According to the latest Valley Business Forecast report produced by Gökçe Soydemir, the Foster Farms endowed professor of business economics at Stanislaus State, interest rate cuts by the Federal Reserve will be playing a critical role for the rebound of the national economy in 2024.

In recent weeks, the Federal Reserve has announced at least three rate cuts for the new year. It comes after rates fell twice this month. 

The 30-year fixed-rate mortgage rate fell to 6.95 percent the first week of December, marking the first time they were under 7 percent since mid-August. They fell again last week to an average of 6.67 percent.

In 2023, all employment categories, except for construction, retail and wholesale trade, experienced growth. In contrast, Soydemir predicts that all employment levels will drop in 2024. But without the expected rate cuts, the labor market would experience even more unprecedented declines in employment that would last into 2025, evident from unusually high unemployment rates from this past July and August, months that are normally robust.

In July, Stanislaus County had an unemployment rate of 6.6 percent. It dropped further to 6.5 percent in August, according to the State of California’s Employment Development Department. While they were the only two months of the year that saw a decline in unemployment rates, both figures were still more than 1.5 percent higher than the rates posted in the summer of 2022.

Like the decline in the labor market, Soydemir and his team are also projecting declines in wage growth rates and deflation in the next two years, meaning decreased purchasing power for Valley consumers.

In 2023, average weekly wages increased by 6.01 percent, surpassing the overall price growth of 4.71 percent caused by persistent inflation, which resulted in a real wage increase and a purchasing power gain of 2.79 percent in the Valley. 

Total deposit growth at Valley community banks also declined dramatically, dropping from 10.1 percent in 2022 to just 0.92 percent. The decline is partly attributed to bank closures and mergers with banks outside the region. In contrast, net loans and leases experienced a rise of 9.54 percent in 2023, which was faster than the 4.90 percent increase in 2022. Such an imbalance between deposit growth and net loans and leases, like what occurred in 2008, raises concerns for sustained long-term growth.

This past year also saw a 9.62 percent decline in Valley building permits, reflecting a slowdown in the housing sector. Because there is a significant inventory shortage, Valley home values saw an increase of 1.88 percent in 2023.

To safeguard against economic uncertainties, Soydemir encourages Valley residents to consider the following measures: 

• Maintain a larger cash reserve;

• Delay buying a home and opt to rent;

• Shift from fixed to flexible interest rate options;

• Invest in bonds; and

• Consider leveraging student loans to acquire new skills in the event of job layoffs.

The entire Valley Business Forecast can be found at www.csustan.edu/sites/default/files/2023-12/sjvbf_volume_xiii_issue_1_issu.pdf.