North Bay Economic Outlook

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North Bay Economic Outlook

• Robert Eyler, Ph.D.
• Center of Regional Economic Analysis
• Sonoma State University
• www.sonoma.edu/org/crea

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Where we have been

• Late 1990s had unprecedented growth
• Avg. Real GDP growth rate from 1995-2000 4.5
• Average 1945-1994 2.8
• 2001 growth rate 0.37
• High tech generally led the charge in late 1990s
• Hardware revolution and Biotech in 1980s
• Microprocessing speeds and communications in
  1990s
• Biotech for 2000s? Telecom? Low-tech??

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Where we have been (cont.)

• The inevitable
• Growth had to come to an end at some point
• Market satiation and saturation in internet and
  telecom from profit seeking
• Inflation fears cause higher interest rates
• September 11 tragedy exacerbated fears and
  slowdown.

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Where we are

• Local layoffs scary, but historically cyclic
• Massive build-up leading to downturn.
• Labor the easiest cost to cut, financially.
• Airlines cut over 40,000 jobs
• Ford and GM cut over 15,000 jobs
• Locally, many high-tech layoffs (over 3,000 jobs)
• Merger forces North American Mortgage to cut 750
  workers (services industry).

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Where we are (cont.)

• North Bay Economy has procyclical and
  countercyclical elements
• Some wine segments and agriculture normally
  countercyclical.
• Premium wine sales up 17 in 2001 (10-14)
• High tech and services procyclical.
• Tourism very procyclical.
• We are told when larger firms begin to cut
  workers, slowdown is ending really?

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Where we are going

• Recession is here, but may be ending
• FED Chairman Alan Greenspan, 1/24/2002
• There have been signs recently that some of the
  forces that have been restraining the economy
  over the past year are starting to diminish and
  that activity is beginning to firm
• What does that mean????
• Recovery predicted by most in 2002, but a weak
  one difficult to have back to back booms easy
  to have back to back busts.

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Where we are going (cont.)

• Recession (cont.) Signs of Stabilization
• Airline fares back on the rise.
• Oil prices bottoming out.
• Food prices stabilizing.
• Car sales slow growth led to layoffs and lower
  production to support car prices prices rising.
• If discount prices do not work, lower supply
  stabilizes prices when demand sags.

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Where are we going (cont.)

• National Forecasts
• FED Jan 10, 2002 speech in LA summer recovery
• NBERUses the Conference Board
• Conference Board Leading indicators and
  Coincident both up, recovery in 3-5 months.
• State Forecasts
• Department of Finance California recovery by
  midyear, will lead national recovery.
• Is it all good?

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Recovery?

• Signs of recovery
• Consumer confidence on the rise (up 3.2 in Dec.)
• Leading indicators surge at national level
• Up 1.2 in December, with coincident also up.
• Stock markets seem to be stabilizing
• Even with instability in Middle East, Enron
• DJIA up 6 since Oct. 1, down from Dec. peak
• NASDAQ up 11 since Oct. 1, down from Dec. peak
• SP500 up 2 since Oct. 1, down little from Dec.
  peak
• Fiscal and Monetary stimulus incentives rising?

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Recovery? (cont.)

• What needs to happen for recovery
• Business borrowing must rise in all industries
• Sign of RD, need for workers.
• Sign of profit pursuit.
• Consumer confidence must become spending
• Sign of higher retail sales now and to come.
• Sign of increased expectations bearing fruit.

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Recovery? (cont.)

• What needs to happen for recovery
• Housing prices must stabilize (only 5 increase
  in 2001 in Median Price, 20 drop in sales)
• Depends on labor market more layoffs, higher
  home supply.
• Relatively high cost of living locally may make
  re-hire tough
• Stimulus packages must bear fruit
• Rate decreases must lead to some new
  spending/borrowing.
• Equity markets must begin to react through
  portfolio adjustments.

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Indicators to watch

• Unemployment
• Shows inflation pressures when low, shows easing
  prices when rising (like now).
• Provides a trend for economy on hiring and local
  labor markets.
• Acts as a predictor of housing markets locally.

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Indicator to watch (cont.)

• Housing and Unemployment (Example)
• Typically mortgage rates and housing sales
  correlated
• For Marin County, there is 30 correlation
  between changes in mortgage rates lagged 4 months
  and housing sales.
• There is a 85 correlation between changes in
  unemployment lagged 3 months and housing sales in
  Marin County

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Indicators to Watch (cont.)

• Forecasts of North Bay Unemployment Rate
• Marin County (currently 2.7)
• Peak of Unemployment forecasted 3.3
• Napa County (currently 4.5)
• Peak of Unemployment forecasted 4.9
• Sonoma County (currently 3.3)
• Peak of Unemployment forecasted 4.0
• Seasonally Adjusted Data here

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Source Bureau of Labor Statistics
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Indicators to watch (cont.)

• US Leading Index and Consumer Confidence Index
• Newsworthy, easy to understand
• Many business use these to make decisions
• Good general figures
• Local Leading Indicators produced by CREA Marin,
  Napa, Sonoma

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Sources Toby Tyler (Sonoma) CREA (Marin and
Napa)
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Leading Indicators

• Variables try to show different forces
• Default Notices (Local)
• Building Permits (Local)
• New UI Claims (Local)
• US Leading Index (National)
• Help-Wanted Ads (Local)
• Ag Price Index (National)

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Marin County Leading Indicators
Sources Toby Tyler (Sonoma) CREA (Marin and
Napa)
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Napa County Leading Indicators
Sources Toby Tyler (Sonoma) CREA (Marin and
Napa)
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Sonoma County Leading Indicators
Sources Toby Tyler (Sonoma) CREA (Marin and
Napa)
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Outlook

• North Bay Recovery predicted by CREA to begin
  Summer 2002
• Most sources, including FED
• Mainly a historical assessment, still many danger
  signs
• Car sales, airline travel, business orders.
• Housing prices should stabilize, depends on
  events.
• However, do not think your portfolio is going to
  double in three or four months.

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Outlook (cont.)

• Keys to North Bay turnaround
• Identify industries to lead local recovery and
  support
• High tech, Biotech (historically the case)
• Ag, Tourism (cost of living and attractions must
  change)
• Health Care, Banking, support but do not lead
  economy.
• Local tech push may be long in coming
• The recovery may look a lot like 1992-94 where a
  double dip was possible.
• Need to think rationally about portfolio choice
• We (as always) are waiting for the next big tech
  push, must support it while maintaining economic
  diversity.

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Conclusions

• What Should We Take From This?
• Businesses in each county
• Marin Look for high-tech opportunities and
  making housing more affordable.
• Napa Expand diversity to complement ag and wine.
• Sonoma Prepare for next wave by planning for
  growth and effects on other municipalities in
  2002.
• Recovery will be slow, but take advantage.

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Conclusions (cont.)

• What Should We Take From This?
• Investors in each county
• Marin Find local companies and invest,
  especially with ties to larger markets and firms.
• Napa Develop land and property for multi-use
  continue to diversify
• Sonoma Service industries a good investment.
• Spend with caution as consumers, think locally.

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Conclusions (cont.)

• Recovery is coming, but take lessons from the
  recent past
• High-tech is cyclic, think about diversity
• Services and Tourism a big part of taking
  advantage of booms
• Government and Business must have a common vision
• Questions?

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Center of Regional Economic AnalysisSonoma State
University

• Robert Eyler, Ph.D., Director
• www.sonoma.edu/org/crea
• crea_at_sonoma.edu