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«California State University Stanislaus MESSAGE FROM THE PRESIDENT CSU Stanislaus is committed to supporting this region. Our roots here – the San ...»

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Business Forecast Report

San Joaquin Valley

Volume 2, Issue 1

California State University Stanislaus


CSU Stanislaus is committed to supporting this region. Our roots here – the San Joaquin Valley

and foothill communities – run deep. Most of our students are from here, and most of our graduates

stay here. They make up a large portion of the region’s educated

workforce and have a huge impact on our economy. We strive to provide them with the high quality, cutting-edge education that they need to contribute to today’s fast-moving world.

Our impact goes even beyond our graduates, however, as is apparent with this business forecast report, prepared by our Foster Farms Endowed Professor of Business Economics, Dr. Gökçe Soydemir.

Dr. Soydemir uses industry data to identify trends and build forecast projections. His forecasts focus specifically on this region and its major industries. This focus provides area businesses with specific data and projections to assist them in their business planning. By supporting the these businesses, we contribute to the economic recovery and advancement of the entire region.

We are thankful to Foster Farms and the Foster family for their support. This business forecast report would not be possible without their commitment to this region and CSU Stanislaus.

Sincerely, Joseph F. Sheley



San Joaquin Valley California State University Stanislaus One University Circle Turlock, CA 95382 Gökçe Soydemir, Ph.D.

Dr. Gökçe Soydemir


Dr. Gökçe Soydemir joined California State University, Stanislaus as the inaugural Foster Farms Endowed Professor of Business Economics in August 2011. Dr. Soydemir 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.

Dr. Soydemir received his Ph.D. in Economics from Claremont Graduate School, Claremont, CA; an M. Phil. in International Finance from Glasgow University, Scotland, U.K.; and a Bachelor of Science in Economics from Middle East Technical University, Ankara, Turkey. He has several years of central banking experience co-constructing and forecasting large and medium scale macroeconometric models. In addition, he has conducted policy independent research on monetary economics.

Contents Executive Summary...............................................ii A~ Introduction................................................ iii B~ Employment Indicators...........

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This report relies on data gathered from third-party sources. The data has not been independently verified. While we believe these sources to be reliable, we make no warranties or representations of any kind as to the accuracy or completeness of the data. This report reflects the views and opinions of its author.

© 2012 California State University Stanislaus Business Forecast Report San Joaquin Valley 2013 Executive Summary Despite fluctuating performance from one month to the next, the U.S. economy continued to grow at a gradual pace in 2012. In terms of job creation nationwide, California was the second after Texas in 2012.

At the aggregate level, San Joaquin Valley employment grew by an average of 2.08 percent a year in the first eight months of 2012. The fastest job growth occurred San Joaquin and Kings counties at 4.38 and

4.18 percent respectively. All counties posted job growth at varying rates except Madera at -.2 percent decline. Overall, 2012 Valley employment growth was more than double its long run historical rate of.8 percent.

To quicken the national economic recovery, the Federal Reserve introduced phase three of Quantitative Easing (QE3) in September 2012. Open-ended QE3 is set to continue until unemployment significantly improves at the national level. Immediately following the QE3 announcement however, the spread between regular and TIPS treasury securities widened significantly reflecting increasing inflationary expectations for the long run.

The yearly inflation rate in the western region fell from 2.8 percent in 2011 to 2.1 percent by August

2012. Due to aggregate demand growing faster than the nation, inflation in the West exceeded that of the nation by.4 percent during this period. For the first time since the recessionary period of 2007-2009, average change in sales price of new single-family houses is projected to post a switch from negative to positive territory in 2013. The steep decline observed earlier in foreclosure starts for the West slowed considerably following the end of the foreclosure settlement reached by banks in early 2012 temporarily interrupting the downward pattern in foreclosures. However, foreclosures are projected to decrease further during the forecasting interval of 2013–2014. Slowly rising consumer confidence, in line with improved retail, consumption and construction spending jumped in September 2012 following QE3.

There was a slight decrease in Valley real wages in 2011 and 2012 when the average hourly wage growth fell behind the inflation rate in the region. The current sentiment of consumers and investors alike has improved following the new phase of quantitative easing. Valley jobs grew in all areas except the government sector in 2012. However, our projections point to an improvement in this employment category beginning in 2013. Slow growth was observed in information technology employment.

Most notably, the Valley economy began catching up to its long-term mean, showing slowly strengthening performance. Following a well-defined housing market turning point in the past year, builders slowly began constructing new dwellings. The unemployment rate is now below 8 percent nationally, and the U.S. real GDP is projected to grow more significantly in 2014 than 2013. As projected in our earlier reports, the natural rate of unemployment of 12 percent for the Valley and 6 percent for the nation is projected to be reached by early 2014.

In all, our analysis projects that the Valley economy in 2013 and 2014 is going to perform at more accelerated rates than in previous years for two main reasons. First, at the aggregate level in the Valley, incoming numbers in 2012 now point to employment growth that is well above previous years. Second, QE3 in September 2012 has increased medium-term expectations of consumers and businesses alike.

Improved expectations as reflected in such leading indicators as consumer confidence and new orders indexes currently provide an added incremental effect on the future performance of the economy.

ii California State University Stanislaus Introduction The purpose of this year’s forecast report is to provide forecasts from 2013 to the end of 2014 and inform the business community on the past, current and future trends of the Valley economy.

Each mean forecast line is displayed with lower and upper statistical confidence bands. The actual values – realizations – are expected to fall within this range. Given the low percentage errors, the out-of-sample forecast accuracy appears to be in the range of 94 percent. Forecasts are generated using actual numbers until August 2012, and the percentage changes in 2012 are based on the same month previous year.

The remainder of this report is organized as follows. Section B provides a discussion of San Joaquin Valley labor market conditions and forecasts; Section C reports the region’s housing market conditions;

Section D reports prices and inflation; and Section E reports depositary institutions and capital markets.

Section F provides a summary along with concluding remarks.

We thank the Valley community for providing valuable feedback throughout the year and hope to receive further suggestions to improve our future business forecast reports.

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Employment Indicators At the aggregate level, San Joaquin Valley annual average employment grew at 2.0 percent in the first eight months of 2012. However, not all counties grew the same. While San Joaquin and Kings counties grew above 4 percent over this period, Madera was the only one that had a negative growth of -.2 percent. Employment gains in Stanislaus and Merced counties were modest at.8 percent each.

The trend since 2010, unlike the previous year, now appears to be relatively well defined and sustained approaching its structural pattern prior to the Great Recession. With improving numbers for the Valley at the aggregate level, long-term employment growth has increased from.7 percent to.9 percent. Valley employment grew by 2.08 percent in 2012, which was more than double its long-term rate of.9 percent.

When compared to 2010 and 2011 growth rates, there appears to be a clear sign of sustained recovery since the recessionary period in 2007–2009. Our forecast predicts this recovery to continue into 2013 and 2014 at 2.25 and 2.83 percent, respectively, with a more pronounced pace in 2014 after the effects of QE3 begin to weigh in more heavily into the regional economy. Interestingly, average yearly growth in 2012 in total employment at 2.08 percent came close to the average yearly rate of growth in total employment that prevailed before the Great Recession at 2.18 percent.

Employment Indicators 1 California State University Stanislaus Consumption expenditure is what drives the U.S. economy. The Conference Board’s Consumer Confidence Index is a relatively accurate leading indicator that foretells the path of the U.S. economy.

The dynamics observed in the last two years appear to be very different exhibiting a sustained but gradual increase from that observed during and immediately before the onset of the Great Recession.

During that period the series basically exhibited a free fall prompting some circles to issue a recession warning early on. The gradual increase in the series is suggestive of anticipated increases in consumption, which is further backed by positive retail sales data in 2012. Consumer confidence jumped to 70.2 in September as expectations became more confident following the announcement of QE3.

Employment Indicators Business Forecast Report San Joaquin Valley 2013

In line with its structural pattern, Valley labor force growth began to exceed employment growth in

2012. This pattern was reversed during the boom years and early recessionary period of 2007–2009, mainly due to influx of population to the Valley and the slow adjustment afterward. Since then, the influx of population has declined significantly, which has caused employment to grow faster than the labor force. This pattern is consistent with its historical behavior and is indicative of the Valley gaining traction in terms of job creation and economic performance.

Employment Indicators 3 California State University Stanislaus Consistent with its structural pattern, Valley employment growth in 2012 was above that of California’s employment growth. Historically, the abundance of relatively low-cost land, labor and capital provides greater opportunity for growth in the Valley than the rest of the state. The pattern was reversed at times however, during the 2007–2009 recessionary period when the Valley economy was hit hardest by the housing crisis.

Employment Indicators Business Forecast Report San Joaquin Valley 2013

Although recovery first takes place in coastal regions, inland counties such as San Joaquin and Kings were quicker to catch up in recovery relative to Merced and Madera, which exhibited more of the bifurcation between coastal and inland California. Higher employment growth for the Valley is projected to continue into 2013 and 2014.

Employment Indicators 5 California State University Stanislaus In the first, second and third quarters of 2012, the U.S. real gross domestic product (GDP) grew at 2.0,

1.3 and 2.0 percent respectively. Economic growth as measured by real GDP mostly oscillated around 2 percent. To bring unemployment down, at least 2 percent growth is needed in the U.S. economy, which convinced policymakers to announce Phase Three of quantitative easing to quicken the recovery.

Real GDP is projected to grow at 2.3 and 2.6 percent in 2013 and 2014 with an overall average growth of 2.4 percent. As the effects of the QE3 begin to weigh in more heavily in the economy higher growth numbers are expected in 2014.

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More than half of Valley education and health services employment is private sector. The series historically exhibits the most robust pattern displaying linear growth. Despite being lower than the long-term average growth rate of 2.8 percent, Valley education and health services employment managed to post positive growth rates in 2009 and 2010.

Employment Indicators 7 California State University Stanislaus Valley education and health services employment is projected to continue along this robust pattern.

Even during the recessionary 2007–2009 period, the series grew 1.0 percent a year indicating that this sector is not much affected by recessions. Education and health services employment in the Valley is projected to grow at an average annual rate of 2.08 percent in 2013 and 2014.

Employment Indicators Business Forecast Report San Joaquin Valley 2013

The contraction observed for manufacturing employment in 2009 and 2010 reversed itself in 2011 by growing.2 percent a year. In the first eight months of 2012, yearly average growth in Valley manufacturing employment reached 4.96 percent. Apart from heavy seasonal behavior, the new trend observed since 2010 appears to be steeper than the one observed structurally.

Employment Indicators 9 California State University Stanislaus According to our forecasts, manufacturing employment is projected to grow at a yearly average rate of

5.2 percent in 2013 and 2014. Due to QE3, higher employment numbers are projected in 2014.

Assuming that the global slowdown proves to be temporary, the actual numbers are more likely to fall within the optimistic range.

Employment Indicators Business Forecast Report San Joaquin Valley 2013

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