The Great Recession 1-2 Punch of Credit Crisis and Consumer Retrenchment

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Q4-211 4 2 % - 2-4 - 6-8 GDP Growth GDP as % of Peak (Q4- '7) GDP per Capita as % of Peak GDP RelaJve to

1 Economic Recovery: The Bay Area Jon Haveman Chief Economist, BAC Economic Ins2tute April, 211 The Great Recession 1-2 Punch of Credit Crisis and Consumer Retrenchment 6 GDP Growth (SAAR) and % of Peak GDP to Q % GDP Growth GDP as % of Peak (Q4- '7) GDP per Capita as % of Peak GDP RelaJve to PotenJal Q1-6 Q3-6 Q1-7 Q3-7 Q1-8 Q3-8 Q1-9 Q3-9 Q1-1 Q3-1 Q1-11 Q3-11 Source: Bureau of Economic Analysis 1

2 Change in Payrolls (Thousands) Jul- 9 Nov- 9 Mar- 1 Jul- 1 Source: Bureau of Labor StaNsNcs Progress on Jobs NaNonal Change in Payrolls To March Nov- 1 Mar- 11 Jul- 11 Nov- 11 Mar- 12 Change in Payrolls by Sector Jan- 3 to Dec- 7 Dec- 7 to Dec- 9 Dec- 9 to Present Total Non- Farm 7,712-8,663 3,52 EducaNon/Health 2, Admin Support 71-1, Leisure/Hospitality 1, Manufacturing - 1,126-2, Prof/Sci/Tech 1, Retail Trade 614-1, Transport/Warehouse Finance/Insurance Federal Gov't Real Estate State Gov't ConstrucNon 786-1, InformaNon Local Gov't US Employment Growth Index = at Onset of Recession Total NonFarm Employment Growth 96.3 (Down 3.7%) Months Since Onset of Recession Source: Bureau of Labor StaNsNcs 2

3 US Unemployment Unemployment Rate To March Labor Force To March (%) 6 Millions Jan- 7 Jul- 7 Jan- 8 Jul- 8 Jan- 9 Jul- 9 Jan- 1 Jul- 1 Jan- 11 Jul- 11 Jan- 12 Jan- 7 Jul- 7 Jan- 8 Jul- 8 Jan- 9 Jul- 9 Jan- 1 Jul- 1 Jan- 11 Jul- 11 Jan- 12 Source: Bureau of Labor StaNsNcs Source: Bureau of Labor StaNsNcs National Unemployment Number of Unemployed Persons by DuraJon of Unemployment (Thousands) Dec- 7 Jul- 9 Mar- 12 Less than 5 weeks 2,716 3,15 2,572 5 to 14 weeks 2,385 3,587 2, to 26 weeks 1,181 2,895 1, weeks and over 1,327 4,951 5,38 Total 7,69 14,583 12,51 Average DuraJon in Weeks Source: Bureau of Labor StaNsNcs 3

Employment to Population Ratio 65 7 6 65 55 6 % 5 55 % 45 5 4 45 35 Jan- 6 Jan- 62 Jan- 64 Jan- 66 Jan- 68 Jan- 7 Jan- 72 Jan- 74 Source: Bureau of Labor StaNsNcs Jan- 76 Jan- 78 Jan- 8 Jan- 82 Jan-

4 Employment to Population Ratio % 5 55 % Jan- 6 Jan- 62 Jan- 64 Jan- 66 Jan- 68 Jan- 7 Jan- 72 Jan- 74 Source: Bureau of Labor StaNsNcs Jan- 76 Jan- 78 Jan- 8 Jan- 82 Jan- 84 Jan- 86 Jan- 88 Jan- 9 Jan- 92 Jan- 94 Jan- 96 Jan- 98 Jan- Jan- 2 Women's Labor Force ParJcipaJon (LeZ) Full- Jme and Part- Jme Employment to PopulaJon RaJo (Right) Full- Jme Employment to PopulaJon RaJo (Right) Jan- 4 Jan- 6 Jan- 8 Jan- 1 Jan Unemployment by Sex Men Women Jan- 9 Dec- 9 Nov- 91 Oct- 92 Sep- 93 Aug- 94 Jul- 95 Jun- 96 May- 97 Apr- 98 Mar- 99 Feb- Jan- 1 Dec- 1 Nov- 2 Oct- 3 Sep- 4 Aug- 5 Jul- 6 Jun- 7 May- 8 Apr- 9 Mar- 1 Feb- 11 Jan- 12 Source: Bureau of Labor StaNsNcs 4

5 National Housing Markets Case-Shiller US National Values to Q4-11 Index = in Q Q1-87 Q1-88 Q1-89 Q1-9 Q1-91 Q1-92 Q1-93 Q1-94 Q1-95 Q1-96 Q1-97 Q1-98 Q1-99 Q1- Q1-1 Q1-2 Q1-3 Q1-4 Q1-5 Q1-6 Q1-7 Q1-8 Q1-9 Q1-1 Q Billions of $ Case Shiller Index (NaJonal) Total ConstrucJon Spending on Single Family Homes Source: Standard and Poor s / U.S. Census Millions Jan- 98 California: An Uneven Hit Jan- State Labor Markets To February Jan- 2 Jan- 4 Total NonFarm Jan- 6 Jan- 8 Jan- 1 Jan- 12 Unemp Rate Source: California Employment Development Department (%) February 211 Peak to Current (%) Inland Empire 1, Orange County (MD) 1, Oakland (MD) Los Angeles 5, CALIFORNIA 14, San Diego 1, San Francisco (MD) San Jose *Total Non- Farm Employment (Thousands) 5

6 CA Employment Growth Total NonFarm Employment Growth Index = at Onset of Recession (Down 6.6%) Months Since Onset of Recession Source: Bureau of Labor StaNsNcs Employment by Industry CA Employment by Industry, YTD to Dec. InformaJon ConstrucJon Professional/Business EducaJon/Health Leisure and Hosp. Total Nonfarm Retail Trade Wholesale Trade Government Other Services Fin. AcJviJes Manufacturing % Change (Annualized Rate) Source: California Employment Development Department

7 Manufacturing is Alive and Well in California 16 Manufacturing Value Added Across U.S. States Share of U.S. GDP California Texas New York 2 Bay Employment Growth Total NonFarm Employment Growth Index = at Onset of Recession (Down 4.7%) Months Since Onset of Recession Source: Bureau of Labor StaNsNcs 7

8 Bay Employment Growth San Jose (MSA) Total NonFarm Employment Growth Index = at Onset of Recession (Down 2.1%) Months Since Onset of Recession Source: Bureau of Labor StaNsNcs Bay Employment Growth San Francisco (MD) Total NonFarm Employment Growth Index = at Onset of Recession (Down 3.4%) Months Since Onset of Recession Source: Bureau of Labor StaNsNcs 8

9 Bay Employment Growth Oakland (MD) Index = at Onset of Recession Total NonFarm Employment Growth 91.6 (Down 8.4%) Months Since Onset of Recession Source: Bureau of Labor StaNsNcs ConstrucJon InformaJon EducaJon/Health Retail Trade Total Nonfarm Manufacturing Professional/Business Wholesale Trade Government Fin. AcJviJes Other Services Leisure and Hosp. Employment by Industry Source: California Employment Development Department San Jose (MSA) Employment by Industry, YTD to Dec % Change (Annualized Rate)

10 Employment by Industry San Francisco (MD) Employment by Industry, YTD to Dec. Professional/Business Other Services InformaJon Leisure and Hosp. Total Nonfarm EducaJon/Health Government Fin. AcJviJes Wholesale Trade Manufacturing ConstrucJon Retail Trade Source: California Employment Development Department % Change (Annualized Rate) Employment by Industry Oakland (MD) Employment by Industry, YTD to Dec. Wholesale Trade EducaJon/Health Other Services Retail Trade Professional/Business ConstrucJon Total Nonfarm Manufacturing Government InformaJon Leisure and Hosp. Fin. AcJviJes Source: California Employment Development Department % Change (Annualized Rate)

11 Regional Employment Very different drivers of recovery across the Bay Region San Jose VC, Social Media, Business Equip. San Francisco Business Services, Tourism East Bay Wholesale Trade Problem for East Bay WT is not a sector that can drive recovery East Bay will likely have to be pulled along by SF and SJ Growth in 212? Region Annualized Growth Rate Time Period United States 1.9% Jan- Mar California.2% Jan- Feb Bay Area 5.9% Jan- Feb - Oakland 8.5% Jan- Feb - San Francisco MD 2.2% Jan- Feb - San Jose 5.1% Jan- Feb 11

12 Where do we stand now? Many signs of progress Consumers have been solid Businesses are doing quite well Cash on hand is off the charts But business investment is slowing Primary causes of slow growth Housing Over- indebted and income challenged consumers NaJonal gov t austerity US Consumer Markets 41 Nominal Retail Sales To February 18 Auto and Light Truck Sales To February, SAAR Billions ($), SA Jan- 7 Jul- 7 Jan- 8 Jul- 8 Jan- 9 Jul- 9 Jan- 1 Jul- 1 Jan- 11 Jul- 11 Jan- 12 Millions Feb- 7 Jul- 7 Dec- 7 May- 8 Oct- 8 Mar- 9 Aug- 9 Jan- 1 Jun- 1 Nov- 1 Apr- 11 Sep- 11 Feb- 12 Source: Census Bureau Source: Census Bureau 12

13 Where do we stand now? Many signs of progress Consumers have been solid Businesses are doing quite well Cash on hand is off the charts But business investment is slowing Primary causes of slow growth Housing Over- indebted and income challenged consumers NaJonal gov t austerity US Production on the Rise 84 Capacity UNlizaNon To February 12 Industrial ProducNon To February 82 (%) Index = in Jan- 7 Jun- 7 Nov- 7 Apr- 8 Sep- 8 Feb- 9 Jul- 9 Dec- 9 May- 1 Oct- 1 Mar- 11 Aug- 11 Jan Jan- 7 Jun- 7 Nov- 7 Apr- 8 Sep- 8 Feb- 9 Jul- 9 Dec- 9 May- 1 Oct- 1 Mar- 11 Aug- 11 Jan- 12 Source: Federal Reserve Board Source: Federal Reserve Board 13

14 Where do we stand now? Many signs of progress Consumers have been solid Businesses are doing quite well Cash on hand is off the charts But business investment is slowing Primary causes of slow growth Housing Over- indebted and income challenged consumers NaJonal gov t austerity State How Many Underwater? as of Q4-11 # Mortgages Underwater NegaJve Equity Share Nevada 343, Arizona 631, Florida 1,916, Michigan 48, Georgia 541, California 2,41, United States Total 11,118, Local MSAs (Q3-11) Oakland- Fremont- Hayward 157, San Jose- Sunnyvale- Santa Clara 6, San Francisco- San Mateo- Redwood City 33, Source: First American CoreLogic 14

15 Lending Standards: Prime Mtg (Through Q4-211) % of Survey Respondents Loosening Tightening - 8 Lending Standards Loan Demand Source: Federal Reserve Lending Standards: C&I (Through Q3-211) 8 (%) Q1-5 Q1-6 Q1-7 Q1-8 Q1-9 Q1-1 Q1-11 Loosening Tightening Large Firms Small Firms Source: Federal Reserve 15

CA Housing Markets Through 211-Q3 $6 25 $5 2 Thousands $4 $3 $2 15 Thousands $ 5 $ 2Q1 2Q3 21Q1 21Q3 22Q1 22Q3 23Q1 23Q3 24Q1 24Q3 25Q1 25Q3 26Q1 26Q3 27Q1 27Q3 28Q1 28Q3 29Q1 29Q3 21Q1 21Q3 211Q1

16 CA Housing Markets Through 211-Q3 $6 25 $5 2 Thousands $4 $3 $2 15 Thousands $ 5 $ 2Q1 2Q3 21Q1 21Q3 22Q1 22Q3 23Q1 23Q3 24Q1 24Q3 25Q1 25Q3 26Q1 26Q3 27Q1 27Q3 28Q1 28Q3 29Q1 29Q3 21Q1 21Q3 211Q1 211Q3 Source: DataQuick Median Prices Home Sales Local Housing Markets Sales Volume Median Price Feb- 11 Feb- 12 % Chng Feb- 11 Feb- 12 % Chng Ventura % $345, $325, - 5.8% Alameda 895 1, % $312, $295, - 5.4% Orange 1,93 1,94.1% $41, $388,5-5.2% Los Angeles 4,736 5, % $315, $299, - 5.1% San Mateo % $516,5 $492,5-4.6% Solano % $18, $172, - 4.4% Contra Costa 1,95 1, % $243, $235, - 3.3% San Bernardino 1,974 2,82 5.5% $15, $148, - 1.3% Napa % $324, $32, - 1.2% Riverside 2,842 3,11 5.9% $195, $193, - 1.% San Diego 2,33 2, % $38, $35, - 1.% Santa Clara 1,178 1, % $435, $432, -.7% Sonoma % $295,5 $295, -.2% San Francisco % $589, $624, 5.9% Marin % $497,5 $535,5 7.6% Source: DataQuick 16

17 CA Housing Difficulty Through 211-Q Thousands Q1 2Q3 21Q1 21Q3 22Q1 22Q3 23Q1 23Q3 24Q1 24Q3 25Q1 25Q3 26Q1 26Q3 27Q1 27Q3 28Q1 28Q3 29Q1 29Q3 21Q1 21Q3 211Q1 211Q3 Foreclosures Defaults Source: DataQuick State Construction: Stabilized 12, Single Family Permits to December 2,3 Total NonresidenNal Permits To December 1, 2, Number of Permits 8, 6, 4, 2, Value (Millions $) 1,9 1,7 1,5 1,3 1, 9 Jan- 6 Dec- 6 Nov- 7 Oct- 8 Sep- 9 Aug- 1 Jul Jan- 7 Oct- 7 Jul- 8 Apr- 9 Jan- 1 Oct- 1 Jul- 11 Source: ConstrucNon Industry Research Board 17

18 Thousands of Dollars $1, $9 $8 $7 $6 $5 $4 $3 $2 $ $ Source: DataQuick Median Home Prices Through Q3-211 Price Declines Peak to Current Bay Area: - 39% Alameda: - 36% 1989Q3 1991Q2 1993Q1 1994Q4 1996Q3 1998Q2 2Q1 21Q4 23Q3 25Q2 27Q1 28Q4 21Q3 ALAMEDA CONTRA COSTA SANTA CLARA SAN FRANCISCO BAY AREA Contra Costa: - 47% Marin: - 18% Napa: - 42% Santa Clara: - 28% San Francisco: - 19% San Mateo: - 21% Solano: - 49% Sonoma: - 31% Foreclosures / 1, Homes Foreclosures Through Q3-211 Current Rates Bay Area: 2.6 Alameda: Q1 1996Q2 1997Q3 1998Q4 2Q1 21Q2 22Q3 23Q4 25Q1 26Q2 27Q3 28Q4 21Q1 211Q2 ALAMEDA CONTRA COSTA SOLANO BAY AREA Contra Costa: 4.2 Marin: 1.2 Napa 3.4 Santa Clara: 1.4 San Francisco:.7 San Mateo: 1.3 Solano: 6.9 Sonoma: 3. Source: DataQuick 18

19 Where do we stand now? Many signs of progress Consumers have been solid Businesses are doing quite well Cash on hand is off the charts But business investment is slowing Primary causes of slow growth Housing Over- indebted and income challenged consumers NaJonal gov t austerity Debt and Savings Household Debt as % of GDP to Q4-11 Personal Savings as % of Income Q (%) (%) Q1-8 Q1-83 Q1-86 Q1-89 Q1-92 Q1-95 Q1-98 Q1-1 Q1-4 Q1-7 Q1-1 Q1-66 Q3-73 Q1-81 Q3-88 Q1-96 Q3-3 Q1-11 Source: Federal Reserve Board Source: Bureau of Economic Analysis 19

20 Billions ($) National Spending Drivers Consumer Credit to February Personal Income to February 1,5 1,55 13,5 13,3 1, 1,5 13, 95 1,45 12,9 12,7 9 1,4 12,5 85 1,35 12,3 8 1,3 12, 11,9 75 1,25 11,7 Billions ($) Billions ($) SAAR Jan- 6 Oct- 6 Jul- 7 Apr- 8 Jan- 9 Oct- 9 Jul- 1 Apr- 11 Jan- 12 Jan- 8 Jul- 8 Jan- 9 Jul- 9 Jan- 1 Jul- 1 Jan- 11 Jul- 11 Jan- 12 Revolving Non- Revolving (Ex. Gov't) Source: Federal Reserve Board Source: Bureau of Economic Analysis Where do we stand now? Many signs of progress Consumers have been solid Businesses are doing quite well Cash on hand is off the charts But business investment is slowing Primary causes of slow growth Housing Over- indebted and income challenged consumers NaJonal gov t austerity 2

1937 Federal Revenues 4, 3,5 Billions of Dollars 3, 2,5 2, 1,5 $1.5T $2.

21 The Fiscal Austerity Issue Austerity: US culng spending EU Greek prescripjon driving renewed recession ConJnue sjmulus unjl strong growth prevails Plenty of Jme later for austerity Remember 1937 Federal Revenues 4, 3,5 Billions of Dollars 3, 2,5 2, 1,5 $1.5T $2.5T 1, Revenues: Actual Revenues: Trend Growth EsJmate Source: Bureau of Economic Analysis 21

22 US Jobs, Jobs, Jobs Change in Payrolls (Thousands) NaNonal Change in Payrolls to January Jul- 9 Oct- 9 Jan- 1 Apr- 1 Jul- 1 Oct- 1 Jan- 11 Apr- 11 Source: Bureau of Labor StaNsNcs Jul- 11 Oct- 11 Jan- 12 Thousands Change in Government Employment to March Jan- 1 Apr- 1 Jul- 1 Federal Oct- 1 Jan- 11 Apr- 11 Jul- 11 Source: Bureau of Labor StaNsNcs Oct- 11 Jan- 12 State and Local Long Term Effects of Recession Investment Deficit Disorder Net physical capital investment is sjll low EducaJon - spending gelng cut Human Capital Erosion Long term unemployment is very costly SoluJon? NOT austerity (See EU) More short term sjmulus 22

23 Stimulus Programs What works? Aid to unemployed Reducing payroll taxes for firms expanding emplt Refundable tax credits to LMI households Reducing payroll taxes Aid to states for non- infrastructure programs Definition of works : Jobs per million $ according to consensus of economists. Source: Congressional Budget Office Stimulus Programs (con t) What sort of works? Increased spending on infrastructure Reducing income taxes What doesn t work? Reducing taxes on business income Reducing taxes on repatriated foreign earnings Source: Congressional Budget Office 23

anemic Long term unemployment will be a problem for some Jme to come CA Summary California: part of the recession s epicenter Housing, exports, business investment Employment recovery slow

24 Summary Economy s Prognosis Uncertainty Austerity = slower growth Europe: could be trouble drag on US economy Gas prices? Overall energy costs are down Budget Policy, both short and long run, is crucial Short run sjmulus may sjll be warranted Must convince bond markets of long run fiscal sanity Employment growth anemic Long term unemployment will be a problem for some Jme to come CA Summary California: part of the recession s epicenter Housing, exports, business investment Employment recovery slow Stalled out in 1 st half of 211 Picked up in 2 nd half Should conjnue to grow into 212 Decisions now will affect economy long term Budget EducaJon, infrastructure, regulatory environment Years before recovery is complete Catching up to potenjal could be 4+ years 24

25 Bay Area NonFarm Payrolls Through Q ,15 San Francisco 1, East Bay 1,5 Thousands 1, San Jose 8 Q Q Q Q Q Q1-2 Q1-21 Q1-22 Q1-23 Q1-24 Q1-25 Q1-26 Q1-27 Q1-28 Q1-29 Q1-21 Q1-211 Q1-212 Q1-213 Q1-214 Q1-215 Q1-216 SF Actual SJ Actual EB Actual SF Forecast SJ Forecast EB Forecast Source: Bureau of Economic Analysis Forecast by Beacon Economics 14 Bay Area Unemployment Through Q4-216 (%) San Jose East Bay 4 2 San Francisco Q Q Q Q Q Q1-2 Q1-21 Q1-22 Q1-23 Q1-24 Q1-25 Q1-26 Q1-27 Q1-28 Q1-29 Q1-21 Q1-211 Q1-212 Q1-213 Q1-214 Q1-215 Q1-216 SF Actual SJ Actual EB Actual SF Forecast SJ Forecast EB Forecast Source: Bureau of Economic Analysis Forecast by Beacon Economics 25

26 Regional Summary Reasonably opnmisnc forecast: Employment Recovery = However, will sjll be in a deep hole San Jose recovery is well underway The tech sector has been booming for some Jme East Bay recovery is more difficult Housing and its effect on construcjon and finance San Francisco uncertain Business and tourism services America s Cup won t hurt Regional future: There are challenges But generally very bright! Still, Bay Area employment remains near its lowest point over the past 15 years Total employment in the Bay Area, Employment in thousands 3,6 3,5 3,514 3,479 3,4 3,3 3,2 3, 3, 2,9 2,8 2,7 2,6 2,916 2,94 2,867 2,937 2,857 2,859 3,46 3,174 3,274 3,363 3,314 3,297 3,33 3,268 3,199 3,21 3,18 3,18 3,69 2,5 Source: BLS

27 Public funding for UC schools has fallen 51% since 22 Appropriations by institution type for California higher education, $ per full-time equivalent student 2 18, 17, 16, 15, 14, 13, 12, 11, 1, 9, 8, 7, 6, 5, Figures in 22 dollars 2 FTEs: Full- Jme equivalent students. State funding is allocated on a full- Jme equivalent students basis Source: Shulock, N. et al, Dollars and Sense, Ins=tute for Higher Educa=on Leadership & Policy. Sacramento, 211. p. 14. UC CSU CCC Maintaining the transportation system largely faces shortage in funding Transportation 235 funding levels $ billions of year-of-expenditure dollars Committed Total need funds Discretionary funds Shortfall Local streets and roads Transit capital Transit operations State highways Source: California MTC 27

28 California employers find regulations including workers compensation, CEQA, and wage and overtime laws the most challenging Survey results: How will these laws and regulations impact your future decisions to make investments/keep workers in California? 1 Very harmful Somewhat helpful Somewhat harmful Very helpful No effect / Don t know Workers compensation Land use regulations, including CEQA requirements Wage and hour overtime laws Meal period law California Family Rights Act California minimum wage law Proposition 65 requirements Source: California Manufacturers and Technology AssociaNon and NaNonal FederaNon of Independent Business 211 Survey, California Office of Environmental Health Hazard Assessment While the Bay Area s cost of living index has surpassed its productivity index, since 25, the gap has started to narrow Cost of living index in the Bay Area 1, MSA index as compared to the US average Cost of living relative to US average Productivity relative to US average Relative productivity adj. for relative cost of living 1 The Bay Area includes Oakland, San Francisco, and San Jose MSAs 2 Indexed to for US average Source: ACCRA cost of living index, Moody s Economy.com 28

29 Bay Area Innovation Assets Academia/ research Venture capital funding Innovation hub Innovative corporations Recent startups Source: McKinsey, unpublished Venture Capital (%) CA and Bay Area Shares of U.S. Venture Capital to Q4-211 Q1-95 Q2-96 Q3-97 Q4-98 Q1- Q2-1 Q3-2 Q4-3 Q1-5 Q2-6 Q3-7 Q4-8 Q1-1 Q2-11 Q4-211 Value of All Deals (Millions) % of Total US VC Bay Area 3,41 46 California 3, United States 6,565 Bay Area California Source: PriceWaterhouseCoopers MoneyTree 29

30 Patents Granted Rank Among CounNes County Total ( 6-1) 1 Santa Clara 7,85 1,47 4,29 2 King, WA 3,26 3,637 13,75 3 Los Angeles 2,216 2,817 11,8 4 San Diego 1,964 2,993 11,12 5 San Mateo 1,954 2,664 1,13 6 Middlesex, MA 1,822 2,564 9,899 7 Alameda 1,69 2,191 8,971 8 Orange 1,648 2,175 8, Contra Costa ,516 Source: US Patent and Trademark Office Bay Area Council Economic Institute Ø Regional Analysis Ø Business & Market Analysis Ø Ports & Infrastructure Analysis Ø Economic Impact Analysis Ø Public Policy Analysis Jhaveman@BayAreaCouncil.org

The Great Recession 1-2 Punch of Credit Crisis and Consumer Retrenchment

US & CA Economic Recovery Jon Haveman Chief Economist, BAC Economic Ins2tute February 14, 2012 The Great Recession 1-2 Punch of Credit Crisis and Consumer Retrenchment 6 GDP Growth (SAAR) and % of Peak