BUSINESS FORECAST
Emerging Trends in the Valley’s Economy
Contributors
Faculty
Gökçe
Soydemir, Ph.D. Foster Farms Endowed Professor of Business Economics
Sacha Maria Joseph-Mathews, Ph.D. Interim Dean, College of Business Administration
College of Business Administration Staff
Diamelle Abalos Administrative Support Coordinator Carmen Garcia Administrative Analyst
Annhenrie Campbell, Ph.D. Professor, Emerita Accounting and Finance
David Lindsay, Ph.D. Professor, Accounting and Finance
Student Assistants
Dr. David Zhu Professor, Accounting Interim Director, MBA Programs
STRATEGIC COMMUNICATIONS AND MARKETING
Rosalee Rush Vice President for Strategic Communications & Marketing
Stamper Director for Communications and Creative Services
Mandeep Khaira Director of Marketing & Digital Strategy
Erik Soto
Oscar Perez Vincent Abarca
Sofia Rodriguez Ethan Templeman
Kristina
Donna Birch Trahan Senior Writer and Content Specialist
Katie Dowling Graphic Designer
Kirsteen Gayle Cabral Graphic Design Intern
Dr. Kim Tan Professor, Accounting ACFI Department Chair
Executive Summary
Given the continuing slowdown of the economy, our suggestions from the previous business forecast report did not change, which were basically to stay cash heavy and avoid leverage. The economic slowdown is now likely to extend into the second half of 2026. The slowdown expectation has resulted from the Federal Reserve deciding to hold rates steady instead of going with a series of rate cuts as previously announced. The escalating regional wars and the uncertainty from the fallout of tariffs being ruled unconstitutional contribute to the slowdown, with recession expectations continuing to hold at 50 percent in the next 12 months. Uncertainty on the national and global scale keeps investors refraining from investments as they are unable to clearly foresee the future and make plans. This wait-and-see approach interferes with future economic growth, leading to an overall slowdown in economic activity. The Federal Reserve, with the dual mandate of full employment and price stability, has now chosen to focus on inflation to tame the cost-push effect coming from the oil price hikes resulting from the regional interruption of supply, which is seen to be of a temporary nature. Instead of going with a series of rate cuts as previously announced, the Federal Reserve delayed cutting rates in the first quarter of 2026 as the overall price level is expected to increase for several months ahead.
Valley retail trade employment declined more than three times the rate of 2024 in 2025. The delay in rate cuts is not likely to improve retail trade employment in 2026. Other categories of employment that displayed declining employment numbers or stagnant performance in 2025 were Valley manufacturing, financial activities, information, leisure and hospitality services and construction. More categories of employment declined in 2025 than in 2024. Displaying a structural pattern, the decline in Valley information employment registered the fastest pace in 2025 followed by financial activities employment. Conversely, Valley education and health services employment, a category composed of a highly skilled workforce, grew at a slower pace in 2025 but the pace of growth was the fastest among all other categories of employment in 2025. The second-fastest pace of growth occurred in government employment even though in 2025 growth was slower than the average growth in the past three consecutive years. Construction employment growth, on the other hand, switched from positive to negative territory in the first half of 2025. Projections point to a slightly accelerated decline in employment levels from the second half of 2026 to the first half of 2027, followed by a small improvement thereafter.
Valley single-family building permits declined 9.24 percent in 2025 after a very strong year in 2024. Because of the delay in rate cuts in 2026, building permits in the Valley are projected to decline in the coming 12-month period, improving thereafter but at about the same pace as the long-term benchmark growth of the series. The Freddie Mac 30-year rate declined from the peak observed in the fourth quarter of 2023 and continued to decline along with the federal funds rate up until the first quarter of 2026 but is not expected to decrease further in the coming months if the Federal Reserve continues to hold rates steady. Coupled with inventory shortage on the supply side and the effect on demand coming from borrowing costs remaining the same, home values are expected to rise at rates much less than the long-term benchmark rate of the series during the two-year forecasting window.
Inflation will likely display a rising trajectory sparked by the hike in the price of oil resulting from the escalation of regional conflicts and interruptions in oil supply. Average weekly wages grew more than the rate of inflation in 2025. The projections point to a
slightly faster wage increase in the coming months, more in line with the rising inflation rate. Valley consumers’ purchasing power increased in 2025 after two consecutive years of decline. The yearly average real rate of increase in home values was higher than the rate of inflation in 2025. Foreclosure starts increased 42 percent in California but for the time being, the level of foreclosure starts continues to remain very low in 2025.
Both Valley community bank total deposits and net loans and leases increased in 2025, but the increase in total deposits continued to be less than the increase in net loans and leases in the remainder of the year. While the increase in total deposits was slower than the historical average of the series, the increase in net loans and leases occurred at a faster pace than the series’ historical average. Perhaps the most worrying development occurred in community bank assets in nonaccrual, which began displaying a faster increase in 2025, with nonaccruals now reaching levels comparable to those that existed in 2022. Consistent with this pattern, community bank assets in default 30 to 89 days, which had not begun displaying a rising pattern in the previous report, suddenly began displaying a fast-rising trend with levels reaching those that existed in 2010. Assets in default 90-plus days have not yet begun to display a rising trend, but given the dynamics in the previous two series, community bank assets in default are expected to display a similar fast-rising trend in the coming months consistent with rising delinquencies in general and credit card debt reaching all-time highs.
In all, the odds of a recession continue to remain high at 50 percent, significantly higher than the normal rate of 15 percent. Worries of a resurgence in the inflation rate returned with regional conflicts escalating, leading to interruptions in oil supply. The Valley as an agricultural region continues to be adversely affected by the impact on fertilizer supply from the lack of urea and other oil byproducts. We recommend staying cash heavy and maintaining a wait-and-see approach until the uncertainty from regional wars disappears, renting and delaying home purchase until rates begin to fall again and come all the way down in line with long-term benchmark rates. If finances permit, purchasing a home now at an adjustable rate or refinancing later is also an option. Valley residents can defend against changing economic conditions by holding on to their cars a bit longer or go with the zero emission vehicles option if must purchase a car. They can borrow at adjustable-rate mortgages and taking advantage of relatively cheap student loans to acquire skills if laid off from work. At a more macro level, worries over public and private credit being too high, stretched asset values and uncertainty from ongoing regional wars warrant staying in cash and having the liquidity needed to reinvest and support businesses in case a systemic crisis emerges.
The Federal Reserve, with the dual mandate of full employment and price stability, has now chosen to focus on inflation to tame the cost-push effect coming from the oil price hikes resulting from the regional interruption of supply, which is seen to be of a temporary nature.
Introduction
In this update report, time series data spans from January 2001 to April 2026. The two-year medium-term forecasts are from May 2026 to June 2028. Forecasting a range rather than a point provides a more realistic assessment of 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: Section B analyzes labor market conditions for the San Joaquin Valley; the region’s real estate market based on eight metropolitan statistical areas (MSAs) is examined in Section C; Section D reviews trends in prices and inflation; indicators of local banking and capital markets are examined in Section E. Section F concludes.
San Joaquin Valley
Kings
Merced
Stanislaus
San Joaquin
Madera
Fresno Tulare
Kern
Valley total employment growth was slower in 2025 and in the first quarter of 2026 than in 2024. The slowing pace of growth is expected to extend into the second half of 2026, resulting from the escalation of regional wars disrupting the oil supply and tariffs being ruled unconstitutional. Adding to the overall degree of uncertainty, farm worker shortage and fertilizer scarcity are adversely impacting farm revenue and a weakening labor market. The delay in the Federal Reserve rate cuts in the first quarter of 2026 is another important factor contributing to the expectation that any improvement in the economy is not likely to occur until the first half of 2027.
Data reporting was interrupted due to a prolonged government shutdown that led to the use of interpolation techniques to ensure continuity of the time series for forecasting purposes. Employment numbers slightly declined in the Hanford-Corcoran MSA, and there was basically no growth in the Visalia-Porterville and Bakersfield MSAs. The remaining MSAs, Stockton, Modesto, Merced and Fresno, reported growth in total employment numbers less than their long-term benchmark growth rates, whereby the fastest growth occurred in Stockton and Modesto MSAs.
Valley total employment grew at an average annual rate of 0.76 percent in 2025, slower than the past two consecutive years and the long-term benchmark rate of
1.13 percent.
The employment categories that declined in the Valley were retail trade, leisure and hospitality services, information, construction, financial activities and manufacturing employment in 2025. Those categories in which growth was reported were composed of education and health services, government, trade, transportation and utilities employment, but all were below their long-term benchmark growth rates.
Valley total employment grew at an average annual rate of 0.76 percent in 2025, slower than the past two consecutive years and the longterm benchmark rate of 1.13 percent. A slower pace of growth is likely to intensify into the second half of 2026 depending on how long the escalation of regional wars persists in impacting oil and fertilizer supply, both of which are important inputs for the Valley economy. Under this scenario of temporarily rising oil and fertilizer prices, projections point to a trivial 0.08 percent average yearly growth from the second half of 2026 followed by a 0.91 percent improvement from the second half of 2027 to the first half of 2028.
An important leading indicator on the future course of the economy is the consumer confidence index compiled by the Conference Board. The index has continuously remained below the benchmark index value of 100 points since May 2025. The reading in January 2026 had the biggest monthly decline since the first quarter of 2025, implying a worsening assessment of labor market conditions and pessimistic expectations about future consumption activity ahead. The falling pattern of the consumer confidence index is consistent with the all-time high in credit card debt and fast rising delinquencies, putting pressure on consumers to cut back on consumption. Escalation of regional conflicts impacting the overall price level from the ripple effect of higher oil prices is not expected to change consumer confidence in the coming months.
Both employment and labor force growth numbers in the Valley began displaying a slowing pattern beginning in the second quarter of 2025. These two series will likely cross each other when labor force growth exceeds employment growth, pointing to a continuing increase in unemployment numbers. The current unemployment rate, structurally twice the national unemployment rate in the Valley, will likely climb above ten percent at this gradual pace in the coming two-year interval.
Total employment growth in the state and the Valley also began to slow simultaneously beginning in the second quarter of 2025. However, total employment growth in the state continued to remain significantly below total employment growth in the Valley. At this pace of gradual slowing, both series are likely to switch from positive to negative territory in the two-year interval, pointing to declining employment numbers.
The odds of a recession are likely to increase further with rising unemployment numbers, delays in the rate cuts and oil price increases resulting from disruption of oil supply from the escalation of the Middle East conflict. Projections point to slowing economic activity in the Valley in the second half of 2026, which may extend to the first half of 2027 depending on how long the escalation of regional wars lasts and the domino effect on the economy resulting from the rise in oil prices.
Employment indicators
One of the few categories of employment that posted growth in the Valley was education and health services. Education and health services employment grew faster in 2025 than any other category of employment in the Valley. However, employment in this category grew 5.46 percent in 2025, less than the previous year’s growth of 6.89 percent, also pointing to a slowdown in this high-skills category. Such highly skilled jobs are least likely to be affected by a recession, since the higher the skill, the harder it is to be displaced from work. Education and health services employment will likely continue to grow at a slowing pace in the coming months.
Employment levels in education and health services are projected to stay slightly below 335,000 by the second half of 2027 given the slowdown effect and begin to rise a bit faster in the first half of 2028. The linear trend-like pattern in this series reflects the relatively recession-proof nature of this category relative to other categories of employment in the Valley. Projections point to growth at an average yearly rate of 4.31 percent from the second half of 2026 to the first half of 2027 and at 4.86 percent thereafter, but below the past three consecutive years of average yearly growth and higher than the long-term benchmark rate of 3.63 percent.
Employment levels in education and health services are projected to stay slightly below 335,000 by the second half of 2027 given the slowdown effect and begin to rise a bit faster in the first half of 2028.
At a yearly average rate of negative 1.93 percent, Valley manufacturing employment declined at a relatively fast pace in 2025, given the past two consecutive years of growth.
At a yearly average rate of -1.93 percent, Valley manufacturing employment declined at a relatively faster pace in 2025 given the past two consecutive years of growth, which were both above the long-term benchmark growth of 0.35 percent. The decline observed in this category of employment in 2025 is consistent with the trend observed nationwide but at a faster rate. Employment levels in this category will likely stay below 115,000 by the end of the first half of 2028.
With the accumulating effects of tariff uncertainty, higher input prices such as fertilizers, the price of oil and saturation of warehouse distribution centers, employment in this category is expected to continue declining in the coming months at a faster pace for some time to come. Projections point to an average yearly decline of -2.32 percent in the first 12-month forecast interval, followed by slower growth of 0.70 percent growth in the second 12-month interval.
An important leading indicator for manufacturing activity, the Institute of Supply Management’s (ISM) Purchasing Managers Index is closely followed by policymakers and investors. The index rose above 50 points to 52.6 in January 2026 before the escalation of Middle East conflict began and the resulting increase in oil prices and fertilizer inputs such as urea in late March 2026. The index will likely fall below 50 points in the coming months, indicating that the economy is expected to slow.
employment indicators
Valley leisure and hospitality services employment registered two consecutive years of decline. The 0.72 percent decline in 2025 occurred at a faster rate than 0.63 percent in 2024. Mounting credit card debt and rapidly rising consumer delinquencies likely contributed to the decline in this category. Employment levels in this category are expected to stay below 145,000 by the first half of 2027 and improve slightly afterwards.
The categories of employment that have shown to be most vulnerable to downturns in business cycles are Valley leisure and hospitality services and retail trade employment.
The categories of employment that have shown to be most vulnerable to downturns in business cycles are Valley leisure and hospitality services and retail trade employment. These categories, unlike education and health services employment, require the lowest skills. Workers in these lowskill categories are the first to be displaced during a downturn. Projections point to a 1.06 percent average yearly decline in the first 12-month forecast interval, followed by a slight improvement of 0.34 percent in the remaining interval when the delay in rate cuts ends, providing stimulative effects on the economy.
Valley trade, transportation and utilities employment posted a slight 0.06 percent decline in 2025. Employment levels in this category have been hovering around 327,000 since the fourth quarter of 2021 and are expected to remain below 330,000 by the end of the first half of 2027. Valley trade, transportation and utilities employment is expected to grow slightly in the coming two-year interval but stay significantly below the long-term benchmark growth of 1.86 percent.
The slight growth in Valley trade, transportation, and utilities employment in the coming months will likely result from its own structural dynamics and this sector being a necessity sector for all other farm-related and other categories in the Valley. Projections point to 0.21 percent average yearly growth from the second half of 2026 to the first half of 2027 and a slight correction of -0.09 percent in the following 12-month period.
Valley retail trade employment posted yet another year of decline in 2025. The decline in 2025 was more than three times the decline in 2024 and about twice the rate of decline in 2023. Competition from online vendors is increasingly presenting itself as a structural problem in regional retail trade employment. In addition, consumers incurred about twothirds of the costs coming from tariffs in 2025, while the remaining one-third was borne by companies whose margins declined from absorbing the cost of tariffs. With tariffs declared unconstitutional and reimbursement an issue, it is unlikely that consumers will get any kind of reimbursement as all will likely go to companies and international carriers. Employment levels in this category are expected to stay below 155,000 until the end of the first half of 2028.
Given the back-to-back yearly declines, the long-term benchmark growth in retail trade employment decreased in 2025 to just 0.80 percent. The Federal Reserve’s delay in rate cuts is likely to make the picture worse for Valley retail trade employment. Projections point to a slightly accelerated 0.94 percent decline from the second half of 2026 to the first half of 2027 and a slightly slower 0.30 percent decline from the second half of 2027 to the first half of 2028.
Employment indicators
Unlike retail trade employment, Valley wholesale trade employment grew 0.68 percent in 2025 but about half the rate of 1.28 percent growth in 2024. The slowing growth in 2025 was indicative of warehouse distribution centers’ growth coming to a standstill in the Valley. With the delay in rate cuts, Valley wholesale trade employment is expected to slow further in the months ahead.
Employment levels in the Valley wholesale trade category are expected to stay below 53,000 by the second quarter of 2028. As a farm-related category, the rise in input costs such as the price of oil and fertilizers shortages is likely to hamper wholesale trade and employment for some time to come as the ripple effects dissipate. Projections point to an average yearly growth of 0.53 percent in the first 12-month forecast interval followed by a slight 0.04 decline thereafter.
The slowing growth in 2025 was indicative of warehouse distribution centers’ growth coming to a standstill in the Valley.
The structural declining pattern in Valley information employment has been showing signs of leveling since the fourth quarter of 2024. This year-over-year decline is due to digitalization and social media changing the way individuals get their news and stay informed. Consequently, job creation in this category of employment is suffering not only at the regional but also at the national level. Information employment numbers will likely fall below 6,500 in the Valley as improvements in artificial intelligence further lower the time and cost of finding and readily accessing information.
Valley information employment was the category that declined the fastest among all other categories in 2025. Consistent with this flattening trend, the 2.40 percent decline in 2025 was significantly less than the 7.76 percent decline in 2024. Projections point to a 3.71 percent decline from the second half of 2026 to the first half of 2027 and then even slower 0.92 percent decline from the second half of 2027 to the first half of 2028.
Construction employment growth switched from positive territory in 2024 to negative territory in 2025. Rising costs of lumber and other materials from inflation, tariffs in 2025, along with oil price increases in 2026, will likely keep growth in this category of employment in negative territory in the months ahead before showing signs of recovery.
Construction employment growth switched from positive territory in 2024 to negative territory in 2025. Rising costs of lumber and other materials from inflation, tariffs in 2025, along with oil price increases in 2026, will likely keep growth in this category of employment in negative territory in the months ahead before showing signs of recovery. The delay in rate cuts in the first quarter of 2026 will likely contribute to the decline in Valley construction employment. Employment levels in this category are expected to remain below 81,000 during the two-year interval.
Employment indicators
Valley government employment is an important economic driver since it constitutes about 22 percent of total employment in the Valley. Government employment was one of the few categories of employment that posted three years of consecutive growth consistently above the long-term benchmark growth. Employment in this category lags all other categories in terms of responding to business cycles. The expectation is therefore for government employment to show a lagged response and decline in the coming months. The decline may have amplified effects on other categories through induced effects given that it takes up one-fifth of total Valley employment.
Valley government employment grew 2.09 percent in 2025, significantly slower than the 5.00 percent growth in 2024, in line with lagged behavior. In 2025, employment in this category recovered all the jobs lost from the pandemic. Government employment is likely to stay below 330,000 by the end of the second quarter of 2028. It is worth noting that even though government employment slowed in 2025, growth was still faster than the 1.15 percent long-term benchmark rate. Projections point to a 1.02 percent average yearly growth from the second half of 2026 to the first half of 2027 and a slight 0.10 percent decline in the remaining 12-month interval.
Financial activities employment declined at an accelerated pace in 2025. Online banking and digitalization continued to negatively affect employment numbers in this category. Employment numbers have been consistently declining for the past three years in a row and at rates faster than the 0.63 percent decline in the long-term benchmark rate. With the slowdown in economic growth and the unemployment rate rising, employment in this category is expected to decline further in the two-year interval.
Financial activities employment declined at an accelerated pace in 2025. Online banking and digitalization continued to negatively affect employment numbers in this category.
The level of financial activities employment in the Valley is projected to decline to 35,000 by the end of the second quarter of 2029. A flatter declining pattern appears to take shape as of the first quarter of 2025. Financial activities employment is projected to post a slower 2.2 percent decline from the second half of 2026 to the first half of 2027, followed by an even slower 1.08 percent decline, consistent with a flattening trend from the second half of 2027 to the first half of 2028.
The Valley economy is expected to slow further and perform below average with higher odds of a recession from the adverse effects of the rise in input prices such as the price of oil and fertilizers, uncertainty from the elimination of tariffs and the imposition of new ones, a shortage of farm workers and rising unemployment. Increased uncertainty is creating anxiety among farmers, creating fertilizer shortages, lower quality and increasing costs of producing agricultural goods in an environment of slowing economic growth.
Increased uncertainty is creating anxiety among farmers, creating fertilizer shortages, lower quality and increasing costs of producing agricultural goods in an environment of slowing economic growth.
Housing Sector
The Bureau of Labor Statistics now lists seven Metropolitan Statistical Areas (MSAs) of the San Joaquin Valley. These MSAs are Fresno, BakersfieldDelano, Hanford-Corcoran, Merced, Modesto, Stockton and Visalia-Porterville, excluding Madera, which is merged with Fresno under the heading of the Fresno MSA. The total value of the seven MSAs makes up the total single-family building permits in the Valley.
Single-family housing permits in the Valley grew at a very impressive rate of 24.48 percent in 2024, which was more than three times the 7.44 percent longterm benchmark rate of growth. In 2025, however, growth switched from positive to negative territory when single-family building permits declined 9.24 percent. Valley building permits are on their path to exceed an average value of 1,000 per month by the end of the second quarter of 2028.
Fresno took the lead with 2,283 building permits while Bakersfield came second with 2,013 permits in 2025. Stockton fell from first to third in 2025 with 1,818 single-family building permits. A total of 1,197 building permits were issued in Visalia, the fourth fastest growing housing market in 2025. Modesto and Merced took fifth and sixth place with 580 and 471 housing permits, respectively. Hanford had 342 building permits issued in 2025. With the delay in rate cuts, projections point to a further decline of 8.33 percent from the second half of 2026 to the first half of 2027, then switching back to positive territory with a 7.25 percent growth thereafter.
Foreclosure starts increased by 42 percent in 2025. However, given the current low levels of foreclosure starts, this significant increase in foreclosures is not of concern, at least for the time being. As the economy continues to slow further and more workers lose their jobs, the trend will likely become significantly steeper and noticeable enough to become concerned. The same trend is observed in community bank assets in nonaccrual and assets in default 30 to 89 days.
Stockton fell from first to third in 2025 with 1,818 single-family building permits.
With the Federal Reserve’s rate cuts delayed from the first quarter of 2026, 30-year rates are expected to display a rising trend along with inflation. Higher rates would make it difficult for households to obtain loans to purchase a home or refinance their existing loans. Higher rates should also make it harder for the housing market to stay active during an economic downturn. Refinancing activity already began showing signs of slowing, resulting from an uptick in long-term borrowing costs as the Federal Reserve refrains from cutting rates further to mitigate the impact on inflation coming from higher oil prices, which are seen as temporary.
Valley single-family home values rose at an average annual rate of 3.43 percent in 2025, which was slower than the 5.14 percent growth rate in 2024, indicative of a cooling housing market. Existing inventory shortage should not decrease home values much in the coming months, at least in real terms, despite rates remaining steady. After factoring in the average yearly inflation of 2.75 percent in 2025, the real appreciation in home values came out to be quite small at 0.68 percent.
The yearly increase in home values in 2025 was less than the long-term benchmark growth rate of 5.80 percent, reflective of a cooling real estate market. The dilemma faced by potential homeowners is that, with high interest rates, buying a home results in higher monthly mortgage payments. If they wait for lower rates, their monthly mortgage payments will be lower, but home values will likely be higher since they follow dynamics similar to those of the 30-year bond, with rates being inversely related to the price. As a partial solution, home buyers can borrow at adjustable rates to lock in the price of the home and make lower monthly payments when rates fall. The refinance option, since it involves refinancing costs, can be suboptimal under this scenario of higher rates hanging around longer than expected due to the inflationary impact coming from higher oil prices resulting from the escalation of regional conflicts.
While some regions may report a decline in home values, at the aggregate level, Valley home values are expected to increase at a rate less than the 5.86 percent long-term benchmark rate. Projections point to growth of 3.03 percent in 2026 followed by a 4.2 percent increase in 2027. The faster increase in 2027 will likely occur after the full effect of the decrease in rates begins to be felt in the Valley economy.
Growth in Housing Prices: Historical vs. Projected Average Yearly Growth
Inflation and Prices
Disruption of oil transportation routes and production sites has led to a significant increase in the price of crude oil in the first quarter of 2026, which is seen as being temporary. Given that the main driver of inflation is the price of oil, inflation is expected to rise further in the months ahead. There is also the indirect effect on inflation coming from the price of other goods and services that use oil as an input to production and in the transportation of other raw materials, seen mainly as induced effects.
The inflation rate in the West and nationwide continued to display a converging path in the fourth quarter of 2025, a familiar pattern observed before contractions such as the 2008 recession and the pandemic years. This converging pattern serves to some extent as a leading indicator of further slowing activity in the economy. As the Federal Reserve’s focus is now on the inflation rate given the rise in the price of oil, attaining the target level of 2.0 of inflation will be more difficult to achieve.
The rising price of oil as a cost-push factor puts upward pressure on the overall level of prices. Cost-push factors have a greater impact on inflation than demand-pull factors simply because they affect the costs of production. Given the ripple effects of the rising price of oil, the yearly rate of inflation is likely to remain high for some time to come until the effects are fully dissipated.
The rate of inflation is likely to increase above the series’ long-term 2.73 percent benchmark rate. Projections of the Western region’s inflation rate, assuming the rise in oil price is only temporary, point to an average yearly increase of 3.17 percent up until the first half of 2027 and then to a lower rate of 2.81 percent thereafter. If regional conflict escalations last longer than expected, inflation is expected to be much higher than the projected rates.
Given that the main driver of inflation is the price of oil, inflation is expected to rise further in the months ahead.
Valley average weekly wages rose 3.05 percent in 2025 after a slower pace of 4.41 percent in 2024. The rising trend is expected to become flatter and more consistent with the rate of inflation in the months ahead.
Average weekly wages will likely stay below $1,300 by the first half of 2028 as wage increases tend to slow during economic downturns. However, rising inflation and shortages observed in farm labor might put some upward pressure on wages that could cause the trend to steepen instead.
Average weekly wage growth remained slightly below the long-term benchmark rate of 3.30 percent in 2025, unlike the two past consecutive years when wage growth was higher. The reservation wage of a representative Valley worker grew at a slower pace in 2025, reflecting the falling inflation rate in 2025. Projections point to an average yearly increase of 3.18 percent in the first 12-month forecast interval, followed by a slower 2.63 percent increase thereafter.
Considering that wage growth usually falls below the rate of inflation, 2025 was a relatively good year from the standpoint of real wage appreciation.
During 2025, the average yearly rate of inflation materialized at 2.75 percent. During the same interval, average weekly wages increased by 3.05 percent, corresponding to an increase in real wages and a rise in purchasing power of 0.30 percent. Considering that wage growth usually falls below the rate of inflation, 2025 was a relatively good year from the standpoint of real wage appreciation
Banking and Capital Markets
The long-term benchmark growth rate for Valley community bank total deposits and net loans and leases appears to be about the same, pointing to sustainable growth. However, Valley community bank total deposits grew more than net loans and leases both in 2023 and 2024. This pattern was reversed in 2025, during which net loans and leases grew more than total deposits. In total, however, the rate of increase in total deposits was less than the rate of increase in net loans and leases by about 6 percent over a three-year period, indicating that Valley community banks extended more loans than they took in deposits.
Valley total bank deposits grew 4.50 percent in 2025, slower than 7.02 percent growth in 2024 and 6.70 percent growth in 2023. The pace of growth in 2025 was also slower than the 6.93 percent long-term benchmark growth. Projections point to a below benchmark growth rate of 4.62 percent from the second half of 2026 to the first half of 2027 and a slower 4.02 percent growth in the following 12-month interval.
Perhaps the most concerning development took place in Valley community bank assets in nonaccruals, which exhibited a sharp increase in 2025 exceeding the levels that existed in 2022. This sharp increase in 2025 is consistent with rising delinquencies and all-time high credit card debt of consumers, reflective of Valley consumers being tapped out. The level of nonaccruals is rapidly increasing, becoming a serious worry for the Valley and the national economy. This pattern will likely continue into the first half of 2027 and possibly beyond that due to the delay in further rate cuts and the rising unemployment rate.
Valley community bank assets in default 30 to 89 days, which had exhibited a falling pattern in the first half of 2025, also began trending upward sharply in the second half of 2025, a pattern consistent with sharply rising nonaccruals. Community bank assets in default 90-plus days have not yet begun to trend upward but are expected to follow the dynamics exhibited by nonaccruals and assets in default 30 to 89 days in the coming months.
Total Bank Deposits (in $ Thousands)
Valley net loans and leases grew at a faster pace than total bank deposits during 2025. Growth in net loans and leases came in at 6.16 percent in 2025, slightly less than the series’ long-term benchmark growth of 6.91 percent but significantly higher than the 2024 growth of 2.82 percent and the 2023 growth of 3.75 percent given the faster dynamics observed in total bank deposits, allowing the banks to extend more loans.
In the coming months, both net loans and leases and total deposits will likely perform below average due to a cooling economy. Net loans and leases will likely exceed 17,300,000 while total deposits will exceed the 24,000,000 level during the upcoming two-year interval. Projections point to net loans and leases increasing at an average yearly rate of 4.82 percent from the second half of 2026 to the first half of 2027, followed by a slightly slower growth rate of 3.96 percent in the second 12-month interval.
The Federal Reserve’s decision in the first quarter of 2026 to keep rates unchanged to mitigate the effect of higher oil prices on the rate of inflation, along with an already slowing economy, will likely cause both total deposits and net loans and leases to remain below their long-term benchmark rates for some time to come. When the Federal Reserve resumes rate cuts, it may not come in time to have a stimulatory effect on the economy before an economic contraction.
When the Federal Reserve resumes rate cuts, it may not come in time to have a stimulatory effect on the economy before an economic contraction
Concluding Remarks
The Valley economy has been extremely resilient amid the fallout from tariff uncertainty, escalating regional conflicts, rising cost of raw materials and rates not falling fast enough to generate an expansion. The Valley, being an agricultural economy, is being disproportionately impacted by the uncertainty arising from economic and geopolitical events at the national and global level.
Total employment grew below average in all MSAs except the Hanford-Corcoran MSA, where a slight decline was reported. There was basically no growth in the Bakersfield and VisaliaPorterville MSAs. Valley employment categories that reported a decline were retail trade, information, financial activities employment, construction, leisure and hospitality services and manufacturing employment. Categories that reported growth in 2025 were education and health, wholesale trade, government, trade, transportation and utilities employment. Education and health services employment was the only category that reported above-average growth, but the 2025 growth was slower than the two previous years’ growth.
Home values increased at a slower pace in 2025 than in 2024, despite rates not coming down as fast. Homeowners continued to hold on to their homes to avoid facing higher rates. Inventory shortage continued to increase in 2025, putting upward pressure on home values. There was a smaller real gain in home values when the inflation rate was considered. With the rate cut put on hold in the first quarter of 2026, and in line with a slowing economy, home values are likely to grow slightly less than the long-term benchmark rates.
Homeowners continued to hold on to their homes to avoid facing higher rates. Inventory shortage continued to increase in 2025, putting upward pressure on home values. There was a smaller real gain in home values when the inflation rate was considered.
Inflation is likely to rise following the spike in the price of oil in the first quarter of 2026, which is likely to create ripple effects in our regional economy, including in the price of fertilizers. Valley average weekly wages rose in 2025 at a faster rate than in 2024 and are expected to rise at rates less than the long-term benchmark rate. There was a gain in the purchasing power of the Valley consumer when wage growth exceeded the inflation rate in 2025.
Valley net loans and leases grew at a faster pace than total bank deposits. The increase in net loans and leases now appears to be more than the increase in total deposits over a three-year period, but net loans and leases are expected to grow below average as the economy continues to slow, achieving an equilibrium between the two. Valley community bank assets in nonaccrual began sharply trending upward, bringing back economic worries of a contraction. Community bank assets in default 30 to 89 days also exhibited a sharp increase in the second half of 2025. Assets in default 90-plus days are expected to display a similar sharply rising trend in the coming months.
At a more macro level, worries over private credit being too high; an overvalued stock market with more than twice the market capitalization to GDP ratio; and uncertainty stemming from regional conflicts and tariffs underscore the need for businesses to remain liquid in case a systemic crisis unfolds.
The Valley economy slowed at a relatively accelerated pace in 2025, which is likely to extend into the second half of 2026, mainly resulting from uncertainty about the future path of the economy. Valley residents can avoid being stuck with high mortgage payments by borrowing at adjustable mortgage rates (ARM) to adjust monthly interest payments when rates decrease further. If finances permit, purchasing a home now is an option with the strategy to borrow at adjustable mortgage rates or refinance later when rates come down. If not urgent, residents can avoid high borrowing costs and delay purchasing homes and cars until the Federal Reserve resumes rate cuts or go with the zero emission vehicle to mitigate shocks coming from the price of oil.
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