Sonoma County Outlook 2005: Looking Toward Growth

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North Bay Economic OutlookMixed Signals, Strong
HopesFebruary 2, 2006
Robert Eyler, Ph.D. Department of Economics Dire
ctor, Center for Regional Economic Analysis
Sonoma State University
eyler_at_sonoma.edu
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Introduction

• National Forecasts for 2006 are tenuous, but good
  for now.
  
• Growth rates of 3.2 to 3.4 real GDP predicted
  for U.S.
  
• Inflation projections less precise (1.9 to
  3.5)
  
• Which makes real GDP forecasts a little
  problematic
  
• Unemployment looks to be slowly moving down
• Interest rates likely to increase from policy and
  market forces
  
• Many similarities to 2005 and 2004
• General uncertainties and tensions unresolved
• Recession if these continue, more likely that
  significant boom
  
• Local signals mixed
• No true industry or sector pulling the economy
  behind it yet
  
• Local businesses seem to be watching and waiting
  still
  
• Indicators mixed, 2006 dependent on three major
  items.

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Macroeconomic Specifics to Watch

• Twin Deficits
• Fiscal budget deficit(s) become trade deficits
• Wine and Tourism are local industries best
  positioned
  
• Believe it or not owe 2 billion more intl than
  own, make more revenue than pay
  
• Interest rates rising
• A long time coming speed and magnitude the
  uncertainties
  
• Energy price and corporate earnings fears making
  2006 start financially slow
  
• Housing markets watching and waiting
• Rates not the only factor here

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Specifics (cont.)

• Federal Reserve will continue inflation
  fighting.
  
• New Federal Reserve chair will bring little
  change
  
• Real federal funds rate the target
• Most likely to continue to raise rates in 2006,
  not as often.
  
• International issues
• Japans recent economic struggles not a good
  sign
  
• Euro still strong against dollar
• Iraq war continues Sharon problems Hamas
  continued global political uncertainty
  
• All these imply global financial tentativeness

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The North Bay Economy

• 2006 outlook seems to be shaped by three main
  issues locally
  
• Local concerns over business costs hiring
  uncertainty for local businesses at current
  wages
  
• Local fears about housing markets and living
  costs consumer uncertainty and
  
• Economy has been moving upward, albeit slowly.
• Local businesses seem to be continuing forward
  movements.

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County-Specific Questions

• Economic balance long-term a major theme
• Lake
• Will construction and employment continue to
  grow?
  
• Marin
• Balanced Economy or Wealthy Suburb?
• Demography beginning to show us the future
• Mendocino
• Is there a tangible vision of this dichotomous
  county?

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County ?s (cont.)

• Napa
• Wine the key here is there balance?
• Sonoma
• The hub, but need to focus on entrepreneurs
• 2nd panel will help address this for all North
  Bay
  
• What local industry will lead Sonoma Countys
  economy?
  
• Solano
• Is this county balanced?
• In a good position to be a long-term, high-tech
  alternative

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Local Economic Indicators

• Leading and Coincident Indicators for six North
  Bay counties, and a composite.
  
• Lake, Marin, Mendocino, Napa, Solano, and
  Sonoma.
  
• These indicators are meant to show the shape of
  economic cycle.
  
• Leading shows 2006 will be volatile.
• Coincident shows 2006 slow movement upward.
• The sum shows slow, tenuous movement up.

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Toby Tyler Leading Indicators

• Weighted average of macroeconomic data for each
  county.
  
• Leading Indicators tell us where we are headed
• Default Notices Inverse
• Building Permits Positive
• New UI Claims Inverse
• US Leading Index Positive
• Help-Wanted Ads Positive
• Ag Price Index Positive
• As indicator increases, economy moves in bolded
  direction.

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Toby Tyler Coincident Indicators

• Coincident Indicators tell us where we are
• Non-agricultural employment
• Retail Sales
• Personal Income
• Once business and consumers receive positive
  signals, they hire and spend more as a reaction.
  
• The leading indicator drives the coincident.

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Conclusions

• High tech remains poised to take off.
• Consumer electronics, biotech, telecom look good
• Local firms on frontier
• Will this industry be able to hire locally or
  have to import?
  
• Nationally, trend is positive but gas prices
• Energy prices (not just gas) rising
• The pump price has both a psychological and real
  effect
  
• Need to concentrate on real effects

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Conclusions (cont.)

• Outlook for North Bay marginally positive
• Continue real estate growth predicted
• This year will be a true test
• Cost of living a major factor for the poor
• Need to react at some point or suffer
  socioeconomic and political consequences
  
• Affects hiring ability
• Aging demography becoming a huge issue
• Can go into recession given opposing forces
• Gas prices merely one of many caveats

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CREA at SSU

• To download this presentation, see
• www.sonoma.edu/org/crea/outlook2006.ppt