No Direction for Sonoma County Economy
Sonoma County Economy Update:
From a Study by:
Center for Regional Economic Analysis at Sonoma State University
Last year basically came out a wash -- there were no significant job gains, wages climbed at a rate barely higher than inflation, and retail sales were flat, according to the SSU economic study."It's almost like last year was a complete write-off," Eyler said. "We're right back where we were last January." And economists are mostly forecasting more of the same in 2006.
In fact, this will be the third year that Eyler and other economists have predicted marginal growth year over year, suggesting the county remains in a holding pattern until one industry takes flight. It's getting to be a little frustrating, economists said.
Economist Doug Henton said, today's economy, is led by three clusters:
1. the Sonoma "experience," a convergence of tourism and agriculture
2. health and wellness, which includes not only hospitals and medical offices but also health clubs and recreation
3. professional/innovative services, which includes things like marketing, architecture and engineering
Health care accounts for 14 percent of local jobs, thanks to an aging population and a growing interest in preventive health care.
92 percent of businesses are locally owned and employ 72 percent of workers.
"The wine industry has issued predictions that the 2005 harvest looks good from a volume and quality standpoint. However, the 2002 and 2003 harvests are now the focus of this industry, and global competition continues to rise. Export opportunities do exist in the wine industry and are likely to continue through 2006"
"The employment forecasts are lower than past forecasts. Specific local industries that seem poised for growth are tourism due to the dollar’s continued relative weakness and predicted national economic growth."
"Help wanted ads have decreased since mid 2005, which signals a slowdown in hiring. Sonoma County experienced slow job growth throughout 2005, gaining only about 600 jobs in net, with the unemployment rate at 4.2% as of November 2005."
Local economic leaders are betting on high-tech -- specifically, the county's burgeoning medical instrument industry -- to lead the way out of the doldrums. But the odds are long, and even if the biotech industry does take off, it's unlikely to reach the peaks of the telecom boom of the late 1990s.
With most of Sonoma County's high-tech manufacturing jobs either lost due to recession or shipped overseas to cheaper labor markets, Steve Cochrane of Economy.com in Westchester, Pa., who monitors the Sonoma County economy and other economists said the county won't see a significant increase in high-tech hiring this year.
"The biggest problem is the fact that there is no direction to our economy," said Robert Eyler, director of the Sonoma State University Center for Regional Economic Analysis. "There is no outstanding industry that has stepped forward to drive our economy. "The fact that the economy has shifted away from technology (including telecom and high-tech manufacturing) is no surprise to the thousands of people who have been laid off."
Among the key forecasts in the Sonoma State report:
The unemployment rate will drop to 3.7 percent in 2006, from 3.8 percent in 2005. During the height of the dot-com boom, unemployment was 3.3 percent, before climbing to a high of 5.4 percent in 2003.
The challenge will be finding workers to fill new jobs and to replace retiring baby boomers (According to Supervisor Paul Kelly 10 percent of the county of Sonoma's work force has recently retired).
"Sonoma County must be sure to seize opportunities that appear. Government jobs were stagnant in 2005 and are likely to do the same in 2006."
The county will add about 1,900 jobs this year, a 1 percent increase. That's not a lot of growth, but still an improvement over last year, when the county added only 1,000 jobs for a 0.5 percent increase.
Adjusted for inflation, per-capita income will increase 1.9 percent, to $29,113. Per-capita income fell 2.6 percent in 2005.
Retail sales will climb 2.9 percent, after falling 0.4 percent in 2005. The data is vaguely positive, Eyler pointed out, but nothing to get excited about. In general, the forecasts are less optimistic than what Eyler had predicted for 2006 last year.
The ongoing war in Iraq, the national and state deficits, and continually rising fuel prices are all factors that held back the local and national economies last year and will continue to apply pressure this year.
Plus there's the housing market, which is arguably headed into a slump, Eyler said. "One of the major concerns in 2006 is the local housing market. With rising interest rates, slow growth in personal income, and general uncertainty about fuel prices and labor markets, not much good news exists currently for local real estate."
Housing prices have dropped in three of the past four months, and sales were the lowest in four years. Added volatility comes from interest rates that have finally started to rise, and the fact that fuel prices are starting off at a higher level this January than they were last year -- and are only going to climb.
"Gas prices rising caused an increase in the price of primary products, such as lumber, rock, cement, etc. Local building permits surged at the end of 2005, but with rising interest rates likely in 2006, this trend is unlikely to continue.
Default notices are rising, signaling business instability and consumer insolvency. As interest rates rise, and there are conversions from adjustable rate mortgages to fixed, defaults are likely to rise."
Percentage of home buyers choosing adjustable-rate mortgages
2003 - 36.8%
2004 - 59.4%
2005 - 69%
Eyler says housing prices could fall 10 percent to 15 percent this year in Sonoma County as interest rates continue to rise and consumers lose confidence in an economic recovery. Local real estate agents and other economists, however, have predicted prices will stabilize and won't climb quite as fast as they have in the past two years.
That said, most economists agree the Sonoma County housing market is overpriced and headed for at least a small downturn to bring prices to a more reasonable level. The outcome, Eyler said, could either lead to more buying from outside the county -- for example, Baby Boomers looking for retirement homes -- or make prices more affordable for local residents who have been priced out of the market so far.
"In the long-term sense, it's better for the housing market to tumble because it's overpriced," he said. If prices do fall, even if it's only for a fairly short period of time, that could have an immediate impact beyond just the housing industry.
Construction jobs could fall off, and if homeowners are concerned about their largest asset losing value, they might spend less, affecting everything from retail sales to the high-tech industry.
"For the real estate markets, 2006 looks like an interesting year. However, it is a mistake to watch the housing market alone as an indicator of local economic growth or recession. The housing market should lag behind the economy, not drive it."
However, there are three issues that 2006 should resolve for this market.
"First, as prices continue to fall, it will be a test of external demand for Sonoma County housing.
If this is truly a desirable place to live for reasons beyond the local job market and income-making opportunities local real estate may find support from the outside if current residents begin to sell off."
"Second, the extent to which current Sonoma County homeowners have leveraged themselves should become apparent as interest rates rise.
This may happen either as household predictions of higher mortgage rates, or a forced change in mortgage costs based on the transition from a low fixed interest rate to higher, adjustable rates. This may lead to a real estate sell-off that begins to look like a real estate bubble and initiates the test mentioned above."
"Finally, a slowdown in local retail sales may precede any real estate sell off."
"The outlook for 2006 is mixed for Sonoma County, as we continue strolling along a thin line between growth and recession."
Where The Jobs Aren't...
More on the Sonoma County Forecast 2006:
It's time to loosen the tourniquet. The bleeding has stopped. With unemployment in the North Bay at its lowest point since 2001, staffing executives in Marin, Sonoma and Napa say 2005 was a banner year for job seekers - by far the best jobs climate since the calendar flipped its pages to the 21st century (not that that's saying much). But hold the champagne and don't set off the celebratory fireworks quite yet. With apologies to the rock group Timbuk 3, while things are looking up, "the future is not so bright that you're gonna have to wear shades."
First of all, high-paying jobs are not plentiful, and many of the new jobs pay less than the average wage. Second, there is a disparity between the competency of the available workforce and the specific skills required for many of the new jobs. And finally, the economy is not firing on all cylinders yet and may suffer temporary setbacks, according to a report prepared for the Sonoma County Economic Development Board by Economy.com. In short, it isn't the best of times, but it certainly isn't the worst of times either.
"We won't see 1999 or 2000 again," says Ben Stone, executive director of the Sonoma County Economic Development Board, referring to an era of nearly full employment and top-dollar salaries. "That was a unique confluence of events that created a level of prosperity that wasn't based in reality and certainly wasn't sustainable…"
Marin and Sonoma, more so than Napa, have economies that depend on a healthy technology sector. When the tech bubble burst, the Bay Area, according to a study by the San Francisco Chronicle, lost more than 400,000 jobs from 2001 to 2003.
In Marin, the unemployment rate doubled - from 1.5 percent to 3 percent. Meanwhile, telecom-centric Sonoma County lost jobs faster than a game of dominoes. Even today, after a modest tech rebound, the county still has 6,500 fewer jobs than it did in 2001, according to the California Employment Development Department (CEDD). And roughly one-third of the higher-paying tech jobs that existed in 2001 have sailed offshore to cheaper labor pools.
The poor get poorer…
In a sense, the story of the North Bay job rebound is a classic example of the rich get richer and the poor get poorer. An analysis of state job and wage reports by the Santa Rosa Press Democrat in September, using figures through March of 2005, found that wages for many workers at the higher end of the pay scale are rising, but those on the low end are falling further behind and are not even keeping up with inflation.
Average California wages, adjusted for inflation, fell 0.7 percent in 2005, according to the CEDD. That drop followed a decline of 0.5 percent the year before. In Sonoma County, the average wage is $42,171, but the Press Democrat study found that 58 percent of the new jobs created between 2003 and 2005 paid below the average wage.
Jerry Dunn, director of the Sonoma County Human Services Department Employment and Training Division, says the county's dislocated worker program has been able to place 88 percent of workers who completed special training programs to teach them new job skills. On average, however, those workers are earning 25 percent less in their new positions, Dunn says.
Displaced tech workers are among the hardest hit. Even though it has been five years since the massive layoffs started, many of those left in the wake of the storm have yet to regain their previous wage footing, and it's common belief among many - whether they be headhunters or job seekers - that they never will.
"Technical skills are not as needed as they once were because those jobs have shifted offshore," says Jennifer Vidkjer, vice president of sales and marketing for Alkar, a full-service human resources agency serving Sonoma, Napa and Solano counties. "What we're seeing is more research and development work in the U.S. while technical execution is being sent overseas because of the cost. Many of the positions we are filling are actually requiring softer management skills with an emphasis on critical thinking and communication."
Tech workers and their families, who wanted to stay in the North Bay because of their ties to the community, have had to face the reality that those jobs are gone, and much like Bruce Springsteen sings, "they're not coming back."
"They've adjusted," says Carolyn Silvestri, founder of The Personnel Perspective, a human resources consulting, training and recruiting firm based in Santa Rosa. "They have decided what they need to do in their lives in order to stay. Many of them have taken lower-paying jobs that they enjoy and that utilize their skills while keeping their eyes and ears open for new opportunities."
Silvestri points out that many of the people who worked at the larger tech companies - Hewlett-Packard, Agilent and JDS Uniphase, for example - were long-term employees, who spent 10, 12, 15 years or more with the same company.
"They formed allegiances and alliances, and they are networking and helping each other out," she explains. "These are well-trained, entrepreneurial and creative people who didn't want to take the first thing that came along. Many are consulting on an independent basis in the area, and they are very receptive to getting calls from each other to find opportunities. It must be working because they seem to be paying their bills and making ends meet."
Baez says her firm placed several tech refugees through temporary or "temp-to-hire" positions with reasonable success in securing decent salaries. "These were flexible and open-minded people who got actual on-the-job experience and fit right in," she says. "Over time, many of them have told me it was actually a great experience in the end. What started out as something really awful turned out to be the best thing that could have happened for some of them."
One of the programs with considerable success in helping tech workers regroup and redeploy is Job Link, funded by the Sonoma County Human Services Department Employment and Training Division. It consists of two offices - a Job Seekers Center located at 2245 Challenger Way in Santa Rosa and an Employer Resource Center at 606 Healdsburg Avenue in Healdsburg.
Much like a library, Job Link is open to anyone in the county. Its manager, Kathy Young, estimates 30,000 workers have used the Job Seekers Center over the past five years. And while the numbers have slowed somewhat, "We still have lots of people coming in," she says.
Three of Job Link's most successful programs have directed former tech workers toward human services work. These include a Caregiver Training Program, which enabled people to find nursing assistant positions; a Nurse Workforce Initiative, which has licensed more than 100 new nurses; and a "Tech to Teach" program that took laid-off tech workers and trained them to be teachers in math, science and related subjects.
The new job landscape
As the economy slowly rebounds and companies venture forth into a hiring mode, staffing executives are optimistic about prospects in the North Bay but with one caveat: finding the talent to fill the jobs.
"We have well-paying jobs out there," says Mark Nelson, president of the Nelson Family of Companies, which owns Nelson Staffing Solutions in San Rafael and other locations throughout Northern California.
"But what's happening right now is that there is a significant disparity between the talent required for many jobs and the skill set of those currently seeking work. That's not to say these people aren't talented - they are. But the specific talent required for many positions and the talent available are not one and the same. Finding the right talent is very difficult and getting more pronounced each year because greater numbers of Baby Boomers are retiring, and we, in the United States, are not creating the appropriate numbers of skill-ready college graduates."
Particularly unsettling to Nelson is the dearth of technologists (computer programmers, software engineers, network administrators, accountants, etc.) with skill sets to handle today's jobs.
"We may be graduating smarter and more educated people, but they are not skill- and work-ready for the types of positions that businesses are demanding," he says. "In 1975, the United States was the No. 1 country in the world in producing the best-trained science and engineering graduates. Thirty years later, we're projected to land south of fifteenth on the list. And that's a problem."
Neil Kreuzberger, president of Kreuzberger Associates in San Rafael, an executive search and contract staffing firm that specializes in filling high-level finance and accounting positions, also sees a gap in the availability of worker expertise and job requirements, and he is once again feeling the supply side of labor tightening up.
The strong demand for experienced people with Sarbanes-Oxley knowledge and the overall high demand for employees in the financial and accounting sector is actually bringing back something that placement executives haven't seen in a long time-signing bonuses. "I'm seeing people get multiple job offers and signing bonuses," says Kreuzberger.
"In our niche, companies held back on hiring full-time and contract workers for so long during the economic downturn that they built up a backlog of project work. As they came out of the downturn, they released the brakes, but at the same time, the supply side tightened up as many of the workers had been absorbed into the marketplace. It's not quite like it was in the late '90s when it was incredibly difficult to find people, but it's close. It's getting challenging again to find good people."
Kreuzberger and other staffing executives also point out that employers are very demanding, wanting a perfect match between the job requirements and the worker's expertise. "It's a market where they are looking for a Perfect 10," he says. "That doesn't make things any easier."
Vidkjer believes employers are demanding more quality because the scope of work has been expanded. "When the companies downsized, it didn't eliminate their needs or their business. Work still needed to be done, but middle management took a big hit. Now, when companies hire, they are asking people to take on more duties, and it takes a certain person to manage it in a healthy, positive way. Companies want to be absolutely sure they've got the right person. They want people who can deliver positive results and leaders who can motivate," she says.
In addition to the growth in specialized tech, finance and accounting, placement agencies are seeing increased demand for new employees in the wine and food industries and continued demand in the medical sector. Having the name Napa or Sonoma on a label is a major selling point for a product, whether it be wine or food, according to Silvestri, and after several years of consolidation, the wine industry is starting to breathe again. "The internal marketing and public relations positions were hard hit in the consolidations," says Silvestri. "We're still not seeing growth there, but we are getting lots of requests for national sales managers, finance personnel, people with general management skills and visitor center managers."
"The wine business is booming," echoes Vidkjer. "We're seeing more demand for winery workers across the board."
Meanwhile, the food industry "continues to blossom," says Silvestri. Adecco's Baez agrees with Silvestri's observation. "Fairfield, American Canyon and Napa are on fire with manufacturing jobs - food, in particular," she says. "It's very exciting, and the salaries are good."
It's the economy, stupid.
While hiring seems to have gotten a green light, experts still believe most North Bay firms will proceed with caution into the new year. The reason is the fluctuating economy. A fairly bright outlook last summer from Economy.com described the economy as "expanding, with moderate growth in employment and industrial production." That same study three months later noted that growth had slowed and predicted the area's economy likely would lag that of the U.S. through the middle of 2006.
In the Fall 2005 Local Economic Report, Steve Cochrane, managing director of Economy.com, wrote that leading indicators were giving off "mixed signals." For example, Cochrane's analysis showed that employment is essentially unchanged from a year ago even though industrial production in the area is rising. And while some firms, like Boston Science, Alcatel and Medtronic are hiring people for research and development positions in the tech sector, Agilent shipped 300 jobs overseas just in the third quarter.
Cochrane's study indicates that income growth will exceed 5 percent for the first time since 2001, which he believes will revive demand for retailing, particularly for high-end retailers that are currently not in plentiful supply. Over at Sonoma County's Job Link, however, Young noticed a drop-off in retail hiring for this past holiday season. "They definitely did not hire in the same numbers they have in the past," she says. "That signals to me that there still is some apprehension out there. Back in April, May and June, we had lots of placements in retail. Since then, I've seen a definite slowdown."
Economic gurus worry that the impact of Hurricanes Katrina and Rita on the nation's energy supply will continue to ravage consumers' budgets. Cochrane writes that this could negatively impact the North Bay's travel and tourism industries - and conceivably could hurt local wineries that produce lower-priced wines because demand for wine could be diminished by the loss of disposable income once consumers pay their higher energy bills.
Higher-priced wines would not be impacted as much, he writes, because the people who buy them generally have more disposable income and are not equally impacted by higher energy costs.
In his Fall 2005 economic outlook, Dr. Robert Eyler, chairman of the Economics Department at Sonoma State University, says the local economy is in a "tug-of-war," with local forces moving forward while state and national forces are trying to pull it toward stagnation.
While he agrees that oil prices play an important role in everyone's economic life, he writes that "we cannot make trends in gas prices the culpable party for all economic woes," pointing out that in past eras, consumer behavior has continued unabated without parallel income growth during times of rising gas prices.
Eyler also is concerned about local real estate prices, which he predicts will contract somewhat if the Federal Reserve continues to increase interest rates and general economic uncertainty rises. People "falsely watch home prices as an indicator that the economy is going to be okay," he writes in the report.
"Our local high-tech industries, especially biotechnology, and the wine industry are poised to continue growing. Watching their hiring and their trends will tell you more about this economy than any other indicator. Their hiring reflects their forecasts of demand for their goods and services, and the more they hire, the more they intend to produce in the future. While our financial markets trends do not reflect much confidence in the economy, these hiring trends will show confidence or not."
Reflecting on the economy, Jerry Dunn of the Sonoma County Human Services Department Employment and Training Division cites the inevitable - ebb and flow, yin and yang, coming and going.
"To be certain, it's not all hearts and flowers out there," says Dunn. "But one of our strengths is our diversity. We have tourism, we have agriculture, we have a strong health care industry, growing construction and emerging biotech. When one thing leaves, other things come in to fill the gaps. We're diversified, and we have a balanced workforce. Are the jobs coming in paying as well as the jobs going out? No, they're probably not. But by the same token, the economy just keeps going."
Other News Items of Interest:
Weary Home Builder Stocks
"Hedge-fund manager David Einhorn has a prediction about publicly traded home builders: "Slowing orders, reduced prices, reduced margins, slowing backlogs -- it's all going to come."
And he's one of the bulls.
Could it simultaneously be true that there is a housing bubble and that home builders are undervalued?
Housing-price gains have been huge and mortgage-lending practices lax. The washout was bound to come, and now it looks like it may have started.
Investors are beginning to panic. Toll Brothers, once the most admired home builder, warned in recent weeks that sales would disappoint. The stock is down almost 50 percent from its peak. KB Home has warned about cancellations and falling orders. That stock is off 25 percent from its top.
More warnings are sure to come. And the next stage could be big price cuts to move product. Credit Suisse analyst Ivy Zelman, a longtime bear who is finally achieving a measure of vindication, says that Centex is already running sales in select markets.
"Depending on where the builder builds ... a great tailwind now becomes a major headwind. It was a great ride up but it could be an ugly ride down," said Zelman.
Home builders' shares as a group are now trading at six times projected per-share earnings. That means only one thing -- the market doesn't believe the earnings. And at the heart of it, they fear builder bankruptcies, as happened in the early 1990s.
"If you talk to a hedge-fund manager, (the home builders) are going from 50 percent growth to 20 percent to down 50 percent. It's totally manic-depressive behavior," said Margaret Whelan, an analyst for UBS who has a far less gloomy view herself.
"For five years, we've been waiting to see how bad it's going to get. It's honest now. We are going to find out whether bears are right and there's no business at the bottom, or I am right and there's a good business and good earnings at the bottom," said Einhorn, who runs Greenlight Capital, a hedge fund with more than $2 billion under management.
How bad is it going to get? Zelman sees a substantial profit squeeze coming. Over the past year, home-builder operating-profit margins were around 17 percent; she said she thinks those margins will fall in the next three years and eventually return to a more typical 10 percent."
"Christopher Thornberg, an economist with the UCLA Anderson Forecast, who previously described the real estate market as a bubble, warned that the real estate market is slowing down. He stated in a meeting with business leaders that the real estate market has peaked. “And beyond that is a downhill run.” He estimated that house prices in California are 30 to 40 percent overvalued."
Economic investment drives the business cycle, and a third of investment is related to real estate. As construction declines, workers in that industry as well as complementary fields such as real estate finance lose their jobs. Homeowners will stop borrowing on the equity of their real estate. Their demand for goods declines, reducing profits in the rest of the economy. The reduction in investment and consumption eventually brings down total output, and the recession then strains the banking system as homeowners walk away from their loans.
The real estate boom was unsustainable because mortgage payments come out of wages. Productivity has been growing, but the extra income is not going to wages.
From CNN's 101 dumbest moments in business: Real estate
"67. Can't keep up with the Joneses? Heck, it's bad enough just trying to keep up with the appreciation on their dilapidated Victorians.In March the median price of a single-family detached home in the San Francisco Bay Area rises more than $1,000 per day. By month's end, it swells to $106,000 above the previous year's median -- 43 percent more than the area's estimated average household income of about $74,000."
"100. Bubble? What bubble? Oh ... that bubble.In May an Experian-Gallup national survey finds that 65 percent of Americans haven't heard anything about a possible "housing bubble." Another 12 percent have heard "only a little." Indeed, 70 percent expect home prices to keep rising, while only 5 percent think they'll slip. However, when the facets of a housing bubble are described to them, about 40 percent go on to say that the scenario is likely to occur in their area in the next three years."