The Economic Outlook Full steam ahead but where are we going?

Transcription

1 of Management Christopher Thornberg Senior Economist The Economic Outlook Full steam ahead but where are we going?

2 What s on the table? The National Economy: Why the future isn t what it used to be Houses: Now THAT S a FIRE Consumers and government need to join SA The State and Local Situation Short run vs. long run Education and the budget

3 First: a bit of history 6% 5% 4% 3% 2% 1% 0% -1% Downturn Normal Growth Period Internet Rush Doldrums -2% 89Q1 90Q1 91Q1 92Q1 93Q1 94Q1 95Q1 96Q1 97Q1 98Q1 99Q1 00Q1 01Q1 Recovery? 02Q1 03Q1 04Q1 Smoothed US GDP Growth

4 Why the doldrums? Three imbalances created by the Rush The corporate imbalance Investing without profit The saving imbalance Who is thinking about tomorrow? The external imbalance Massive trade deficits

5 The investment bubble caused the 2001 downturn and the doldrums Non-Res Investment (Black) $Bil Bubble Downturn 80 Q1 81 Q3 83 Q1 84 Q3 86 Q1 87 Q3 89 Q1 90 Q3 92 Q1 93 Q3 95 Q1 96 Q3 98 Q1 99 Q3 01 Q1 02 Q3 04 Q1 Recovery Corporate Profits (Blue) $Bil

6 Why so mild? No Housing Cycle 7.0% 6.0% 5.0% 4.0% No Durable Cycle Just one big investment cycle 3.0% 54 Q3 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 54 Q3 58 Q3 58 Q3 62 Q3 62 Q3 66 Q3 66 Q3 70 Q3 70 Q3 74 Q3 74 Q3 78 Q3 78 Q3 82 Q3 82 Q3 86 Q3 86 Q3 90 Q3 90 Q3 94 Q3 94 Q3 98 Q3 98 Q3 02 Q3 02 Q3 54 Q3 58 Q3 62 Q3 66 Q3 70 Q3 74 Q3 78 Q3 82 Q3 86 Q3 90 Q3 94 Q3 98 Q3 02 Q3

7 And what about outsourcing??? Blame India: The tech sector s attempt to pass the buck Outsourcing is nothing new to the US, especially to the tech sector Jobs are not created or lost -they are the result of labor market equilibrium It isn t the high value jobs that are being lost, its formerly high value jobs Efficiency in the US leads to more profits, more jobs, and more consumption in the long run. Outsourcing is equivalent to technological advancements The issue of outsourcing: equity Remember when Japan was going to buy up the US?

8 The Outsourcing Scare: Just That US Real Per Capita Income US Manufacturing Output $28,000 $24,000 $20,000 $16,000 $12,000 $8, Q1 64Q1 69Q1 74Q1 79Q1 84Q1 89Q1 94Q1 99Q1 04Q1 72Q1 77Q1 82Q1 87Q1 92Q1 97Q1 02Q1 Disposable, $2000 Real, Index 1997=100

9 Manufacturing 5.0% Employment Growth % 3.0% 2.0% 1.0% 0.0% 0.0% -1.0% 5.0% 10.0% 15.0% 20.0% -2.0% Employment in Manufacturing

10 The Good: Production / Prices Jan-97 Jul-97 Jan-98 Jul-98 Inflation still normal cur rent rise a blip (PPI, SAAR, smoothed) Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan % 6.0% 2.0% -2.0% -6.0% Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jul-03 Jan-01 Jan-04 Jul-01 Jul-04 Jan-02 Jul-02 Industrial production up for now Jan-03 Jul-03 Jan-04 Jul-04

11 The Good: Labor Markets 133, , , , , , , ,000 Jan-99 Jul-99 Jan-00 Unemployment is low, historically Jul-00 Jan-01 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Payroll jobs increasing (SA) Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04

12 The Good: Income $63,500 $63,000 $62,500 $62,000 $61,500 $61,000 $60,500 $60,000 $59,500 $59,000 $58,500 $58,000 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Real per worker income $2000 $1,100 $1,050 $1,000 $950 $900 $850 $800 $750 $700 $650 $600 96Q1 97Q1 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1 Real Corporate Profits $ Q1

13 Are oil prices going to sink the boat? $70 $60 Real Price of Oil West Texas Oil Imports as % of GDP $50 $40 $30 $20 $10 $- Jan % 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Jan Jan Jan Jan Jan Jan Jan Jan Jan-99 Jan

14 The Bad: Real Estate Then vs. Now: Real Appreciation in the 80 s and 90 s Fresno -4.6% 44.5% San Diego 36.9% 72.5% Los Angeles 49.1% 59.1% San Francisco 58.3% 58.3% Oakland 42.7% 63.2% San Jose 52.2% 54.5% Orange County 40.6% 65.6% Santa Barbara 44.3% 73.0% Inland Empire 29.3% 59.6% Stockton-Lodi 29.5% 55.9% Sacramento 29.0% 58.1% Ventura 48.9% 63.0% Sonoma Prices

15 This is not a normal cycle Changes in employment and housing prices 8% 6% 4% 2% 0% -2% -4% -6% Housing Price Employment 70 Q1 72 Q1 74 Q1 76 Q1 78 Q1 80 Q1 82 Q1 84 Q1 86 Q1 88 Q1 90 Q1 92 Q1 94 Q1 96 Q1 98 Q1 00 Q1 02 Q1 04 Q1 Where s the cycle?

16 This is not a normal cycle US Real Home Prices and the Long Run Trend Log Scale Trend.7% per year 69 Q3 71 Q3 73 Q3 75 Q3 77 Q3 79 Q3 Most of the the return from housing is in the coupon 81 Q3 83 Q3 85 Q3 87 Q3 89 Q3 91 Q3 93 Q3 95 Q3 97 Q3 99 Q3 01 Q3 03 Q3 Where s the cycle?

17 Real Estate is an asset and HAS a fundamental value Today s price should be the present value of the future revenues Value Today s Rent D - G Low mortgage rates aren t necessarily good for buyers! G: Future rental growth rates D: Discount factor: mortgage rates, depreciation, taxes, risk premium

18 Rental growth and mortgage rates $15.00 $14.00 Apartment Rents Mortgage Rates $13.00 $12.00 $11.00 $ % 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 96 Q1 96 Q4 97 Q3 98 Q2 99 Q1 99 Q4 96 Q1 00 Q3 96 Q4 01 Q2 97 Q3 02 Q1 98 Q2 02 Q4 99 Q1 03 Q3 99 Q4 04 Q2 00 Q3 01 Q2 02 Q1 02 Q4 03 Q3 04 Q2

19 Where are the hottest spots? SAN DIEGO 129.5% MILWAUKEE 54.7% SAN FRANCISCO BAY 126.6% ATLANTA 50.3% ORANGE COUNTY 120.9% PHOENIX 42.5% LAS VEGAS 105.8% KANSAS CITY 40.7% FT. LAUDERDALE 100.6% PORTLAND 37.9% SACRAMENTO 98.9% OKLAHOMA CITY 37.7% MIAMI 97.7% HOUSTON 37.6% WEST PALM BEACH 89.4% PITTSBURGH 37.2% LOS ANGELES 86.5% ST. LOUIS 31.7% ORLANDO 72.4% NEW ORLEANS 30.5% NEW YORK 71.5% PHILADELPHIA 29.8% BALTIMORE 71.0% CINCINNATI 29.7% TAMPA/ST. PETERSBURG 69.9% SAN ANTONIO 29.7% WASHINGTON, DC 69.4% GREENSBORO/WINSTON 26.6% MINNEAPOLIS-ST PAUL 67.2% DALLAS FORT WORTH 26.0% RIVERSIDE-SAN BERN. 62.4% COLUMBUS 24.0% SEATTLE 60.9% BOSTON 21.7% DENVER 60.7% SALT LAKE CITY 21.2% JACKSONVILLE 60.3% INDIANAPOLIS 16.9% CHICAGO 56.2% BIRMINGHAM 11.2% Change in Leamer Housing P/E Ratio

20 Over Priced or Over Built Prices and Building: 1998 to 2003 Housing Appreciation 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% California New Pop / New Homes

21 Who s at risk when it does pop? Annual Housing Appreciation Employment and Prices by MSA 1989 to % 5% 0% -5% Inland Empire Ventura -2% 0% 2% 4% 6% 8% Annual Change Employment Those cities that saw employment losses also typically experienced nominal housing price declines

22 The market effects So-Cal Total Unit Sales: Three months ending in month Source: Dataquick National Housing Completions 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 2,500 2,000 1,500 1,000 Apr-88 Oct-88 Apr-89 Oct-89 Apr-90 Oct-90 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Oct-96 Apr-97 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr Q1 70Q4 73Q3 76Q2 79Q1 81Q4 84Q3 87Q2 90Q1 92Q4 95Q3 98Q2 01Q1 03Q4

23 The UGLY consumers out of control R-3 R-2 R-1 R 0 R+1 R+2 R+3 R+4 R+5 R+6 R+7 R+8 R+9 R+10 R+11 R+12 R+13 R Index values of consumer durable sales and residential investment through past recessions

24 But consumer spending is good, isn t it? 9.0% 6.0% 3.0% Spending in the short run can pull an economy through a downturn, but spending has to be constrained by income in the long run And those tax cuts? Straight to spending, reducing public and private savings even more. Net National Savings as % of GDP $300 $100 -$100 -$300 -$500 Government Deficit 0.0% 80 Q1 83 Q1 86 Q1 89 Q1 92 Q1 95 Q1 98 Q1 01 Q1 04 Q1 -$700 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04

25 Consumers out of control 100% $27 98% 96% 94% 92% 90% 88% 86% Jan-59 Jan-64 Jan-69 Jan-74 Jan-79 Jan-84 Jan-89 Jan-94 Jan-99 Jan-04 $26 $25 $24 $23 $22 $21 $20 $19 $18 91Q1 92Q3 94Q1 95Q3 97Q1 98Q3 00Q1 01Q3 03Q1 04Q3 Spending as % of Disposable Income US per capita spending Real, $2000

26 How and why? Trade Deficit as % of GDP Real Interest Rates (Short Term) 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 50Q1 63Q1 53Q1 66Q1 56Q1 59Q1 69Q1 62Q1 72Q1 65Q1 75Q1 68Q1 71Q1 78Q1 74Q1 81Q1 77Q1 84Q1 80Q1 87Q1 83Q1 86Q1 90Q1 89Q1 93Q1 92Q1 96Q1 95Q1 98Q1 99Q1 01Q1 02Q1 04Q1

27 What does it mean? 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% Consumer Durables and Residential Investment as % of GDP! 54Q1 57Q1 60Q1 63Q1 66Q1 69Q1 72Q1 75Q1 78Q1 81Q1 84Q1 87Q1 90Q1 93Q1 96Q1 99Q1 02Q1 We could be setting ourselves up for a regular consumer-led cycle in 05 or 06

28 The slowdown--beginning? 2100 US Housing Starts Real Retail Sales Jan-02 $350,000 $340,000 $330,000 $320,000 $310,000 $300,000 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jan-02 Jul-03 Apr-02 Oct-03 Jul-02 Jan-04 Oct-02 Apr-04 Jan-03 Jul-04 Apr-03 Oct-04 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04

29 Don t look for a big pull from businesses $55,000 7% $50,000 $45,000 $40,000 $35,000 $30, % 5% 4% 3% 2% 1% 0% -1% 93Q1 94Q3 96Q1 97Q3 99Q1 00Q3 02Q1 03Q3 Real Capital Stock per Worker Labor Productivity Growth

30 Any Silver Lining? M1 02M5 02M9 03M1 10 Year Treasury Fed Funds 03M5 03M9 04M1 04M M1 2001M5 2001M9 2002M1 2002M5 2002M9 2003M1 2003M5 2003M9 2004M1 2004M5 2004M9 Interest Rates falling, despite Fed tightening The $US is down and will stay down

31 The US Forecast An 80-year old economy in a 20 year-old body Look for so-so growth rates for the Q4 2004, early 2005, not a return to the go-go nineties. 3% at best Economic growth to be centered around exports and business spending. Slower growth in structures, houses and consumer spending. Job growth will continue, but be moderate (150,000 per month) Those two outstanding imbalances are a big worry. Is a consumer cycle coming down the pike? Keep an eye out. Another downturn won t be as hard on the tech sector however Interest rates have no where to go but up: but slowly

32 California compared to the US? Payroll Jobs USA California 97.0 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Household Jobs California USA Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04

33 California: A tale of two states Payroll Employment Indexes 03= % AR % AR Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 US California So-Cal Bay Area

34 Employment and Unemployment Mixed Messages Payroll Employment Unemployment Feb-Aug Aug-Feb Feb-Aug Q3 Q3 Q3 Los Angeles -0.4% 0.2% 0.2% 6.6% 7.2% 6.1% Orange County 1.1% 0.0% 0.3% 4.3% 3.7% 3.1% Inland Empire 0.4% 1.5% 0.8% 5.9% 5.9% 5.4% San Diego 0.8% 0.1% 1.3% 4.4% 4.2% 3.8% Ventura 0.1% 0.4% 0.0% 5.5% 5.0% 4.6% East Bay -1.6% 0.3% 0.3% 6.3% 6.2% 5.2% San Francisco -1.9% -0.1% 0.3% 6.0% 5.5% 4.5% San Jose -2.1% -0.9% -0.5% 8.6% 7.9% 5.6% Saccramento 0.2% 0.8% -0.7% 5.4% 5.5% 5.2% Fresno -0.1% 1.2% -0.4% 14.2% 14.0% 12.9%

35 Business Activity: Solid So-Cal Non-Residential Permits $800 $750 $700 $650 $600 $550 $500 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Office Vacancy Statistics Q1 00 Q3 01 Q1 01 Q3 02 Q1 02 Q3 Los Angeles Orange County 03 Q1 03 Q3 04 Q1 04 Q3 4,300 4,100 3,900 3,700 3,500 3,300 3,100 2,900 LAX Passenger Traffic Jan-00 Domestic Jul-00 Jan-01 Jul-01 International Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 1,600 1,500 1,400 1,300 1,200 1,100 1,000 Trade through L.A. Customs $23,000 $22,000 $21,000 $20,000 $19,000 $18,000 $17,000 $16,000 $15,000 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04

36 1,500 1,400 1,300 1,200 1,100 1, Jan-00 The Growth Sector: Informal Jobs Jul-00 Jan-01 Informal Jobs: Household - Payroll Southern California Informal Jobs Seasonally Adjusted, Thousands Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 19% 17% 15% 13% 11% 9% 7% 5% 3% 1% -1% Informal Jobs as percent of Payroll Jobs Seasonally Adjusted Jan-92 Jan-94 Jan-96 Balance of USA Jan-98 Jan-00 Southern California Jan-02 Jan-04

37 Tech coming back Shipments: Computers and Electronic Goods Bay Area HQ Corporate Revenues $Bil SA East Bay $45 $40 $35 $30 01Q2 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 01Q4 East Bay 02Q2 02Q4 03Q2 Bay Total 03Q4 04Q2 Jan-04 Jul Bay Area Total

38 Business activity on the rise Commercial Property Statistics Taxable Sales Statistics $Mil East Bay San Jose San Fran Industrial Vacancy Rate Q2 11.2% 9.4% 10.1% Net Abs. 04 YTD M -.57 M 1.97 M Total Stock M 87.5M 72.7 M Office Vacancy Rate Q2 17.5% 17.7% 19.0% Net Abs. 04 YTD.08 M.47 M 1.72 M Total Stock 28.1 M 53.7 M M $10,000 $9,000 $8,000 $7,000 $6,000 00Q1 00Q3 01Q1 01Q3 02Q1 02Q3 03Q1 E.B. S.J. 03Q3 S.F. 04Q1

39 Aug-04 3-Month Change 1-Year Change Payroll Employment East Bay 1,026, % 5, % San Fran 953,000 2, % % San Jose 842,000-2, % -10, % Sacramento 755,200-5, % % Household Employment East Bay 1,208,100 6, % 25, % San Fran 862,300 8, % 12, % San Jose 819,800 1, % 3, % Sacramento 841, % 14, % Index: Peak = Bay Region 2000 LA / OC 1990 Bay Area Jobs: Turning the bend Slow growth in Months past employment peak

40 Sonoma Employment Oct-04 Civilian Employment 255,900 7, % Civilian Unemployment Rate 3.8% -0.7% Total Nonfarm 183,300 2, % Construction 13, % Durable Goods 12, % Nondurable Goods 12, % Trade, Transportation and Utilities 34, % Wholesale Trade 6, % Retail Trade 23, % Transportation, Warehousing and Utilities 3, % Information 3, % Financial Activities 10, % Professional and Business Services 19, % Educational and Health Services 22, % Leisure and Hospitality 20, % Other Services 6, % Government 27,600 1, % Federal Government 1, % State and Local Government 25,900 1, %

41 Bay Area: Poised for LR Success 2003 Demographic Data United States California Contra Costa Alameda San Fran. MSA San Jose MSA Total population 282,909,885 34,650, ,855 1,433,586 1,653,855 1,648,486 % < % 27.0% 25.9% 24.8% 19.1% 25.0% % > % 10.3% 10.7% 9.9% 13.4% 9.9% Born Overseas 11.9% 26.5% 22.3% 30.5% 31.4% 36.5% % Without High School 16.4% 19.8% 10.6% 14.1% 11.6% 13.0% % Bachelor and Above 26.5% 29.1% 38.7% 39.3% 47.7% 44.1% % Poverty 12.7% 13.4% 8.5% 10.9% 7.7% 7.3% Homes Median household income $43,564 $50,220 $69,835 $61,731 $65,060 $76,544 Ownership Rate 66.8% 58.1% 70.2% 57.5% 49.9% 62.7% Occupations Management, professional 34.1% 35.2% 40.2% 44.2% 48.5% 50.6% Service occupations 16.1% 16.4% 16.6% 13.0% 13.8% 12.8% Sales and office 26.2% 25.9% 25.7% 25.1% 24.6% 21.3% Construction, extraction 9.5% 8.9% 9.2% 7.4% 5.3% 7.7% Production, transport 13.3% 12.1% 8.2% 10.2% 7.4% 7.4% Median earnings $26,236 $27,302 $36,806 $32,700 $37,947 $40,699

42 How does Sonoma stack up? Total population Average household size 2.61 Median age (years) 37.9 Average family size 3.15 HOUSING OCCUPANCY OCCUPATION Total housing units Management, professional 33.5% Homeowner vacancy rate (percent) 0.6 Service occupations 16.4% Rental vacancy rate (percent) 5.3 Sales and office occupations 28.0% Ownership Rate 64.2% Farming, fishing, and forestry 1.4% Construction, extraction 9.3% EDUCATIONAL ATTAINMENT Production, transportation 11.4% Percent high school graduate or higher 87.6 Percent bachelor's degree or higher 30.1 INCOME AND BENEFITS Employed Median household income Percent unemployed 5.4 Per capita income (dollars) Armed Forces 191 Employed civilian population PERCENT BELOW POVERTY 8.9

43 The importance of education Family Income Education and Income Average Education Inequality Out of 110 B / D Rank San Jose Oakland Sacramento San Francisco Ventura Santa Barbara Orange County Salinas Vallejo Stockton Modesto Riverside-SB San Diego Fresno Bakersfield Los Angeles

44 Where is growth in the Bay? 10 Year Changes: Pop 2003 New MF Homes New SF Homes Adult Pop Ch Growth Sacramento 1,330,711 15,294 68, , % Contra Costa 1,001,136 9,796 39, , % Santa Clara 1,678,421 34,236 29, , % Alameda 1,461,030 17,276 28,176 98, % San Joaquin 632,760 2,456 42,896 90, % Sonoma 466,725 5,995 17,007 46, % Solano 412,336 4,257 17,518 39, % San Francisco 751,682 19,447 1,216 23, % San Mateo 697,456 7,172 7,620 21, % Santa Cruz 251,584 2,279 4,788 14, % Napa 131,607 1,041 5,301 12, % Marin 246,073 1,913 4,741 5, %

45 Where is growth in the Bay? Economic Growth House Income 00 Annual Increase Labor Force Partic. rate Increase Sacramento $43, % 660, % 136,400 Contra Costa $63, % 520, % 84,200 Alameda $55, % 751, % 72,100 San Joaquin $41, % 289, % 61,700 Sonoma $53, % 263, % 56,800 Solano $54, % 216, % 51,100 Napa $51, % 71, % 15,330 Santa Clara $74, % 866, % 12,300 Santa Cruz $53, % 140, % 4,300 San Mateo $70, % 370, % -400 Marin $71, % 130, % -1,400 San Francisco $55, % 403, % -7,300

46 The Bay in the Long Run? Housing prices aren t the issue. Net Migration as % of Population. 1.4% 1.0% 0.6% 0.2% -0.2% -0.6% Migration and Price Appreciation: California -10.0% 0.0% 10.0% 20.0% Relative Change in Real Estate Prices* 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% Migration and Unemployment: California US Unemploymemt - California Unemployment Net Migration (% of Population)

47 So will the lack of infrastructure investments slow population growth? 700, , , , ,000 Change in California Population It s a quality of life, not quantity of life issue.

48 What kind of population growth? Real Median Income Orange Los Angeles Inland Empire 1990 $59,652 $44,408 $43, $57,830 $43,682 $45,918 % Households < 50K / Year Income (real) Orange Los Angeles Inland Empire % 53.7% 56.3% % 55.3% 54.2%

49 California s Growing Educational Gap 37.0% 32.0% 27.0% 22.0% 17.0% 12.0% Percent population 25+ without a high school diploma Balance of US California % 29.0% 27.0% 25.0% 23.0% 21.0% 19.0% 17.0% 15.0% Percent population 25+ with Bacherlor Degree or more California 1987 Balance US This is the result of international immigration into the state, which is predominantly in the Southern region.

50 The education budget rose from 1995 to 2000 California Education in Comparison: 2002 Data California Rank Spending Per Student $7, Spending Per Teacher $54,348 1 Student Teacher Ratio Non-Instructor / Instructor Ratio.53 6 Public spending oneducation as % of Personal Income 3.8% 37 The largest crisis in infrastructure? Human capital investments in the next generation. Budget reform and structural reforms are both clearly needed. Remember: these are the kids who are going to be supporting YOU in 20 or 30 years.

51 Any budget relief in the future? General Fund Forecast (In Billions) $ Expenditures 95 Revenues Operating Deficits

52 But California is a high tax state, right? California State and Local Taxes and Fees relative to US FY California % Inc USA % Inc Personal Income $1, % $8, % General revenue own sources $178.4 % Rev $1,324.2 % Rev Taxes $ % $ % Property $ % $ % Sales and gross receipts $ % $ % Individual income $ % $ % Corporate income $ % $ % Charges and miscellaneous $ % $ % Value Equity Taxes Rate 1 $600,000 15% $9, % 2 $600, % $1, %

53 Summary for the Bay region Short run weak / long run strong The fundamentals for strong long run growth in place: education, industry, income, jobs Population growth continues to expand inland Challenges from the area largely external Tax system that needs overhaul as does state budget Business climate issues to remain a drag Southern Cal demographic issues

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