The California Economy Recession, Forecast, Budget, Issues

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1 The California Economy Recession, Forecast, Budget, Issues City National Bank Annual Economic Forecast Conference Stephen Levy, CCSCE February 2, 2010

2 California Economy and Budget Outlook and Issues Economy Bottom Line modest recovery, substantial long term opportunities, MANY CHALLENGES Budget Bottom Line numbers don t add, lousy choices, bad feelings, BIG GRIDLOCK The relationship of the budget, policy and the California economy getting beyond blame to create a great future for our children

3 Background The California economy closely tracks the national economy. So the California forecast depends heavily on the national forecast. California has become an average growth state measured by jobs, income and population.

4 Annual Change in Total Jobs 4.0% 3.0% 2.0% 1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% California United States

5 Annual Change in Personal Income 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% California United States

6 California as Share of U.S. Now an Average Growth State 13.5% 13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% Population Jobs Personal Income

7 A Deep Recession A million Lost Jobs In 2 years CA lost more than 6% of job base The unemployment rate more than doubled Construction led the recession falling by 60% or $60 billion As a result, California s recession was deeper than the nation s The recession hit businesses, consumers and devastated government revenues

8 California Loses A Million Jobs 40,000 20, ,000 40,000 60,000 80, , , ,000 Dec 07 Apr 08 Aug 08 Dec 08 Apr 09 Aug 09 Dec 09

9 Unemployment Rates Surge Wiping Out the Decade s Job Gains 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Dec 07 Apr 08 Aug 08 Dec 08 Apr 09 Aug 09 Dec 09 California United States

10 California Construction Spending $Billions Residential Non Residential Public Total Construction

11 Residential Permits in California Thousands

12 CA Job Losses Driven by Construction Decline 40.0% % Job Loss Dec 07 Dec % 20.0% 10.0% 29.2% 21.5% 9.2% 6.7% 11.9% 15.4% 6.9% 5.1% 0.0% Construction Finance Manufacturing Total Nonfarm California U.S.

13 The California Outlook Broad consensus on slow recovery Pace depends on the nation s recovery Positives for CA 1) world recovery, 2) allocation of federal funds; 3) VC recovery Negatives for CA 1) long delay for construction as we work off the large stock of homes, office and retail space; 2) gridlock are we still a welcoming state?

14 Let s Get the Arithmetic Right First Most forecasts for California show negative job growth and slow income growth in 2010 compared to 2009 But that is on a year over year basis The same forecasts show growth starting in Q but slower than in previous cycles California s question is the nation s question if we are done with the recession, how soon and strong will the recovery be?

15 Nonfarm Job Growth 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0.5% 1.0% 1.5% 1.8% 1.7% 1.5% 1.3% 0.3% 0.7% 1.0% 0.9% UCLA DOF UCLA DOF California United States

16 Job Growth in CA from Q % 103.0% 102.5% 102.0% 101.5% 101.0% 100.5% 100.0% 99.5% 99.0% 98.5% Q Q Q Q Q Q Q Q Q UCLA DOF

17 Income Growth From Q % 108.0% 106.0% 104.0% 102.0% 100.0% 98.0% 96.0% 94.0% Q Q Q Q Q Q Q Q Q UCLA DOF

18 The Positives in California The world economy is recovering that means exports, tourism and investment dollars for CA Domestic capital spending is recovering we sell technology embodied in capital goods The federal agenda favors investment in technology to address energy, health care and other issues. CA getting a high share of grants VC funding should rise in response to these opportunities CA offers creative talent always in demand

19 Share of U.S. Venture Capital 60% 50% 40% 30% 20% 10% 0% CA % of US Bay Area % of US

20 Negative Short Term Trends The desire of consumers to rebuild balance sheets probably more to rebuild in CA The need to work through the inventory of distressed residential and commercial properties before new building can occur The contraction in state and local government employment The CA budget and policy gridlock

21 California Median Resale Home Price $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Dec 89 Dec 93 Dec 97 Dec 01 Dec 05 Dec 09

22 California Home Prices and Income = Median Resale Price Median HH Income

23 CA Budget and Economy Two budget problems structural deficit from 2000 and deep recession In 2000 CA spent peak revenues on new spending and tax cuts huge majority votes Unlike businesses, when government revenues fall, the number of customers rises We are in gridlock about how the budget affects the economy and what choices to make

24 General Fund Tax Revenue ($Billions) $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $

25 $30 $25 $20 $15 $10 $5 General Fund Shortfall ($Billions) $

26 General Fund Budget K 12 40% Higher Ed 10% Medi Cal 15% Social Services 15% Corrections 10% Other 10% Retirement and Debt Service included in categories approximately $5 billion each

27 General Fund as % of Personal Income 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Taxes as % of Income Spending as % of Income

28 Budget Choices and Issues The current revenue structure, even with economic recovery, does not support historical spending choices The situation will get tougher as rising retirement and debt service levels kick in Yet CA ranks 45 th 50 th in the number of teachers, librarians, and counselors in K 12, is turning students away from colleges and plans large new infrastructure investments

29 Thoughts to Ponder from Jan 27 Tom Friedman Adults Only, Please We badly need leaders inspired by sustainable values, not situational ones. Without that we ll just be digging our hole deeper and making the reckoning that much more ferocious Barack Obama As hard as it may be.it s time to get serious about fixing the problems that are hampering our growth

30 Budget Choices and Issues We give legislators a mixed message don t cut spending, don t raise taxes and then get mad at them when they say Got it!!. So what kind of budget do we want for our state, our economy and our children? How do we connect to our future and resolve gridlock? The story of LA voters amidst recession what is the lesson?

California Jobs and Unemployment

March 2009 California Jobs and Unemployment How Did California Do in 2008? California underperformed the nation in 2008 losing 494,000 jobs or 3.3% of the state s nonfarm wage and salary jobs between January