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Cliffs, Tooth Fairies and The End of Year Four

Cliffs, Tooth Fairies and The End of Year Four. Bank of Agriculture and Commerce Stockton, California February 6, 2013 John W. Mitchell. 24 th. February 2013. Disasters Avoided-Cliff One, Euro Survived March1st and March 27 th Deadlines Year Four of Upturn-Modest or Moderate

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Cliffs, Tooth Fairies and The End of Year Four

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  1. Cliffs, Tooth Fairies and The End of Year Four Bank of Agriculture and Commerce Stockton, California February 6, 2013 John W. Mitchell 24th

  2. February 2013 • Disasters Avoided-Cliff One, Euro Survived • March1st and March 27th Deadlines • Year Four of Upturn-Modest or Moderate • 1/2013 Employment 3.23 Million below 1/2008 but 5.51 million above 2/2010 Trough • House Prices Rising Case Shiller up 5.5% to November • California with Clean Budget? • Fourth Quarter Output Decline • Global Economy Weak But Stabilizing? • S &P 500 up 6.1% to 2/1/13 • Personal Income in December up 2.6% (SAAR) • Largest Increase in Domestic Oil Production in History of Industry in 2012 • Inflation Moderated • Lone Ranger Back, but Twinkies GONE!

  3. Real GDP (SAAR) Commerce Department2012 (SAAR,%)

  4. Contributions to GDP GrowthQ3( Blue) and Q4(Red) 2012

  5. 2011-13 Nonfarm Payroll Employment Change(,000 SA) Average 181,000 Per Month in 2012

  6. Annual Job Change January, 2012-January, 2013 (1.6%)

  7. Consumer Price Index Monthly Changes 2011-121.7% in DecemberCore 1.9%, Annual Average 3.2% in 2011

  8. Inflation • Beige Book January 16, 2013 Stable Price Pressures • Energy Commodities 8.6% in Aug, 6.7% in Sept. -.5% in October and -6.9% in November and -2.2 in December • Compensation 12 Months to December 1.9%, Wages1.7%, Benefits 2.5%

  9. Interest Rates Source: US Treasury

  10. Rates • Seven Years of Zero Short Term Rates ? • 30 Year Mortgage 3.42% Week Ending 1/25/13 • 10 Year 1.9% on Week Ending 1/25/13 • Fed will tolerate 2.5% Inflation • All Treasuries Under 5 Years Yield Less than 1% • Personal Interest Income Q4 2007 $1.32 Trillion in December 2012 $1.012 Trillion • Pension Obligations?

  11. Prospects • GDP Growth Fed Central Tendency for 2013 2.3-3% and 3-3.5% in 2014 ( 2012 2.2% First Est.) • Consensus Moving from 2% in 2013 to 2.6% in 2014 • Inflation Staying Near 2% Through 2014 • Fed on Hold Until at Least Mid 2015

  12. Known Unknowns • What happens Overseas ? • Dealing with the debt ceiling and sequesters in the next few months? • How will the actors behave ?

  13. Residential Permits (SAAR) Census Bureau December 2012 Up 30.3% For the Year

  14. Residential Permits 2004 to 2012 California Up 28.7% in 2012 Source: Census

  15. FHFA Purchase Only Index CAStockton All Transactions

  16. The Centerpiece • Affordability • Price Declines • Mortgage Rates • Employment • Household Formation • Different Credit World • More Renters • San Joaquin County Median Sales Price in December up 15.7% to $184,320 (CAR) Stockton Permits-2004-2012 Building Forces

  17. Total State Tax Collections Above Previous Year for 11 Quarters

  18. California Budget • After Proposition 30 • Governor Proposed Budget with a Spending Increase of 5% • Expecting Gains in Personal Income Tax of 1.8% ($1.1B), Sales Tax Receipts 12.3% ($2.55B), Corporate Taxes 20.4% ($1.55B) • What will Actually Appear-Getting Beyond the Cliff Impact

  19. Policy Cauldron • The First Cliff • Payroll Tax Holiday Ends • Bush Tax Cuts Expire for Over $450,000 • Sequester Process Delayed 2 Months • New Medicare Taxes Start • Phase Outs and Deduction Limitations Back • Estate Tax Rate Bumped • AMT Fix, Doc Fix • Long Term Spending Issues-Not Addressed • Debt Ceiling Unresolved • Short Term Problem-Long Term Problem • Geithner-”And you can’t count indefinitely on the world having more confidence in our political system than is justified”

  20. Monetary Policy • Twist Ended in December-Now Buying $45 Billion of Treasuries Per Month with Maturities from 4 Years to 30 Years • Continue to Buy $40 Billion Mortgage-Backed Securities per month • Total $85 Billion Per Month in New Acquisitions as well as Reinvesting Principal Payments • Exceptionally low rates as long as unemployment remains above 6.5% and inflation is no more than .5 point above 2% longer run goal (12/12/12) and (1/30/2013) • When does the buying program end? When the labor market improves! • How does the unwinding take place? “Balanced approach” 1/30/13

  21. North Dakota 1 Utah 2 Arizona 3 Texas 4 Colorado 5 Oklahoma 6 Idaho 7 Montana 8 Indiana 9 Hawaii 10 Washington 11 Minnesota 12 Ohio 13 Georgia 14 South Carolina 15 North Carolina 16 California 17 Massachusetts 18 Nevada 19 Job Growth UpdateDecember 2012 Data-Year over Year Change-45 States Up, 1 Unchanged Kentucky 20 Missouri 21 New York 22 Tennessee 23 Oregon 24 New Jersey 25 Florida 28 Virginia 32 Pennsylvania 34 Alabama 38 Alaska 39 Connecticut 44 Mississippi 45 Wyoming 46 Connecticut 47 Maine 48 New Mexico 49 West Virginia 50

  22. Net Farm Income ($,000)

  23. California Wage and Salary Employment 2/10 to 12/12

  24. California Job Change Year to December, 2012 (1.7%) Source: EDD

  25. California Area Employment December 2012

  26. Stockton Job Change Year to December, 2012 (2.9%) Source: EDD

  27. Stockton Annual Average Wage and Salary EmploymentUp 4% in 2012

  28. Leftovers • Youth Un and Underemployment –Scarring • January U-6 14.4%, Mean Duration 35.3 Weeks • Labor Force Participation Rate January 63.6%-The last Time it was there was December 1981. Recession Start 66% • Real Family Median Net Worth Down 38.8% 2007-2010 Survey of Consumer Finances • California Jobs Gap 1,791,000 In October Brookings • CoreLogic Underwater in CA 28.3% in Q3 • City Finances

  29. Nagging Questions • How Does the Fiscal Situation End? • Simpson-Bowles, Confidence Collapse as in John Mauldin’s–Endgame, Rogoff and Reinhart’s This Time is Different- Slow Growth • Do we still have the recipe for growth? (Lots of Gloom, but Remember the Late 1970s!)

  30. Stella and The Fairies • The Tooth Fairy • Free Medical Services Fairy • The No New Taxes Fairy • The Rich Will Pay Fairy • The Entitlement Fairy Stella Fairies

  31. 2013 • Uncertainty Reduced, But Remains • Most likely GDP Growth 2-2.5% • California Employment 1.5-2% • Falling Debt Burdens, Housing, Rising Income and Employment, Balance Sheets, Financial Institutions Strength, ISM both Manufacturing and Non-Manufacturing, Energy Developments, Initial Claims, Global Glimmers

  32. Thank you, our customers are our strength.

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