The North Bay and Economic Challenges Exchange Bank Seminar September 26, 2007www.sonoma.edu/org/crea/exchangebank92607.ppt: The North Bay and Economic Challenges Exchange Bank Seminar September 26, 2007 www.sonoma.edu/org/crea/exchangebank92607.ppt Robert Eyler, Ph.D. Chair, Economics Department Director, Center for Regional Economic Analysis Sonoma State University eyler@sonoma.edu


Introduction: Introduction Major questions in U.S. banking may have local effects Subprime lending issues: fear or reality? Local housing market like other asset markets? Federal Reserve, equity markets and inflation Is the economy in recession, especially locally? Slipping value of dollar internationally Will local “export” business benefit? The answers affect the local economy Local demography, both business and population, changing


Subprime Issues: Subprime Issues Shake out has begun Mortgage rates have not surged, however Likely a sign that problem not widespread, just dangerous to homeowners on margin otherwise. Has Federal Reserve helped enough? Are rate reductions help for or exacerbate the problems? Signs locally Housing market in Sonoma County like to be relatively stable Foreclosures  housing supply  housing prices fall  economic impacts: job losses and spending reductions External demand tested here


Monetary Policy: Monetary Policy What is the Federal Reserve really watching? Should not be watching the equity markets primarily Trying to prevent financial panics Still an inflation focus However, lower rates exacerbate inflation problems For Sonoma County Housing market threatened by higher rates Rate cuts helps? Is local market overvalued anyway? Can a speculative bubble be stopped from bursting What about other loan markets? Should expect all consumer loans to be supported Must remember commercial loans also affected by these changes


The Dollar’s Value: The Dollar’s Value Inflation lies in the dollar’s value Should be good for exports: wine, tourism Bad for local cost of living Not sure if it is good for personal and home lending Real estate is generally been a good inflation hedge Another round of outsourcing to come? As inflation goes, so go wage demands. If local cost of living does not contract somewhat, lose more jobs to relatively cheaper labor markets This is a by-product of growth


Local Economic Performance: Local Economic Performance Real Personal Income per Capita down last year Inflation and flat nominal income Retail Sales continued to rise Eating wealth from homes or rising debt Recession: not just GDP growth falling anymore General reduction in economic activity Is Sonoma County and the North Bay in recession? Job growth continued Likely in lower-wage jobs Is demography change a part of this for now?


Demography: Labor, Business: Demography: Labor, Business Emerging Demographic Trends: North Bay Latino population to be majority by 2023 Sonoma and Marin Counties will lag in this change Aging to slow down in north Bay By 2022, North Bay will get slowly younger Due mainly to Latino population influx For local businesses, there are two issues Changing customer base Changing labor force For lenders, the issues are similar


Two Major Issues: Two Major Issues Changing Customer Base Local labor spends locally If that labor changes culturally, change in goods demanded, including housing and other durables Consumer loan markets change accordingly Will a cultural shift take place? Changing Labor Force Will the Sonoma County worker of the future: Be a native English speaker? Have a college education? Live in Sonoma County? Does it matter?


The Latino Population: The Latino Population Concerns Cost of Living Will wages keep pace with housing? Remittances How much income is going back home? If that income leaves, reduced local multiplier effect Opportunities Globalization hits home Provides a workforce otherwise missing May force foreign language requirements back into schools.


An Aging Population: An Aging Population Concerns Aging in place means shift in consumer and government services demand Likely less loan demand Lack of available workers for local positions, Residents remain Import more labor, lose certain businesses Opportunities If older population educated and not retired, local economy enhances. Population Pyramid: Should be shaped like an Inca ruin, not an upside-down cone.


Slide17: Source: Census 2000


Slide18: Source: CA Department of Finance


Slide19: Source: CA Department of Finance


Slide20: Source: Census 2000


Slide21: Source: CA Department of Finance


Slide22: Source: CA Department of Finance


Implications: Implications Of Ethnic Changes Education in English as a Second Language (ESL) Education in science and math Technical, vocational education What does the labor need to be for economic vitality? Of an Aging Population Difficult to assess the skill base of an aging population without a census. Educational choice and connections to local industry the best way to shape labor force. Industrial composition and causality Industries choose to locate or expand based on profit opportunities


Conclusions: Conclusions Local economic performance for the next 3-5 years: Depends largely on housing market and reaction to shifting demographics Large amount of employment and income tied up in housing markets Economic impact of major housing downturn large locally The data suggest the North Bay will: Become older then slightly younger, changing the age profile of labor Become more ethnically diverse, changing the ethnic composition of labor All these trends have begun Federal Reserve acting like U.S. economy is in recession If local business seize export opportunities, local economy supported. If recession is here, lending base to change Housing market downturn likely to be relatively small May feel like a brutal downturn initially (if it hasn’t already)