AFTER THE FALL:

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, CaliforniaApril 21, 2010

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, CaliforniaApril 21, 2010

2 2

-7.5%

-5.5%

-3.5%

-1.5%

0.5%

2.5%

Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10

California

Source: U.S. Dep't Of Labor

CALIFORNIA LAGS THE U.S. ECONOMY, AGAIN, IN THIS ECONOMIC CYCLENon-Farm Job Growth; Year-Ago Percent Change, 3-Mo. Moving Avg. Data

U.S.

3/10

Recession Period 2/10

3 3

-8.0%

-5.7%

-3.4%

-1.1%

1.2%

3.5%

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

Bay Area

Central Valley

Source: U.S. Dep't Of Labor

WILL SOUTHERN CALIFORNIA BE FIRST "OUT?"Non-Farm Job Growth; Year-Ago Percent Change, 3-Mo. Moving Avg. Data

2/10Southern California

Recession Period

4 4

-9%

-6%

-3%

0%

3%

6%

Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10

L.A.-Long Beach

2/10

Riverside-San Bernardino

Source: U.S. Dep't Of Labor

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

Orange County

5 5

-9%

-7%

-5%

-3%

-1%

1%

3%

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

San Francisco

2/10

San Jose

Source: U.S. Dep't Of Labor

…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

Oakland

6 6

-7.0%

-5.5%

-4.0%

-2.5%

-1.0%

0.5%

2.0%

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

Sacramento

Non-Farm Job Growth; Year-Ago Percent Change, 3-Mo. Moving Avg. Data

Source: U.S. Dep't Of Labor

…AND IN THE CENTRAL VALLEY

2/10

Central Valley, Ex. Sacramento

7 7

-22%

-17%

-12%

-7%

-2%

3%

8%

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

AN IMPROVING--BUT STILL DISAPPOINTING--PERFORMANCE BY CA'S "EXPORT" INDUSTRIESYear-Ago Percent Change In Non-Farm Payroll Employment

"Housing-Related"*

"Export" Industries*

2/10

Source: California Employment Development Department

* "Housing-related" includes residential construction, specialty trade contractors, furniture, home furnishings and building materials retail stores, real estate leasing and finance. "Export industries" include high tech, aerospace, travel and tourism, motion pictures and sound recording.

Health Care

8 8

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09

U.S. AND CALIFORNIA METRO HOME PRICES BACK "ABOVE WATER"Year-Ago Percent Change; Seasonally Adjusted Data

1/10

20 U.S.-Metro Average

San Francisco Bay Area

Source: Standard & Poors, Inc.

L.A.-San Diego Average

9 9

TOWARD SELF-SUSTAINING ECONOMIC GROWTH

• 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

10 10

-4%

-3%

-2%

-1%

1%

2%

3%

4%

Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-090

1

2

3

4

5

6

7

HOUSEHOLDS DIP INTO SAVINGS TO FINANCE A SPENDING RECOVERY

Source: U.S. Commerce Dep't.

2/10

Personal Saving Rate(Right Scale)

Inflation-Adjusted Spending, Ex. Autos

(Left Scale)

Yr-Ago % Chg; 3-Mo Moving Avgs. Percent of After-Tax Income

11 11

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

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

HOUSEHOLD DEBT-PAYMENT BURDENS AT A NINE-YEAR LOW Financial Obligations* Ratio, In Percent

'09Q4

Note: Bars Denote Recession Periods

12 12

-14%

-10%

-6%

-2%

2%

6%

10%

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09

2/10

HOUSEHOLD "PURCHASING POWER" FINALLY HITS BOTTOMPercent Changes In Three-Month Moving Average Data

Sources: U.S. Commerce Department

Avg. Annual % Chg, 1975-2009=2.3% P.A.

* Inflation as measured by the PCE deflator.

Annualized % Change From 3 Months Ago

Year-Ago % Change

14 14

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

15 15

90%

100%

110%

120%

130%

140%

150%

Mar-64 Mar-70 Mar-76 Mar-82 Mar-88 Mar-94 Mar-00 Mar-06

OPERATING LEVERAGE SOARS Non-Fin'l Corps. Revenue Per Dollar Of Labor & Capital Costs

* Normalized revenue growth based on rolling, 5-year average annual gains.Source: U.S. Department Of Commerce

'09Q4

Avg., 1960-2008=118%

16 16

Avg. Ann. % Chg, '04 -

'07Avg. '08 -

'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 6.9Non-Residential Constr. (% Chg.) 2.4 -31.0 -4.4 19.1 26.3

Population (% Chg.) 1.2 1.1 1.0 1.0 1.0Net Immigration (Thousands) 117 83 66 85 118

Source: The UCLA Anderson Forecast, March 2010; WCM Forecast.

ECONOMIC OUTLOOK: THE U.S. AND CALIFORNIA ECONOMIES COMPAREDYear-To-Year Percent Change, Unless Otherwise Specified

17 17

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0 5 10 15 20 25 30 35 40Years To Maturity

12/31/08

Source: Bloomberg Financial News, Inc.

10/1/09

THE SHAPE OF THINGS TO COME?The Treasury Yield Curve, Selected Periods; Yields In Percent

Fed Funds Target Rate (12/16/08)=0-0.25%)

4/13/10

18 18

-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

"CORE," OR UNDERLYING INFLATION TAKES A DIVEYear-Ago Percent Change

Source: Bureau Of Labor Statistics

CPI(Left Scale)

2/10

"Core" CPI (Excluding Food & Energy)

(Right Scale)

19 19

14

17

20

23

26

29

32

35

38

Dec-99 Jun-01 Dec-02 Jun-04 Dec-05 Jun-07 Dec-08 Jun-10

WILL BROADENING "DEFLATION" HELP SHAPE MONETARY POLICY? Percent Of PCE Components Declining; Three-Month Moving Average

Jan. '10=36%

Average, 2/77-12/08=21.6%

Sources: U.S. Commerce Department; Federal Reserve Bank Of Dallas

20 20

RISKS TO A DELAYED, GRADUAL RISE IN U.S. INTEREST RATES

• 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

21 21THEMES 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?