California Economic Condition& the Health of Regions

John Husing, Ph.D. Economics & Politics, Inc.

1. General Economy’s Problems Starting To RecedeRecede

472,117

367,883

307,925

404,475

463,300

329,108

253,450

(162,433)

(195,875)

(97,500)

131,525

256,567

356,025

391,033

459,525

393,633

500,750

84,842

(150,992)

(62,550)

151,000

260,558

255,942

121,717

(172,258)

(680,060)

Source: CA Employment Development Department, LA Economic Development Corp.

California Employment GrowthWage & Salary Jobs, 1983-2009e

California’s Job Creation/Losses

DefenseCutbacks

Dot.Com GreatRecession

U.S. & California Unemployment Rates19

2919

31

1933

1935

1937

1939

1941

1943

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Oct

-09

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

U.S. California

Source: U.S. Bureau of Labor Statistics & U.S. Census Bureau

U.S. & California Unemployment History, 1929-2009

Unemployment by Market Area

CA = 12.3%

So. California

Central Coast

Bay Area

Northern

Sacramento I-80

Central Valley

3.12.2%

1. 9.8%

2. 10.8%

4.13.1%

5.13.4%

6.15.4%

Where Are the Job Losses?

CA = -756,600

So. California

Central Coast

Bay Area

Northern

Sacramento I-80

Central Valley

-383,90058.9%

-16,3002.5%

-153,50023.6%

-58,0008.9%

-6,7001.0%

-33,2005.1%

A U.S. Recovery Has BegunBegun

1.0

8.0

0.3

2.4

-1.3

2.6

-1.1

1.4

3.5

2.12.0

0.1

1.6

3.2

6.9

3.62.82.9 3.0

3.54.1

1.7

3.1

2.1

5.4

1.5

0.1

3.0

1.2

3.23.6

2.1

-0.7

1.5

-2.7

-5.4

-6.4

-0.7

2.2

5.7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: U.S. Bureau of Economic Analysis, Wall Street Journal

U.S. Gross Domestic Product, 2000-2009Percentage Change, Annualized Growth Rate (no inflation)

Why?

Empty Shelves

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.65

Source: U.S. Census Bureau

U.S. Inventory to Sales Ratio, 1985-2009Months of Inventory On Hand At Existing Sales Levels

Where Will Recovery Be Seen?

2. Tax Base Considerations Assessed Valuation

City Manager Financial Help

So. California

Central Coast

Bay Area

Northern

Sacramento I-80

Central Valley

4.-2.5%

3.-1.4%

2.-0.5%

6.-5.9%

1.+0.6%

5.-5.2%

2009Assessed Valuation

CA -2.4%

10 Largest Percent AV DeclineDecline

High Growth Inland AreasHigh Growth Inland Areas

Bay Area Contra Costa (11,170,913)$ -7.0%Sacto/I-80 Yuba (382,150)$ -7.0%Sacto/I-80 Sacramento (9,865,090)$ -7.2%Central Valley Stanislaus (3,127,310)$ -7.7%Central Valley Madera (990,631)$ -8.0%Bay Area San Benito (553,619)$ -8.2%Sacto/I-80 Solano (4,362,860)$ -9.4%Sacto/I-80 San Joaquin (6,568,042)$ -10.2%So. California Riverside (25,498,383)$ -10.5%Central Valley Merced (2,699,228)$ -13.4%

I-80

Central

10 Largest Percent AV GainGain

Bay Area San Francisco 10,041,026$ 7.1%Northern Trinity 62,057$ 5.3%Northern Colusa 106,420$ 4.0%Northern Humboldt 424,787$ 3.9%Northern Alpine 29,551$ 3.8%Northern Mendocino 334,539$ 3.3%Northern Del Norte 51,825$ 3.0%Northern Siskiyou 112,935$ 2.6%Northern Lassen 55,823$ 2.5%Northern Glenn 61,101$ 2.3%

Residential Markets: Bottom Behind Us?

Foreclosures Less Important

October 2009Foreclosure Sales Share

of Total Sales

California41%41% down from 59%59% in Feb.

Foreclosure Problem Not Over

Sub-PrimeOver

Alt-AOption AdjustableUnsecured ARMS

Market 1st-2006 3rd-2009 ChangeHigh Desert 22% 75% 53%Merced 20% 73% 53%Inland Empire 18% 66% 48%Sacramento 22% 65% 43%Fresno 25% 63% 38%United States 46% 62% 16%Coachella Valley 17% 60% 43%Monterey Region 8% 48% 40%California 13% 48% 35%Santa Cruz 10% 39% 29%No. Wine Country 9% 39% 30%San Diego 9% 36% 27%Ventura 11% 35% 24%Los Angeles 11% 35% 24%Santa Barbara Area 7% 33% 26%Santa Clara 15% 33% 18%Alameda 12% 32% 20%Orange County 11% 32% 21%San Francisco Bay 13% 31% 18%San Luis Obispo 8% 27% 19%San Mateo 12% 26% 14%Contra Costa 11% 22% 11%Marin 12% 22% 10%San Joaquin 17% 21% 4%San Francisco 11% 19% 8%

Affordability

Supply & Demand

Demand From Lower Prices

Supply From Foreclosures vs.

So. California +2.8%

Central Coast: -1.4%

Bay Area: +5.6%

Central Valley: -9.3%

Sacramento I-80: -12.0%

All homes Oct 2008 Oct 2009 Change %ChgLos Angeles    6,824 7,409 585 8.6%Orange         2,833 2,800 (33) -1.2%Riverside      4,619 4,197 (422) -9.1%San Bernardino 2,856 3,176 320 11.2%San Diego      3,598 3,671 73 2.0%Ventura        802 879 77 9.6%SoCal          21,532 22,132 600 2.8%

All homes Oct 2008 Oct 2009 Change %ChngSanta Barbara 345 313 (32) -8.1%Monterey 445 452 7 1.6%San Luis Obispo 290 278 (12) -4.1%Santa Cruz 174 193 19 10.9%Coastal 1,254 1,236 (18) -1.4%

All homes Oct 2008 Oct 2009 Change %ChngAlameda         1,544 1,555 11 0.7%Contra Costa    1,888 1,679 (209) -11.1%Marin           220 264 44 20.0%Napa            135 121 (14) -10.4%Santa Clara     1,520 1,944 424 27.9%San Francisco   414 553 139 33.6%San Mateo       530 586 56 10.6%Sonoma          617 550 (67) -10.9%Bay Area        6,868 7,252 384 5.6%

All homes Oct 2008 Oct 2009 Change %ChngAmador 32 45 13 40.6%El Dorado 214 222 8 3.7%Nevada 132 164 32 24.2%Placer 601 656 55 9.2%Sacramento 2,717 2,163 (554) -20.4%Sutter 140 97 (43) -30.7%Yolo 231 192 (39) -16.9%Yuba 134 131 (3) -2.2%Solano          745 681 (64) -8.6%Sacramento/I-80 4,946 4,351 (595) -12.0%

Fresno 1,047 1,061 14 1.3%Kern 1,062 1,137 75 7.1%Kings 70 69 (1) -1.4%Madera 170 198 28 16.5%Merced 549 433 (116) -21.1%San Joaquin 1,476 1,102 (374) -25.3%Stanislaus 1,049 854 (195) -18.6%Tuolumne 54 62 8 14.8%Tulare 421 436 15 3.6%Central Valley 5,898 5,352 -546 -9.3%

Volume Uneven

So. California

Central Coast

Bay Area

Central Valley

Prices RisingEverywhere

Min-2009 Min-Mo. Oct-09 Change PercentContra Costa 215,000 Feb 275,000$ 60,000$ 28%Santa Clara 400,000 Jan 495,000$ 95,000$ 24%Alameda 300,000 Jan 371,000$ 71,000$ 24%Marin 525,000 Jan 648,000$ 123,000$ 23%San Francisco 561,000 Jan 690,000$ 129,000$ 23%Sonoma 281,500 Feb 331,000$ 49,500$ 18%San Joaquin 145,000 Apr 167,000$ 22,000$ 15%Napa 315,000 Apr 360,000$ 45,000$ 14%San Mateo 507,000 Jan 570,000$ 63,000$ 12%San Benito 230,000 Jul 243,500$ 13,500$ 6%

Min-2009 Min-Mo. Oct-09 Change PercentSacramento 160,000 Feb 180,000$ 20,000$ 13%Yolo 219,000 Feb 245,000$ 26,000$ 12%Solano 180,000 Apr 195,000$ 15,000$ 8%Placer 284,000 Jun 298,000$ 14,000$ 5%Nevada 320,000 Aug 327,000$ 7,000$ 2%El Dorado 288,000 Sep 290,000$ 2,000$ 1%

Sacramento I-80

Min-2009 Min-Mo. Oct-09 Change PercentFresno 138,500 Feb 172,000$ 33,500$ 24%Tulare 125,250 Apr 145,500$ 20,250$ 16%Kern 122,250 May 138,000$ 15,750$ 13%Merced 105,000 May 115,000$ 10,000$ 10%Madera 122,500 Apr 132,500$ 10,000$ 8%Stanislaus 133,000 Apr 140,000$ 7,000$ 5%

Min-2009 Min-Mo. Oct-09 Change PercentSanta Barbara 244,000 Jan 334,000$ 90,000$ 37%Santa Cruz 332,500 Mar 410,000$ 77,500$ 23%Monterey 183,000 May 225,000$ 42,000$ 23%San L. Obispo 360,000 Apr 370,000$ 10,000$ 3%

Min-2009 Min-Mo. Oct-09 Change PercentOrange 369,500 Jan 433,000$ 63,500$ 17%San Diego 280,000 Jan 325,000$ 45,000$ 16%Ventura 325,000 Feb 365,000$ 40,000$ 12%San Bernardino 137,000 May 150,000$ 13,000$ 9%Los Angeles 298,000 Feb 325,000$ 27,000$ 9%Riverside 179,000 Apr 190,000$ 11,000$ 6%

But: Shadow InventoryShadow Inventory of ForeclosuresInland Empire (example)

Upside Down: 628,327

Bank Resale

Notice of Trustee Sale: 183,447

REO/ 3rd Party Sale: 119,066

Notice of Default: 230,691

47,244

64,381

???

111,625

Housing SummarySupplySupply

• ForeclosuresForeclosures will continue to late 2013

• Shadow InventoryShadow Inventory Of Upside Down Properties An Issue

DemandDemand• AffordabilityAffordability much higher – At record levels in the most

affordable markets

• VolumeVolume up substantially from lows

• DemandDemand should absorb foreclosures & let prices rise

– Federal tax credits helping

– Financing less of an issue in affordable markets (FHA)

– Mortgage negotiations some help

Prices Have Bottomed & Started Up In Every MarketPrices Have Bottomed & Started Up In Every Market

?

Office Vacancy Rate Up Almost Everywhere!

2005/2006 20092009

Inland Empire 10.5% 24.3%24.3%

Sacramento 13.5% 21.4%21.4%

Santa Clara 16.0% 20.5%20.5%

Orange County 8.0% 18.0%18.0%

San Diego 9.0% 19.2%19.2%

Los Angeles County 12.2% 16.3%16.3%

Oakland 16.5% 15.6%15.6%

San Francisco 13.0% 14.9%14.9%

Valuation FallingValuation Falling

Industrial Vacancy Rate Up Almost Everywhere!

2005/2006 20092009

Silicon Valley 14.4% 13.9%13.9%

Inland Empire 2.7% 12.8%12.8%

Sacramento 10.5% 12.3%12.3%

San Diego 7.0% 12.0%12.0%

Oakland 6.0% 8.9%8.9%

Orange County 5.4% 6.5%6.5%

Los Angeles County 2.1% 3.2%3.2%

Valuation FallingValuation Falling

Assess Valuation Future

2009 Very Rough Year

2010 Rough Year

2011 Should Stabilize (Homes vs. Non-Res.)

3. Tax Base Considerations

Sales Taxes: A Serious Problem

City Manager’s Office

Gold Mine Theory

Primary Tier

Secondary Tier

Retail Sales

-6.9%

2.2%

7.8%

1.4%

4.2%

6.6%

-2.0% -4.7%

-4.3%

1.8%

-2.6%

2.4%

-1.7%

3.5%

-4.6% -7.0%

7.2%

-2.1%

-8.0%

2.8%

3.5%

-4.7%

-3.7%

-3.2%

-1.0%

-6.0%

-3.8% -7.4%

-16.1%

-14.6%

-9.0%

-20.1%

-15.9%

-20.5%

-18.2% -21.9%

-17.4%

-15.5%

-17.8%

-13.1%Ju

l-06

Aug

-06

Sep-

06

Oct

-200

6N

ov-0

6

Dec

-06

Jan-

2007

Feb-

07M

ar-0

7

Apr

-07

May

-07

Jun-

07

Jul-0

7A

ug-0

7

Sep-

07

Oct

-200

7N

ov-0

7

Dec

-07

Jan-

2008

Feb-

08

Mar

-200

8A

pr-0

8

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

2009

Feb-

09

Mar

ch-0

9A

pril-

09

May

-09

June

-09

Sep-

09

Oct

-200

9N

ov-0

9

Dec

-09

Source: CA State Controller

California Prop 172 ReceiptsCompared To Same Month Year Ago

California Prop 172 Sales Tax Receipts

So. California

Central Coast

Bay Area

Northern

Sacramento I-80

Central Valley

-12.8%

-12.5%

-11.6%

-9.8%

-9.5%

-8.5%

4th 2008Change In Retail SalesCA = -11.8%

10 Largest Percent Retail Sales DropDrop

So. California Imperial (27,593,790)$ -5.1%Sacto/I-80 Sutter (18,237,447)$ -5.2%Northern Glenn (5,862,988)$ -6.5%So. California San Bernardino (512,128,565)$ -6.8%Bay Area Alameda (466,293,486)$ -7.1%Sacto/I-80 Placer (145,542,984)$ -7.8%So. California Riverside (540,404,017)$ -7.9%Sacto/I-80 Amador (11,732,346)$ -9.4%Sacto/I-80 Nevada (34,678,801)$ -9.6%Northern Sierra (1,050,461)$ -14.8%

So. CA

I-80

No. CA

10 Largest Percent Retail Sales GainGain

Northern Modoc 3,906,986$ 15.8%Northern Colusa 11,231,743$ 14.3%Central Valley Inyo 10,108,034$ 11.9%Central Valley Kings 31,680,550$ 9.3%Central Valley Mariposa 3,675,556$ 7.0%Sacto/I-80 Yolo 53,823,160$ 6.4%Central Valley Kern 187,796,732$ 6.3%Northern Siskiyou 7,773,980$ 5.6%Northern Lake 8,290,174$ 5.5%Bay Area San Francisco 191,415,827$ 5.3%

Central

No. CA

Retail Sales Future

2009 Very Rough Year

2010 Rough Start, Modest Improvement Late

2011 Modest Improvement

Economic Future Most Drivers Remain StuckStuck

CA Jobs: From All Negative to Erratic

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(125,000)

(100,000)

(75,000)

(50,000)

(25,000)

0

25,000

50,000

75,000

100,000

Source: CA Employment Development Department

Seasonally Adjusted Job ChangesCalifornia, 2000-2009

What Sectors Drove 4th Quarter’s–40,200 Job Loss?

5,500

2,900

(200)

13,000Private Education

6,800        Health Care & Social Agcy.          Local Government &

Schools 4,800

8,500      Information

        Professional, Scientific, Technical

          State Government & Colleges 1,400Finance, Ins., R. Estate

        Federal Government

(5,700)          Arts, Entertainment & Recreation

8,600        Administrative Support & Part Time

(15,600)Agriculture

(6,600)

(10,100)

(16,900)

Logistics      Construction

      Manufacturing

(4,000)          Accommodation & Food Service

(32,600)        Retail Trade & C. Service

Source: CA Employment Development Department

Seasonally Adjusted Job ChangesCalifornia, September to December 2009

+51,500

-91,700

Gold Mine Theory

Primary Tier

Secondary Tier

Economic Drivers

Green

Construction Manufacturing

Tourism

Trade

Bio-Tech

Logistics

Motion Pictures

Computer Games Retirement Center

InformationAgriculture

What’s The Status of So. California’s “Gold Mines“Gold Mines?”F+

Bottom

F-Unstable

Regulators

D+Inventory

D+Inventory

C$ Helps

Inc.Unstable

Regulators

BStrong

CStrong

BStrong

B-$ Helps

BBoomers

D-Water

6,300

4,800

4,400

1,800

600

(100)

(300)

(400)

(700)

(2,400)

(3,800)

(4,300)

(4,700)

(6,900)

Los Angeles

Inland Empire

San Diego

Kern

Santa Barbara

Santa Rosa

StocktonVentura

SalinasModesto

East BaySilicon Valley

Orange CountySan Francisco/Marin

Source: CA Employment Development Department

Exhibit 5.-Job Creation/Destruction, Seasonally AdjustedCalifornia Metropolitan Areas, December vs. September 2009

Geographically Where Did 4th Quarter Changes Occur?

2010: Job Future

National: Inventory Recovery (early)Slow Recovery Continues (late)

CA: Inventory Related Recovery (early)West CA Areas Respond To U.S./WorldEast CA Miniscule Recovery (housing)

5. Economic Development

It is A Competition

Who Was Hurt By The Recession

Least Hurt = 12

4. So. California

1. Central Coast

2. Bay Area

3. Northern

6. Sacramento I-80

5. Central Valley

45

28

30

52

41

48

Environmental Issues

Takes Precedence

Job Worries

Take Precedence

California Governing Philosophy

Command & Control

Markets

Vs.

California Ranks California Ranks LastLast in the U.S. in the U.S. For For Business LocationBusiness Location

- Forbes -- Forbes -

Unstable Regulatory Agencies

If A Business Can’t Plan,

They Won’t Come or Stay

State Mandated Costs Not Found Elsewhere In U.S.

Overtime After 8 Hours … Not 40 Hour Week

Mandatory Family Leave

Dysfunctional State Government

California Bond Rating Drops Lower Than Any Other State's

Lack of Investment InAging & Missing Infrastructure

Grade Separations

Modestly Trained Labor Force

K-12 Performance 38th Pew Center for States

Share of Adults: No College 42.6% Census Bureau

Education Funding Per Capita 27th Public Policy Institute

How Minnesota Can Avoid the "California Spiral"

CA Long Term Future?

Command & Control

Markets

Vs.?

While Waiting For Complete Recovery….

www.johnhusing.com