Recession will end, eventually

The recession in Sonoma County will come to an end in five months.

That is the bold prediction from Robert Eyler, director of the Center for Regional Economic Analysis at Sonoma State University.

Eyler’s report comes a year after he declared Sonoma County was in a recession — a controversial forecast he spent months defending until he was vindicated when even the U.S. government agreed last month the national economy fell into recession in December 2007.

Eyler forecasts the local recession will end in mid-2009 and be followed by a long period of slow growth, according to his twice-a-year report prepared for The Press Democrat.

“I’m predicting we’re going to hit bottom in May,” Eyler said. “But it’s going to take a few years for us to get our feet underneath us economically.”

After 17 months of what Eyler called “the most tumultuous economic movements in a generation,” Sonoma County’s economy will slowly — and shakily — end its downward plummet, according to his forecast.

But before anyone breaks out the champagne and goes on a shopping spree, people need to keep some perspective on how slowly this is expected to play out.

When growth returns to the economy, it will not be robust.

Sonoma County’s economic output will not return to the high reached in 2006 for another two years, according to the forecast. In other words, the county will spend the next 24 months getting back to where it already was in terms of economic strength.

So what does that mean for Sonoma County?

 The housing market will hit bottom this year, and retail sales will decline until 2010.

Sonoma County will do better than the national economy because of strength in the tourism and wine industries.

 Gas prices will return to $3 a gallon by summer’s end.

 Unemployment will improve in 2009 as the local economy adds jobs, although they will pay less.

 Average annual income will remain lower for the foreseeable future.

 Future economic growth in the county is dependent on startup sectors such as green technology to make solar energy, geothermal energy and water usage more efficient.

 The local economy will have shrunk about 2 percent when the recession ends.

Eyler makes his predictions using an economic model that has accurately predicted every recession to date. It takes into account current market data such as default notices, the number of help-wanted ads and agricultural prices. It then measures the upward or downward trends in these areas to predict what will happen in six months.

It is not an exact science, but it serves as a crystal ball to predict the most likely economic future, Eyler said.

Others are not ready to predict an exact date for the end of the recession.

“We are kind of in unprecedented times,” said Ben Stone, director of Sonoma County’s Economic Development Board. “Forecasting has become more challenging.”

But both Eyler and Stone agree on the fundamentals of the Sonoma County economy.

“Our bread and butter we will continue to be tourism and wine,” Stone said.

Perhaps the most striking prediction of Eyler’s forecast is that people will be less wealthy for years to come.

After the U.S. stock market dropped nearly 40 percent in 2008 and home prices in the county dropped an average 48 percent from the peak in 2005, residents are not nearly as wealthy as two years ago.

The average income of Sonoma County residents, which includes money from investments as well as wages, will not eclipse 2006 levels for at least another six years, according to the forecast.

“People won’t see those levels of income for the foreseeable future,” Eyler said.

Smaller incomes will impact people’s shopping. Retail spending is predicted to fall again in 2009, following successive declines in the past two years after adjusting for inflation.

Some high-end boutiques and other retailers that were opened during the boom years are expected to be driven out of business in 2009, following numerous retail bankruptcies last year.

But there is a bright side to that gloomy news. For as the economy contracted, layoffs piled up and credit markets froze, the march of technology continued to improve health care, communications, transportation and other fundamentals of every day life.

“The standard of living is probably a bit better now than it was in 2000,” Eyler said.

Technology is also the hope of the future, Eyler said. He predicts that long-term growth will depend on new sectors of the economy taking root and growing. Green technology is one startup sector likely to bear fruit in the coming years.

That prospect can already be seen in companies such as Enphase Energy, which developed a highly lauded solar technology and has added high-paying jobs in Petaluma.

Thermasource, a Santa Rosa company, is growing fast with its expertise in geothermal power.

The company has gone from four employees in 2006 to 280 now, and it expects to hire an additional 70 by the end of the year.

“It’s going to be a slow first quarter. But we see a big second, third and fourth quarter,” said Louis Capuano Jr., chief executive of Thermasource. “We’ve had credit problems, along with many of our clients. Now we’re seeing it loosening up.”

The economy’s long-term growth depends on startups such as these, Eyler said.

In the short term, growth will be fueled by the federal stimulus package that is expected to push nearly a trillion dollars into the national economy and help buoy consumer spending.

For instance, Exchange Bank received $43 million in December as part of the federal bailout program. That money will trickle out to the economy at large and boost spending as credit loosens up and banks begin lending again, Eyler said.

Of course, it was years of easy credit and exuberant spending that resulted in the collective pain the economy is now feeling.

“We are feeling a bit of a hangover effect from that,” Elyer said.

Now the Fed is taking the approach that “a little hair of the dog that bit you” will help the economy get over its hangover.

One reason green tech looks promising for long-term growth is that Elyer does not expect people to flock back to petroleum fuels. He expects gasoline prices will return to $2.50 a gallon in six months and peak at $3.00 a gallon by summer’s end.

Overall, Eyler forecasts inflation will hold steady at 3.7 percent in the Bay Area for the next six years.

Unemployment will fall to 5.2 percent in 2009 — an improvement of .4percent or about 800 fewer unemployed people, according to the forecast. On the downside, many high-paying jobs lost in the past two years will be replaced with lower-paying jobs.

Nationally, many economists are predicting much higher unemployment rates, in the ballpark of 8 percent. But the wine and tourism industries will remain strong, and help keep national woes from taking root here, Eyler said.

The tourism industry is expected to continue growing, while the wine industry might experience small contraction and job loss early in 2009.

Eyler said that his forecast, like any other, is an educated prediction of the future and could be wrong.

“I’m not confident with a great deal of certainty that the recession will end in May,” he said. “But it is likely that the end of 2009 will be the absolute end of this recession.”

One of the biggest uncertainties hanging over the economy is the housing market and the state budget deficit.

If banks began lending more, then lower housing prices and near-historic low mortgage rates could make 2009 a good time to buy a house, Eyler said. And that will help strengthen the industry, he said.

“The next 12 to 18 months in real estate are probably going to be pretty good months,” he said.

However, robust new construction will not take hold again until it is clear the housing market has hit bottom.

The state budget deficit will continue to affect local governments and potentially slow down public work projects that create jobs in the county, Eyler said.

“Our state government is facing some serious questions,” Eyler said.

And that hurts people’s confidence in the economy, he added.

But if some of these hurdles can be overcome, then Eyler concludes, “Sonoma County can be a place of long-term growth in the next decade.”

You can reach Staff Writer Nathan Halverson at 521-5494 or nathan.halverson@pressdemocrat.com.