Central Valley

Economy Could Slow Down as Ag, Commodity, and Water Issues Impact Region

While the Central Valley is impacted by agricultural fluctuations, commodity prices, water-supply issues and global trade tension, the local economy remains “stable” and will continue growing in 2019. However, growth will probably start slowing in 2020.

That's according to local experts and organizations recently presenting economic forecasts in February, including the Craig School of Business at Cal State Fresno and the Center for Business and Policy Research at the University of the Pacific. The keynote speaker and researcher opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately:

San Joaquin Valley Forecast

Below is a synopsis of the latest Central California Business Review recently released by the Craig School of Business at Cal State Fresno:

  • A leading economic indicator (the San Joaquin Valley Purchasing Managers’ Index) remains in “growth” territory for the 26th consecutive month and points to continued business expansion in 2019. Business confidence remains strong. However, local businesses are expecting a 4.4 percent increase in the prices they will pay for inputs and supplies over the next year. Almost one-fourth of local businesses report that domestic and foreign tariffs and trade skirmishes have made it more difficult to purchase from other countries.

  • San Joaquin Valley will continue adding jobs in 2019, but at a somewhat slower pace. Over the past two years, the regional economy advanced at a very solid pace—but recent survey results point to slowing growth. Rising interest rates and tariffs, a slowing global economy, and shortages of qualified workers for regional job openings will restrain this year’s employment growth. Aided by the relatively larger pool of unemployed workers to draw from in the San Joaquin Valley (compared to other regions across California), local economic growth will continue to outpace that of the national economy.

  • The local job market in the San Joaquin Valley is poised to continue growing (both the number of jobs and individuals entering the market), but at a slower pace in 2019. The unemployment rate in the Central Valley began declining in 2012, with some counties’ rates reaching historically low records in 2018. While the region boasts significantly higher shares of employment in the combined natural resources/agriculture and mining sector, it is well behind the state and nation in the professional/business services sector.

  • Distribution of industries in the San Joaquin Valley—as measured by the number of jobs—shows an interesting localized picture when compared to California as a whole. Local sectors that are noticeably higher in their employment base than the state are agriculture/natural resources and mining (19 percent) and trade/transportation/utilities (21 percent). Those lower than the state are information (1 percent), financial activities (4 percent), professional/business services (9 percent), leisure/hospitality (10 percent), and “other” services (3 percent). The remaining sectors locally versus the state that are very similar or equal include construction (6 percent), manufacturing (9 percent), and education/health services (18 percent).

  • However, the proportion of employment growth in the San Joaquin Valley reveals a mixed picture when compared to the entire state. The only local sector that is noticeably outpacing California as a whole is trade/transportation/utilities (2 percent growth). Those significantly underperforming the state are manufacturing (0 percent growth), information (4 percent decline), financial activities (0 percent growth), and “other” services (0 percent growth). The remaining sectors locally versus the state that are similar or equal include agriculture/natural resources and mining (2 percent decline), construction (5 percent growth), professional/business services (1 percent growth), education/health services (4 percent growth), and leisure/hospitality (2 percent growth).

  • Two counties in the San Joaquin Valley continually stand out in terms of employment growth—Merced and Madera. Enrollment and employment at UC Merced have increased continuously since the university’s inception in 2005. UC Merced was recognized by the Chronicle of Higher Education as the fastest growing university in the nation in 2017, and for the last academic year it granted 1,418 degrees—over three times the number granted from 2010 - 2011. “The university generates a monthly payroll of $16.5 million (salary and benefits), and is one of the county’s largest non-agricultural related employers,” the report states. Additionally, Valley Children’s Healthcare contributes to employment growth in Madera County and is one of the county’s largest employers, with more than 650 physicians and 3,400 staff delivering health care to over 1.3 million children. “The inflow of skilled labor working in this sector could stimulate higher demand in non-traded industries such as local service sectors, possibly generating multiplier effects in additional employment growth.”

  • Food and beverage manufacturing in the San Joaquin Valley contributes $123 billion to California’s economy. Additionally, in the Central Valley this sub-industry generates $21 billion in economic activity, employs over 30,000 people, and represents more than half of all jobs in the broader local manufacturing sector. Each local value-added dollar created by food and beverage manufacturing creates total economic activity of $1.83, and each additional local job created in this area results in 1.77 jobs in total. In fact, the dairy, fruit/vegetable, and animal processing industries combined (within a five-county area in the broader region) represents more than one-third of California’s total Gross State Product (similar to national GDP). Other industry contributors (highest to lowest) include those in the production of animal food, grain/oil seed, "other" food, soft drink/ice, bakery/tortilla, wineries/distilleries, and breweries.

  • The San Joaquin Valley’s food/beverage manufacturing sector also impacts local tax revenues from the output created in “multiplier effects.” These multipliers aren’t expected to change significantly unless underlying fundamentals change. “Hence, the overall economic (direct and secondary) impact of the sector to the Central Valley may be over $38 billion ($21 billion in direct food/beverage manufacturing impact times the 1.83 economic multiplier)—and it may be responsible for over 58,000 jobs (33,184 times the 1.77 jobs multiplier).”

  • Food/beverage manufacturing employment growth in the San Joaquin Valley from 2010 – 2017 displays some impressive numbers—especially due to the past few years. Within a five-county area in the broader region (Fresno, Kings, Madera, Merced and Tulare), this seven-year period experienced 8 – 56 percent job growth within the sector depending on the county (and a total of nearly 8,200 new jobs created). These kinds of businesses catch the attention of local economists because annual worker wages range between $33,000 – $55,000 depending on the type of employment and county. In total, about 33,200 food/beverage manufacturing jobs existed in the region as of late 2017.

  • Over the last five years, a six-county area within the San Joaquin Valley experienced a 25 percent increase in small and medium-sized businesses. These businesses employ about 80 percent of the workforce, similar to statewide employment of 79 percent. “Smaller” businesses (with four or fewer employees) are most prevalent locally and account for 66 percent of the total. “A recent study by LendingTree identified Fresno as the second-best location in California for small businesses to succeed,” the report states. “Certified Development Financial Institutions (CDFIs) are a viable source of start-up capital for new ventures, as well as operating loans and lines of credit for established small businesses.”

  • Altogether, credit unions and banks in the San Joaquin Valley posted “impressive” 20 percent loan growth this past year (ending Sept. 30, 2018)—but 2019 is expected to be slower. Local banks continue to lead the way with 23 percent loan growth as commercial real estate lending became the largest segment (41 percent) of all loans. Loan growth was strong in every category, with the slowest (residential) growing at 14 percent and the strongest (multi-family residential) growing at 40 percent. Local credit unions reported 8 percent loan growth as slowing vehicle sales (55 percent of all Central Valley credit union loans) continue to be a headwind. “Rising interest rates and an expected 2019 reduction in economic growth are likely to make it more challenging for Central Valley banks and credit unions to continue their impressive growth rates,” the report states.

  • Consumer sentiment in the San Joaquin Valley remains generally positive. About 48 percent of survey respondents indicate their family is better off financially today than five years ago. Over half (54 percent) expect their income will increase more than prices over the next year or two—or will increase about the same as prices. Just over 80 percent believe economic conditions are the same or better than last year, and that same percentage expect regional business conditions will improve or stay the same over the next year. However, compared to national data, regional respondents are less positive about their current personal finances and economic conditions compared to the past year (but they are more positive in expectations about economic conditions one year from now than their national counterparts).

  • About 49 percent of San Joaquin Valley survey respondents said now is a good time to make major household purchases, and about 48 percent anticipate making one soon. Also, 42 percent reported making a major household purchase during the past six months (furniture, television, home appliance, etc).

  • Slightly more San Joaquin Valley survey respondents indicated this year versus last that they plan to increase their credit/lending usage (with the exception of student loans). These residents indicated their plans to seek mortgages (12 percent), auto loans (15 percent), student loans (6 percent), and credit cards (18 percent) within the next 12 months. Currently, 32 percent hold a mortgage, 35 percent hold an auto loan, 50 percent have a credit card carrying a balance, and 20 percent have a student loan, with all forms of credit having higher balances this year than last year (with the exception of student loans).

  • The San Joaquin Valley’s Real Estate Sentiment Index has continued its positive trend, but lately it shows a slight deterioration in current and future expectations. Most real estate sectors (office, retail, industrial and residential) follow similar declining expectations, including the agricultural sector. “This may reflect growing concerns over the national and state economies, and over potential tariffs affecting lumber and, subsequently, construction prices,” the report states. “The industrial sector has been a hot topic in the last couple of years with news of big deals taking place locally, yet current and future expectations may be showing a downturn.”

  • Certain counties within the San Joaquin Valley have some of the highest poverty rates. Rates in California and the United States range from 13. 6 – 13.9 percent, but in San Joaquin Valley they range from 17.4 – 25.5 percent. “Poverty manifests itself in the share of households earning less than $50,000 per year (about 50 percent of all households in the area), compared to the nation (42 percent) and the state (36 percent),” the report states. “The rate of poverty may be partially explained by the lack of high-paying jobs and by ‘underemployment’ in the region.”

  • The San Joaquin Valley continues having a significantly low share of residents who are college graduates compared to California. “Enhancing education and occupational training services could potentially address the challenges of high poverty and unemployment in the Central Valley by attracting labor-intensive jobs and businesses to the region,” the report states. “In addition, improving the quality of living and job opportunities, especially in high-value added sectors, could attract and retain skilled workers and thus boost income growth and employment. Growth in major sectors could further generate additional employment growth in local services, thus multiplying the employment in the region. Potential opportunities for spatial, network, and economic integration with other metropolitan areas in Northern California and Southern California could also boost employment growth, bringing higher-value jobs to the area.”

  • While the San Joaquin Valley’s economic conditions and agricultural production statistics appear relatively favorable, the same cannot be said for California’s water resource conditions due to six reasons: 1) The state is three years removed from the worst drought on record; 2) California’s agricultural industry anticipates the potential need to fallow or retire 500,000 – 2 million acres of productive farmland to accommodate state-mandated water reductions; 3) Urban water agencies will be assigned mandatory water budgets to reduce indoor and outdoor water consumption for residential, commercial, industrial, and institutional users; 4) The State Water Resources Control Board estimates there are 200,000 – 300,000 Californians, most living in the San Joaquin Valley, who do not have access to clean, reliable, and affordable water for cooking, drinking, and basic hygiene; 5) Several native species of Delta Fish are on a trajectory toward extinction; 6) Some experts say “climate change and sea-level rise” will require changes in water resources management.

North Central Valley and Sacramento Regional Forecast
Below are highlights from the California and Metro Forecast report recently released by the Center for Business and Policy Research at the University of the Pacific:

  • Annual job growth in the broader regions of Fresno, Merced, Modesto, Stockton, and Sacramento will continue posting positive numbers in 2019, but growth will noticeably slow down going into the second half of 2020. Within local metropolitan areas, yearly employment growth will come in at the 1.1 – 2.4 percent range over the next two years (noticeably slower than the 1.7 – 3.9 percent range from 2016 – 2018). Furthermore, while county unemployment rates will drop, some areas could still register some of the highest unemployment in the state, comparatively speaking, for a “metro” region (Fresno, Merced and Stanislaus)—with unemployment rates ranging from 3.4 – 7.8 percent by late 2020, depending on the county. Some of this will be due to more local individuals officially entering and/or re-entering the “labor force” to look for a job as the economy’s continued record amount of employment openings beckons them.

  • The report projects “stable” (not stellar) economic growth for the North Central Valley region: “North San Joaquin Valley areas and Fresno are projected to grow at a slightly slower pace in 2019. Although a wet winter bodes well for valley water supplies, the region’s agricultural economy is not expected to experience significant revenue growth as most commodity prices are weak and global trade uncertainty increases risk. Construction activity and population growth rates are not expected to rise from current levels, which should also keep the regional economy moving forward at a steady pace, but limit further acceleration. Several years of strong job growth, increased commuting to the Bay Area, and modest labor force growth have pushed unemployment rates across the valley to record lows—and unemployment should stabilize near current levels for the next few years.”

  • Fresno region—Nonfarm jobs will grow 1.9 percent in 2019 and 1.1 percent in 2020. Leading employment sectors include leisure/hospitality, financial activities, and education/health services. Job growth will be experienced in all sectors except wholesale trade and state/local government. The average annual wage will rise from $54,340 in 2019 to $60,150 by 2022. The population is expected to reach 1.04 million by 2022 and will grow approximately 1 percent each year until then. In 2019 an increase of 1.9 percent is expected in the labor force. The anticipated 2019 and 2020 unemployment rate of 6.8 percent will increase to 7.3 percent by 2022. Housing starts will reach 3,600 per year by 2020 and remain at that level through 2022, with the majority continuing to be single-family units (although multi-family starts will stage a noticeable rise).

  • Merced region—Nonfarm jobs will grow 1.9 percent in 2019 and 1.7 percent in 2020. Leading employment sectors include professional/business services, wholesale trade, and transportation/warehousing and utilities. However, job declines will be experienced in the construction/mining and financial activities sectors. The average annual wage will rise from $56,850 in 2019 to $62,930 by 2022. The population is expected to reach 280,000 by late 2019 and grow approximately 1.2 percent each year, reaching 290,400 by 2022. In 2019 an increase of 4 percent is expected in the labor force before starting to slow going into 2022. The anticipated 2019 unemployment rate of 7.7 percent will rise to 8.5 percent by 2022. Housing starts (probably 1,100 in 2019) will steadily drop to 1,020 per year by 2022, with the majority continuing to be single-family units.

  • Modesto region—Nonfarm jobs will grow 1.5 percent in 2019 and 1.1 percent in 2020. Leading employment sectors include information, education/health services, and manufacturing. However, job declines will be experienced in the “other” services and retail trade sectors. The average annual wage will rise from $57,000 in 2019 to $63,940 in 2022. The population is expected to reach 557,600 by late 2019 and grow to 574,400 by 2022. In 2019 an increase of 1.9 percent is expected in the labor force (and 1.2 percent in 2020). The anticipated 2019 unemployment rate of 6.1 percent will remain steady before rising to 6.8 percent going into 2022. Housing starts (probably 780 in 2019) will reach 1,520 per year by 2022, with the majority continuing to be single-family units (although multi-family starts will stage a noticeable rise).

  • Stockton region—Nonfarm jobs will grow 2.1 percent in 2019 and 1.3 percent in 2020. Leading employment sectors include construction/mining, manufacturing, and professional/business services. However, job declines will be experienced in the “other” services and retail trade sectors. The average annual wage will rise from $54,900 in 2019 to $61,220 in 2022. The population is expected to reach 767,500 by late 2019 and will grow to 797,100 by 2022. In 2019 an increase of 2.1 percent is expected in the labor force (and 0.4 percent by 2022). The anticipated unemployment rate for 2019 will be 5.6 percent (down from 6 percent in 2018). Housing starts (probably 3,280 in 2019) will average approximately this same amount from 2020 – 2022, with the majority continuing to be single-family units.

  • Sacramento region—Nonfarm jobs will grow 2.4 percent in 2019 and slow steadily every year thereafter, eventually dropping to 1 percent by 2022. Leading employment sectors include transportation/warehousing and utilities, professional/business services, and leisure/hospitality. However, job declines will be experienced in the federal government sector. The average annual wage will rise from $66,000 in 2019 to $74,050 by 2022. The population is expected to reach 2.38 million by late 2019. Also in 2019, an increase of 2.9 percent is expected in the labor force. The anticipated 2019 unemployment rate of 3.5 percent will increase to 3.9 percent by 2022. Housing starts (probably 10,140 in 2019) will reach 12,300 per year by 2022, with the majority continuing to be single-family units.

Local County-Level Perspectives
The California Department of Transportation (Caltrans) has released its 2018 – 2050 demographic forecast for all counties in California regarding local jobs, wages, home prices, population, personal income, taxable sales, net migration, wildfire issues, public policy implications, legal cannabis, industries, workforce, and more.

For forecasting purposes, the shorter-term economic projections for 2018 – 2023 within this county-wide report by Caltrans do not factor in an economic recession into its local scenarios. They are only highlights stemming from a baseline projection (view the report above for more information).

Latest CA Economic and Demographic Research
The organization “Next 10” recently released a handful of new studies in early May looking at divisions in California's economy with respect to residents' income, where they live, and other key insights:

Demographic Profile and Projections: Central Valley*

  • Total population: 4.2 million (and will hit 4.7 million by 2025).
  • Working-age individuals (15 - 64 years old): 64 percent of total population in 2015 (and will fall to 63 percent by 2025).
  • Labor force (at least 16 years old who are working/looking for a job): 1.87 million out of 3.24 million adult population.
  • Labor force participation rate (adults who “want” to work): 58 percent (or 1.87 million individuals).
  • Unemployment rate: 7.3 percent (versus 4 in CA and 3.9 in U.S.)
  • Unemployed workers: 138,000.
  • Median household income: $51,000 as of 2018 (compared to $66,600 for CA and $59,000 for U.S.)
  • Poverty rate: 23 percent (versus 14 in CA and 14 in U.S.)
  • Education of population: 17 percent have a college degree; 31 percent some college; 28 percent high school diploma; and 24 percent no high school diploma.
  • Employment sector growth: click the following links for local future growth breakdowns (2014 – 2024) of nonfarm job projections by industry, occupation, education, and fastest-versus-largest areas of importance in the counties of Kern, Tulare, Kings, Fresno, Madera, Merced, Stanislaus, and San Joaquin.
  • * The combined eight counties of Kern, Tulare, Kings, Fresno, Madera, Merced, Stanislaus, and San Joaquin
  • ** Data as of February 2019 from the California Center for Jobs and the Economy; California Employment Development Department; California Department of Finance; Federal Reserve Bank of St. Louis; U.S. Bureau of Economic Analysis; and U.S. Census Bureau

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