Rate hikes are having a disproportionate effect on the San Joaquin Valley economy, according to the latest Valley Business Forecast report, produced by Gökçe Soydemir, Foster Farms professor of business economics at Stanislaus State.
“We stated in our previous report that the severity of the recession will depend on how quickly and how high the Federal Reserve raises interest rates. It takes time for rate hikes to affect the economy, and concerns are growing that the Federal Reserve is raising rates too quickly without waiting to see the effect on the economy,” said Soydemir.
He says the yield curve of two-year versus 10-year bond yields, which has inverted several times since late March, is a predictor of a recession.
“There are now heightened concerns that the Federal Reserve’s rate hikes to reduce inflation will send the economy into a hard landing,” Soydemir said.
Soydemir offers these recommendations: “Businesses and residents of the valley can take precautions by switching from flexible to fixed rates, reducing leverage by reducing debt, increasing cash retention, renting instead of owning and transitioning.” of credit cards that offer zero introductory interest rates.”
It’s not all bad news. All employment categories except financial activities grew in 2022, and total employment in all counties grew at significantly higher rates than their long-term standard growth rates. However, total employment in the Valley is likely to decline in 2023, but will show an increase in 2024.
Other key points of the report include:
REAL ESTATE: The most worrisome indicator to watch is the 30-year fixed interest rate, which started showing its biggest increase ever seen in the series. In 2022, housing permits increased by 18.92 percent and home values increased by 21.46 percent, reigniting concerns of a housing market bubble. Double-digit increases in first home values in 2022 and 2021 do not appear to be sustainable and a correction back to rates more in line with benchmark growth rates is expected.
PRICES AND INFLATION: During 2022, the average inflation rate stood at 8.29 percent while average weekly wages rose by 3.28 percent, resulting in a decline in real wages and a marked loss of purchasing power that is expected to continue in the coming months. Other factors putting upward pressure on overall price levels are the ongoing Ukraine-Russia war and unresolved supply chain issues. Although inflation is likely to decline at a very gradual pace, a drop in the Federal Reserve’s target rate of 2 percent is unlikely to occur in the very near future.
BANKING AND CAPITAL MARKET: There was a clear difference in the dynamics of Valley community banks’ total deposits and net loans. Total bank deposits in the Valley grew by 9.57 percent in 2022 — about half the rate seen in 2020 and 2021. There was no additional growth in the Valley’s net loans and leases, reflecting the tighter stance of community banks in granting loans. Valley community banks’ non-accrual assets began to trend higher in 2022 than in 2021 and are more likely to rise if unemployment rates continue to rise. Community bank assets 30 to 89 days past due and assets 90 days past due showed greater growth in 2022 than previous years.
To read the full report, visit: https://www.csustan.edu/cba/san-joaquin-valley-business-forecast
