Mark Schniepp Director

September 15, 2015

There’s something happening here . . . .

. . . what it is, ain’t exactly clear For What it’s Worth -- Buffalo Springfield, 1966

A turbulent summer

ü Series of “crashes” on the Shanghai Stock Market • down 33 percent, from mid-June to early July, • then another 9 percent on July 27, and • another 8.5 percent on August 24

ü U.S. and other world financial markets correspondingly reacted to China’s collapse

ü Dow free falls 1,000 points on August 24 ü China devalues Yuan on August 11 ü Will the slowdown in China drag down the world?

Agenda -- today q  Extraordinary observations q  Is financial market volatility justified ? q  3 Quizzes . . . . re: FE q  Social and Economic changes q  The building spree in California q  The California Budget and Recession Watch q  There’s life in the housing market q  The 2016 forecast for California

Extraordinary Observations / Sept. 2015

•  Prices and interest rates •  Oil prices …… •  Gasoline prices •  Treasury yields •  Inflation Rates

•  The drought •  4 years and very little impact

•  6 + years after the end of the recession and we are approaching full employment economy

•  El Nino news . . . .

35

43

51

59

67

75

83

91

99

107

Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15

West Texas Intermediate Crude Oil Price: Daily dollars per barrel March 2014 -- September 14, 2015

$44

Gasbuddy.com September 14, 2015

Average Price per Gallon (regular gas) U.S. and California

California

U.S.

$2.30 $3.16

1.6

1.8

2.0

2.2

2.4

2.6

Sep-14 Nov-14 Feb-15 Apr-15 Jul-15 Sep-15

Daily 10 year U.S. Treasury Bond Yield September 2014 -- September 14, 2015

percent

2.18 %

Yield on 10 year U.S. Treasury

December 1940 1.9 %

July 2012 1.5 %

-1

0

1

2

3

4

Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

U.S. Consumer Price Inflation percent

July 2010 - July 2015

360

370

380

390

400

410

420

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Farm Employment / California thousands of workers

1993 - 2015

30

32

34

36

38

40

42

44

46

48

50

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Real Total Value of Agriculture / California billions of constant 2014 dollars 1990 - 2014

10

11

12

13

14

15

16

17

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Real Farm Income / California millions of constant 2014 dollars 1990 - 2014

100

125

150

175

200

225

250

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

Producer Price Index of Cattle index (2002=100) July 2007 - July 2015

Source: Bureau of Labor Statistics

43 %

80

100

120

140

160

180

200

Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

Producer Price Index of Milk index (2002=100) July 2007 - July 2015

Source: Bureau of Labor Statistics

58 %

600

800

1000

1200

1400

1600

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

Producer Price Index of Tree Nuts index (2002=100) July 2007 - July 2015

Source: Bureau of Labor Statistics

60 %

The Mother of all El Ninos may be brewing in the Pacific

http://mashable.com/2015/07/21/2015-el-nino-

versus-1997/ September 2, 2015

http://mashable.com/2015/07/21/2015-el-nino-versus-1997/ July 2015

http://mashable.com/2015/07/21/2015-el-nino-versus-1997/ July 2015

• Weekly Nino 3 index at 2.3C. • Only two El Ninos since 1950 have had monthly Nino 3 values >= 2.3C ('82-'83, '97-'98). • 90 percent chance El Nino conditions will be present for the 2015-2016 winter

16,000

16,250

16,500

16,750

17,000

17,250

17,500

17,750

18,000

18,250

18,500

Sep-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Jul-15 Sep-15

Dow Jones Industrial Average September 12, 2014 - September 14, 2015 index

Summary / Positive Signals • corporate profits near/at record highs • the unemployment rate is nearly “full” • business investment is soaring • inflation running less than 1% • retail spending at all time record high • world tourism at record levels • gasoline prices have tumbled

~ except in california

0%

1%

2%

3%

4%

5%

6%

7%

Mar-94 Jun-99 Sep-01 May-05 Dec-06 Apr-08 Nov-09 Jun-11 Jan-13 Sep-15

Federal Funds Rate and Discount Rate rate

March 1994 - September 2015

Federal Funds Rate

The Discount Rate

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2006Q2 2008Q3 2010Q4 2013 Q1 2015 Q2

Corporate Profits / U.S. 2006 Q2 - 2015 Q2

trillions of dollars

-4

-3

-2

-1

0

1

2

3

4

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Jobs Created / US millions of jobs

2000 - 2015

20

30

40

50

60

70

80

90

100

110

Aug-07 Aug-09 Aug-11 Aug-13 Aug-15

Consumer Confidence & Sentiment Conference Board / U. of Michigan Surveys

August 2007 - August 2015

index 1985=100

Sentiment

Confidence

360

370

380

390

400

410

420

430

440

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

Real Retail Sales / U.S. billions of 2015 dollars, SAAR July 2008 - July 2015

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Aug-11 Aug-12 Aug-13 Aug-14 Aug-15

Unemployment Rate / U.S. percent August 2011 - August 2015

5.1 %

3

5

7

9

11

13

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Unemployment Rate / California 2000 - 2020 percent

Unemployment Rates / July 2015

•  San Mateo 3.6 •  Marin 3.7 •  San Francisco 3.8 •  Santa Clara 4.3 •  Napa 4.4 •  Sonoma 4.6 •  Orange County 4.7 •  San Luis Obispo 4.9

•  Alameda County 5.0 •  Placer County 5.2 •  San Diego 5.4 •  Sacramento 6.2 •  Fresno 9.6 •  Stanislaus 9.4

Meaning of Full Employment • Employers have a tough time filling job

vacancies, and they start to bid up wages, either to keep their employees from leaving, or to recruit skilled employees from other firms . . . .

• Since wages are not generally rising much, there is still slack in the labor force

• However, particular regions are at FE • Bay Area, and parts of Southern California

325

350

375

400

425

450

475

500

Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15

Technology Services Employment / California thousands of jobs July 2005 - July 2015

174

177

180

183

186

189

192

195

Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15

Technology Equipment Mfg Employ / California thousands of jobs July 2005 - July 2015

Quiz: How easy is it for you to recruit skilled workers ?

(a)  We get many qualified applications and it’s a snap

(b)  Only some of our applicants are qualified but we fill most positions

(c)  We can’t find qualified applicants (d)  Even people working for us now aren’t qualified

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2006 Q2 2007 Q4 2009 Q2 2010 Q4 2012 Q2 2013 Q4 2015 Q2

Inflation in Wages and Salaries per Worker Los Angeles and Bay Area regions

2006 Q2 -- 2015 Q2 percent change

Los Angeles / Orange County Region

Bay Area

Quiz: Did or will your wage or salary increase this year ?

(a)  nope, and I’m just lucky I’m not fired (b)  no, but an increase is coming soon (c)  not for me but for other workers or

new recruits of the firm (d)  yes, 3 to 5 percent (e)  Every week I laugh all the way to the bank

10

11

12

13

14

15

16

17

18

1994 1997 2000 2003 2006 2009 2012 2015

New Car & Light Truck Sales / U.S. 1994 - 2015

millions of sales

200

400

600

800

1,000

1,200

1994 1997 2000 2003 2006 2009 2012 2015

New Home Sales / U.S. 1994 - 2015 thousands

of sales

Quiz: What happened to the Demand for housing?

(a)  We are demanding housing…… It’s called rental housing

(b)  We like having our 20-something kids live at our house

(c)  We like living with our parents (d)  We like our parents living with us

✔

✔

✔

Social & Economic Changes § We are now seeing change more frequently

and it’s redefining normal .…. §  Due to Global influences

-  Manufacturing going abroad -  Geopolitical issues

§  But mostly as a result of - Technology and Demographics - The aging baby boomer generation, and Generation Y

now becoming more economically relevant

Social & Economic Changes § Who was Kathleen Casey ?

Social & Economic Changes § Who was Kathleen Casey ? §  76 million for the next 19 years . . . . §  That surge in population proved to be a major

societal and economic changing force in America §  Boomers grew up in the 50s and 60s and were

responsible for the explosion of roads, highways, and particularly: school construction in 50s

§  Onset of popular Toys: Barbie (‘56), Hula Hoop (’57) EtchaSketch (’60), Easy Bake (’63), GI Joe (‘64)

Social & Economic Changes §  Social changes of the 60s and 70s

§ the Drug Culture and Rock Music explosion of the 60s § Civil rights movement and the Environmental movement

Social & Economic Changes §  Social changes of the 60s and 70s

§ the Drug Culture and Rock Music explosion of the 60s § Civil rights movement and the Environmental movement

§  Entered colleges and universities in record numbers in the late 60s to the mid 80s

§  Boomers became the spendthrift consumers §  Were responsible for the housing booms of the

70s and 80s, and the first real inflation in housing prices

§  Personal computer booms of the 80s and 90s

Social & Economic Changes §  Principal among their many inventions:

§  Small electronics, cell phones, and video games §  the internet in the 90s §  Viagra in 1998

§  The housing bubble in 2004 – 2007 §  The technology boom of the new millennium and

insatiable demand for electronics and gadgets §  Boomers are now growing old ………

…. and their impact on the economy should be less, in favor of the next generation

2,000

2,500

3,000

3,500

4,000

4,500

1901 1909 1917 1925 1933 1941 1949 1957 1965 1973 1981 1989 1997 2005 2013

Births in the United States 1901 - 2013

births in thousands

generation Y or "millenials"

gener- ation

X

silent generation

wwII generation

baby boom Z

U.S. Census Bureau / Purple bars actual; green bars projected

The Baby Boom Population 1946 to 2060 Now aged

50 to 68

4,000

6,000

8,000

10,000

12,000

Under 16 16 to 35 36 to 50 51 to 69

Population by Generation / California 2015

thousands of people

Generaton Z

Generaton Y

Generaton X

Baby Boomers

Generation Y . . . . born ~ 1980-1999 •  Currently in their 20s and early 30s •  Have grown up with technology, connectedness,

and immediate information •  Expectation for immediacy

•  Boomer parents have provided them every emotional, educational, and physical need and want •  Including shelter, which is often still the case today …..

•  Nevertheless, they were impacted by the Great Recession, the stock market crash, and directly experienced unemployment and financial problems

Generation Y •  Boomer parents advised them to seek an education

field that they loved and that a job would be waiting for them upon graduation . . . . .

•  The unemployment rate for 18 to 24 year olds is extraordinarily high, as Gen Y is ill prepared and entry level jobs have been replaced by robots

•  Consequently, their behavior toward purchasing housing, autos, and bigger ticket items has been affected . . .

•  They will buy homes later (if at all)

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

New Housing Starts / U.S. 1959 - 2015

thousands of units

Gen Y: Ages 16 to 35

Boomers: 13 to 31

Boomers: 22 to 40

Boomers: 41 to 59

The Atlantic May 19, 2015

22.5

11.3

7.0 5.1

0

5

10

15

20

25

Age 16-19 Age 20-24 Age 25-34 35 & over

Unemployment Rate in California / By Age July 2015 percent

Generation Y Implications

•  Millennials have delayed adulthood •  They will be employed in their ultimate career

field later (and they’ll likely switch jobs and even careers many times . . . . )

•  So they don’t want to be tied down with a home, a dog and two kids . . . .

•  They don’t have much money now and they’re carrying debt, so staying at home in their boomer parent homes is smart living

Generation Y --- A reluctance to buy Share of 18 to 34 year olds that own homes

Home ownership lowest in 25 years

.

18 to 34 year olds living with their parents . ……………………………….…..

. ……………………………….…..

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

2000 2003 2006 2009 2012 2015

Average Rental Vacancy Rate / California 2000 - 2015

percent

Delaying adulthood also ….. …. means delaying marriage and children •  In 2014,

Millennials aged 20 to 34: 26% •  Gen X: 36 % •  Boomers: 48 % •  Silents: 65 % •  Delaying marriage/children means delaying

household formation which delays economic impacts . . .

The New Normal for housing §  Don’t expect a sharp housing market recovery • Owning vs renting preferences have changed • Boomers are pretty much set in their housing now

and Gen Y is in no condition to replace their parents’ propensity to spend

……. on housing or anything else yet • Regarding new development of non-housing,

there is no new normal . . . . • California is experiencing a building boom

2

4

6

8

10

12

14

1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Investment in New C&I Building California

1988 - 2015

billions of dollars

-1,000

-800

-600

-400

-200

0

200

400

600

2001 2003 2005 2007 2009 2011 2013 2015

Total Jobs Created / California 2001 - 2015

thousands of jobs

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15

Cumulative Job Growth by Region percent change in non-farm employment July 2013 - July 2015

Coastal Southern California

Bay Area

Inland Counties

Recent Evidence: California

•  Housing now rebounding •  More residents working •  Unemployment rate approaching full •  Jobs, Income, Spending . . . . •  Wages rising •  More housing projects starting up •  Office vacancy improving to best levels

of the current cycle

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

New Commercial & Industrial Investment Los Angeles County

1995 - 2015

millions of dollars

Non-Residential Development •  Commercial and industrial development has

rebounded sharply in California •  Much of the increase in non-residential

development has been in infrastructure and energy projects.

•  Also: parking garages, hospitals, retail stores including amusement facilities

• Half of total investment in structures was in remodel activity

25

50

75

100

125

150

175

200

99 01 03 05 07 09 11 13 15

New Housing Production / California 1999 - 2015

thousands of units permitted

Largest Housing Projects Tejon Ranch, Kern County

Grapevine Project 12,000 Tejon Mountain Village 3,400 Centenniel Project (LA County) 23,000

Quay Valley, Kings County 25,000 Entire solar powered community

Newhall Ranch, Santa Clarita Valley 21,420 West Jackson Highway Master Plan 17,000 Otay Ranch, San Diego County 15,000 Placer Vineyards, Placer County 14,000

Largest Housing Projects Rancho Mission Viejo, Orange County 14,000 Concord Reuse Project, Contra Costa 12,272 Redwood City Saltworks, San Mateo 12,000

- located between Oracle and Facebook Yokohi Ranch, Tulare County 10,000 Folsom Specific Plan,

Sacramento County 10,210 Treasure Island, SF County 8,000 Coliseum City, Alameda County 5,700

http://www.ebudget.ca.gov / Dept of Finance California Budget

Budget in 2015-2016

•  The May revision added $7 billion to General Fund Revenues

•  Prop 98 increased K-14 funding by $5.5 billon •  $1 billion more in 2015-16 than 2014-2015 for the

Community College System •  More support to students •  More full time faculty •  Increased operation and deferred maintenance

budgets

•  http://www.ebudget.ca.gov / Dept of Finance Calif Budget

Demands on the California Budget

•  Deferred maintenance on roads, and other infrastructure

•  Future retiree health care benefits for state employees

•  Future pension benefits for state employees

•  Proposition 2 Rainy Day Fund •  Emergency Drought Response

Page 3 of the May Revision Budget Document

-9.0

-6.0

-3.0

0.0

3.0

2005 2008 2011 2014 2017 2020

General Fund Surplus / California FY 2005 - FY 2020

billions of dollars

Community College Update Current Enrollment & Future Demand

2.0

2.2

2.4

2.6

2.8

3.0

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Total Enrollment California Community Colleges

1994-95 to 2014-2015

millions of students

0

25

50

75

100

125

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Distance Education / FTES California Community Colleges

1993-1994 to 2014-2015 thousands of students

0

10

20

30

40

50

1987 1991 1995 1999 2003 2007 2011 2015

Fees per Unit California Community Colleges

Fall 1987 - Fall 2015

dollars per unit

100

300

500

700

900

1,100

1,300

1,500

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Enrollment by Age California Community Colleges

1994-95 to 2014-2015

thousands of students

24 and Under

35 to 49

25 to 34

50 and Up

Factors Affecting CC Enrollment • Pool of graduating 12th graders in the region • Per unit fees

- larger impact on Part Time than FTE students • Economy had a negative impact on part time

student enrollment - Less enrollment of PT students when the economy created more jobs and the unemployment rate fell

• 18-24 year old population growth - 25 to 34 population growth a factor for some colleges

3.1

3.3

3.5

3.7

3.9

4.1

1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Population Age 18 to 24 / California 1985 - 2030

millions of people

In search of the next . . . .

The Next Recession ?

•  Due to China ? •  Greece ? •  No, China is not the problem . . . . Our

interpretation of the situation is the problem •  And Greece is just too small . . . . •  Recession appears far enough away to

predict with any confidence •  Statistically, it would occur in 2018

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019

Real Gross Domestic Product Growth / U.S. 1975 - 2019

percent

9 years 10 years 7 years 9 years

The Next Recession ?

•  2 ½ years away . . . . . . . . ? in 2018 ? •  There is nothing that we can see now that

would necessarily lead us into recession –  Asset prices rising in the Bay Area that model a bubble –  No observable excesses elsewhere

•  And the world economy is forecast to strengthen •  However, geopolitical instabilities are always a threat •  Technology and demographics are rapidly

changing. . . . clouding the future

“The future isn’t what it used to be”

Yogi Berra

27

29

31

33

35

37

39

41

Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

Existing Home Sales / California . thousands of sales

July 2009 - July 2015

•  Southern California: 8 percent increase •  Bay Area: 11 percent increase

90

115

140

165

190

215

240

265

290

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

For-Sale Housing Inventory / California July 2008 - July 2015

thousands of homes

250

300

350

400

450

500

Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

Median Home Selling Price / California . thousands of dollars July 2010 - July 2015

Median Home Selling Prices California Counties July 2015

San Diego Orange Los Angeles Inland Empire Kern San Francisco Santa Clara California

County Price $562,650 $722,170 $486,310 $294,710 $229,700

$1,312,500$965,000 $488,260

% Change From Peak

-9.6 -6.9

-22.3 -24.3 -23.4 35.0 11.6

-17.9

7.6 3.9 5.4 6.8 9.4

19.9 12.1 5.4

% change

The 2016 Forecast

2016 Forecast Notes / A Recap

•  The environment today is the result of demographic forces ……

•  …..which has impacted the housing market •  Full employment in CA by mid 2016

-  Already full in many other counties •  Therefore, hiring trails off •  Consequently, salaries will be rising

adding to inflation pressures

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

225,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

New Housing Units / California 2000 - 2020 units

authorized

-100,000

-50,000

0

50,000

100,000

150,000

200,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Net In-Migration / California 2000 - 2020

in-migrants minus out-migrants

-1,000

-800

-600

-400

-200

0

200

400

600

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Job Creation / California 2000 - 2020

thousands of jobs

10

12

14

16

18

20

22

24

26

28

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Real Investment in Non-Residential Structures California 2000 - 2020

billions of constant 2015 dollars

42,000

45,000

48,000

51,000

54,000

57,000

60,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Per Capita Personal Income / California 2000 - 2020

constant 2015 dollars

200

250

300

350

400

450

500

550

600

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Median Home Selling Price / California 2000 - 2020

thousands of dollars

Expectations: next 12 months

•  Another year of economic expansion • Housing extends and accelerates growth

•  Despite the volatility in the financial markets, there is no recession in sight . . . .

•  Hiring will get tougher from this point on •  Full employment by late this year or early ‘16

•  Rising salaries for skilled workers •  Rising incomes for families in general

Expectations: next 12 months

•  Virtually no possibility of recession •  Another solid year where the California

budget benefits and a surplus should occur

The END