The Economic Outlook May 2018 Focus on the South Bay Christopher - - PowerPoint PPT Presentation

Beacon Economics

The Economic Outlook

May 2018

Focus on the South Bay

Christopher Thornberg, PhD

Founding Partner, Beacon Economics Director, UC Riverside Center for Economic Forecasting and Development

Beacon Economics Beacon Economics

§ Meet the new economy, same as the old economy

—2017 solid year for growth: looked a lot like 2013-2014 —2018 likely to be better: good momentum with fiscal stimulus even after a slow start —Still a low chance of recession in next 24 months

§ Brakes and Imbalances

—Labor and housing shortages —Recent market froth / volatility / rising long term rates —Aggressive Fed: rising rates, flattening yield curves —Sharp growth in government deficits coming —Consumer savings rate declining —Global trade / security worries

§ Politics going in the wrong direction

—Little effort to deal with underinvestment in infrastructure, rising wealth and income inequality, healthcare cost inflation, pension and entitlement issues, etc etc etc —The great disconnect between economic realities and political discourse

The Good, Bad, and Ugly

2

Beacon Economics Beacon Economics

Now the 2nd longest expansion

3

20 40 60 80 100 120 140 October 1949 (IV) March 1933 (I) March 1975 (I) November 2001 (IV) June 1938 (II) November 1982 (IV) February 1961 (I) June 2009 (II) March 1991(I)

Length of Expansions (Months)

0.0% 20.0% 40.0% 60.0% 80.0% 2023 2022 2021 2020 2019 2018

WSJ Next Recession Poll

Its not ‘when’, its ‘why’

Beacon Economics Beacon Economics

GDP Growth: Almost back to 3%

4

2014 2015 2016 2017 2018 q1 GDP 2.73 2.00 1.85 2.73 2.30 FD 3.45 2.70 2.19 2.79 1.67 PCE 2.40 2.04 1.93 1.95 0.73 Fixed Inv 0.95 0.40 0.18 0.86 0.76 Struct 0.26

• 0.28

0.10 0.07 0.34 Equip 0.24 0.21

• 0.22

0.52 0.27 IPP 0.26 0.13 0.21 0.20 0.14 Res 0.20 0.35 0.09 0.08

• 0.00

Invent

• 0.15
• 0.02
• 0.02
• 0.11

0.43 Net exports

• 0.57
• 0.68
• 0.31

0.05 0.20 Government 0.09 0.28 0.07 0.12 0.20

• 1.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 1994Q1 1995Q2 1996Q3 1997Q4 1999Q1 2000Q2 2001Q3 2002Q4 2004Q1 2005Q2 2006Q3 2007Q4 2009Q1 2010Q2 2011Q3 2012Q4 2014Q1 2015Q2 2016Q3 2017Q4

Y-o-Y Growth Real Output

Beacon Economics Beacon Economics

Consumer Spending / Retail Sales

5

0.0 1.0 2.0 3.0 4.0 5.0 6.0 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17

Y-o-Y Growth Retail Sales

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Jan-90 Jul-91 Jan-93 Jul-94 Jan-96 Jul-97 Jan-99 Jul-00 Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12 Jan-14 Jul-15 Jan-17

Personal Savings Rate (Share DPI)

Beacon Economics Beacon Economics

No Debt Overhang

6

0.7 0.75 0.8 0.85 0.9 0.95 1 1.05 1.1 1.15 1.2 03:Q1 03:Q4 04:Q3 05:Q2 06:Q1 06:Q4 07:Q3 08:Q2 09:Q1 09:Q4 10:Q3 11:Q2 12:Q1 12:Q4 13:Q3 14:Q2 15:Q1 15:Q4 16:Q3 17:Q2 18:Q1

Household Debt / DPI Ratio

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 03:Q1 04:Q1 05:Q1 06:Q1 07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 14:Q1 15:Q1 16:Q1 17:Q1 18:Q1

Newly Delinquent Debt (Share)

AUTO CC MORTGAGE STUDENT LOAN

Beacon Economics Beacon Economics

Housing Markets: Steady

7

• 15.0%
• 10.0%
• 5.0%

0.0% 5.0% 10.0% 15.0% 20.0% Jul-94 Jan-96 Jul-97 Jan-99 Jul-00 Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12 Jan-14 Jul-15 Jan-17

Case Shiller National HPI Y-o-Y Ch

• 10.0%
• 5.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 04:Q1 04:Q4 05:Q3 06:Q2 07:Q1 07:Q4 08:Q3 09:Q2 10:Q1 10:Q4 11:Q3 12:Q2 13:Q1 13:Q4 14:Q3 15:Q2 16:Q1 16:Q4 17:Q3

Consumer Debt Growth (Y-o-Y)

All Mortgage

Beacon Economics Beacon Economics

Pace of Construction

8

0.5 1 1.5 2 2.5 3 3.5 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014

Housing Starts per New Household

200 400 600 800 1000 1200 1400 1600 1800 2000 Jan-92 Jul-93 Jan-95 Jul-96 Jan-98 Jul-99 Jan-01 Jul-02 Jan-04 Jul-05 Jan-07 Jul-08 Jan-10 Jul-11 Jan-13 Jul-14 Jan-16 Jul-17

Sales and Starts

SF Starts SF Sales MF Starts

Beacon Economics Beacon Economics

Rising Rates?

9

1.00 1.50 2.00 2.50 3.00 3.50 2013-05-16 2013-08-16 2013-11-16 2014-02-16 2014-05-16 2014-08-16 2014-11-16 2015-02-16 2015-05-16 2015-08-16 2015-11-16 2016-02-16 2016-05-16 2016-08-16 2016-11-16 2017-02-16 2017-05-16 2017-08-16 2017-11-16 2018-02-16

10 Year Bond Rate (daily)

30.0% 35.0% 40.0% 45.0% 50.0% 55.0% 60.0% 65.0% 70.0% Jan-93 Aug-94 Mar-96 Oct-97 May-99 Dec-00 Jul-02 Feb-04 Sep-05 Apr-07 Nov-08 Jun-10 Jan-12 Aug-13 Mar-15 Oct-16

US Housing Buy In Ratio

Beacon Economics Beacon Economics

Industrial activity

10

• 20.0
• 15.0
• 10.0
• 5.0

0.0 5.0 10.0 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Y-o-Y Growth Industrial Production

600 700 800 900 1000 1100 1200 2005I 2005IV 2006III 2007II 2008I 2008IV 2009III 2010II 2011I 2011IV 2012III 2013II 2014I 2014IV 2015III 2016II 2017I 2017IV

Real Manufacturing Output (VA)

Durables Non Durables

Beacon Economics Beacon Economics

The New Energy Boom

11

20 40 60 80 100 120 140 Jan-02 Feb-03 Mar-04 Apr-05 May-06 Jun-07 Jul-08 Aug-09 Sep-10 Oct-11 Nov-12 Dec-13 Jan-15 Feb-16 Mar-17

US Drilling Activity (Production Index)

2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 1/6/84 1/6/87 1/6/90 1/6/93 1/6/96 1/6/99 1/6/02 1/6/05 1/6/08 1/6/11 1/6/14 1/6/17

US Oil Production (MBD)

Beacon Economics Beacon Economics

Rising Prices?

12

20 40 60 80 100 120

Oil Prices (WTI)

Beacon Economics Beacon Economics

Domestic Energy Glut

13

50 60 70 80 90 100 110 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Energy Consumption / Real GDP Indexes

Petroleum Electricity 70.0 75.0 80.0 85.0 90.0 95.0 100.0 1977-04-01 1979-09-01 1982-02-01 1984-07-01 1986-12-01 1989-05-01 1991-10-01 1994-03-01 1996-08-01 1999-01-01 2001-06-01 2003-11-01 2006-04-01 2008-09-01 2011-02-01 2013-07-01 2015-12-01

US Utilities Capacity Utilization

Beacon Economics Beacon Economics

Exports

14

1000 1200 1400 1600 1800 2000 2200 2400 2004Q1 Q4 Q3 Q2 2007Q1 Q4 Q3 Q2 2010Q1 Q4 Q3 Q2 2013Q1 Q4 Q3 Q2 2016Q1 Q4 Q3

US Real Exports

Nominal Trade Flows

2018 Y-o-Y Gr Q1 $Bil Exports 2471.8 7.7% Industrial supplies 507.6 14.8% Travel 224.4 6.6% Consumer goods 208.8 4.4% Automotive 171.3 6.1% Petroleum 159.9 25.8% Foods, feeds 136.3 2.4% Charges for IP 123.9 1.0% Civilian aircraft 121.2 5.7% Transport 90.2 5.5% Computers 48 9.3%

Beacon Economics Beacon Economics

Global Growth

15

China United States EU East Asia Latin America World

2009 9.2

• 2.8
• 4.3

4.4

• 1.8
• 0.1

2010 10.6 2.5 2.1 8.8 6.1 5.4 2011 9.5 1.6 1.8 6.7 4.7 4.3 2012 7.9 2.2

• 0.4

5.8 3 3.5 2013 7.8 1.7 0.3 6 2.9 3.5 2014 7.3 2.6 1.8 5.5 1.2 3.6 2015 6.9 2.9 2.3 5.3 0.1 3.4 2016 6.7 1.5 2 5.2

• 0.9

3.2 2017 6.8 2.2 2.3 5.4 1.2 3.6

75.0 80.0 85.0 90.0 95.0 100.0 105.0 110.0 115.0 Jan-02 Dec-02 Nov-03 Oct-04 Sep-05 Aug-06 Jul-07 Jun-08 May-09 Apr-10 Mar-11 Feb-12 Jan-13 Dec-13 Nov-14 Oct-15 Sep-16 Aug-17

$US: Broad Index, Real

IMF Global Forecast: 3.9%

Beacon Economics Beacon Economics

Tariffs: 25% steel, 10% aluminum

16

Trade (Billions) 2013 2016 Iron & steel mill products $18.1 $16.0 Bauxite & aluminum $10.3 $12.3 Exports Imports Goods $1,547 $2,381 Services $797 $534

6

Steel Imports Report: United States

Overall Production and Import Penetration U.S. crude steel production decreased 11 percent between 2014 and 2016, from 88.2 million metric tons in 2014 to 78.6 million metric tons in 2016. Production in YTD 2017 has increased 3 percent to 61.5 million metric tons from 59.6 million metric tons in YTD 2016. Since 2009, apparent consumption (a measure of steel demand) has increasingly outpaced production. The gap between demand and production increased to 19.2 million metric tons in YTD 2017. Imports have captured an increasing share of demand, as shown by the relatively high levels of import penetration in 2014, 2015, and 2016 at 34.4, 33.8, and 30.1 percent, respectively. In YTD 2017, import penetration stood at 33.3 percent, up from 29.8 percent in YTD 2016. Top Producers The top seven steel producers in the United States are a mix of foreign and domestically owned companies and a mix of electric arc furnace mills and blast furnace mills. The top four companies alone accounted for the majority of U.S. crude steel production in 2016 at 81 percent.

United States Top Steel Producers in 2016

Rank Company Production (mmt) Main Products

1 Nucor Corporation 22 Bars, beams, sheets, plate 2 ArcelorMittal USA 15 Hot rolled, cold rolled, plate, coated products, rails 3 United States Steel Corp. 14.2 Hot rolled, cold rolled, coated sheets, tubular products 4 Gerdau North America 12.4 (N. Amer. capacity) Beams, pilings, billets, rebar, wire rod 5 Steel Dynamics Inc. 7.4 (2014 shipments) Flat rolled, structural, bars, rails 6 AK Steel Corporation 5.1 Hot rolled, cold rolled, galvanized, stainless, electrical 7 Commercial Metals Co. 2.8 (capacity) Rebar, bars, sections, billets

Source: World Steel Association; Metal Bulletin, Iron and Steelworks of the World Directory 2017; Company websites

US Metal Industry: <100,000 Production Workers

100.0 150.0 200.0 250.0 300.0

Jan-02 Feb-03 Mar-04 Apr-05 May-06 Jun-07 Jul-08 Aug-09 Sep-10 Oct-11 Nov-12 Dec-13 Jan-15 Feb-16 Mar-17

PPI: Steel and Steel Products

Beacon Economics Beacon Economics 17

Beacon Economics Beacon Economics

The China Syndrome

18

Value US Exports to China as % of GDP: 0.75%

Demands

• reduce its trade surplus with the U.S. by

$200 billion over two years

• would not challenge U.S. actions taken in

intellectual property disputes

• stop subsidizing high-tech sectors

identified in its “Made in China 2025“ plan

• cut tariffs on “all products in non-critical

sectors” to levels at or below U.S. duties

• demanded that China not target U.S.

farmers and agricultural products

• demanded that China not retaliate

against U.S. restrictions on Chinese investments

• ease a process for approving U.S.

investments

Value China Exports to US as % of GDP: 4.0%

Beacon Economics Beacon Economics

Labor Markets

19

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17

Growth Payroll Employment (Y-o-Y)

500 1000 1500 2000 2500 3000 3500 2010 2011 2012 2013 2014 2015 2016 2017

Net Change Payroll Jobs

Beacon Economics Beacon Economics

Why Slowing Job Growth?

20

1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% Dec-00 Jan-02 Feb-03 Mar-04 Apr-05 May-06 Jun-07 Jul-08 Aug-09 Sep-10 Oct-11 Nov-12 Dec-13 Jan-15 Feb-16 Mar-17

Job Openings Rate

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 Jan-94 Jul-95 Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 Jul-13 Jan-15 Jul-16 Jan-18

US Unemployment Rate

U6 U3

Beacon Economics Beacon Economics

Consequences

21

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 2005Qtr1 2005Qtr4 2006Qtr3 2007Qtr2 2008Qtr1 2008Qtr4 2009Qtr3 2010Qtr2 2011Qtr1 2011Qtr4 2012Qtr3 2013Qtr2 2014Qtr1 2014Qtr4 2015Qtr3 2016Qtr2 2017Qtr1

Growth in Average Cost per Employee Hour

• 1.0

0.0 1.0 2.0 3.0 4.0 5.0 Sep-02 Aug-03 Jul-04 Jun-05 May-06 Apr-07 Mar-08 Feb-09 Jan-10 Dec-10 Nov-11 Oct-12 Sep-13 Aug-14 Jul-15 Jun-16 May-17

Real Wage Gains for Continuously Employer Workers

Median Average

Beacon Economics Beacon Economics

Workforce Growth

22

• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 Jan-80 Mar-82 May-84 Jul-86 Sep-88 Nov-90 Jan-93 Mar-95 May-97 Jul-99 Sep-01 Nov-03 Jan-06 Mar-08 May-10 Jul-12 Sep-14 Nov-16

US Labor Force Growth (Smoothed)

60.0 61.0 62.0 63.0 64.0 65.0 66.0 67.0 68.0 Jan-86 Nov-87 Sep-89 Jul-91 May-93 Mar-95 Jan-97 Nov-98 Sep-00 Jul-02 May-04 Mar-06 Jan-08 Nov-09 Sep-11 Jul-13 May-15 Mar-17

US Participation Rate

Beacon Economics Beacon Economics

The Boomer Bust

23

• 0.5%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Jan-75 Jun-77 Nov-79 Apr-82 Sep-84 Feb-87 Jul-89 Dec-91 May-94 Oct-96 Mar-99 Aug-01 Jan-04 Jun-06 Nov-08 Apr-11 Sep-13 Feb-16

US Population 25-54 Y-o-Y Gr

• 5.0

10.0 15.0 20.0 25.0 Under 5 years 5 to 9 years 10 to 14 years 15 to 19 years 20 to 24 years 25 to 29 years 30 to 34 years 35 to 39 years 40 to 44 years 45 to 49 years 50 to 54 years 55 to 59 years 60 to 64 years 65 to 69 years 70 to 74 years 75 to 79 years 80 to 84 years 85 years and over

2016 Population by Age (Millions)

Beacon Economics Beacon Economics

The Cure for Secular Stagnation

24

Beacon Economics Beacon Economics

Consequences

25

1850 1900 1950 2000 2050 2100 2150 2200 2250 2300 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2012 2013 2014 2015 2016 20172018

Corporate profits

2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 1999Q1 Q2 Q3 Q4 2004Q1 Q2 Q3 Q4 2009Q1 Q2 Q3 Q4 2014Q1 Q2 Q3 Q4

Real Investment Share GDP

Equipment Intellectual property products

Beacon Economics Beacon Economics

The Cure for Secular Stagnation

26

Beacon Economics Beacon Economics

Tax Reform vs Tax Cuts

27

0% 5% 10% 15% 20% 25% 30% 35% 1980I 1982I 1984I 1986I 1988I 1990I 1992I 1994I 1996I 1998I 2000I 2002I 2004I 2006I 2008I 2010I 2012I 2014I 2016I

US Corporate Taxes as % Profit

Federal State & Local

$860.8B $264.7B $328.5B $0B $250B $500B $750B $1,000B $0B $250B $500B $750B $1,000B Individual Taxes Pass-Through Business Taxes Corporate Taxes

Net Tax Cuts Relative to Current Law

Billions of USD, FY 2018-2027

Beacon Economics Beacon Economics

Budget Implications

28

60.0 65.0 70.0 75.0 80.0 85.0 90.0 95.0 200 400 600 800 1,000 1,200 1,400 1,600 1,800

New Estimates: Debt and Deficit

Deficit Net Debt % GDP

• $1,600
• $1,400
• $1,200
• $1,000
• $800
• $600
• $400
• $200

$0 $200 $400 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026

CBO:Past and Projected Federal Budget Gap

2017 Projection 2018 Projection

Beacon Economics Beacon Economics

Financial “Turmoil” in Perspective

29

1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 1990-04-01 1992-01-01 1993-10-01 1995-07-01 1997-04-01 1999-01-01 2000-10-01 2002-07-01 2004-04-01 2006-01-01 2007-10-01 2009-07-01 2011-04-01 2013-01-01 2014-10-01 2016-07-01

10 Year Rates

5000 10000 15000 20000 25000 30000 35000 1995-01-06 1997-01-06 1999-01-06 2001-01-06 2003-01-06 2005-01-06 2007-01-06 2009-01-06 2011-01-06 2013-01-06 2015-01-06 2017-01-06

Wilshire Full Cap Price Index

Beacon Economics Beacon Economics

Fed Tightening: Normalization?

30

1 2 3 4 5 6 2003-01-01 2003-08-20 2004-04-07 2004-11-24 2005-07-13 2006-03-01 2006-10-18 2007-06-06 2008-01-23 2008-09-10 2009-04-29 2009-12-16 2010-08-04 2011-03-23 2011-11-09 2012-06-27 2013-02-13 2013-10-02 2014-05-21 2015-01-07 2015-08-26 2016-04-13 2016-11-30 2017-07-19

Interest Rates

FFR 10 Yr Tr

• 1.00
• 0.50

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Jan-84 Dec-85 Nov-87 Oct-89 Sep-91 Aug-93 Jul-95 Jun-97 May-99 Apr-01 Mar-03 Feb-05 Jan-07 Dec-08 Nov-10 Oct-12 Sep-14 Aug-16

10 Year 3 Month Rate Spread

Beacon Economics Beacon Economics

Inflation Risks?

31

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% Jan-92 Jun-93 Nov-94 Apr-96 Sep-97 Feb-99 Jul-00 Dec-01 May-03 Oct-04 Mar-06 Aug-07 Jan-09 Jun-10 Nov-11 Apr-13 Sep-14 Feb-16 Jul-17

Inflation Rate

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 Jan-57 May-60 Sep-63 Jan-67 May-70 Sep-73 Jan-77 May-80 Sep-83 Jan-87 May-90 Sep-93 Jan-97 May-00 Sep-03 Jan-07 May-10 Sep-13

Unemployment and Inflation

Beacon Economics Beacon Economics

Inflation Drivers

32

• 5.0
• 3.0
• 1.0

1.0 3.0 5.0 7.0 9.0 11.0 13.0 15.0

Y-o-Y Growth Bank Loans

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 1998-01-05 2000-01-05 2002-01-05 2004-01-05 2006-01-05 2008-01-05 2010-01-05 2012-01-05 2014-01-05 2016-01-05 2018-01-05

M2 Growth (y-o-y)

Beacon Economics Beacon Economics

Another Bubble?

33

0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 50.00 Jan-86 Nov-87 Sep-89 Jul-91 May-93 Mar-95 Jan-97 Nov-98 Sep-00 Jul-02 May-04 Mar-06 Jan-08 Nov-09 Sep-11 Jul-13 May-15 Mar-17

Shiller P/E Ratio

40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 110.0% 120.0% 130.0% 1988Q1 1989Q3 1991Q1 1992Q3 1994Q1 1995Q3 1997Q1 1998Q3 2000Q1 2001Q3 2003Q1 2004Q3 2006Q1 2007Q3 2009Q1 2010Q3 2012Q1 2013Q3 2015Q1 2016Q3

Debt to GDP Ratios

Financial Business

Beacon Economics Beacon Economics

Height of the Chairperson

34

Beacon Economics Beacon Economics

State Economic Performance

35

Rk State # Ann GrShare US 1 Nevada 211.2 3.4% 1.7% 2 Utah 218.3 3.2% 1.7% 3 Florida 1238.2 3.1% 9.8% 4 Oregon 252.1 2.9% 2.0% 5 Idaho 92.1 2.8% 0.7% 6 Colorado 328.7 2.7% 2.6% 7 Washington 413.1 2.7% 3.3% 8 California 2051 2.6% 16.3% 9 Georgia 537.9 2.6% 4.3% 10 South Carolina 237.6 2.4% 1.9% 11 Texas 1371.6 2.4% 10.9% 12 Arizona 283.3 2.2% 2.2% 13 North Carolina 441.2 2.1% 3.5% 14 Tennessee 291.6 2.0% 2.3% 15 Massachusetts 321.1 1.9% 2.5%

100 105 110 115 120 125 130 2005:Q1 2005:Q4 2006:Q3 2007:Q2 2008:Q1 2008:Q4 2009:Q3 2010:Q2 2011:Q1 2011:Q4 2012:Q3 2013:Q2 2014:Q1 2014:Q4 2015:Q3 2016:Q2 2017:Q1 2017:Q4

Real State Output Index

United States California

Beacon Economics Beacon Economics

State Incomes

36

$0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 <35K 35-65K 65-100k 100K+

California: Change in Employment by Income (F.T.) 2012-2016 California Balance US Share Ch 12-16 Share Ch 12-16 < 25K 18.5%

• 3.3%

21.6%

• 3.1%

25-50K 19.4%

• 2.4%

22.9%

• 1.6%

50-100K 28.5%

• 0.5%

30.2% 0.2% 100-150K 15.7% 1.3% 13.8% 1.7% 150K-200K 7.9% 1.6% 5.6% 1.2% 200K+ 10.1% 3.3% 6.0% 1.6% Distribution Household Incomes

Beacon Economics Beacon Economics

Still Strong Indicators

37

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 Q1-00 Q2-01 Q3-02 Q4-03 Q1-05 Q2-06 Q3-07 Q4-08 Q1-10 Q2-11 Q3-12 Q4-13 Q1-15 Q2-16

California Non Residential Permit Values

• 5.0%
• 3.0%
• 1.0%

1.0% 3.0% 5.0% 7.0% 9.0% 11.0% 13.0% Q1-04 Q4-04 Q3-05 Q2-06 Q1-07 Q4-07 Q3-08 Q2-09 Q1-10 Q4-10 Q3-11 Q2-12 Q1-13 Q4-13 Q3-14 Q2-15 Q1-16 Q4-16 Q3-17

Taxable Sales Growth

Beacon Economics Beacon Economics

The Big Slowdown

38

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18

YOY Growth Payrolls

US CA

2016 2017 2018 Stockton-Lodi MSA 239,200 3.9% 3.4% 3.4% Fresno MSA 351,600 3.6% 2.9% 2.9% IE MSA 1,479,500 4.0% 3.9% 2.9% San Jose MSA 1,118,000 3.2% 2.9% 2.6% Sacramento MSA 980,000 3.5% 2.3% 2.0% San Diego MSA 1,470,100 2.7% 2.5% 1.7% East Bay MD 1,180,300 3.2% 3.2% 1.7% Ventura MSA 307,700 1.4% 1.3% 1.6% San Francisco MD 1,130,200 4.3% 2.8% 1.6% Santa Rosa MSA 208,300 2.5% 2.5% 1.4% Bakersfield MSA 259,800

• 1.1%

0.4% 1.4%

Beacon Economics Beacon Economics

West Bay / South Bay

39

800 850 900 950 1000 1050 1100 1150 Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May-10 Apr-11 Mar-12 Feb-13 Jan-14 Dec-14 Nov-15 Oct-16 Sep-17

Non-Farm Payrolls

San Francisco (MD) San Jose

Industry Employment for San Jose MSA

Mar-18 16-17 17-18 Total Nonfarm 1118 2.9% 2.6% Information 90.8 13.5% 10.1% Management 14.1 5.5% 4.4% Education 48.1 3.6% 4.1% Manufacturing 170.9

• 1.1%

4.0% Health Care 125.4 5.5% 3.0% Prof Sci Tech 152.3 2.2% 2.6% Leisure and Hospitality 103 4.2% 1.9% Wholesale Trade 35.8

• 5.4%

1.7% Financial Activities 36.8 2.3% 1.7% NR/Construction 50.8 5.9% 1.6% Government 96.1 1.4% 1.4% Retail Trade 86.1

• 0.9%

0.6% Admin Support 65.1 3.8%

• 0.6%

Other Services 27.8 6.6%

• 3.8%

Logistics 14.8 2.6%

• 4.5%

Beacon Economics Beacon Economics

Wages

40

20000 40000 60000 80000 100000 120000 140000 Q1-90 Q4-90 Q3-91 Q2-92 Q1-93 Q4-93 Q3-94 Q2-95 Q1-96 Q4-96 Q3-97 Q2-98 Q1-99 Q4-99 Q3-00 Q2-01 Q1-02 Q4-02 Q3-03 Q2-04 Q1-05 Q4-05 Q3-06 Q2-07 Q1-08 Q4-08 Q3-09 Q2-10 Q1-11 Q4-11 Q3-12 Q2-13 Q1-14 Q4-14 Q3-15 Q2-16 Q1-17

Average Payroll Wages

California San Francisco San Mateo Santa Clara

Beacon Economics Beacon Economics

California Net Migration

Source: U.S. Census 41

3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 Jan-76 Mar-78 May-80 Jul-82 Sep-84 Nov-86 Jan-89 Mar-91 May-93 Jul-95 Sep-97 Nov-99 Jan-02 Mar-04 May-06 Jul-08 Sep-10 Nov-12 Jan-15 Mar-17

State Unemployment Rate

• 0.50%
• 0.30%
• 0.10%

0.10% 0.30% 0.50% 0.70% 0.90% 1.10% 1.30% 1.50% 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Net Migration as a % of Pop

Beacon Economics Beacon Economics

Local Situation

42

2 3 4 5 6 7 8 9 10 11 12 Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May-10 Apr-11 Mar-12 Feb-13 Jan-14 Dec-14 Nov-15 Oct-16 Sep-17

Unemployment Rates

Oakland (MD) San Francisco (MD) San Jose 800 850 900 950 1000 1050 1100 1150 Jan-03 Dec-03 Nov-04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May-10 Apr-11 Mar-12 Feb-13 Jan-14 Dec-14 Nov-15 Oct-16 Sep-17

HH / Payroll Balance

Payroll Householkd

Beacon Economics Beacon Economics

New Housing Supply

43

5000 10000 15000 20000 25000 30000 35000 40000 45000 Q1-95 Q2-96 Q3-97 Q4-98 Q1-00 Q2-01 Q3-02 Q4-03 Q1-05 Q2-06 Q3-07 Q4-08 Q1-10 Q2-11 Q3-12 Q4-13 Q1-15 Q2-16

New Home Permits

SF MF

How Much Housing Needed? Housing Needed to maintain 2% State Job Growth Method 1 Total 722,022 Per Year 206,674 Current 111,185 Shortfall 100,489 Method 2 Total 911,001 Per Year 263,667 Current 111,185 Shortfall 157,482

Beacon Economics Beacon Economics

Residential Real Estate

44

Price Growth Alameda $830,757 13.1% San Francisco MD $1,339,354 13.0% Monterey $571,343 12.6% Sacramento MSA $380,501 10.1% Riverside $369,835 9.7% Los Angeles $604,650 8.2% San Diego $596,313 7.8% San Bernardino $299,514 7.2% Orange $756,950 6.4%

200000 400000 600000 800000 1000000 1200000 1400000 Q1-03 Q4-03 Q3-04 Q2-05 Q1-06 Q4-06 Q3-07 Q2-08 Q1-09 Q4-09 Q3-10 Q2-11 Q1-12 Q4-12 Q3-13 Q2-14 Q1-15 Q4-15 Q3-16 Q2-17 Q1-18

Santa Clara MSA

Beacon Economics Beacon Economics

Housing Affordability

Source: American Community Survey 45

20 22 24 26 28 30 32 34 36 Percent (%)

Median Gross Rent as Share of Household Income Bay Area, 2005 to 2016 County 2016 (%) Change since 2011 (p.p.) Contra Costa 31.1

• 2.6

Alameda 29.8

• 1.8

Santa Clara 29.3 0.6 San Francisco 24.6

• 3.4

Beacon Economics Beacon Economics

Permits

46

200 400 600 800 1000 1200 1400 1600 Q1-95 Q2-96 Q3-97 Q4-98 Q1-00 Q2-01 Q3-02 Q4-03 Q1-05 Q2-06 Q3-07 Q4-08 Q1-10 Q2-11 Q3-12 Q4-13 Q1-15 Q2-16 Q3-17

SF Permits

San Francisco San Mateo Santa Clara 500 1000 1500 2000 2500 3000 3500 4000 Q1-95 Q1-96 Q1-97 Q1-98 Q1-99 Q1-00 Q1-01 Q1-02 Q1-03 Q1-04 Q1-05 Q1-06 Q1-07 Q1-08 Q1-09 Q1-10 Q1-11 Q1-12 Q1-13 Q1-14 Q1-15 Q1-16 Q1-17 Q1-18

MF Permits

San Francisco San Mateo Santa Clara

Beacon Economics Beacon Economics

On Feb 1, 2018 the state released the list

• f cities that are

behind on their housing goals are thus required to streamline housing approvals under housing bill, SB 35. As it turns out, 97% of CA cities have not met their housing goals.

SB 35

Beacon Economics Beacon Economics

§ Positives: It will be a good year

—GDP Growth Outlook for 2018: 3% —State revenues will look positive —Labor markets to remain tight —Rising wages to put pressure on profits —Exports, business investment continue to pick up —Inflation to remain constrained —Interest Rates Still Low —Debt Levels still safe

The Big Picture

48

§ Negatives: Problems Growing

—Fed will continue to tighten, yield curve flattening —Markets looking frothy —Consumer savings: entering dangerous waters —Federal deficit will widen sharply —Political uncertainty to dominate headlines —California housing shortages will constrain growth locally —Critical Policy Issues Remain Undiscussed

Beacon Economics Beacon Economics

The Great Disconnect

What we are worried about 49

§ What we are worried about § What we should be worried about

The Number of Jobs The Number of Workers Who pays for Healthcare What are we paying for? Tax Levels Tax Structure Income Inequality Wealth Inequality Funded Govt. Liabilities Unfunded Govt. Liabilities Business Investment A Lack of Public Investment Inflation Slowing Lending The Cost of CA Housing The Supply of CA Housing

Beacon Economics

Thank You

Chris@BeaconEcon.com | www.BeaconEcon.com