THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2004: What Next For The U.S. & California Economies? A Presentation To The Annual CMTA Pre-Conference Workshop.

THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2004:

What Next For The U.S. & California Economies?

A Presentation To The Annual CMTA Pre-Conference Workshop

South Lake Tahoe, CaliforniaApril 19, 2004

THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2004:

What Next For The U.S. & California Economies?

A Presentation To The Annual CMTA Pre-Conference Workshop

South Lake Tahoe, CaliforniaApril 19, 2004

ANOTHER "JOBLESS RECOVERY" ANOTHER "JOBLESS RECOVERY" Cumulative % Change In Private, Non-Farm Cumulative % Change In Private, Non-Farm

Payrolls Before And After The Cyclical Low PointPayrolls Before And After The Cyclical Low Point

-1-1

00

11

22

33

44

55

66

77

-12-12 -10-10 -8-8 -6-6 -4-4 -2-2 00 22 44 66 88 1010 1212 1414 1616 1818 2020 2222 2424 2626Months Before And After The Cyclical Low In Economic ActivityMonths Before And After The Cyclical Low In Economic Activity

* Based on six economic cycles back through 1953.* Based on six economic cycles back through 1953.Source: U.S. Commerce DepartmentSource: U.S. Commerce Department

Avg., Past 6 Long Avg., Past 6 Long Economic Cycles*Economic Cycles*

Current Cycle, 11/00-3/04Current Cycle, 11/00-3/04

CCUUMMUULLAATTIIVVEE

GGRROOWWTTHH

RecessionRecession RecoveryRecovery

3/90-7/92 Cycle3/90-7/92 Cycle

"MISERY'S"* WARNING FLAG FOR THE "MISERY'S"* WARNING FLAG FOR THE PRESIDENTPRESIDENT

Cumulative % Chg. In The "Misery Index*"Cumulative % Chg. In The "Misery Index*"

-15%-15%

-10%-10%

-5%-5%

0%0%

5%5%

10%10%

15%15%

20%20%

00 33 66 99 1212 1515 1818 2121 2424 2727 3030 3333 3636Months From The Start Of RecoveryMonths From The Start Of Recovery

* Avg. of inverted index for job gains, rolling 12-mo. periods, and an index of retail gasoline prices.* Avg. of inverted index for job gains, rolling 12-mo. periods, and an index of retail gasoline prices. Sources: U.S. Dep'ts. Of Energy and LaborSources: U.S. Dep'ts. Of Energy and Labor

Current Recovery Current Recovery (11/01-3/04(11/01-3/04

3/91-7/93 Recovery3/91-7/93 Recovery

INVENTORIES UNUSUALLY "LEAN" VS. INVENTORIES UNUSUALLY "LEAN" VS. SALESSALES

Business Inventory-Sales (I/S) RatioBusiness Inventory-Sales (I/S) Ratio

1.311.31

1.331.33

1.351.35

1.371.37

1.391.39

1.411.41

1.431.43

1.451.45

1.471.47

1.491.49

Dec-96Dec-96 Dec-97Dec-97 Dec-98Dec-98 Dec-99Dec-99 Dec-00Dec-00 Dec-01Dec-01 Dec-02Dec-02 Dec-03Dec-03Source: U.S. Department Of CommerceSource: U.S. Department Of Commerce

Rolling 3-Year Rolling 3-Year Avg.Avg.

MonthlyMonthly

2/042/04

U.S. EXPORT ORDERS RESPOND U.S. EXPORT ORDERS RESPOND

TO A WEAKER DOLLARTO A WEAKER DOLLAR

4444

4646

4848

5050

5252

5454

5656

5858

6060

Dec-98Dec-98 Dec-99Dec-99 Dec-00Dec-00 Dec-01Dec-01 Dec-02Dec-02 Dec-03Dec-039292

9494

9696

9898

100100

102102

104104

106106

108108

110110

112112

* Based on the dollar's inflation-adjusted, trade-weighted exchange rate against 44 other currencies.* Based on the dollar's inflation-adjusted, trade-weighted exchange rate against 44 other currencies.

Sources: Nat'l Ass'n Of Purchasing Mgrs.; J.P. Morgan & Co.Sources: Nat'l Ass'n Of Purchasing Mgrs.; J.P. Morgan & Co.

3/043/04

"Real Trade-Weighted" $*"Real Trade-Weighted" $* (Right Scale)(Right Scale)

Export Orders, Mfd. Export Orders, Mfd. GoodsGoods

(Left Scale)(Left Scale)

% Rept'g An Increase% Rept'g An Increase Index: 2000=100Index: 2000=100

A BETTER SHOWING BY CALIFORNIA DURING A BETTER SHOWING BY CALIFORNIA DURING THE CURRENT ECONOMIC CYCLETHE CURRENT ECONOMIC CYCLE

Non-Farm Job Growth; Year-Ago Percent ChangeNon-Farm Job Growth; Year-Ago Percent Change

-2.5%-2.5%

-1.5%-1.5%

-0.5%-0.5%

0.5%0.5%

1.5%1.5%

2.5%2.5%

3.5%3.5%

4.5%4.5%

Dec-89Dec-89 Dec-91Dec-91 Dec-93Dec-93 Dec-95Dec-95 Dec-97Dec-97 Dec-99Dec-99 Dec-01Dec-01 Dec-03Dec-03

3/043/04

U.S.U.S.

CACA

Source: U.S. Dep't Of LaborSource: U.S. Dep't Of Labor

Note: Bars Denote U.S. Recession Note: Bars Denote U.S. Recession PeriodsPeriods

TRADING PLACES: NORTHERN CALIFORNIA ON TRADING PLACES: NORTHERN CALIFORNIA ON THE THE

LEADING EDGE OF THE ECONOMIC LEADING EDGE OF THE ECONOMIC SLOWDOWNSLOWDOWN

Yr-Ago % Change In Non-Farm PayrollsYr-Ago % Change In Non-Farm Payrolls

-7.8%-7.8%

-6.8%-6.8%

-5.8%-5.8%

-4.8%-4.8%

-3.8%-3.8%

-2.8%-2.8%

-1.8%-1.8%

-0.8%-0.8%

0.2%0.2%

1.2%1.2%

2.2%2.2%

3.2%3.2%

4.2%4.2%

5.2%5.2%

6.2%6.2%

Dec-89Dec-89 Dec-91Dec-91 Dec-93Dec-93 Dec-95Dec-95 Dec-97Dec-97 Dec-99Dec-99 Dec-01Dec-01 Dec-03Dec-03

No. CaliforniaNo. California

2/042/04

So. CaliforniaSo. California

Central ValleyCentral Valley

Source: U.S. Dep't Of LaborSource: U.S. Dep't Of Labor

Note: Bars Denote Recession Note: Bars Denote Recession PeriodsPeriods

CALIFORNIA'S ECONOMIC GROWTH DRIVEN BY CALIFORNIA'S ECONOMIC GROWTH DRIVEN BY "DOMESTIC," NOT “EXPORT” INDUSTRIES"DOMESTIC," NOT “EXPORT” INDUSTRIES

Year-Ago Percent Change In Employment, March 2004Year-Ago Percent Change In Employment, March 2004

-7%-7%

-6%-6%

-5%-5%

-4%-4%

-3%-3%

-2%-2%

-1%-1%

0%0%

1%1%

2%2%

3%3%

4%4%

5%5%

6%6%

Tot

al N

onfa

rmT

otal

Non

farm

Res

id. C

onst

r.R

esid

. Con

str.

Sof

twar

e P

ub

.S

oftw

are

Pu

b.

Rea

l Est

ate

Rea

l Est

ate

Pro

f &

Bu

s S

vcs

Pro

f &

Bu

s S

vcs

Ed

uc

& H

ealt

hE

du

c &

Hea

lth

Svc

sS

vcs

Lei

sure

&L

eisu

re &

Hos

p.it

yH

osp

.ity

Gov

ern

men

tG

over

nm

ent

Source: California Employment Development DepartmentSource: California Employment Development Department

"Export" Industries"Export" Industries

"Domestic" Industries"Domestic" Industries

TTeecchh

MMffgg

IInntteerrnneett

MMoottIIoonn

PPIIccttuurreess

FFIInnll

SSvvccss

A MORE VULNERABLE CA HOUSING MARKET A MORE VULNERABLE CA HOUSING MARKET TO HIGHER INTEREST RATES? TO HIGHER INTEREST RATES?

% Of Households Qualifying For The Median-Priced Home, By % Of Households Qualifying For The Median-Priced Home, By Selected AreaSelected Area

00

1010

2020

3030

4040

5050

6060

U.S.U.S. CACA LALA SFSF Cent. ValleyCent. ValleySource: California Association Of RealtorsSource: California Association Of Realtors

12/9612/96

12/0012/00

2/032/03

2/042/04

ECONOMIC OUTLOOK: THE U.S. AND CALIFORNIA ECONOMIC OUTLOOK: THE U.S. AND CALIFORNIA ECONOMIES COMPAREDECONOMIES COMPARED

Year-To-Year Percent Change, Unless Otherwise SpecifiedYear-To-Year Percent Change, Unless Otherwise SpecifiedForecastForecast

19911991 19921992 19931993 20002000 20012001 20022002 20032003 20042004 20052005

"Real" GDP/ GSP"Real" GDP/ GSP U.S.U.S. -0.9-0.9 2.72.7 2.72.7 3.73.7 0.50.5 2.22.2 3.13.1 4.14.1 3.03.0 CaliforniaCalifornia -1.9-1.9 -1.2-1.2 -0.8-0.8 6.56.5 -1.3-1.3 1.91.9 3.03.0 3.73.7 2.72.7

Unemployment Rate (%)Unemployment Rate (%) U.S.U.S. 6.96.9 7.57.5 6.96.9 4.04.0 4.84.8 5.85.8 66 5.85.8 6.06.0 CaliforniaCalifornia 7.77.7 9.39.3 9.49.4 4.94.9 5.45.4 6.76.7 6.76.7 6.26.2 6.26.2

Housing Starts/PermitsHousing Starts/Permits U.S. (Starts, MM)U.S. (Starts, MM) 1.011.01 1.21.2 1.291.29 1.571.57 1.601.60 1.711.71 1.851.85 1.861.86 1.671.67 California (Permits, Th)California (Permits, Th) 105105 9898 8484 149149 149149 168168 198198 196196 189189

Other Key California DataOther Key California DataTax. Retail Sales(% Chg.)Tax. Retail Sales(% Chg.) -3.9-3.9 0.60.6 -0.1-0.1 12.012.0 0.00.0 -0.2-0.2 3.13.1 4.24.2 4.94.9

Population (% Chg.)Population (% Chg.) 2.32.3 2.12.1 1.31.3 1.91.9 1.91.9 1.71.7 1.61.6 1.51.5 1.41.4Net Inmigration (Thus)Net Inmigration (Thus) 224224 225225 -45-45 322322 364364 308308 251251 237237 199199

Source: The UCLA Anderson Forecast, March 2004Source: The UCLA Anderson Forecast, March 2004

AGGRESSIVE COST-CUTTING HELPS SUSTAIN AGGRESSIVE COST-CUTTING HELPS SUSTAIN THE RECOVERY IN MARGINS AND PROFITS THE RECOVERY IN MARGINS AND PROFITS Year-Ago % Change, Selling Prices Vs. Non-Farm Year-Ago % Change, Selling Prices Vs. Non-Farm

Unit Labor Costs*Unit Labor Costs*

-4%-4%

-3%-3%

-2%-2%

-1%-1%

0%0%

1%1%

2%2%

3%3%

4%4%

5%5%

Mar-89Mar-89 Mar-91Mar-91 Mar-93Mar-93 Mar-95Mar-95 Mar-97Mar-97 Mar-99Mar-99 Mar-01Mar-01 Mar-03Mar-03

Selling PricesSelling Prices

Unit Labor CostsUnit Labor Costs

Source: U.S. Commerce Dep't.Source: U.S. Commerce Dep't.

'03Q4'03Q4

Note: Bars DenoteNote: Bars DenoteRecession PeriodsRecession Periods

Margin PressureMargin Pressure

Margin ExpansionMargin Expansion

WEAK "PRICING POWER" DRIVES A TECH-WEAK "PRICING POWER" DRIVES A TECH-LED INVESTMENT RECOVERYLED INVESTMENT RECOVERY

Year-Ago Percent Change, Inflation-Adjusted Year-Ago Percent Change, Inflation-Adjusted SpendingSpending

-24-24

-20-20

-16-16

-12-12

-8-8

-4-4

00

44

88

1212

1616

2020

2424

2828

01-Mar-9101-Mar-91 01-Mar-9401-Mar-94 01-Mar-9701-Mar-97 01-Mar-0001-Mar-00 01-Mar-0301-Mar-03

'03Q4'03Q4

Info Processing EquipmentInfo Processing Equipment

Low-Tech EquipmentLow-Tech Equipment

StructuresStructures

Source: U.S. Commerce Department Source: U.S. Commerce Department

Note: Bars Denote Note: Bars Denote Recession PeriodsRecession Periods

"APPRECIATING-CURRENCY" COUNTRIES "APPRECIATING-CURRENCY" COUNTRIES LIFT U.S. IMPORT PRICES & “PRICING LIFT U.S. IMPORT PRICES & “PRICING

POWER” POWER” Year-Ago Percent Change, Import Prices Of Year-Ago Percent Change, Import Prices Of

Manufactured GoodsManufactured Goods

-7%-7%

-5%-5%

-3%-3%

-1%-1%

1%1%

3%3%

5%5%

7%7%

Dec-99Dec-99 Jun-00Jun-00 Dec-00Dec-00 Jun-01Jun-01 Dec-01Dec-01 Jun-02Jun-02 Dec-02Dec-02 Jun-03Jun-03 Dec-03Dec-03 Jun-04Jun-04

CanadaCanadaEuropeEurope

"Emerging Asian" "Emerging Asian" EconomiesEconomies

3/043/04

Source: U.S. Department Of Labor Source: U.S. Department Of Labor

SMALL BUSINESS "PRICING POWER" ON THE SMALL BUSINESS "PRICING POWER" ON THE RISERISE

Percent Of Small Businesses Reporting Price Percent Of Small Businesses Reporting Price IncreasesIncreases

-8-8

-4-4

00

44

88

1212

1616

2020

Dec-94Dec-94 Dec-96Dec-96 Dec-98Dec-98 Dec-00Dec-00 Dec-02Dec-02

Source: National Federation Of Independent Businesses (NFIB)Source: National Federation Of Independent Businesses (NFIB)

Mar. '04Mar. '04

Recession Recession PeriodPeriod

A LOOK BACK AT THE LAST A LOOK BACK AT THE LAST “UP CYCLE” FOR INTEREST RATES “UP CYCLE” FOR INTEREST RATES

The Treasury Yield Curve, Selected Periods; Yields The Treasury Yield Curve, Selected Periods; Yields In PercentIn Percent

4.34.3

5.35.3

6.36.3

7.37.3

00 55 1010 1515 2020 2525 3030 3535Years To MaturityYears To Maturity

Fed Funds Target Rate, Fed Funds Target Rate, 11/17/98=4.75%11/17/98=4.75%

5/18/005/18/00

Source: Bloomberg Financial News, Inc.Source: Bloomberg Financial News, Inc.

6/29/996/29/99

11/18/9811/18/98

Federal Funds Target Rate, Federal Funds Target Rate, 5/16/00=6.50%5/16/00=6.50%

HOW CLOSE A CLASH BETWEEN PUBLIC & HOW CLOSE A CLASH BETWEEN PUBLIC & PRIVATE-SECTOR BORROWING?PRIVATE-SECTOR BORROWING?

Year-Ago % Change In Federal & Non-Federal Year-Ago % Change In Federal & Non-Federal BorrowingBorrowing

-10%-10%

-5%-5%

0%0%

5%5%

10%10%

15%15%

Dec-89Dec-89 Dec-91Dec-91 Dec-93Dec-93 Dec-95Dec-95 Dec-97Dec-97 Dec-99Dec-99 Dec-01Dec-01 Dec-03Dec-03Source: Federal Reserve BoardSource: Federal Reserve Board

Non-FederalNon-Federal

FederalFederal

'03Q4'03Q4

THE FEDERAL RESERVE KEEPING THE THE FEDERAL RESERVE KEEPING THE POLICY "PEDAL TO THE METAL"POLICY "PEDAL TO THE METAL"

The Federal Funds Rate Less The PCE "Deflator;" The Federal Funds Rate Less The PCE "Deflator;" PercentPercent

-2.0-2.0

-1.0-1.0

0.00.0

1.01.0

2.02.0

3.03.0

4.04.0

5.05.0

Jan-90Jan-90 Jan-92Jan-92 Jan-94Jan-94 Jan-96Jan-96 Jan-98Jan-98 Jan-00Jan-00 Jan-02Jan-02 Jan-04Jan-04

3/043/04

Avg., 1969-2003=2.6%Avg., 1969-2003=2.6%

Sources: Bloomberg Financial News, Inc., U.S. Commerce Dep'tSources: Bloomberg Financial News, Inc., U.S. Commerce Dep't

Fed "Easing" During TheFed "Easing" During TheSluggish 1991-92 RecoverySluggish 1991-92 Recovery

Note: Bars Denote Note: Bars Denote Recession PeriodsRecession Periods

EIGHT SURPRISES FOR 2004EIGHT SURPRISES FOR 2004

* ANOTHER TERRORIST ATTACK* ANOTHER TERRORIST ATTACK

* THE “CARRY TRADE” UNRAVELS* THE “CARRY TRADE” UNRAVELS

* “DISINFLATION” LINGERS ON * “DISINFLATION” LINGERS ON

* A DOLLAR TAILSPIN* A DOLLAR TAILSPIN

* SAUDI TURMOIL* SAUDI TURMOIL

* A CHINESE RECESSION* A CHINESE RECESSION

* A DEMOCRATIC ELECTION VICTORY* A DEMOCRATIC ELECTION VICTORY

* POLICY STRAINS BEGIN TO SHAKE THE EURO* POLICY STRAINS BEGIN TO SHAKE THE EURO

BOND MANAGERS STILL CAUTIOUSBOND MANAGERS STILL CAUTIOUSPortfolio Duration Vs. Target, In Percent; 4-Wk. Moving Portfolio Duration Vs. Target, In Percent; 4-Wk. Moving

AveragesAverages

9494

9595

9696

9797

9898

9999

100100

101101

102102

103103

104104

25-Dec-0125-Dec-01 25-Jun-0225-Jun-02 24-Dec-0224-Dec-02 24-Jun-0324-Jun-03 23-Dec-0323-Dec-03 22-Jun-0422-Jun-04Source: Stone McCarthy Research Associates, Inc.Source: Stone McCarthy Research Associates, Inc.

4/13/04 4/13/04 WeekWeek

"Neutral" (100% Of "Neutral" (100% Of Benchmark Duration)Benchmark Duration)

EARNINGS GROWTH TO PROPEL STOCKS EARNINGS GROWTH TO PROPEL STOCKS HIGHERHIGHER

-23%-23%

-17%-17%

-11%-11%

-5%-5%

1%1%

7%7%

13%13%

19%19%

25%25%

Mar-97Mar-97 Mar-98Mar-98 Mar-99Mar-99 Mar-00Mar-00 Mar-01Mar-01 Mar-02Mar-02 Mar-03Mar-03 Mar-04Mar-04 Mar-05Mar-05-60%-60%

-40%-40%

-20%-20%

0%0%

20%20%

40%40%

60%60%

80%80%Qtr-To-Qtr % Chg Qtr-To-Qtr % Chg

* First Call "bottom-up" consensus estimate, including goodwill adjustments.* First Call "bottom-up" consensus estimate, including goodwill adjustments.Source: First Call, Inc.Source: First Call, Inc.

Forecast*Forecast*

Yr.-Ago % Chg.Yr.-Ago % Chg.

S&P 500 Earnings GrowthS&P 500 Earnings Growth(Left Scale)(Left Scale)

S&P 500S&P 500(Left Scale)(Left Scale)

A FAIRLY TIGHT LINK BETWEEN THE S&P A FAIRLY TIGHT LINK BETWEEN THE S&P 500 P/E MULTIPLE AND INTEREST RATES500 P/E MULTIPLE AND INTEREST RATES

00

22

44

66

88

1010

1212

1414

1616

Jan-79Jan-79 Jan-82Jan-82 Jan-85Jan-85 Jan-88Jan-88 Jan-91Jan-91 Jan-94Jan-94 Jan-97Jan-97 Jan-00Jan-00 Jan-03Jan-0333

77

1111

1515

1919

2323

2727S&P 500 Price Per $ Of Opng. EarningsS&P 500 Price Per $ Of Opng. EarningsPercentPercent

Sources: Standard & Poors, Inc.; Federal Reserve BoardSources: Standard & Poors, Inc.; Federal Reserve Board

10-Yr T-Note10-Yr T-Note(Left Scale)(Left Scale)

P/E RatioP/E Ratio(Right Scale)(Right Scale)

4/5/044/5/04

SEEMINGLY "RICH" STOCKS "CHEAP" VS. SEEMINGLY "RICH" STOCKS "CHEAP" VS. BONDSBONDS

33

77

1111

1515

1919

2323

2727

Jan-79Jan-79 Jan-83Jan-83 Jan-87Jan-87 Jan-91Jan-91 Jan-95Jan-95 Jan-99Jan-99 Jan-03Jan-030.40.4

0.60.6

0.80.8

1.01.0

1.21.2

1.41.4

1.61.6

1.81.8

Sources: Standard & Poors, Inc., IBES, Federal Reserve BoardSources: Standard & Poors, Inc., IBES, Federal Reserve Board

Yield Ratio*Yield Ratio*S&P 500 P/E MultipleS&P 500 P/E Multiple

* Ratio, 10-Yr. Treasury yield vs. earnings-price yield (E/P) on S&P 500 stocks.* Ratio, 10-Yr. Treasury yield vs. earnings-price yield (E/P) on S&P 500 stocks.

S&P 500 P/E MultipleS&P 500 P/E Multiple(Left Scale)(Left Scale)

Yield Ratio, Bonds Vs. StocksYield Ratio, Bonds Vs. Stocks(Right Scale)(Right Scale)

4/16/044/16/04

"DEFENSIVE" STOCKS* TURN WITH "DEFENSIVE" STOCKS* TURN WITH INTEREST RATESINTEREST RATES

Cumulative % Chg., Past 4 Bus. Cycles*Cumulative % Chg., Past 4 Bus. Cycles*

-12-12

-9-9

-6-6

-3-3

00

33

66

00 22 44 66 88 1010 1212 1414 1616 1818 2020 2222 2424 2626 2828 3030 3232 3434 3636 3838 4040 4242 4444 4646 4848-17-17

-15-15

-13-13

-11-11

-9-9

-7-7

-5-5

-3-3

-1-1

11

33

* Health care and consumer staples. Expansions beginning 12/70, 4/75, 1/83 and 4/91. * Health care and consumer staples. Expansions beginning 12/70, 4/75, 1/83 and 4/91. Source: Federal Reserve Board; Citigroup, Inc.Source: Federal Reserve Board; Citigroup, Inc.

Month's From Recession's EndMonth's From Recession's End

Cum. % Chg. In 10-Yr. Treas. Cum. % Chg. In 10-Yr. Treas. YieldsYields

(Right Scale)(Right Scale)

Cum. % Chg. In "Defensive" Vs. Cum. % Chg. In "Defensive" Vs. S&P 500 StocksS&P 500 Stocks

(Left Scale)(Left Scale)