Seven Years In Amidst Global,

Technological and Policy Shocks

WBA CFO Conference

Seattle, Washington

November 13, 2015

John W. Mitchell

November 13, 2015

Midway Through The Seventh Year

Headline Inflation Zero

Fed Funds Target 0-.25

US Treasury 3 Month Securities Sold With Zero Interest Rate

World Awash in Oil-Weak Commodity Prices

Record Employment

Weakness Overseas

Fiscal Truce

Schumpeter’s Ghost Walks the Land

Regional Strength

Q4-

14

Q1-

15

Q2-

15

Q3

15

GDP 2.1 .6 3.9 1.5

Consumption 4.3 1.8 3.6 3.2

Equipment -4.9 2.3 .3 5.3

Intell

Prop6.9 7.4 8.3 1.8

Non-Res 4.3 -7.4 6.2 -4

Residential 10 10.1 9.3 6.1

Federal -5.7 1.1 0 .2

State and

Local1.3 -.8 4.3 2.6

Exports 5.4 -6 5.1 1.9

Imports 10.3 7.1 3 1.8

Revised Real GDP 2014-15

Commerce Department (SAAR,%)

0

50

100

150

200

250

300

350

400

450

January

Apri

l

July

Octo

ber

January

Apri

l

July

Octo

ber

January

Apri

l

July

Octo

ber

January

Apri

l

July

Octo

ber

January

Apri

l

July

Octo

ber

Source: BLS

2011-15 Nonfarm Payroll Employment

Change(,000 SA) October 271,000

In October 13 Million Jobs above the Trough (2/10) and 4.3 Million above the Previous Peak (1/08)

Participation Rate at 62.4%- was 66% at Previous Peak-Decline Amongst Prime Working Age

Hourly Earnings up 2.5% over the Year (2.2% in Sept.)

Compensation Costs up 2% over the Year ECI--September

Initial Unemployment Claims Continuing to Trend Down- Recent 42 Year Low

5.8 Million Part Time for Economic Reasons 1.9 Million Marginally attached to the Labor Force

All Super Sectors up Except for Mining and Logging

Unemployment Rates: 25 and Older: Less than HS 7.4%, High School 5.2%, Some College or AA 4.4%, BA or More 2.5%- Teens 16-19 15.9%

Unemployment Fallen Much Faster than Anticipated

Labor Market Signals

(Strong October)

Consumer Prices

Where is it?

September Year Over Year Zero

Commodity Shocks- Gasoline Down 29.6% Year to

September

Used Car Prices Down 1.7% YoY

Clothing -1.4%

Medical Care Services YoY 2.4%

Shelter YoY 3.2%

Airline Fares fell 5.6% in July

Trade Weighted Dollar

Import Prices have declined every month since July 2014

and the Import Price Index is down 10.7% over the Year to

September

Fuel Import Prices are down 44.7 %, Non-Fuel Import

Prices down 3.1%

Export Prices down 7.4% with Ag Export Prices down 13.5%

and Non Ag down 6.7%

Import Prices down from all Geographic Regions

10 Year US 2.21% Germany .6%,Swiss -.28%, Japan .31%

Federal Funds Rate and 10 Year Treasury

Source: Treasury, Fed

0

1

2

3

4

5

6

7

Fed Funds 10 Year

Consensus 2.4% in 2015 and 2.6% in 2016

Inflation .2% in 2015 and 1.8% in 2016

Fed GDP Projections: 2-2.3% in 2015, 2.2-2.6% in 2016

Unemployment 5-5.1% in 2015 and 4.7-4.9% in 2016

CBO 2% in 2015 and 3.1% in 2016 (July)

Fed Long Term Median 2015 2.1%, 2016 2.3%, 2017 2.2%

and 2018 2% September

Inflation Target not achieved until 2018 (Fed September)

Prospects

Real GDP Growth

-4

-3

-2

-1

0

1

2

3

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: BEA, Fed

Shocks and Excuses

Tsunami

Budget Conflicts/Shutdown/Debt Ceiling/Episodes

Fiscal Cliff

Oil Shocks

Dollar Strength

Weakness Overseas

Port Disputes

Severe Winter Weather

Labor Force Growth/Productivity/ Secular Stagnation

Permanent Effect of Recession/Policy (Hysteresis)

Changes in Net Worth Households and Non-

Profits ($ Billions) Up 50% Since 2008

$4,184.10

$1,265

$6,082.30

$9,448.90

$4,054.70

$1,591.50

$694.80

$0.00

$1,000.00

$2,000.00

$3,000.00

$4,000.00

$5,000.00

$6,000.00

$7,000.00

$8,000.00

$9,000.00

$10,000.00

2010 2011 2012 2013 2014 2015/Q1 2015/Q2

Source: Fed

Debt Service Ratio and Financial

Obligations Ratios (Fed)

Debt Service to Disposable Income

2007/Q4 13.22% Total 7.19% Mortgage and 6.02% Consumer

2015/Q2 10.06%% 4.61% 5.46%

Financial Obligations Ratio ( Rent, Auto Lease, Homeowners Insurance and

Property Taxes)

2007/Q4 18.13%

2015/Q2 15.38%

Washington Residential Permits 2010-

September 2015 (YTD 27%)

05000

10000150002000025000300003500040000

Source: Census

Source: Census

FHFA

House Price Index Q2 2015

% %

Bellingham 5.01 Seattle 8.95

Bremerton 9.82 Spokane 4.45

Kennewick 4.23 Tacoma 7.64

Longview 6.26 Wenatchee 7.06

Mt Vernon 5.73 Yakima 4.52

Olympia 8.26

Housing Questions

Washington Apartment Markets-Falling Vacancy Rates-Rising Rents

Millennial Behavior-Apartments or Houses (TV Commercial)

Housing Affordability- Q2 2015 Index over 100-every county save San Juan

Average 143.1, First Time Affordability 81

Case Shiller August National 4.7%, Seattle 7.6%, Denver and San Francisco

10.7%

Employment Growth, Household Formation Gain, Ease in Lending Standards

US Permits to Sept. up 13%-Single Family 9.8%, 2-4 units 18.6%, 5 plus 38.5%

Census

10/28/15 “moderate pace”, “ underutilization of labor

resources diminished”, “household and business

spending expanding at solid rates”, “inflation below

long run objective, partly reflecting declines in energy

prices and prices of non-energy imports.”

Reaffirmed 0-1/4 percent target is appropriate

Assessment: Labor Market, inflation pressures and

expectations, readings on financial and international

developments

Move when “ seen further improvement in the labor

market and is reasonably confident that inflation will

move back to its 2 percent objective over the medium

term.”

Macro Policy Uncertainty

Monetary

September Estimates from Board Medians End of 2015

.5%, 2016 1.5%

No Surprises-How will Markets React?

What Mistakes Could Be Made?

New Tools-Interest on Excess Reserves and Overnight

Reverse Repurchase Agreements-for Institutions that do

not have Deposits with Fed-Money Market Funds, GSE’s

Today-December Looks Probable

Kick the Can

Fiscal Policy

Debt Ceiling Constraint lifted for Two Years

Sequester Caps from 2011 Budget Control Act-lifted by $80 Billion over the Next Two Fiscal Years for Defense and Non-Defense Discretionary

Shutdown Averted

Disability Fund Patched

Medicare Premium Shock Diminished

CBO Fiscal 2015 Receipts up 8%, Spending up 5% Defense -2.7%, Medicaid 16%, Medicare 6.9%, Net Interest -4,1%, Education Department up 51% on Student Loan Subsidies and Guarantees

Entitlements Squeezing Defense/Non-Defense Discretionary

Utah 1

Idaho 2

South Carolina 3

Florida 4

Washington 5

California 6

Nevada 7

Oregon 8

North Carolina 9

Arizona 10

Michigan 11

Massachusetts 12

Indiana 13

Job Growth Update September, 2015 Data

Year over Year Change – 46 States Up

Georgia 14

Texas 15

Wisconsin 16

Colorado 17

Arkansas 18

Tennessee 19

South Dakota 20

Kentucky 21

Maryland 22

Alabama 23

Hawaii 24

New York 25

Connecticut 27

Minnesota 28

Ohio 29

Iowa 30

New Jersey 31

New Mexico 32

Maine 33

Missouri 34

Montana 35

Virginia 36

Mississippi 37

Rhode Island 38

Pennsylvania 40

Nebraska 41

Kansas 42

Illinois 43

Oklahoma 45

Louisiana 46

Alaska 47

Wyoming 48

West Virginia 49

North Dakota 50

Regional

Populati

on

Change

13-14

2014

Pers.

Income

FHFA

House

Price

Index

Q2 PO

Tax

Revenue

s Q1

2015

State

Q2

Personal

Income

Idaho 1.3% 4.4% 6.05% 15% 1.1%

Oregon 1.1% 5.7% 7.96% 10.5% 1.2%

Washington 1.3% 5.8% 8.76% 9.2% 1.5%

Washington Wage and Salary Employment

(SA ,000)

2600

2700

2800

2900

3000

3100

3200

3300

2007/D

EC 2 4 6 8

10

2008/D

EC 2 4 6 8

10

2009/D

EC 2 4 6 8

10

2010/D

EC 2 4 6 8

10

2011/D

EC 2 4 6 8

10

2012/D

EC

2013/D

ec 6

2015/Ju

ne

Source: Emp. Security

Washington Job Growth Year to

September 2015 (2.9%)

7,000-400

12,10015,300

1,8003,5003,000

13,00013,400

8,6006,5007,400

92,900

-20,000 0 20,000 40,000 60,000 80,000 100,000

Manufacturing

Mine & Log

Construction

Trade

Information

Finance

TP,W and Util

Prof. Services

Ed. and Health

Leisure & Hosp.

Other Services

Government

Total

Source: Emp. Security

Job Growth Year to September 2015

Metro Areas

Source: Employment Security

Number %

Bellingham 3,400 4

Bremerton 2,000 2.3

Kennewick 1,600 1.5

Longview -600 -.5

Mount Vernon -400 -.8

Olympia 2,600 2.4

Seattle 50,900 3.3

Number %

Spokane 6,400 2.7

Tacoma 10,200 3.5

Walla Walla 100 .4

Wenatchee 500 1.2

Yakima 2,300 2.9

Seattle Job Growth Year to September

2015 (3.3%)

100100

6,90012,000

2,7001,9001,300

9,9003,400

1,8003,600

7,30050,900

0 10,000 20,000 30,000 40,000 50,000 60,000

Manufacturing

Mine & Log

Construction

Trade

Information

Finance

TP,W and Util

Prof. Services

Ed. and Health

Leisure & Hosp.

Other Services

Government

Total

Source: Emp. Security

“A Region Floats on a Global Sea,

Buffeted by Local Tides and Winds”

National Expansion Should Continue

Tightening Labor Markets

Low Energy Prices

Tech Sector Strength

Challenged Exports

Pressure on Infrastructure- Response-Increase Capacity, Renovate

Farm Income Pressures

Waiting for the Snowpack!

Financial Market Volatility-No One Knows How This Will Play Out

Pressure on Discretionary Federal Spending

State Fiscal Issues-Initiative 1366, McCleary

Job Growth in 2015 3% for Washington slower in 2016 at 2.3%

Tumultuous Times

(Again)

World of “ Phone Fondlers”

Amazon, Uber, Airbnb, Peer to Peer Lending

Consumer Good to Capital Good and Back-Into and Out of

the Labor Force

Internet of Things

Disruptive Technical Change-Challenges Institutions and

Regulations

In The Quiet of the Morning

How much of a hit from Global Slowdown? Fate of TPP?

Capacity/Traffic/Cost Constraints

Will the Buildings Fill?

Generational Conflict in the Federal Budget?

Can Washington Fund Its Public Services with Current Tax Structure?

How Do Expansions End?

Black Swans