Sacramento Region

'Recession' is Top of Mind, but Economy Shows Strong Fundamentals Going Forward

The Sacramento region’s economy displays robust fundamentals and will continue expanding in 2019—although probably at a slower pace. But certain risks could impact businesses and consumers going into 2020 and turn into a recession.

That’s according to the “2019 Sacramento Business Review,” a special report and conference recently hosted by local experts and presented at Sacramento State University. The keynote speakers’ opinions spotlight intriguing viewpoints, trends and projections so your credit union can plan appropriately.

Click here for the entire archived forecast report, or view the synopsis below:

Sacramento Regional Forecast

  • (To view the entire complimentary 44-page forecast report, click here).

  • The Sacramento area’s economy is in good shape overall, but optimism among business leaders, policymakers, and consumers is slightly dwindling. Locals and establishments are making money and spending it at a healthy clip, but they aren’t quite fully convinced the economy is on its strongest footing compared to one or two years ago. Whatever “downturn” might be brewing in the state and national economies leading into 2020 (according to many experts) may end up impacting certain segments of the Sacramento economy sooner rather than later due to the region’s industry demographics.

  • The Sacramento region’s unemployment rate has declined below 4 percent for the first time since the economic boom years of the late 1990s. However, there are still reasons for concern. Annual local employment growth has been positive for several years but is steadily declining (to just 1.3 percent yearly)—the slowest since 2011. This may be partially due to the stagnation in the labor force growth rate as everyone who wants a job may already be employed. “We are at full employment and running out of workers,” the forecast report states. “Many companies are converting contractors into payroll employees as the labor force stops growing.”

  • The Sacramento area’s recent declining annual job-growth rate could be a leading indicator of the United States entering an economic downturn sometime in the future—although it’s unclear exactly when. It’s noticeable that Sacramento County’s annual employment growth rate has fallen below the U.S. rate in the second half of 2018. Historically, the local region’s job growth significantly declines 18 months before the nation (and on the flipside it usually takes the local job market about 18 months longer than the United States to achieve a full economic recovery coming out of a recession). In other words, Sacramento County has a history of being “first to go into a recession but last coming out.”

  • Another explanation for the recent job-growth decline in the Sacramento region may be related to recent concerns by some experts about the national economy’s near-term future. Recently, several job sectors considered to be more economically sensitive have reported a decrease in employment, which may be a sign of future weakness. Fortunately, Sacramento-area employment is more concentrated in “defensive” sectors than cyclical sectors, but time will tell how this scenario plays out.

  • Other headwinds against a continued bullishness in the Sacramento area’s economy include the changing global, geopolitical and economic environment, as well as rising interest rates. Foreign trade tension will negatively affect global growth, and so will a tightened monetary policy by the Federal Reserve. Weak employment growth in an already-maxed-out labor market could hinder economic growth as well. While the real estate market has been behaving in a more disciplined way since the Great Recession, total non-financial corporate debt has reached a historic high as many large corporations have leveraged low interest rates. “The economy is strong right now, but we expect to see slower growth in 2019 in Sacramento and a potential national recession in the following years,” states the forecast report. “Enjoy the warm weather, but winter is coming.”

  • The Sacramento region’s “defensive job sectors” (industries sensitive to economic change) stand in the majority compared to the area’s “cyclical job sectors” (very sensitive industries). Also, the annual growth rate of the former has been increasing while the latter declines. Education (4 percent growth rate), health care (2.3 percent growth rate), and government (2 percent growth rate) combined make up 40 percent of the region’s total employment base. However, information (-2.5 percent), construction (-2.4 percent), and professional/business services (-0.5 percent) altogether make up only 20 percent of total local employment.

  • Construction employment has noticeably declined in the Sacramento area during the past year despite increasing 3.6 percent across California. This is likely a result of construction activity shifting to Sonoma County, where construction employment increased 9.3 percent over the past year—fueled by a 407 percent increase in the number of building permits authorizing construction spending of $683 million during the past six months. This is most likely due to rebuilding efforts after the recent wildfires. Unfortunately, this trend will likely continue as Sacramento-area construction workers will be needed in Butte County as well.

  • The Sacramento region’s strong labor market has been pushing local household incomes higher. Median household income increased nearly 5 percent in 2017, and all indications show this trend continued into 2018 at probably the same rate. Historically speaking, it has increased nearly 10 percent from its cyclical low in 2013—and the rate of increase has been accelerating.

  • Household income distribution in the Sacramento area has also improved. The number of households with annual income of $100,000 or more increased sharply over the past five years while the number of households bringing in less than $100,000 has declined. This is partially fueled by an increase in household earnings from employment.

  • Consumer sentiment in the Sacramento region remains mostly positive but appears to be cooling somewhat—which hints at a potential slowing of consumer spending locally. While national sentiment has remained steady since our last release, local/regional sentiment is down for the first time since the inception of the survey (taken by the Sacramento Business Review and SAFE Credit Union). Also, expectations regarding the future of the local/regional economy have fallen the most over the past year. In contrast, national data for the same period shows increased optimism about the future. Taken together, this suggests local consumers are feeling slightly less positive about the economic prospects for the Sacramento region in the coming years.

  • Even with the economy still growing, lenders in the Sacramento area could experience a downshift in consumers obtaining mortgages, auto loans, and credit cards. The same survey asked respondents about credit acquisition planned over the next year. “This collective response could suggest the prospect of slowing consumer spending on the horizon if fewer regional consumers seek access to these forms of lending,” the forecast report states. All categories (auto, mortgage, credit card, and student loan) except HELOCs show a downward shift with respect to local consumers’ plans to access these credit vehicles. Two years ago (January 2017), about 37 percent of local consumers planned to borrow money, but today that number is 26 percent.

  • Total Small Business Administration (SBA) loan approvals for the counties of Sacramento, Placer, El Dorado, and Yolo hit a record $300 million in 2018. This comes after dropping to a low of $100 million in 2010 (the last peak being $260 million in 2007). It’s mostly being driven by business activity in Placer County. The three-year SBA loan growth rate was 9 percent in Placer versus El Dorado (1 percent), Sacramento (0.2 percent), and Yolo (-1 percent). However, for 2018 the outstanding share of SBA lending was centered mostly in Sacramento (54 percent), with Placer next (27 percent), then Yolo (11 percent), and lastly El Dorado (8 percent).

  • The Small Business Confidence Index in the Sacramento region remains very high, although survey responses registered a more uncertain outlook about the economy’s future compared to this time last year. About 60 percent of local business leaders feel “positive” about future business activity in the region, while 30 percent are “neutral” and 10 percent are “negative.” These numbers have grown dramatically since 2011 but started to flatline in mid-2018. However, respondents’ outlook on the overall economy (a different survey question) has dropped slightly from early 2018—perhaps the consequence of stock market volatility, geo-political policies, and uncertainty about interest rates/monetary policy. Respondents expect a more challenging business revenue environment and conditions ahead. With that being said, it should be noted that local credit accessibility for manufacturing, services, and “other” businesses remains strong, as well as employers’ plans to hire new workers in 2019.

  • While Sacramento-area business transaction activity (acquisitions) remained unchanged over the past year (still robust), the size and valuations of such companies have already started to slowly decline. This may be a “troublesome” sign, the forecast report states. Business transactions are measured by the volume of listings and closed sales. These local companies were smaller in both median revenue and cash-flow metrics, and multiples paid for their future earnings and cash flow declined for a second year in a row.

  • The median price of an “existing” single-family home in the Sacramento region will probably continue to slow down in 2019. Sale prices on a per-square-foot basis posted 9 percent annual growth from 2015 – 2017, but then fell to 6 percent in 2018 and is poised for an even slower growth rate this year. Looking just at third-quarter 2018, prices actually dropped 1 percent (although one quarter does not make an entire year). This metric hit $380,000 (or $233 per square foot) as of September 2018 and has risen 38 percent (from $275,000) in early 2014.

  • The majority of the Sacramento area’s “existing” home sales remain below $600,000, which puts pressure on homebuilders/developers to keep costs down. They are also dealing with high land costs, and as a result there has been a lack of starter homes (1,600 square feet or less) coming onto the market. “With that said, the outlook for single-family property values remains positive as developers have learned from the previous recession and are not saturating the market with new supply,” the forecast report states. Single-family building permits were on pace to reach 8,000 by the end of 2018. This is down from 9,430 last year and well below the 2004 peak of 22,000 (but higher than the 2,500 experienced annually from 2009 – 2011).

  • Most of the commercial real estate market in the Sacramento region is either “strong” or “spectacular” depending on the product and location (but with a caveat for retail space):

    Office space—"The office market had a strong 2018, resulting in a decline in vacancy to 9.2 percent, a new low for the market. Strong market metrics result from increased demand from tenants looking to enter the market. High levels of demand have also led to an increase in lease rates and property values. No submarket better exemplifies this more than downtown Sacramento, which has seen asking rates for ‘Class A’ space eclipse $3 per square foot/per month on a full-service gross basis for the first time. The outlook for 2019 is similar, with nearly 1.7 million square feet of tenants actively seeking space and a lack of available ‘Class A’ throughout the region.”

    Industrial—"The industrial market continues its record growth, with vacancy reaching a record low of 4.5 percent. Marijuana tenants, which were initially responsible for the sharp decrease in vacancy and increase in lease rates, have largely saturated the market. But growth is now sustained by demand from the market’s traditional tenant base. New speculative construction is due to complete in early 2019 and will fill a void in the market for ‘Class A’ high clearance-height distribution buildings. The new developments will serve as a litmus test for the market as developers seek to bring large block distributors to the region. Interestingly, much of the market demand is for tenants looking to occupy 10,000 to 50,000 square feet, which has little availability and little in the way of new supply. This may be a hurdle to further market growth.”

    Retail—"The retail market recorded strong fundamentals during 2018, with the vacancy rate falling to 6.5 percent. The strong market fundamentals are driven in part by a shift in landlord preference regarding tenant type. Goods retailers are currently facing increasing competition from online outlets. Now landlords are considering experiential-based retailers—such as indoor trampoline parks or ‘escape rooms’—to fill vacant space. Demand is strong for the region's ‘Class A’ shopping centers; however, poor demographics can change a retail center’s prospects dramatically. In some cases, projects are being redeveloped as mini-storage or other non-retail uses. This trend is expected to continue as brick-and-mortar entities look for creative ways to compete with online retail.”

  • With respect to Sacramento regional capital markets and the banking sector, “We are still cautiously optimistic for 2019, but with a little more caution and a little less optimism,” the forecast report states. Consumer and business confidence is expected to wane in 2019 as the source of future economic growth beyond 2019 becomes less clear. Regional banks and credit unions have performed well, but the dwindling of cheap liquidity and a flatter U.S. Treasury bond yield-curve present formidable headwinds. Click here to read more commentary on pages 26 – 31 about:

    Capital markets outlook (economy, stocks, bonds and commodities).
    Potential economic recession, the yield-curve for U.S. Treasuries, and interest rate predictions.
    Sacramento regional financial institution performance (credit unions versus banks), including loan growth breakdown.
    Market volatility, liquidity, ratios, and local financial institution income versus expenses.
    Operational costs, regulatory compliance, regulatory relief versus burden, and operating performance.

  • Regarding “human capital” (employees and skills) in the Sacramento area: voluntary employee resignations are expected to slow down; preparations for artificial intelligence are happening; and the need for workers to be increasingly proactive and strategic is evident. Trends feeding into these findings have recently come from generational challenges, natural disasters, and economic uncertainty. Research revealed the following:

    There is essentially no movement from businesses on optional benefits and perquisites, or on headcount. Headcount levels indicate that slightly more organizations are planning to actively recruit talent versus staying at current levels, with no indications of layoffs.
    There is a change in anticipated turnover as organizations expect fewer voluntary employee resignations. This is suggestive of a larger workforce locally.
    Companies are basically keeping their relatively high 2018 staffing levels. Some are making increased efforts on the employee compensation front, as well as diversity and inclusion fronts.
    A larger number of organizations report generational differences to be an upcoming challenge.
    Click here to read more commentary on pages 32 – 35 about the decisions companies are making with respect to current employees and future workforce needs; talent management, human resource initiatives; factors exerting the most influence on businesses today and in the future; employee development; awareness; expectations; conflict; technology; and much more.

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