Slowdown, but no recession ahead for San Francisco North Bay in 2020
Robert Eyler is an economics professor and dean of the School of Extended and International Education at Sonoma State University.
The global economy, which the North Bay economy is connected to both by local businesses with worldwide markets and also our consumption behavior, shows signs of weakness as we enter the last year of this decade.
The U.S. economy is now in is longer expansion on record, but also one if its slowest expansions. Forecasters do not see a recession coming until perhaps 2022 or 2023 but definitely things are slowing down.
Still California’s economy continues to be the centerpiece of the world economy and growing has a lot to do with that positive, cautious outlook.
The Federal Reserve, in reaction to anemic growth of inflation rates, cut interest rates aggressively in 2019. Economists were somewhat split (including those on the Federal Reserve’s Open Market Committee that decides on short-term rates) about the magnitude of change and if change was needed at all.
While there is likely a pause on rate changes in early 2020, there is likely one or two more rate cuts coming by early 2021.
Around the world, interest rates remain low. The global economy, while sending mixed signals, has slowed down growth with some green shoots. The European economy, affected by U.S. trade policy and uncertainty around the effects of Brexit and also manufacturing, has teetered on recession’s precipice for the last 12 months. The Chinese economy, due to U.S. trade policy and a slowing global economy, is seeing growth rates fall but nothing near recession.
The U.S. economy is following suit. California remains the driving force in the U.S. economy. If technology firms continue to hire and draw resources globally, the California economy has a decent (not strong) outlook.
Housing supply, which keep home prices and rents relatively high versus demand, may affect labor force availability. Much has been made of an outbound workforce to better housing pastures. This may provide opportunity for inbound workers to take advantage of lower housing and rental prices in the short-term, while California’s economy continues to grow and provide returns to workers.
For our region, jobs growth has slowed over the last two years, and our local industry mix has shifted a bit toward construction jobs and away from manufacturing, while services of all types continue to grow.
A major concern for economists is slow wage growth in a hot labor market. As people continue to find work, incomes are not rising as fast as in the past when unemployment has been this low (under three percent in Sonoma, Napa, and Marin counties for all of 2019). This slows down spending capacity for local merchants in an ever-increasing competitive marketplace. Tourism plays a key role is sustaining retail, restaurant and other services businesses that have both local residents and visitors as customers. It is unlikely Amazon is the first choice for someone staying at a hotel, but assume Amazon is considering ways to also enter that market.
Another year with fire close to Santa Rosa and along the borders of Sonoma, Lake and Napa counties reminds us about the importance of housing and utilities in our lives. Businesses and residents now may face an additional “tax” annually of living for a time with direct power.While these times may be short lived, they are tied to unpredictable weather patterns and are thus difficult to plan for easily.
This continued uncertainty, as in any other asset market, can slow down home buying behavior and perhaps slow down tourism generally because you just don’t know what is going to happen on your trip to wine country. Like a natural disaster, there are winners and losers for power shut-offs, but in general these put small businesses and our lower-income workers at risk.
The regional economy is very much driven by global and national forces, and the idea that this region (or any region of California) will recess on its own is not easy to believe.
For the North Bay, continued connections to the Bay Area economy (for jobs and income but also flow of tourists) support continued growth forecasts for this region. The wine industry is going through a time of rising supply, which may continue to pressure prices to fall. However, tourism in both Sonoma County and Napa Valley is not strongly affected by what goes on in the business of the vineyards and wineries. Tasting rooms may actually attract more visitors as a result of reducing prices and using tourism flow to generate more wine club members as a result of cyclic pressure in wine prices.
Construction demand is likely to continue in all points of the North Bay, either for new construction or remodeling. Lower interest rates and continued economic expansion help fuel continued investment in homes. For 2020 to 2022, the regional economy looks to continue its growth, where elections and some uncertainty about regional disasters are to linger in the background.