Business forecast: Silicon Valley is in recession

Rising interest rates are having a disproportionate impact on the San Joaquin Valley economy, according to the latest Valley Business Forecast report produced by Stanislaus State University Foster Farms-funded business economics professor Gökçe Soydemir.

“We have said in previous reports that the severity of the recession will depend on how quickly and how much the Fed raises interest rates. It will take time for rate hikes to affect the economy, and concerns are growing that the Fed is raising rates too quickly without waiting to see an impact on the economy. impact,” Soydemir said.

Beginning in late March, the yield curve between two-year and 10-year bond yields inverted several times, signaling a recession, he said.

“There is now growing concern that the Fed’s rate hikes to reduce inflation will lead to a hard landing,” Soydemir said.

Soydemir offers these suggestions: “Valley businesses and residents can take precautionary steps by switching from flexible to fixed rates, reducing leverage by reducing debt, increasing cash holdings, renting instead of owning and switching credit cards that offer zero introductory rates. ”

It’s not all bad news. In 2022, all employment categories except financial activities increased, and all counties experienced growth rates for total employment that were significantly higher than their long-term baseline growth rates. However, total employment in the Valley is likely to decline in 2023 but see some growth in 2024.

Other report highlights include:

real estate: The most interesting indicator to watch is the 30-year fixed rate, which is starting to show the largest increase ever in the series. In 2022, housing permits will rise by 18.92%, and home values ​​will rise by 21.46%, renewing concerns about a housing market bubble. The double-digit growth in home values ​​in 2022 and 2021 appears unsustainable, with house prices expected to correct back to levels more in line with benchmark growth rates.

Prices and Inflation: During 2022, inflation averaged 8.29%, while average weekly wages increased by 3.28%, resulting in lower real wages and a significant loss in purchasing power, which 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. While inflation is likely to decline at a very gradual pace, it is unlikely to fall to the Fed’s 2% target rate in the near future.

Banking and Capital Markets: The dynamics of gross deposits and net lending at Silicon Valley Community Banks have shifted markedly. Total Valley bank deposits will grow by 9.57% in 2022, about half the growth rate in 2020 and 2021. Valley net loans and leases did not show any additional growth, reflecting the community bank’s tighter stance on originating loans. Valley Community Bank’s non-accrual assets start trending steeper in 2022 than in 2021 and are more likely to increase if unemployment continues to rise. Community bank assets that are 30 to 89 days in default and assets that are more than 90 days in default will see greater growth in 2022 than in previous years.

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