A continuing slowing in economic activity in the San Joaquin Valley had been predicted along with growth falling to negative territory through the second quarter of 2020, but it was not possible to foresee the magnitude of the economic hardship that has arrived as a result of the COVID-19 outbreak.
An event such as this is called a “Black Swan” in finance literature because of its extremely rare, devastating nature. But because of the positive impact of social distancing, especially in California, and the data that will emerge from increased testing and tracking, Valley residents most likely can expect economic recovery to begin in the second half of 2020. The level and speed of the recovery will be closely tied to our nation’s success in battling the virus, including the development of a vaccine.
This outlook is presented in the San Joaquin Valley Business Forecast update produced by Gökçe Soydemir, the Foster Farms endowed professor of business economics at Stanislaus State. The entire update and past reports can be found on the San Joaquin Valley Business Forecast website.
These forecasts and updates rely on the available information about the virus at the time of writing, including reports that portions of the economy will begin to reopen in May and June of 2020. Any delay in the opening of the economy will alter the timing of its recovery and the accuracy of this update.
Author Gökçe Soydemir’s biannual Business Forecast provides projections for the Valley’s labor market, regional housing conditions, prices and inflation, banks and other depositary institutions and capital markets. Soydemir and his team use a unique forecasting model that produces lower and upper statistical confidence bands, with results that are expected to fall within this range. Soydemir joined Stanislaus State as the Foster Farms endowed professor of business economics in 2011. He brings strong expertise and experience in business analysis and forecasting and has published extensively on applied econometrics, regional economics, financial forecasting, market analysis and international finance.
The effect of the pandemic is being felt across all categories of employment. Leisure and hospitality services employment likely will be affected the most, while education and health services employment will be impacted the least. But the projections also point to a quick recovery, with an annualized growth of 1.05 percent in total employment from the second half of 2020 to the first half of 2021, falling behind the Valley’s typical growth of 1.19. In the following interval, from the second half of 2021 to the second half of 2022, Valley total employment will exceed typical growth, expanding at an average annual rate of 1.26 percent.
Building permits will decline, reflecting an economy in recession, but recovery will be quickest in the construction sector due to the Federal Reserve’s pulling the federal funds rate down to zero, the relief package already in place and low housing inventory in the Valley. The demand for Valley housing will receive an additional boost from an increasing number of Bay Area residents seeking the less-hectic, safer lifestyle offered in our region. The numbers of foreclosures started will climb slightly, as they tend to do in any recessionary period, but will revert to all-time lows following the recovery. The recession will suppress home values for about six quarters. The rate of appreciation will remain positive but will trail the long-term benchmark rate of 5.14 percent and will grow at rates less than those observed in 2018 and 2019.
Following the break-up of the oil cartel in March, the price of oil fell to 18-year lows. This, along with recession, will mean lower inflation rates in the nation and the Valley for the next couple of months. The annual inflation rate will land well below the typical rate of 2.32 percent. As it does in recessions, wage growth will drastically fall below the long-term benchmark rate. Falling wages and rising unemployment will contribute to a significant decrease in purchasing power during the recessionary months, then start to climb back in the fourth quarter of 2020 with the bounce-back of the economy and rebounding oil prices.
During these recessionary months, the Valley’s banks will see stagnant growth in total deposits while growth in net loans and leases fall below their long-term benchmark rates. Valley bank non-accruals are likely to trend sharply upward during the recessionary months and through the recovery period, along with accruals 30-to-89 days and accruals 90-plus days. This trend should continue until the Valley economy is fully back to normal and has erased the increasing unemployment resulting from the pandemic.