Concerns surrounding the ability of the local economy to expand, given global contractions and the recent equity market roller coaster, should not diminish optimism when it comes to a slow but positive growth forecast for the region — at least for now — according to a Sonoma State University economist.
“After six years of upward momentum following the great recession, the key topic on most peoples’ minds is will today’s economic growth trend go away, or has it just begun?” said Robert Eyler, Ph.D., economics professor and director of the university’s Center for Regional Economic Analysis. His assessment for the year ahead is upbeat yet cautious, a forecast he plans to unpack at the Sonoma State University Economic Outlook on Feb. 24.
With the current state of global expansion and equity markets, Eyler believes there are several reasons why the North Bay should care. He sees California as a “jobs center,” but asks how much longer will this last? At the same time, the vagaries associated with growth — density, traffic, cost of living as well as other issues — are not going away.
At present, he does not see signs of a major recession on the horizon. In fact, Eyler’s forecast anticipates incremental global expansion at a rate moving up from 3.56 percent in 2016 to an estimated 3.97 percent in 2020, based on International Monetary Fund (IMF) predictions.
The real U.S. GDP growth rate forecast is expected to be close to 2.4 percent in 2016, 2.2 percent in 2017 and 2.0 percent beyond, based on Federal Reserve Economic Data (FRED) from the Fed in St. Louis in December.
According to that data, the U.S. unemployment rate of 5.0 percent in 2015 is expected to decline to 4.7 percent in 2016 and 2017, rising to 4.9 percent thereafter. The low 0.4 percent rate of inflation last year is projected to increase gradually to 1.6 percent in 2016, 1.9 percent in 2017 and 2.0 farther down the road based on how policymakers expect the rates of growth, unemployment and inflation in the economy to converge over the next five to six years in the absence of further shocks, and with appropriate monetary policies in place.
Another good sign is that the percentage change in non-residential U.S. investment since 2010 has largely been in positive territory, averaging 5 percent or better on a quarterly basis, after three years of negative numbers between 2008 and 2010 according to Bureau of Economic Analysis (BEA) data through Q3 2015.
From 2011 through 2015, the percentage change in U.S. residential investment has also been bullish with six spikes above 10 percent, including two at 20 percent or higher.
Eyler said it is interesting to note that excess reserves, loanable funds not lent at U.S. Depository Institutions (Federal Reserve banks) in 2008 dollars from January 1997 to January 2008, remained constant at about $22 billion. After 2008, total excess reserves has steadily climbed to $2.2 trillion, according to the Federal Reserve Board. This means there is ample capital waiting on the sidelines to help fuel economic growth, given higher lending rates and a greater ROI for banks and other investing institutions.
At the same time, the BEA (via Haver Analytics) reports that the core Personal Consumption Expenditures (PCE) Price Index, excluding food and energy, shows less than a 1.5 percent increase at the beginning of 2016, while total PCE including these two variables remains near zero — reflecting the effect of dramatically lower oil and gas prices offset by some increases in food costs.
The PCE Index measures the average change over time for all consumer purchases. The Federal Open Market Committee (FOMC) objective anticipates a 2 percent average PCE change over 12 months. The PCE Deflator effect is the product of a lower PCE Index helping keep inflationary pressures in check. FOMC is the monetary policymaking body of the Federal Reserve System.
FRED tracking of S&P 500 Dow Jones performance shows steady acceleration since 2011 from below the 1,200 level to between 1,850 and 2,100 in 2016. The Standard & Poors benchmark is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. It is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.
Looking forward at the global and national level, Eyler asks: “Will the dollar weaken or get stronger, and will long-term rates move with Fed policy in step, and does growth in jobs really matter? Since this is an election year, there are some unknowns for sure.” Signs of a strengthening dollar have already been seen this year.
Turning to California, Eyler believes the interior valleys are just starting to emerge from recession, while the Bay Area is the region’s engine of economic growth and will continue to be so. However, he observes that the growth of regional economies is not spilling over into outlying areas as in previous expansions. He also candidly commented that “weed” is growing in the garden as a populist issue in the state.
All things considered, he envisions a good forecast for California through 2019 in his words, “Depending very much on national and global economies — not the other way around.”
While the housing forecast anticipates less than 5 percent growth, there are positive signs. Comparing the housing market in 2016 vs. 2015, Eyler sees rising interest rate pressures following higher prices last year, with continued movement toward a peak. He says what remains the same is about a 5 percent increase in median prices. His SSU regional economic presentation will address demand vs. rental prices, interest rates and remaining inventory issues.
In addition, he will also provide a county-by-county overview of sectors where he expects to see growth in the North Bay. For Sonoma County, he sees expansion in the food and beverage manufacturing and life sciences sectors; for Marin — life sciences; Napa — tourism and wine; Solano — manufacturing, life sciences, services and logistics and in Mendocino and Lake counties, mainly services — given that the aftermath of major fires is still impacting growth potential in Lake County.
“When it comes to leading indicators of economic performance, the weighted average of macro variables tell us where the region is headed,” Eyler said.
For example, as default notices increase, the economy tends to decline. As building permits increase, the economy expands. When new unemployment claims go up, the economy slows. Conversely, as help-wanted ads increase, the economy moves ahead. The same is true for the U.S. Leading Index and the Ag Price Index — as the Agricultural Price Index improves, so does the economy.
Eyler will present an analysis of the leading economic indicators as well as coincident indicators (CI) for North Bay counties. “CI’s tell us where we are when it comes to non-agricultural employment, retail sales and personal income, with leading indicators driving the coincident.”
He said 2015 was a year of continued growth — better regionally than 2014 — and that recovery is now becoming expansion, touching all parts of the North Bay economy.
Given national and international uncertainties, he believes there are four categories of things to watch between 2016 to 2020, including: The role of oil; the SMART train; regional support for life sciences firms; equity markets and public finance, pensions and prospects for the next downturn, along with interest rates, housing, rentals and wages.