Sacramento County:

‘Near Normal’ Economy by Late ’21, but Unemployment to Remain

The ongoing hit to retail, leisure, and hospitality workers — and future concern for local and state government employees — will continue impacting the greater Sacramento region’s economy as it slowly recovers and starts to return to “near normal” by late 2021.

That’s according to the most recent forecast and trends presented by the Sacramento Business Review. These experts’ opinions spotlight intriguing viewpoints and projections so your credit union can plan appropriately.

Sacramento Business Review
Presented on Jan. 14 by the 2021 Sacramento Business Review, an annual forecast publication and consortium of local experts, business leaders, and researchers:

Sacramento County’s economy should start getting “back to near normal” in 2021, although it won’t be quite the same “normal” harkening back to January 2020 as the unemployment rate remains stubbornly above average for the foreseeable future. The financial activities sector and construction industry have both bounced back the quickest since the COVID-19 pandemic when it comes to job growth. But as expected, the leisure and hospitality industry will continue to struggle in 2021, and local government employers in particular may face a severe budget deficit in 2021. For context, during the past 10 years of economic growth following the Great Recession (2007 – 2009) and immediately prior to the COVID-19 pandemic, the construction sector was the biggest winner in job growth and the information technology sector was the biggest loser. “Future economic growth in the greater Sacramento region will remain at or near current levels as the area continues facing the COVID-19 pandemic well into 2021,” the forecast report states. “The region followed broader economic trends with both a sharp decline and a sharp rebound in economic activity through the third quarter of 2020.”

The greater Sacramento region still needs more than 60,000 non-farm jobs added to its employment base to get back to its pre-pandemic jobs level from early 2020. From February to April 2020, the greater Sacramento region lost nearly 15 percent of its non-farm jobs as the COVID-19 pandemic arrived. The local unemployment rate reached 14 percent in April 2020, roughly in line with what the United States experienced. Overall, the Sacramento region’s job recovery since then is in line with the nationwide average and better than the state of California as a whole. However, the presumption is that the distribution of vaccines can effectively stop the spread of the Coronavirus and another congressional stimulus package gets passed to keep assisting the economic rebound in 2021.

By late 2020, half of the lost jobs in the greater Sacramento region’s leisure/hospitality sector had recovered, but it will take at least another 12 months for this local sector to fully recover. Overall, nearly 150,000 total non-farm jobs were immediately lost in the greater Sacramento region when the COVID-19 pandemic hit the economy last year. Yet the local leisure/hospitality industry was hit the hardest with nearly 50 percent of its jobs lost. Going forward, “Vaccinated people may still be capable of transmitting infection, and it takes time for COVID-19 vaccines to be distributed to every corner of the country,” the forecast report states. “Social distancing and masks are still needed practices through the year 2021. Not many people are taking public transit since the pandemic. Meanwhile, Transportation Security Administration (TSA) data show that people taking airplanes are still less than half of the normal level. Hotel occupancy and restaurant booking remain low. The leisure and hospitality industry will continue to struggle.”

Nonetheless, some of the greater Sacramento region’s job sectors bounced back quickly or even thrived despite COVID-related economic restrictions over the past 10 months. The financial activities and construction sectors have created more jobs than what they lost at the beginning of the pandemic. Jobs in business/professional services, local/state and federal government, trade, transportation/utilities, and health care are also getting close to their pre-pandemic levels. The goods-producing sector lost 11,300 jobs but has since recovered 7,300 (or 71 percent) of lost jobs. However, the services sector (business and consumer) lost 135,800 jobs and has only recovered 78,300 jobs (or 58 percent).

While one of every four jobs in the greater Sacramento region is a local, state or federal government job, it’s expected the entire government sector will face severe fiscal deficits in 2021 when 2020’s state tax revenue is collected. “This may create turbulence in the local job market next year,” states the forecast report. “Consumer sentiment is expected to remain low, especially among low-income families. Disrupted supply chains and trade tensions around the world will keep affecting the economy in the long run. COVID-19 cases are still surging. So in the short term, we should keep practicing measures that reduce the risk of spreading the virus as vaccines are expected to be produced and distributed throughout the first three quarters of 2021.”

During the economic growth period from 2010 to early 2020, most job market sectors reported positive growth in the greater Sacramento region (with the exception of information technology). “The publishing industry obviously lost market share to their internet and social media counterparts. Telecommunication also lost a significant number of jobs over the last 10 years,” the forecast report states. However: “Construction was clearly the biggest winner, increasing over 80 percent or nearly 30,000 jobs in 10 years. Health care, professional/business services, and leisure/hospitality also increased approximately 40 percent over these 10 years of growth. This was followed by trade/transportation/utilities, which grew over 20 percent, while the manufacturing and education sectors added about 10 percent.”

Greater Sacramento regional consumer sentiment continues to vary by household income level. Going into late 2020, it’s down across all income levels compared to where it was in early 2020. Also, sentiment has remained flat or declined for all household income levels over the past six months, with the exception of the highest income category ($250,000/year or higher), which is up considerably. “The data reinforce the notion that the economic consequences of the pandemic are being felt unevenly across the population, with lower income households often being hit harder,” the forecast report states.

Overall, aggregate consumer sentiment in the greater Sacramento region has dropped since the second half of 2020, although the decline was much less significant than the first half of 2020. The largest decline regionally was in the sub-category of current economic conditions, whereas consumer expectations held fairly steady since the first half of 2020. In contrast, consumer sentiment nationwide has rebounded slightly after dipping significantly during the first half of 2020. Once again, national sentiment is exceeding local/regional sentiment in the Sacramento region.

Households in the greater Sacramento region plan to use all types of credit/loans at a modestly higher rate in 2021 than 2020. Ironically, feeding into this trend is the fact that the economic impact of the COVID-19 pandemic has been reflected in the overall decline of consumer sentiment nationally and locally/regionally since early 2020. Local/regional perceptions of current economic conditions continued to move downward slightly, and expectations for the future remained relatively flat. Given this phenomenon — combined with low interest rates in all lending categories, congressional fiscal aid/stimulus to all types of households, and bolstered unemployment benefits (both normal and pandemic emergency assistance) — local consumers feel empowered just enough to continue borrowing money at nearly identical growth rates as last year.

Lately, small business leaders in the greater Sacramento region are a bit more optimistic going into 2021 than they were a few months ago. “However, the (small business survey outlook) reading is still low, and the last time this (level) was observed was in 2012,” the forecast report states. “Further progress is needed. But other areas, such as credit access and the future revenue outlook, paint a more positive story and seem to have recovered faster in the services sector and are closely tracking at or above their 18-month moving averages.”

Corporate business-to-business transactions in the greater Sacramento region have recovered from their lows — however, they are still far off from their latest peak in fourth-quarter 2019. The number of business-transaction listings (mergers, acquisitions, and other activity) did not seem to improve from mid-2020 to late 2020. “While revenue metrics for closed transactions recovered to 2019 levels, the sales price of the transaction is below its one-year moving average,” the forecast report states “Finally, cash flow metrics improved slightly to first-quarter 2019 levels, but they are still below the latest peak seen in fourth-quarter 2019. Due to the special economic circumstances this year, it may take longer than usual to resume back-to-normal activity.”

Small business lending activity data in the greater Sacramento region show business loan volumes are very different across local counties — yet higher in general for all combined. For example, total lending activity in El Dorado County and Sacramento County are at their highest levels in the last 15 years. Yolo County had a strong year in 2020 versus 2019 and is on pace to finish with the second-highest reading in the past 15 years. However, the story looks different for Placer County, where lending activity is down -32 percent year-over-year, a level not seen since 2013. Overall, lending activity volume in the entire greater region is on track to finish at the second-highest reading in 15 years.

The greater Sacramento region’s banks and credit unions are expecting challenges in 2021. Namely, they will have difficulty growing their bottom line in 2021, with significant headwinds against net interest margin (as well as credit losses that could begin to materialize sometime in the first half of 2021). Interest rates on the asset side of the balance sheet (lending) are likely to remain low, but rates paid on the liability side of the balance sheet (deposits) may become more competitive if deposits begin to flow back out with the reopening of the economy and more consumer spending.

Put into context, the greater Sacramento region’s banks and credit unions saw some amazing asset growth over the past year, approaching 20 percent. This was mostly due to increased savings during the economic recession. However, the sharp increase in assets has come at a time of historically low interest rates, putting severe downward pressure on net interest margins (lending revenue). Also impacting the bottom lines of regional financial institutions were increased loan-loss provision expenses as institutions prepared to weather a sharp downturn in credit quality (incited by the pandemic influenced rise in unemployment and reduced economic activity related to lockdowns and operating restrictions for local businesses).

The greater Sacramento region’s banks and credit unions have another opportunity to facilitate loan-grants through the second round of the congressional Payment Protection Program (PPP). With local financial institutions extending more than $1.5 billion of PPP loans in 2020, the program has had — and will continue to have — an incremental, positive impact on net income. “However, the PPP comes with significant logistical and servicing hurdles that financial institutions must account for when evaluating the program’s overall benefit,” the forecast report states. “In spite of the recession, loan quality has been surprisingly healthy, with the ratio of loans in a non-accrual status to total loans persisting well below 1 percent for both commercially focused banks and consumer focused credit unions.”

Greater Sacramento regional business’s most significant pressures in 2021 rank as follows: 1) pressure on cost reduction; 2) challenging productivity and profit targets; 3) development and management of new competencies; 4) skills gap in job candidates available; 5) change in company culture; 6) financial/equity market volatility and fear of another recession; 7) artificial intelligence (AI — machine learning and new technologies); 8) pandemic recovery; 9) job candidate and talent shortage; 10) increased market competition; 11) expansion of operations in new markets; 12) organizational restructuring; 13) racial justice; and 14) downsizing. In general, “These numbers tell us that local organizations have more job candidates available than recent years; however, they still lack the skills and abilities needed,” the forecast report states.

Workers in the greater Sacramento region are not expected to exit their current job for other opportunities. Local companies and organizations are anticipating very few resignations. In fact, they are leaning slightly toward actively laying off employees and moving away from remaining at current employment levels (indicating little to no new recruitments). This doesn’t necessarily translate into higher unemployment in the region over the long-term; instead, it may be a difficult churn in the labor market and skills/job mismatch comparatively to pre-pandemic times (along with the unemployment rate not moving higher or lower, just flatlining).

There was a heavy focus on training and development of workers over the past few years in the greater Sacramento region — however, this trend is slightly slowing down. Current numbers indicate a small slowdown in the need for training and development, which means this focus is possibly starting to produce positive downstream effects.

Although the past couple of years showed stunted numbers regarding greater Sacramento regional companies’ compensation goals, a boost is forecasted for 2021. This suggests organizations are expecting to meet these compensation goals. Forecasting 2021 on the “optional benefits and perquisites side,” numbers continue their uptick and show that organizations are more stable than prior years and experiencing an even stronger intent to maintain current compensation/benefit levels.

Recent comments from greater Sacramento regional business leaders include the novel challenges with remote working and difficulty in the ability to train new hires remotely. “Strategic planning included closing regional offices as large parts of the workforce now work from home. Employers are reporting that employees are happier and more productive working from home; work-from-home is more effective than expected; and international teams proved to be more important to company success than realized prior,” the forecast report states. “Another pandemic related problem has been recruiting into the health care field — one of the growing industries here locally in the past few years. Health care employers indicate it’s more challenging to recruit, as fewer job candidates want to work in the medical field because of the current risks.”

Parents who work in the greater Sacramento region seem to be affected most severely with childcare and schooling issues during the recent work-from-home period, and working mothers have taken on the majority of home-school responsibilities. “As the pandemic becomes more of a long-term issue, organizations may need to consider needs-based policies and benefits. Generational issues include older managers being less willing to accept the reality of employees working remotely, equating face time in the office to productivity,” the forecast report states. “There is some unwillingness to be creative about letting work-from-home continue after COVID public safety issues are resolved, even in situations where employees thrive in the work-from-home environment. The assumption of ‘in-person is a must’ is not true anymore. This offers an opportunity for organizations to train managers in effective remote management.”

As companies in the greater Sacramento region quickly adjusted overall policies and procedures (or created and implemented new ones) to accommodate 2020’s stay-at-home orders, they are now reevaluating these procedures in the first half of 2021. “The pandemic has also highlighted the importance of preparation and having emergency and crisis management plans in place, and to communicate more effectively with employees when a crisis occurs,” states the forecast report. “The pandemic of last year is very much imprinting on human resources and management practices of the upcoming year, showing us that local organizations are staying agile and finding opportunities to thrive in crisis.”

An update on the residential real estate market in the greater Sacramento region: The increase in demand is primarily coming from outside the market as people from the Bay Area are now looking to relocate to the Sacramento region. In November, ranked Sacramento as the top destination in the country for people looking to leave their current metropolitan area, with most interested individuals coming from the Bay Area. As many top technology employers reevaluate their workplace strategy and shift toward a remote-work model, more transplants could be coming in the near future. The single-family housing market has enjoyed accelerated growth in the second half of the year. The local median sale price reached $460,500, an increase of 11 percent year-over-year. The market transacts primarily at mid-range pricing, with 74 percent of all sales occurring between $200,000 and $600,000. Interestingly, the rapidly rising sale prices means that during 2020, Sacramento had more sales of $1 million or more than it did of less than $200,000.

An update on the real estate market for office space in the greater Sacramento region: Looking long-term, the office market remains well-positioned to weather the impact of COVID-19. The lack of new, speculative construction during the prior economic cycle (combined with an increasingly diversified tenant base) makes Sacramento one of the only low-risk office markets in the state. The primary impact of the economic shutdown remains a decrease in occupier demand (throughout late 2020). Market fundamentals bear this story out as annual net absorption totaled negative 506,000 square feet, the overall vacancy rate ended the year at 11.7 percent (an increase of 130 basis points), and the overall asking lease rate is beginning to plateau (reaching $1.99, up only 2 cents since the third quarter of 2020).

An update on the real estate market for industrial space in the greater Sacramento region: Despite the less-than-stellar annual figures, industrial product is the least affected commercial sector thus far. The large footprint of many users, particularly distribution/logistics users, combined with the scheduling flexibility that comes with shiftwork allows for greater distancing between workers. The industrial market is the best positioned commercial sector to weather the economic crisis. With consumer shopping increasingly shifting toward an online internet model, the need for large high clear-height distribution buildings is increasing. Net absorption totaled -357,000 square feet for 2020, primarily due to single building vacancies. The vacancy rate ticked up, climbing 180 basis points year-over-year, but it remains near full occupancy at only 5.9 percent. New builds remain a major market component, with 5.3 million square feet under construction and 1.9 million square feet completed during 2020 (led by the 1.1 million square-foot Walmart distribution center at Metro Air Park in Natomas).

An update on the real estate market for retail space in the greater Sacramento region: The pandemic has had the largest effect on the retail sector. Repeated mandatory shutdowns of many retail establishments resulted in layoffs, economic hardship, and business closures. Net absorption for the first half of 2020 totaled -99,000 square feet. Vacancy was on the rise as well, increasing by 30 basis points recently. There is little relief on the horizon as a complete reopening is likely still months away and more time is needed before herd immunity through a COVID-19 vaccine can be achieved. In the meantime, retailers have growing competition from online shopping and struggle to find a short-term solution.

You can view the entire forecast report: Make sure to click here for “A Post-COVID World: Is Sacramento Better Than the Bay Area?” — published in the latest Sacramento Business Review.

Caltrans’ County-Level Economic Forecast
Released in December 2020 by Caltrans (the California Department of Transportation):

You can view Caltrans’ economic, demographic, housing, population, job, inflation, and industry breakdown forecasts for each county. Click on the following to view local trends and projections from 2021 – 2025: Sacramento. Or you can click here to view any county in California.

Sacramento County Small Business Activity
Updated routinely by Homebase, a provider of real-time digital tools for small businesses:

Small business activity across the greater Sacramento region was down at varying amounts compared to pre-COVID levels as of early December of 2020. Activity was down -22 to -27 percent depending on the measurement analyzed. In contrast, the region was down between -58 to -76 percent in April 2020 before starting to recover. Measurements include the volume of hours worked by employees, the number of businesses open, and the number of employees actually working. You can click here to learn more and pick your region.

Sacramento County: Demographics, Labor, Education & Economic Resources

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