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AFTER THE FALL:

AFTER THE FALL: What Kind Of Recovery In California & In The Rest Of The U.S. From The “Great Recession” Of 2008-09? A Presentation To The California Municipal Treasurers Association Annual Conference Sacramento, California April 21, 2010.

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AFTER THE FALL:

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  1. AFTER THE FALL: What Kind Of Recovery In California & In The Rest Of The U.S. From The “Great Recession” Of 2008-09? A Presentation To The California Municipal Treasurers Association Annual Conference Sacramento, California April 21, 2010

  2. CALIFORNIA LAGS THE U.S. ECONOMY, AGAIN, IN THIS ECONOMIC CYCLE Non-Farm Job Growth; Year-Ago Percent Change, 3-Mo. Moving Avg. Data 2.5% 0.5% 3/10 -1.5% U.S. 2/10 -3.5% Recession Period -5.5% California -7.5% Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Source: U.S. Dep't Of Labor

  3. WILL SOUTHERN CALIFORNIA BE FIRST "OUT?" Non-Farm Job Growth; Year-Ago Percent Change, 3-Mo. Moving Avg. Data 3.5% Bay Area 1.2% -1.1% 2/10 -3.4% Southern California Recession Period -5.7% Central Valley -8.0% Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Source: U.S. Dep't Of Labor

  4. L.A.-LONG BEACH IS CLOSEST TO AN ECONOMIC RECOVERY IN SOUTHERN CALIFORNIA ... Non-Farm Job Growth; Year-Ago Percent Change, 3-Mo. Moving Avg. Data 6% Riverside-San Bernardino 3% L.A.-Long Beach 0% Orange County -3% 2/10 -6% -9% Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 Source: U.S. Dep't Of Labor

  5. …WHILE ACTIVITY HAS CONVERGED IN THE BAY AREA'S THREE MAJOR ECONOMIES... Non-Farm Job Growth; Year-Ago Percent Change, 3-Mo. Moving Avg. Data 3% 1% San Jose -1% San Francisco -3% Oakland 2/10 -5% -7% -9% Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Source: U.S. Dep't Of Labor

  6. …AND IN THE CENTRAL VALLEY Non-Farm Job Growth; Year-Ago Percent Change, 3-Mo. Moving Avg. Data 2.0% 0.5% -1.0% Central Valley, Ex. Sacramento -2.5% 2/10 Sacramento -4.0% -5.5% -7.0% Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Source: U.S. Dep't Of Labor

  7. U.S. AND CALIFORNIA METRO HOME PRICES BACK "ABOVE WATER" Year-Ago Percent Change; Seasonally Adjusted Data 40% 30% 20% 10% 1/10 0% L.A.-San 20 U.S.-Metro Diego Average -10% Average -20% San Francisco Bay Area -30% -40% Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Source: Standard & Poors, Inc.

  8. The Saving Rate Steadying At An Historically Low Level Household Debt Burdens At A Nine-Year Low “Purchasing Power” On The Verge Of Recovery An Early Rebound In Investment Spending Export Growth Still Near A Thirty-Five-Year High TOWARD SELF-SUSTAINING ECONOMIC GROWTH

  9. HOUSEHOLDS DIP INTO SAVINGS TO FINANCE A SPENDING RECOVERY Yr-Ago % Chg; 3-Mo Moving Avgs. Percent of After-Tax Income 4% 7 Personal Saving Rate (Right Scale) 3% 6 2/10 2% 5 1% 4 -1% 3 Inflation-Adjusted Spending, Ex. Autos -2% (Left Scale) 2 -3% 1 -4% 0 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Source: U.S. Commerce Dep't.

  10. HOUSEHOLD DEBT-PAYMENT BURDENS AT A NINE-YEAR LOW Financial Obligations* Ratio, In Percent 19.0 Note: Bars Denote 18.5 Recession Periods 18.0 17.5 '09Q4 17.0 16.5 16.0 15.5 15.0 Mar-81 Mar-85 Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09 * Interest, principal & auto-lease payments, rent, home owner property taxes & insurance. Sources: Federal Reserve Board

  11. HOUSEHOLD "PURCHASING POWER" FINALLY HITS BOTTOM Percent Changes In Three-Month Moving Average Data 10% Avg. Annual % Chg, 6% Year-Ago % 1975-2009=2.3% P.A. Change 2% 2/10 -2% Annualized % Change From 3 Months Ago -6% -10% -14% Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 * Inflation as measured by the PCE deflator. Sources: U.S. Commerce Department

  12. POISED FOR ANOTHER “MINI-BURST” OF ECONOMIC GROWTH? * Pent-Up Consumer Demand * Deferred Equipment Spending --Liquid Assets High, Manufacturing Capacity Falling * Pent-Up Housing Demand From Depressed Household Formations, Labor Mobility * Extraordinarily “Lean” Payrolls * Ample “Liquidity,” “Thawing” Credit Markets * Historically High Operating Leverage

  13. OPERATING LEVERAGE SOARS Non-Fin'l Corps. Revenue Per Dollar Of Labor & Capital Costs 150% '09Q4 140% Avg., 1960- 130% 2008=118% 120% 110% 100% 90% Mar-64 Mar-70 Mar-76 Mar-82 Mar-88 Mar-94 Mar-00 Mar-06 * Normalized revenue growth based on rolling, 5-year average annual gains. Source: U.S. Department Of Commerce

  14. ECONOMIC OUTLOOK: THE U.S. AND CALIFORNIA ECONOMIES COMPARED Year-To-Year Percent Change, Unless Otherwise Specified Avg. Ann. % Chg, '04 - Avg. '08 - '07 '09 2010F 2011F 2012F "Real" Personal Income U.S. 3.3 -1.2 2.3 3.4 2.0 California 3.1 -1.7 1.3 3.7 4.5 Payroll Employment U.S. 1.4 -2.5 -0.2 2.5 1.8 California 1.3 -3.7 -0.7 2.3 3.0 Unemployment Rate (%) U.S. 5.1 7.6 9.7 9.3 8.6 California 5.5 9.3 11.8 10.4 9.7 Housing Starts/Permits U.S. (Starts, MM) 1.8 0.7 0.6 0.7 0.8 California (Permits, Thousands) 175 51 82 140 167 OTHER KEY CALIFORNIA DATA Taxable Retail Sales (% Chg.) 5.1 -7.0 1.2 5.2 6.9 Non-Residential Constr. (% Chg.) 2.4 -31.0 -4.4 19.1 26.3 Population (% Chg.) 1.2 1.1 1.0 1.0 1.0 Net Immigration (Thousands) 117 83 66 85 118 Source: The UCLA Anderson Forecast, March 2010; WCM Forecast.

  15. THE SHAPE OF THINGS TO COME? The Treasury Yield Curve, Selected Periods; Yields In Percent 5.0 4/13/10 4.5 4.0 10/1/09 3.5 3.0 2.5 12/31/08 2.0 1.5 Fed Funds Target Rate 1.0 (12/16/08)=0-0.25%) 0.5 0.0 -0.5 0 5 10 15 20 25 30 35 40 Years To Maturity Source: Bloomberg Financial News, Inc.

  16. "CORE," OR UNDERLYING INFLATION TAKES A DIVE Year-Ago Percent Change 12% 3.5% "Core" CPI (Excluding Food 9% 3.0% & Energy) (Right Scale) 6% 2.5% 3% 2.0% 0% 1.5% -3% 2/10 1.0% -6% 0.5% -9% CPI 0.0% -12% (Left Scale) -15% -0.5% Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Source: Bureau Of Labor Statistics

  17. WILL BROADENING "DEFLATION" HELP SHAPE MONETARY POLICY? Percent Of PCE Components Declining; Three-Month Moving Average 38 Jan. '10=36% 35 32 29 26 23 20 17 Average, 2/77- 12/08=21.6% 14 Dec-99 Jun-01 Dec-02 Jun-04 Dec-05 Jun-07 Dec-08 Jun-10 Sources: U.S. Commerce Department; Federal Reserve Bank Of Dallas

  18. Market Appetite For Dollar-Denominated Assets Dries Up --A Loss Of Confidence In U.S. Economic Policies Unexpectedly Strong Economic Growth, And A Less Sanguine Inflation Outlook Heightened Financial-Market Uncertainties, Volatility Amid A “Sea Change” In Monetary Policy RISKS TO A DELAYED, GRADUAL RISE IN U.S. INTEREST RATES

  19. THEMES SHAPING LONGER-TERM ECONOMIC PERFORMANCE • Asset-Price Volatility In A Low-Inflation, Low Interest-Rate Economy --”Financialization” Of Commodities • Trade Protectionism In A Slower Growing Global Economy --Diminishing “Tail Winds” From “Globalization?” • An Aging Population’s Impact On Potential Growth, Spending & Investment • Toward A Higher-Taxed, “Managed” Capitalist, U.S. Economy?

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