYMENT, ARE CLEARLY IN RECOVERY PHASES BUT SOME HAVE NOT YET BEGUN TO REPORT POSITIVE GROWTH.

160

Percentage Change from Previous Year

With the pandemic recovery taking hold, labor force and employment growth both are in positive territory. However, labor force growth lags significantly behind employment growth due to low labor force participation rates. A similar pattern, at a much-lower scale, of employment growth exceeding labor force growth was observed at the end of the 2008 recession. The tendency to switch directions in both series is now acting as a new leading indicator for our region.

Consumer Confidence Index

Annual Percentage Change

The Consumer Confidence Index, an important leading indicator of upcoming economic activity, has continuously displayed an increasing pattern since the fourth quarter of 2020 and now appears to have stabilized around a value of 120.

As the Covid-19 pill becomes publicly available in the second half of 2022, confidence in consumer spending should continue to rise.

Months Valley

State

San Joaquin San Joaquin Valley Valley Business Business Forecast Forecast, Report,2021 2021| Volume | VolumeXIXI• •Issue Issue1 1| | 7

Employment Indicators U.S. Real GDP Annual Growth 40.0 30.0

Percentage Change

0.0 -10.0 -20.0

2023q1

2022q1

2021q1

2020q1

2019q1

2018q1

2017q1

2016q1

2015q1

2014q1

2013q1

2012q1

2011q1

2010q1

2009q1

2008q1

2007q1

2006q1

2005q1

2004q1

Quarters Actual

Projected

Education and Health Services Employment

Number of Employees

255,000 235,000 215,000 195,000 175,000 155,000 135,000 115,000

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 2021M09 2022M05 2023M01 2023M09

Months Actual

Projected

Average Percentage Growth

Education and Health Services Employment: Historical vs. Projected Average Yearly Growth 5.00% 4.00% 3.00% 2.00% 1.00%

3.22%

0.00%

4.05%

-1.00% -2.00%

Sample Average

Actual

8 | Stanislaus State

2003q1

2000q1

2002q1

-40.0

Education and health services employment reported a decline of 0.16 percent in 2021, but the decline was slower than the previous year’s decline of 0.79 percent.

Delays in school openings and unrelated healthcare centers undoubtedly had an impact on the relatively slower recovery in this category.

At the current pace of recovery, employment levels in education and health services are projected to exceed 235,000 by the end of 2023. Projections point to a switch from negative to positive territory and faster growth in the coming months. As the Valley’s economy continues to recover, employment in this category is expected grow at an average yearly rate of 1.22 percent in 2022 before slowing to 1.07 percent in 2023.

10.0

-30.0

AT THE CURRENT PACE OF RECOVERY, EMPLOYMENT LEVELS IN EDUCATION AND HEALTH SERVICES ARE PROJECTED TO EXCEED 235,000 BY THE END OF 2023.

Noteworthy is the negative projected real GDP growth of the lower bound around the end of the first quarter of 2023. Even though there are no immediate signs, a series of quick rate hikes that reach above a 6 percent threshold may trigger a housing correction led by a panic of homeowners rushing to sell all at once.

20.0

2001q1

Following the sudden pandemic-related decline of more than 30 percent, real gross domestic product overshot the mean at the start of the recovery, then quickly rebounded at roughly the same rate. The latest growth numbers point to a pattern of return to the steady state growth of about 3 percent. With the recovery taking hold in 2021, real GDP is projected to grow at 2.65 percent in 2022 and at a significantly slower rate of 0.51 percent in 2023 as the impact from reversing course begins to intensify.

2019 Average

Optimistic

-0.79%

2020 Average

Most Likely

1.46% 1.22% 0.98%

1.29% 1.07% 0.84%

2022 Forecast

2023 Forecast

-0.16%

2021 Average

Pessimistic

Manufacturing Employment 130,000 125,000

Number of Employees

120,000 115,000 110,000 105,000 100,000

2.05 % IN 2021

Months Actual

Projected

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

Manufacturing employment in the state and nation had been struggling before the pandemic, just as it did in the Valley.

With the new infrastructure plan taking hold, the effect of new investments is expected to contribute to faster growth in this category. Projections point to an average annual increase of 0.96 percent in 2022 and 0.19 percent in 2023.

90,000

2001M01 2001M10 2002M07 2003M04 2004M01 2004M10 2005M07 2006M04 2007M01 2007M10 2008M07 2009M04 2010M01 2010M10 2011M07 2012M04 2013M01 2013M10 2014M07 2015M04 2016M01 2016M10 2017M07 2018M04 2019M01 2019M10 2020M07 2021M04 2022M01 2022M10 2023M07

95,000

VALLEY MANUFACTURING EMPLOYMENT GREW

The Institute of Supply Management’s Purchasing Managers Index reached an all-time high value of 65 in March 2021.

Since then, the index appears to have reverted to its mean, reflecting the strong confidence of consumers, who now can make plans into the future - as opposed the months when the effects of the pandemic were worse. The index value is now around 60, with any value above 50 considered a signal of expansion.

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

1.20% 0.96% 0.71% 0.12%

2.05%

0.25%

0.43% 0.19% -0.04%

-2.04% Sample Average

Actual

2019 Average

Optimistic

2020 Average

2021 Average

Most Likely

Pessimistic

2022 Forecast

2023 Forecast

Purchasing Managers Index 70 65

Index Value

60 55 50 45 40 35 30

Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21

Valley manufacturing employment grew 2.05 percent in 2021, a significant improvement over the decline of 2.04 percent in 2020. At this new pace, the seasonal spike level of manufacturing employment will likely exceed 115,000 by the end of 2023. The manufacturing employment long-term benchmark growth rate remains in positive territory as the recovery of the Valley economy intensifies in 2021.

Months Institute of Supply Management

San Joaquin Valley Business Forecast, 2021 | Volume XI • Issue 1 | 9

Employment Indicators Leisure and Hospitality Services Employment 155,000 145,000

Number of Employees

Leisure and hospitality services employment has been one of the worst-affected categories of employment during the pandemic because of the dominance of unskilled workers earning minimum wage.

Leisure and hospitality services employment grew 4.62 percent in 2021, a very significant improvement after falling 17.18 percent in 2020. Employment levels are expected to exceed 125,000 by the end of 2023, but the discrepancy resulting from the pandemic most likely will continue beyond 2023.

135,000 125,000 115,000 105,000 95,000 85,000 75,000

2001M01 2001M10 2002M07 2003M04 2004M01 2004M10 2005M07 2006M04 2007M01 2007M10 2008M07 2009M04 2010M01 2010M10 2011M07 2012M04 2013M01 2013M10 2014M07 2015M04 2016M01 2016M10 2017M07 2018M04 2019M01 2019M10 2020M07 2021M04 2022M01 2022M10 2023M07

65,000

Months Actual

Projected

Leisure and Hospitality Services Employment: Historical vs. Projected Average Yearly Growth 15.00%

The long-term benchmark growth rate for leisure and hospitality services employment increased to 1.42 percent after factoring in the growth in 2021. The remaining discrepancy in employment levels will likely be around 5,000 by the end of 2021, which still would be a significant improvement. In this category alone, about 30,000 workers were laid off in 2020. Projections point to an average annual growth of 9.57 percent in 2022 and 2.34 percent in 2023.

2.51%

1.42%

0.00%

4.62%

-5.00%

-15.00% -20.00%

-17.18% Sample Average

Actual

2019 Average

Optimistic

2020 Average

Most Likely

2021 Average

2022 Forecast

2023 Forecast

Pessimistic

Trade, Transportation and Utilities Employment 330,000 310,000 290,000 270,000 250,000 230,000 210,000

2001M01 2001M10 2002M07 2003M04 2004M01 2004M10 2005M07 2006M04 2007M01 2007M10 2008M07 2009M04 2010M01 2010M10 2011M07 2012M04 2013M01 2013M10 2014M07 2015M04 2016M01 2016M10 2017M07 2018M04 2019M01 2019M10 2020M07 2021M04 2022M01 2022M10 2023M07

190,000

Months

Actual

10 | Stanislaus State

3.64% 2.34% 1.03%

5.00%

-10.00%

Number of Employees

The only category to post growth during the worst months of the pandemic was trade, transportation and utilities employment. In 2021, the growth intensified to 5.56 percent, becoming one of the fastest-growing categories of employment in the Valley. Further, this category of employment was the quickest to recover, exceeding the pace of growth in construction employment. At this rate, and with supply chain issues, trade, transportation and utilities employment is projected to exceed 310,000 by the of 2023.

11.04% 9.57% 8.09%

10.00%

Annual Growth

LEISURE AND HOSPITALITY SERVICES EMPLOYMENT GREW 4.62 PERCENT IN 2021

Projected

The long-term benchmark growth increased to 0.81 percent on momentum created by the strong growth rates in 2021. However, competition from online shopping continues to hurt retail trade employment in the Valley. Factoring the impact of online shopping, projections point to 2.30 percent growth in 2022 and 0.99 percent in 2023 as the effects of tapering and rate increases take their toll on consumer spending.

Average Growth

5.00% 4.00%

2.51% 2.32% 2.12%

3.00%

1.83%

2.00%

1.21%

1.00%

2.03% 1.79% 1.56%

0.48%

0.00%

Sample Average

Actual

2020 Average

2019 Average

Optimistic

Most Likely

2021 Average

2022 Forecast

2023 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 2001M10 2002M07 2003M04 2004M01 2004M10 2005M07 2006M04 2007M01 2007M10 2008M07 2009M04 2010M01 2010M10 2011M07 2012M04 2013M01 2013M10 2014M07 2015M04 2016M01 2016M10 2017M07 2018M04 2019M01 2019M10 2020M07 2021M04 2022M01 2022M10 2023M07

Retail trade employment suffered a huge loss during the worst months of the pandemic, but the 5.93 percent comeback in 2021 was the fastest among all categories. Employment in this category is expected to exceed 160,000 by the end of 2023. Initially, retail trade employment was slow to recover from the pandemic but in 2021 pace of growth picked up very significantly, even surpassing the growth rates observed in strong categories such as trade, transportation and utilities employment and construction employment.

5.56%

6.00%

Number of Employees

TRADE, TRANSPORTATION AND UTILITIES IS AN ESSENTIAL SECTOR WHEN EXPLAINING THE FAST REBOUND FROM THE PANDEMIC.

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

Months Actual

Projected

Retail Trade Employment: Historical vs. Projected Average Yearly Growth 8.00% 6.00%

Annual Growth

Trade, transportation and utilities is an essential sector when explaining the fast rebound from the pandemic. In particular, this was the only category that could not switch to remote work environments, since goods had to be physically transported from one location to other, especially as consumers switched to online purchasing. A shortage of truck drivers and other logistical issues has created bottlenecks that will last well into 2022. Trade, transportation and utilities employment is projected to grow at an average yearly rate of 2.32 percent in 2022 and slow to a 1.79 percent growth in 2023.

5.93%

4.00%

2.80% 2.30% 1.81%

2.00%

0.81%

0.00%

1.48% 0.99% 0.49%

-1.41%

-2.00%

-4.01%

-4.00% -6.00%

Sample Average

Actual

2019 Average

Optimistic

2020 Average

Most Likely

2021 Average

2022 Forecast

2023 Forecast

Pessimistic

San Joaquin Valley Business Forecast, 2021 | Volume XI • Issue 1 | 11

Employment Indicators Wholesale Trade Employment 50,000 48,000

Number of Employees

Worsening drought conditions took a toll on wholesale trade employment in 2021, causing it to perform below retail trade employment. To fight the adverse effects of drought and climate change the Valley must increase its water storage to make the region more resilient to longer-lasting droughts.

Given these ongoing drought conditions, employment levels in the category are expected to stay below 47,000 through the end of 2023.

46,000 44,000 42,000 40,000 38,000 36,000 34,000 32,000

THE DECLINE IN INFORMATION EMPLOYMENT IN 2021 WAS

30,000

Information employment nationally, statewide and in the Valley had been declining long before the pandemic. The use of social media and consumers’ changing digital media preferences are the main causes of this decline. The decline in information employment in 2021 was 9.12 percent, compared to 19.06 percent the previous year.

The decline slowed in 2021 but was roughly twice the rate observed in 2019. Employment levels in this category will likely stay below 8,500 through the end of 2023.

Actual

Projected

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

Annual Growth

2.00% 1.00%

1.79% 1.48% 1.18% 1.01% 0.65% 0.29%

1.28% 0.01%

0.00%

-1.13%

-1.00% -2.00% -3.00% -4.00%

-4.75%

-5.00% -6.00%

Sample Average

Actual

2020 Average

2019 Average

Optimistic

Most Likely

2021 Average

2022 Forecast

2023 Forecast

Pessimistic

Information Employment 18,500

Number of Employees

Primarily because of the drought and the pandemic, the seasonal pattern observed in prior years was not observed in 2021.

Wholesale trade employment in the Valley declined by 1.13 percent, a slower decline when compared to the 4.75 percent drop in 2020. Projections point to 1.48 percent growth in 2022 and 0.65 percent growth in 2023. Because of the drought, however, the discrepancy of about 2,000 workers will likely not disappear during the forecast interval.

2001M01 2001M10 2002M07 2003M04 2004M01 2004M10 2005M07 2006M04 2007M01 2007M10 2008M07 2009M04 2010M01 2010M10 2011M07 2012M04 2013M01 2013M10 2014M07 2015M04 2016M01 2016M10 2017M07 2018M04 2019M01 2019M10 2020M07 2021M04 2022M01 2022M10 2023M07

9.12%

Months

16,500 14,500 12,500 10,500 8,500 6,500

2001M01 2001M11 2002M08 2003M05 2004M02 2004M11 2005M08 2006M05 2007M02 2007M11 2008M08 2009M05 2010M02 2010M11 2011M08 2012M05 2013M02 2013M11 2014M08 2015M05 2016M02 2016M11 2017M08 2018M05 2019M02 2019M11 2020M08 2021M05 2022M02 2022M11 2023M08

4,500

Months Actual

12 | Stanislaus State

Projected

Low interest rates were another factor contributing to increased demand for housing in the Valley, as was an emerging trend – Bay Area residents relocating to more sparsely populated areas. The huge spike in building permits in 2021 serves as a leading indicator that more homes will be built.

Projections point to an average annual growth of 2.82 percent in 2022, then a fall to 1.23 percent in 2023 as tapering and rising rates begin to take effect.

Annual Growth

5.00% 0.00% -5.00%

-3.35%

4.58% 3.20% 1.82%

3.05% 1.66% 0.28%

2022 Forecast

2023 Forecast

-4.24% -9.12%

-10.00% -15.00%

-19.06%

-20.00% -25.00%

Sample Average

Actual

2019 Average

Optimistic

2020 Average

2021 Average

Most Likely

Pessimistic

Construction Employment 95,000 85,000 75,000 65,000 55,000 45,000 35,000

2001M07 2002M04 2003M01 2003M10 2004M07 2005M04 2006M01 2006M10 2007M07 2008M04 2009M01 2009M10 2010M07 2011M04 2012M01 2012M10 2013M07 2014M04 2015M01 2015M10 2016M07 2017M04 2018M01 2018M10 2019M07 2020M04 2021M01 2021M10 2022M07 2023M04

THE HUGE SPIKE IN BUILDING PERMITS IN 2021 SERVES AS A LEADING INDICATOR THAT MORE HOMES WILL BE BUILT.

10.00%

Number of Employees

Construction employment bounced back quickly in the initial stages of the pandemic, but in later months grew at rates more in line with the long-term benchmark rate. Employment in this category grew 1.99 percent in 2021, rebounding from a 3.01 percent decline in 2020. Increased construction activity is easily visible to the eye in the Valley.

However, the inventory shortage is likely to last for some time, as the number of homes being built in the Valley is not close to what is necessary to satisfy the demand.

Information Employment: Historical vs. Projected Average Yearly Growth

Months Actual

Projected

Construction Employment: Historical vs. Projected Average Yearly Growth 4.00% 3.00%

Annual Growth

The long-term benchmark decline fell further, to 3.35 percent, or about onethird of the decline in 2021. Because the declines in 2020 and 2021 were extreme – multifold of the long-term benchmark rate – a switch from negative to positive territory is expected in the coming months. Projections point to average yearly growth of 3.20 percent in 2022 and 1.66 percent in 2023. Given the historical declining pattern prevailing since 2008, the growth in 2023 might very well occur closer to the lower bound of 0.28 percent.

2.57%

1.99%

2.00% 1.00%

3.25% 2.82% 2.40% 1.71% 1.23% 0.76%

0.92%

0.00% -1.00% -2.00% -3.00% -4.00%

-3.01% Sample Average

Actual

2019 Average

Optimistic

2020 Average

2021 Average

Most Likely

Pessimistic

2022 Forecast

2023 Forecast

San Joaquin Valley Business Forecast, 2021 | Volume XI • Issue 1 | 13

Employment Indicators Government Employment 325,000 315,000

Number of Employees

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

295,000

2001M01 2001M10 2002M07 2003M04 2004M01 2004M10 2005M07 2006M04 2007M01 2007M10 2008M07 2009M04 2010M01 2010M10 2011M07 2012M04 2013M01 2013M10 2014M07 2015M04 2016M01 2016M10 2017M07 2018M04 2019M01 2019M10 2020M07 2021M04 2022M01 2022M10 2023M07

245,000

NOT COUNTING THE SEASONAL UPS AND DOWNS, GOVERNMENT EMPLOYMENT LEVELS WILL LIKELY REACH

Months Actual

Projected

Government Employment: Historical vs. Projected Average Yearly Growth

BY THE END OF 2023.

3.00%

2.01%

1.88% 1.59% 1.30%

2.00%

Annual Growth

Not counting the seasonal ups and downs, government employment levels will likely reach 295,000 by the end of 2023. The discrepancy of about 12,500 employees will not likely be filled during the two-year ahead forecast interval. Projections point to an average yearly growth of 1.59 percent in 2022 and a lagged positive response of 1.06 percent in 2023.

305,000

1.00%

0.61%

0.00% -1.00% -2.00% -3.00% -4.00%

Valley financial activities employment continued to improve, even as growth did not switch from negative to positive territory.

Employment levels in this category continued to decline in 2021 but at a slower pace than the year before. Employment in this category will likely reach 42,000 in the fourth quarter of 2023.

-5.00%

In the coming months, as interest rates begin to increase, Valley banks’ profitability also will increase. As interest rates fell during the pandemic, Valley banks extended fewer loans, reacting to very high default risks and interest rates too low to generate profit. Financial activities employment is projected to increase at an average yearly rate of 2.22 percent in 2022 and 1.24 percent in 2023.

51,000

-3.91% Sample Average

Actual

2019 Average

Optimistic

-3.92%

2020 Average

2021 Average

Most Likely

Pessimistic

2022 Forecast

2023 Forecast

Number of Employees

Financial Activities Employment 49,000 47,000 45,000 43,000 41,000 39,000 37,000

Months Actual

14 | Stanislaus State

2.36% 2.06% 1.75%

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 2021M09 2022M05 2023M01 2023M09

Government employment was the only category of employment that did not improve from the previous year, declining 3.92 percent in 2021 – nearly matching the 3.91 percent decline observed in 2020.

Recovery in this category comes with a lag, as it did during the 2008 recession.

During a contractionary phase, the decline in this category also comes at a later stage than the declines in all other categories of employment.

Projected

Financial Activities Employment: Historical vs. Projected Average Yearly Growth 3.00% 2.00%

Annual Growth

Recovery seems to be well underway and is steady, based on the incoming data. However, many important policy variables – such as easy monetary policy and falling interest rates – will be reversing course in the coming months. While the projections are upbeat in 2022, slower growth should prevail in 2023 due to a changing business environment. Though there are no immediate signs of a downturn, it is important to watch incoming data to take necessary positions and be prepared before the impact of such reversing of course begins to be felt on our economy. Consumer credit grew more slowly than in previous months, limiting the ability of consumers to spend and eventually lowering their spending power. To prepare for an oncoming correction, it would be prudent for businesses and consumers to lower debt exposure, increase cash holdings, lock interest rates early on loans and move from flexible to fixedrate borrowing.

1.00% 0.00% -1.00%

2.61% 2.22% 1.83%

0.51%

1.66% 1.24% 0.81%

-0.41%

-2.00%

-2.43%

-3.00% -4.00% -5.00%

-4.09% Sample Average

Actual

2019 Average

Optimistic

2020 Average

2021 Average

Most Likely

Pessimistic

2022 Forecast

2023 Forecast

RECOVERY SEEMS TO BE WELL UNDERWAY AND IS STEADY, BASED ON THE INCOMING DATA.

San Joaquin Valley Business Forecast, 2021 | Volume XI • Issue 1 | 15

Housing Sector

With 2,020 permits, Fresno kept the lead in issuing the most housing permits in 2021, followed by 1,749 in Stockton and 1,351 in Bakersfield. Visalia issued 927 permits in 2020, while Madera and Merced issued 778 and 93, respectively. Modesto issued 26 building permits, while no housing permits were issued in Hanford-Corcoran.

Projections point to average annual growth of 17.60 percent in 2022 and 3.76 percent in 2023, as the effects of tapering and rate hikes begin to take hold on the housing sector.

3,000 2,500

Number of Permits

2,000 1,500 1,000 500 0

2004M01 2004M09 2005M05 2006M01 2006M09 2007M05 2008M01 2008M09 2009M05 2010M01 2010M09 2011M05 2012M01 2012M09 2013M05 2014M01 2014M09 2015M05 2016M01 2016M09 2017M05 2018M01 2018M09 2019M05 2020M01 2020M09 2021M05 2022M01 2022M09 2023M05

Housing permits spiked 35.65 percent in 2021, an increase more than four times the long-term benchmark rate of 8.22 percent. Even during the pandemic, building permits increased 13.26 percent. Next year’s building permit totals will likely be lower due to the spike in 2021. In any case, the building permit data points to highly increased activity in home building in the Valley.

At this strong pace, Valley housing permits will most likely exceed 1,000 per month by the second half of 2022.

Single-Family Building Permits

Months Actual

Projected

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

35.65%

35.00%

Annual Growth

The eight Metropolitan Statistical Areas (MSAs) of the Bureau of Labor Statistics that make up the San Joaquin Valley are Fresno, BakersfieldDelano, Hanford-Corcoran, Madera-Chowchilla, Merced, Modesto, Stockton, and VisaliaPorterville. The aggregated data from these MSAs constitute the total single-family building permits in the Valley.

Because of the Federal Reserve’s continued intervention in 2021, the foreclosures started series in California fell further, to all-time lows, and became virtually nonexistent. Thus, this series remains at the lowest levels since 1999. Bank accruals, however, began to rise sharply in 2021, as they did in 2020. With the ending of mortgage assistance in September, 2021, a sharp increase in foreclosures is expected in the coming two-year period.

30.00% 25.00%

19.61% 17.60% 15.60%

20.00% 15.00% 10.00%

13.26% 8.22%

5.00%

5.69% 3.76% 1.84%

1.52%

0.00%

Sample Average

Actual

2019 Average

Optimistic

2020 Average

Most Likely

2021 Average

2022 Forecast

2023 Forecast

Pessimistic

Foreclosure Starts in California 2.4

Percentage

2.1 1.8 1.5 1.2 0.9 0.6 0.3

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 Q2 2019 Q1 2020 Q4 2020

0

Quarters Mortgage Bankers Association of America

16 | Stanislaus State

30-Year Fixed Rate

Percentage

7 6 5 4

2

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 2015M10 2016M06 2017M02 2017M10 2018M06 2019M02 2019M10 2020M06 2021M02

3

Months Freddie Mac

Yearly Growth in Housing Prices 40 30 20 10 0 -10 -20 -30 -40

2000q1 2000q4 2001q3 2002q2 2003q1 2003q4 2004q3 2005q2 2006q1 2006q4 2007q3 2008q2 2009q1 2009q4 2010q3 2011q2 2012q1 2012q4 2013q3 2014q2 2015q1 2015q4 2016q3 2017q2 2018q1 2018q4 2019q3 2020q2 2021q1 2021q4 2022q3 2023q2

The fastest increase in home values took place in Stockton, which reported a 13.92 percent average annual increase in 2021.

The second fastest increase in home values was in Modesto at 13.03, followed

by Merced at 12.50 percent. Madera came next at 12.02 percent, followed by 11.92 percent in Visalia and Porterville. Fresno home prices increased 11.67 percent.

Fresno and Hanford-Corcoran reported the slowest increase in home prices in 2020 at 11.26 percent and 11.19 percent, respectively. Projections point to a 6.38 percent increase in 2022 and a 3.94 percent increase in 2023.

9 8

Percentage Change Over the Previous Year

Home value appreciation in 2021 was the fastest since 2014. About 3.66 percent of this increase was due to inflation, corresponding to 8.93 percent real appreciation. Even in real terms, however, the appreciation was significant enough to create the concern of a potential correction in the housing market, particularly if such high rates of appreciation do not retreat to more sustainable rates.

10

Quarters Actual

Projected

Yearly Growth in Housing Prices: Historical vs. Projected Average Yearly Growth 14.00%

Annual Yearly Growth

Other than a temporary spike in April, 2021, long-term interest rates kept falling.

Falling rates kept borrowing costs very low, but home values increased sharply. The refinancing activity of homeowners who could afford to do so was very active in 2021. When interest rates reverse course, in concert with other important variables – such as low tax rates – it undoubtedly will have a dampening effect on the housing sector. Whether this dampening turns into a correction will very much depend on how fast and how high interest rates rise. Home values continued to increase but the pace intensified in 2021. Home values in the Valley rose 12.19 percent in 2021 – more than twice the rate of the 5.38 percent observed in 2020.

12.19%

12.00% 10.00% 8.00% 6.00% 4.00%

5.23%

4.46%

Sample Average

2019 Average

7.30% 6.38% 5.46%

5.38%

4.83% 3.94% 3.05%

2.00% 0.00%

Actual

Optimistic

2020 Average

2021 Average

Most Likely

Pessimistic

2022 Forecast

2023 Forecast

San Joaquin Valley Business Forecast, 2021 | Volume XI • Issue 1 | 17

Inflation and Prices

The rate of inflation began to come in at rates above 5 percent following the second quarter of 2021. In 2021, the average yearly inflation was 3.66 percent, well above the long-term benchmark rate of 2.34 percent. The high price of oil acts as a cost-push factor, driving prices higher. Another cost-push factor is high labor costs, which have begun to increase well in advance of the rate of inflation in the early months of recovery.

5.5 4.5

Yearly Inflation Rate

3.5 2.5 1.5 0.5 -0.5 -1.5 -2.5 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 2016M01 2016M07 2017M01 2017M07 2018M01 2018M07 2019M01 2019M07 2020M01 2020M07 2021M01 2021M07

As was the case following the 2008 recession, the overall price level has risen during the recovery from 2020 faster nationwide than for our region, a reverse of historic performance.

This change in pattern during recessions and immediately after recovery acts as another reliable coincidental indicator for our region.

Inflation Rate: Nationwide vs. West

Months West

Nationwide

U.S. West Inflation Rate 6.0

Yearly Percentage Change

As the pandemic recovery intensified, enormous liquidity injections in the economy began to take their toll on the rate of inflation, and these high inflation rates are likely to stay with us through the first quarter of 2022.

5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0

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 2021M09 2022M05 2023M01 2023M09

-3.0

Months

Inflation remains mainly anchored to the price of oil. However, excess demand conditions and shortages observed in commodity markets is another significant factor driving prices up from the demand-pull side. Projections of the rate of inflation for the Western region point to an average yearly increase of 2.81 in 2022 and 1.87 percent as the tapering intensifies and rates rise in 2023.

18 | Stanislaus State

Actual

Projected

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

THE RATE OF INFLATION BEGAN TO COME IN AT RATES ABOVE 5 PERCENT FOLLOWING THE SECOND QUARTER OF 2021.

4.00% 3.50%

3.66%

3.00% 2.50%

2.34%

2.69%

2.00%

3.00% 2.81% 2.63%

1.76%

1.50%

2.03% 1.87% 1.71%

1.00% 0.50% 0.00%

Sample Average

Actual

2019 Average

Optimistic

2020 Average

Most Likely

2021 Average

Pessimistic

2022 Forecast

2023 Forecast

2001q1 2001q4 2002q3 2003q2 2004q1 2004q4 2005q3 2006q2 2007q1 2007q4 2008q3 2009q2 2010q1 2010q4 2011q3 2012q2 2013q1 2013q4 2014q3 2015q2 2016q1 2016q4 2017q3 2018q2 2019q1 2019q4 2020q3 2021q2 2022q1 2022q4 2023q3

Average Quarterly Wage

9.00%

8.48%

8.00% 7.00% 6.00%

4.93%

5.00% 4.00%

3.81%

3.21%

3.34% 2.77% 2.21%

3.00%

1.82% 1.58% 1.33%

2.00% 1.00% 0.00%

Sample Average

Actual

2019 Average

Optimistic

2020 Average

2021 Average

Most Likely

Pessimistic

2023 Forecast

2022 Forecast

Yearly Wage Growth vs. Inflation 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0

2020q1

2019q2

2018q3

2017q4

2017q1

2016q2

2015q3

2014q4

2014q1

2013q2

2012q3

2011q4

2011q1

2010q2

2009q3

2008q4

2008q1

2007q2

2006q3

2005q4

2005q1

2004q2

-4.0

2003q3

During 2021, the average rate of inflation stood at 3.66 percent. During the same time, average weekly wages rose 4.93 percent, corresponding to a gain in purchasing power of 1.27 percent. In 2020, the rate of inflation was 1.76 percent while the increase in average weekly wages was 8.48 percent, corresponding to a gain in purchasing power of 6.72 percent – the largest gain since 2001.

In the coming months, however, average weekly wages will likely be increasing at a slower pace than the rate of inflation, thus decreasing purchasing power.

Projected

Quarterly Wage Growth: Historical vs. Projected Average Yearly Growth

2002q4

3.66 %

Actual

2002q1

DURING 2021, THE AVERAGE RATE OF INFLATION STOOD AT

1150 1050 950 900 850 800 750 700 650 600 550 500 450

Quarters

Average Yearly Growth

The reservation wage of a typical Valley worker (the amount the average employee would require to return to work) increased about three times the long-term benchmark rate of 3.21 percent during 2021. Slower increases will likely occur following the first quarter of 2021. Average weekly wages in the Valley will likely exceed $1,050 by the end of 2023. Projections point to an average yearly increase of 2.77 in 2022 and 1.58 percent in 2023.

Quarterly Average Wages

Average Percentage Change

We had reported in our previous report that perhaps the most interesting development during the early months of the recovery was the yearly change in average weekly wages.

Wages normally fall during recessions.

However, average weekly wages in the Valley rose 8.48 percent in 2020, another characteristic that made this recession unique. This sharp rise in wages was due to the reluctance of workers afraid for many reasons – including the fear of catching the virus - to return to work and the amount of available unemployment compensation.

Quarters Inflation

Wage Growth

San Joaquin Valley Business Forecast, 2021 | Volume XI • Issue 1 | 19

Banking and Capital Markets

5.58 % IN 2022

Bank assets in non-accrual have begun to trend more visibly upward in 2021. With the end of mortgage forbearance programs and other support in September of 2021, the pace of non-accruals will likely rise at a faster rate. The rise in interest rates will make it more difficult for Valley residents to meet their mortgages and other financial obligations. The anticipated increases in taxes also will contribute to a decrease in the disposable income that fuels consumer spending and savings.

Total Deposits

24,000,000

14,000,000

\

9,000,000

2003q1 2003q4 2004q3 2005q2 2006q1 2006q4 2007q3 2008q2 2009q1 2009q4 2010q3 2011q2 2012q1 2012q4 2013q3 2014q2 2015q1 2015q4 2016q3 2017q2 2018q1 2018q4 2019q3 2020q2 2021q1 2021q4 2022q3 2023q2

4,000,000

Quarters Actual

Projected

Total Bank Deposits: Historical vs. Projected Average Yearly Growth 30.00%

25.71%

25.00%

21.19%

20.00% 15.00%

8.68%

10.00%

7.07% 5.58% 4.09%

7.07%

5.00% 0.00%

Sample Average

Actual

2019 Average

Optimistic

2020 Average

Most Likely

2021 Average

2023 Forecast

Pessimistic

Assets in Nonaccrual 250,000 200,000 150,000 100,000 50,000 -

Quarters Federal Deposit Insurance Corporation

20 | Stanislaus State

2022 Forecast

6.06% 4.49% 2.91%

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

VALLEY TOTAL BANK DEPOSITS ARE PROJECTED TO INCREASE AT AN AVERAGE ANNUAL RATE OF

29,000,000

Average Yearly Growth

Valley total bank deposits spiked 25.71 percent in 2021 and 21.19 percent in 2020.

When these are compared with the longterm benchmark rate of 8.68 percent one can understand the magnitude of the increase resulting from the Federal Reserve intervention. Yet despite the banks being flooded with cash, they do not appear be extending loans at the same pace as the increase in deposits because of a high default risk and low interest rates. Community bank deposits in the Valley will likely increase at rates in line with their historic rates as tapering resumes and interest rates rise.

Valley total bank deposits are projected to increase at an average annual rate of 5.58 percent in 2022 and 4.49 percent in 2023 as the Federal Reserve slowly begins to deflate the balance sheet.

Total Bank Deposits (in $ Thousands)

Thousand Dollars

The continued interventions in the economy to fight the impacts of the pandemic resulted in tremendous liquidity injections, which were reflected in bank deposits and net loans and leases as well as bank accruals.

Community bank deposits and net loans and leases both are likely to grow more in line with their historical benchmark rates as the Federal Reserve begins to deflate the balance sheet to tame inflation. Projections point to net loans and leases increasing at an average yearly rate of 5.24 percent in 2022 and 4.07 in 2023.

Thousand Dollars

70,000 60,000 50,000 40,000 30,000 20,000 10,000

2021q2

2020q3

2019q4

2019q1

2018q2

2017q3

2016q4

2016q1

2015q2

2014q3

2013q4

2013q1

2012q2

2011q3

2010q4

2010q1

2009q2

2008q3

2007q4

2007q1

2006q2

2005q3

2004q4

2004q1

2003q2

-

Quarters Assets in Default 30-89 Days

Assets in Default 90-Plus Days * 10

Net Loans and Leases (in $ Thousands) 17,300,000 15,300,000 13,300,000 11,300,000 9,300,000 7,300,000 5,300,000 3,300,000

2003q1 2003q4 2004q3 2005q2 2006q1 2006q4 2007q3 2008q2 2009q1 2009q4 2010q3 2011q2 2012q1 2012q4 2013q3 2014q2 2015q1 2015q4 2016q3 2017q2 2018q1 2018q4 2019q3 2020q2 2021q1 2021q4 2022q3 2023q2

The economic stimulus plan, indeed, delivered much-needed assistance to fight-off the impact of the pandemic on the economy. Had the plan not been implemented, the effect of the pandemic on the economy would be much more devastating. But with the end of assistance programs and easy monetary policy and with falling rates reversing course, the trajectory of the economy will likely change in the next two years.

80,000

Net Loans and Leases

Community bank net loans and leases increased 11.36 percent in 2021. The rate of increase was less than the 17.63 percent increase in 2020, pointing to further cuts on the part of community banks to issue loans. It means banks are increasingly choosing to sit on cash rather than extend more loans.

The expected increase in interest rates may change this picture in the coming months as higher interest rates correspond to increased bank profitability.

Assets in Default 30-Plus Days

Quarters Actual

Projected

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

Yearly Growth

The pattern observed in bank assets in default 90-plus days is not yet consistent with the pattern observed in bank assets in non-accrual. The two series are exhibiting a flatter trend when viewed against the steep trend observed in bank non-accruals. The two series will likely increase at much faster rates in the coming months as the Federal Reserve begins to gradually decrease the balance sheet and resorts to a series of rate hikes to control inflation.

20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%

17.63%

11.36% 8.24%

8.16%

Sample Average

2019 Average

Actual

Optimistic

6.00% 5.24% 4.47%

2020 Average

Most Likely

2021 Average

2022 Forecast

6.00% 4.07% 2.14% 2023 Forecast

Pessimistic

San Joaquin Valley Business Forecast, 2021 | Volume XI • Issue 1 | 21

Concluding Remarks Incoming data points to a recovery that is now well underway. With the seeking of emergency authorization for COVID-19 oral medications, and with vaccine booster shots poised to be publicly available in the second half of 2021, we are quickly moving away from the pandemic’s hold on the economy. However, easy monetary policy and falling interest rates will be reversing courses and change the trajectory of the economy. Much will depend on how fast and how high interest rates rise following the tapering activity by the Federal Reserve.

Valley total employment will likely grow at an overall average rate of 3.51 percent in 2022, followed by slower growth of 0.88 percent in 2023. During 2021, total employment in all counties grew, with the exception of Kings County. Merced County employment grew the fastest, with Madera and San Joaquin counties tying for second place. Fourth-fastest growth occurred in Stanislaus County while Kern and Fresno counties took fifth and sixth place, followed by Tulare.

Information employment continued to decline at the fastest rate of all sectors in 2021, but these declines were occurring long before the pandemic hit. The information employment rate of decline was much slower than the decline in 2020. The fastest-growing category of employment was retail trade, followed by trade, transportation and utilities employment. The leisure and hospitality services category grew the third-fastest while manufacturing and construction employment were the fourth- and fifthfastest growing categories. Financial activities employment declined in 2021, but the decline was slower than that of 2020. Government employment posted the same decline in 2021 as in the previous showing. Education and health services employment grew the slowest in 2021, due to delays in school-openings and with healthcare workers primarily assigned to fighting the pandemic. Because of the worsening drought, farm-related wholesale employment declined in 2021.

Home values posted very significant increases in 2021, bringing back worries of a correction in the housing market.

While there are no immediate signs of this happening, tapering and rate hikes may trigger a crisis if homeowners panic and attempt to sell their homes all at once, an action that would significantly depress home values. It is important for homeowners to keep an eye on the variables as they reverse course and to prepare for a potential correction by lowering debt exposure, moving into cash, locking-in fixed interest rates by moving from flexible rates while interest rates are still low, and even selling homes and moving into rental property.

22 | Stanislaus State

The overall price level rose above 5 percent and high inflation rates are likely to prevail through the first quarter of 2022. Average weekly wages rose 4.93 percent, well above the 3.66 percent rate of average yearly inflation. There was a 1.27 percent gain in purchasing power in 2021 but in the coming months inflation is likely to outpace the increase in average weekly wages.

Both Valley bank deposits and net loans and leases increased significantly, but the increase in net loans and leases lagged behind the increase in bank deposits. This discrepancy meant community banks extended fewer loans in 2021.

Valley community bank assets in nonaccrual began to trend more steeply upwards in 2021 compared to the year before and are likely to continue at this pace as tapering resumes and rates rise. Community bank assets in default 30 to 89 days and assets in default 90 plus days displayed a different pattern in 2021 than the pattern displayed by bank assets in non-accrual, but with the ending of mortgage forbearance programs and similar support, the two series will rise in a pattern similar to banks’ assets in non-accrual.

In all, the regional and national indicators point to a recovery taking hold, but easy monetary policy, falling interest rates and low taxes will be reversing course and will change the dynamics of the Valley economy. While the data does not point to any immediate correction, it is now important for Valley residents and business community to keep a close eye on the impact from key variables reversing course in the coming months.

Disclaimer Although information in this document has been obtained from sources believed to be reliable, we do not represent or warrant its accuracy, and such information may be incomplete or condensed. This document does not constitute a prospectus, offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument which may be discussed in it.

All estimates and opinions included in this document constitute our judgment as of the date of the document and may be subject to change without notice. This document is not a personal recommendation, and you should consider whether you can rely upon any opinion or statement contained in this document without seeking further

advice tailored for your own circumstances.

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

San Joaquin Valley Business Forecast, 2021 | Volume XI • Issue 1 | 23

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