How Will the Fires Impact Our Local Economy?

On Friday, March 2, 2018, I had the pleasure of attending the SSU/North Bay Business Journal’s Economic Conference in Rohnert Park. Amongst other speakers, Sonoma State Economist Robery Eyler discussed the National economic state, the California economic state, and the local economic state. Eyler talked about where we are, where we are trending, and what to watch in the next few months. Overall, Eyler has established a lot of credibility in deciphering “the tea leaves” and the economic data over the years, so I thought you all might appreciate some of the forecasting points he made on Friday. Also-a shout out to Exchange Bank and North Bay Business Journal (article link) for sponsoring and hosting the event on Friday.

Nationally:

Eyler displayed some forecasts on Gross National Product growth for 2018 by Quarter, unemployment figures for the same period and the more telling statistic (at least to me), was the forecast on Payroll dollars in “000’s”

Here is what Eyler and the “professionals say about the economic factors nationally:

Growth             Unemployment         Payroll $’s

(ooo’s/month

2018:Q1   3.0%                 4.0%                         183.3

2018:Q2.    2.9%                    4.0%                             171.3

2018:Q3.     2.8%                   3.9%                             168.7

2018:Q4      2.5%                   3.8%                             151.8

I am no economist, but it seems like real payroll dollars are forecast to be decreasing.

But then, Eyler puts up a slide that shows where the jobs in California are trending from 2017-2026

Government————————————up 4.6%

Leisure——————————————-up 9.6%

Health and Education————————up 9.0%

Information services————————up 11.4%

Professional Services———————–up 14.3%

Finance and banking————————up 11.1%

Wholesale/Retail—————————- up 3.8%

Transportation and Utilities —————up 5.7%

Manufacturing———————————up 3.8%

Construction ———————————–up 9.0%

Farm and agriculture (non-cannabis)—-down 2.6%

Total Wage and Salary Increase Expected From 2017-2026 = up 7.9%

Then Eyler talked about local impacts due to the fire. Amazingly, the fire and rebuilding has a negligible effect on the overall economy of the local 4 Counties affected. Although a very big deal to those that lost their homes and businesses, it seems like overall the fire and the rebuilding just are too small a part of the overall economy locally.

Eyler concluded that no major recession expected until at least the end of 2020 BUT cautioned the impact of Tariffs and Trade Wars could “bigly” effect that forecast.

Overall-Eyler continues to be “bullish” on our local economy and because we are so diverse, we are in good shape.

GOOD NEWS! You all can spend more on sponsoring ECA Events! Woot Woot!

That’s All Folks!

John

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Be on the lookout!

Truck thieves target Petaluma area.

Link

A.  General Contractor Inability to Price Housing Costs for Property Owners.

One thing to keep in mind as we “wrestle” with the rebuilding questions. In many of the original home construction processes some 20-40 years ago, there were subdivisions being constructed. Whether it was Coffey Park, Mark West Estates, or Fountaingrove, there were developers that built entire areas of houses. That means the developer was in charge of the land, the customer, and in many cases the financing of the original construction of the houses. Now it is different. There are no developers in charge of any of those three issues. So, contractors have to reinvent a business model to deal with the reality of the situation. They are having trouble figuring out all they need to figure out. They are close, but it has taken some time to get the pricing in place. They have had to go to overtaxed architects, then to overworked subs, then to their own processes and design centers to get staffed and running. It is almost there, but it is not quite there.

B.  Property Owners Are Undecided:

Because (at least partly) of “A)” above, property owners have not decided If they can afford to rebuild yet. Under insured is a real problem. Many owners are worried they cannot afford to replace what they had, and are trying to decide what kind of “reset” of their lifestyles and type of home they want to consider. They are indecisive. In some cases, they do not like the original plans of their Coffey Park house that was designed in the 1970’s or 80’s and a 2-story house with lots of stairs does not appeal to them now they are in their 50’s and 60’s. In other cases, their insurance coverage is dictating how many square feet they can afford to build and if too small, they are deciding if they want to pocket their insurance dollars and rent until they retire and relocate. Lots of decisions.

C. Cash is King:

Many of the GC’s are trying to make sure they can afford the increased volume they are being asked to build. Payment draws from the banks are one thing, but lines of credit are quite another. GC’s are finding out there is not one bank that is offering them a complete package on all their cash flow needs so there is a delay as GC’s determine their appetite for risk.

D. Labor Both Hammer in Hand and Drafter in Hand Type Labor:

We keep hearing there is not enough labor to go around with all the building that is needed. It is true that we have lost two generations of workers in the home building area since the 1990’s-the first due to a big push to get kids into colleges and the second due to the recession that started laying off workers in the construction area in 2005. How to deal with the labor shortages? Some builders are deciding to contract with huge framing firms that have hundreds of carpenters or more. Others may choose smaller framing companies and make “sweetheart” deals with them. In either case, there is a need for those framers (and all trades are the same, I am just using framers as an example) to fix their quotes to the GC’s for some finite period (say 6 months out) and then the GC can determine their costs to the property owners. The other type of labor that is in short demand is the architects needed to draft, and the structural engineers needed to determine the calcs once the architect is through with the revisions to their plans. Both are in short supply, and both are delaying GC’s from getting going with housing starts.

For these reasons and others, there is still uncertainty in rebuilding. Things are moving, just lots of moving pieces need to be fixed before actual contract signing and housing starts take place.