The US and California Economic Outlook

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1 Regional Economic Forum April 25, 2018 The US and California Economic Outlook Robert A. Kleinhenz, Ph.D. Economist/Executive Director of Research LLC

2 Outline U.S. Economy State & Region Conclusion/Looking Ahead

3 U.S. Economy

4 Vital Signs of the US Economy GDP Growth Rate Labor Market Conditions Inflation Rate

5 GDP 2017: 2.3% : 2.5 to 2.8% Gross Domestic Product YTY % Change Contributions to Change in GDP Sector Consumer Investment Net exports Government Total GDP % Chg * * Does not add up due to rounding

6 Consumer Spending: Flywheel of Economy 8% 6% 4% 2% 0% -2% -4% -6% -8% Real Consumer Spending by Type (Y-o-Y Growth to January 2018) Services Goods Source: Federal Reserve Board of St. Louis

7 Real Disposable Personal Income Growth 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% YTY % Change Source: Federal Reserve Board of St. Louis

8 Lower Saving Rate, Growing Wealth 7% Consumer Savings Rate 700 Real Average Wealth per Household (FOF, Thous.) 6% % % % 0 2% 1990Q1 1993Q1 1996Q1 1999Q1 2002Q1 2005Q1 2008Q1 2011Q1 2014Q1 2017Q1 Home Equity Other Net Wealth Source: Federal Reserve Board of St. Louis

9 Credit Card Use Accelerating, but YTY % Change Outstanding Credit Card Balances 10% 5% 0% -5% -10% -15% -20% Source: Federal Reserve Board of St. Louis

10 No Debt Overhang 19% 18% 18% 17% 17% 16% 16% 15% 15% 14% Household Financial Obligation Ratio Household Debt to Income Ratio Source: Federal Reserve Board of St. Louis

11 Business Spending Up % 10% 8% 6% 4% 2% 0% -2% -4% -6% Fixed Investment Structures Equipment Intellectual Property

12 International Trade Deficit: Pros/Cons $ Millions (Yr.=2009) 3,010 Ex-Goods Ex-Svcs Im-All 2,510 2,010 1,510 1, Deficit:

13 Tax Cuts and Spending Increases Mean Deficit (-) or Surplus (+) as % of GDP

14 Macro-Economy Summary Sector CONSUMERS BUS. INVESTMENT GOVERNMENT NET TRADE Outlook Steady solid growth Acceleration, energy drag over Flat/Up Slightly Imports & Exports up, Imports larger NET Negative OVERALL Domestic Spending Up

15 Full Employment, Slower Job Growth Unemployment Rate Yr-To-Yr % Change in Jobs 18% % 14% 12% 10% 8% 6% % 2% 1.0 U-3 U Source: Federal Reserve Board of St. Louis

Plenty of Job Openings, Not Enough Workers 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% JOLT Job Openings Rate in % Sector Level (000s) Rates Feb-17 Feb-18 Feb-17 Feb-18 Total 5,618 6,052 3.7 3.

16 Plenty of Job Openings, Not Enough Workers 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% JOLT Job Openings Rate in % Sector Level (000s) Rates Feb-17 Feb-18 Feb-17 Feb-18 Total 5,618 6, Total private 5,118 5, Education & Health 1,228 1, Trade, Transportation & Util , Professional & Business Leisure and hospitality Government Manufacturing Financial activities Other services Construction Information Mining and logging Source: Bureau of Labor Statistics

17 Labor Force Growth Constrains Potential GDP Growth Labor Force Growth LF Participation Rate 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% 67% 66% 65% 64% 63% 62% 61% 60%

18 Inflation Historically Low But Rising Kyser Center for Economic Research

19 Economic Policy

20 Fiscal Policy & Other Economic Issues Tax Cuts/Budget Package: juicing the economy Immigration: reforms enable economic growth International Trade: consumers or producers? Infrastructure: $4.5 trillion needed Health Care: spending reform, not insurance reform

21 Need Changes to US Health Care National Health Spending As a Share of GDP Per Capita Healthcare Spending 2015, PPP Adjusted 20% 18% 16% 2.1% / Decade 3.3% / Decade USA $9,402 France $5,428 Norway $7,832 Canada $5,421 14% 12% Switzerland $7,300 Belgium $5,340 10% 8% Sweden $6,285 Australia $4,873 6% 4% Netherlands $6,209 Finland $4,467 2% 0% Germany $6,204 Japan $4, Austria $6,143 UK $3,717

22 Monetary Policy Rock-bottom federal funds rate Adjusting to labor market, inflation, GDP Market rates less tied to FFR than in the past Yield curve dynamics FFR increases push up short end Balance sheet activities push up long end Liquidity keep long end market rates low

23 Financial Markets 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Fed Funds Rate 10 Year Yield 30 Year Mort Source: Federal Reserve Board of St. Louis

24 Yield Curve US Treasury Securities 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 4/20/17 10/20/17 4/20/18 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr Source: Federal Reserve Board of St. Louis

25 State Economy

26 CA & US at Full Employment CA at Full Employment Unemployment Rate, Seasonally Adjusted 16% 14% 12% 10% 8% 6% 4% 2% 0% CA: 4.3% US: 4.1% 4.3% Lowest on Record (1976+) Source: California Employment Development Department

27 YTY Job Gains: CA Among Top States

28 Gross Product Q3-17: YTY % Changes -- CA (2.3%)

29 Job Gains Across All CA Industries Industry Mar-18 (000s) YTY Change YTY % Change Total Nonfarm 17, % Health Care & Social Assistance 2, % Construction % Leisure & Hospitality 1, % Professional, Scientific & Technical Services 1, % Government 2, % Transportation, Warehousing & Utilities % Administrative & Support & Waste Services 1, % Educational Services % Retail Trade 1, % Manufacturing 1, % Wholesale Trade % Information % Source: California Employment Development Department

The Big Slowdown 4% 3% 2% 1% 0% State and National Job Growth Location 2017 14-15 15-16 16-17 Los Angeles MD 4,441,600 2.2% 2.6% 1.

1% Oakland MD 1,164,300 3.3% 3.3% 2.4% San Francisco MD 1,117,900 4.9% 4.0% 2.4% San Jose MSA 1,099,200 3.8% 3.1% 2.

30 The Big Slowdown 4% 3% 2% 1% 0% State and National Job Growth Location Los Angeles MD 4,441, % 2.6% 1.3% Orange County 1,619, % 2.6% 2.2% Inland Empire 1,454, % 3.6% 3.8% San Diego MSA 1,454, % 2.7% 2.1% Oakland MD 1,164, % 3.3% 2.4% San Francisco MD 1,117, % 4.0% 2.4% San Jose MSA 1,099, % 3.1% 2.6% Sacramento MSA 970, % 3.4% 2.2% California United States Fresno MSA 345, % 3.5% 2.8% Ventura County 304, % 1.3% 1.3% Source: California Employment Development Department

31 California Taxable Sales (+4.9% in 2017) $160 Billons$180 $140 $120 $100 $80 $60 $40 $20 $0 Source: California Board of Equalization

32 So Cal Unemployment Rates Edging Down (%, SA) Unemployment Rates California Inland Empire Los Angeles Orange County Source: California Employment Development Department

33 Metro Areas Vary in % Job Gains Stockton Fresno MSA Inland Empire San Jose MSA Sacramento MSA San Diego County East Bay San Francisco MD Ventura County Santa Rosa MSA Kern County Orange County LA County Year to Year % Chg. (Mar-18) 0% 1% 2% 3% 4% Source: California Employment Development Department

34 Largest Absolute Gains in So Cal MSA Mar_18 Los Angeles County 50,300 Inland Empire 41,000 San Francisco MD 36,800 San Jose MSA 28,500 San Diego County 24,800 Orange County 20,100 East Bay 19,200 Sacramento MSA 19,000 Fresno MSA 9,900 Stockton MSA 7,800 Ventura County 4,800 Source: California Employment Development Department

35 Los Angeles County % Job Gains Construction Leisure and Hospitality Admin Support Health Care Prof Sci and Tech Transport/Warehouse Total Nonfarm Information Financial Activities Wholesale Trade Government NR/Mining Manufacturing Retail Trade Other Services Year to Year % Chg. (Mar-18) -3% -2% -1% 0% 1% 2% 3% 4% 5% Source: California Employment Development Department

36 Local Real Estate / Construction

37 CA Existing Home Sales & Median Price 600,000 Quarterly Sales Annualized Quarterly Median Price $ 500, , , , ,000 0 Source: DQ/CoreLogic

38 So Cal Residential Outlook County Q4-16 Q4-17 YTY % Change Price YTY % Change Sales Los Angeles $558,926 $604, % 0.4% Orange $711,539 $756, % -1.7% Riverside $337,202 $369, % -2.1% San Bernardino $279,302 $299, % 3.6% San Diego $553,245 $596, % -4.6% Source: DQ/CoreLogic

39 Housing Affordability: % of HHs Affording Median Priced Home State/Region/County Q4-16 Q4-17 Los Angeles Orange County Riverside County San Bernardino County San Diego County California Source: California Association of Realtors

40 Apartment Rents Rising $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 Metro Rents County Wages Rents Share Ventura $57,789 $1,700 35% Los Angeles $63,236 $1,830 35% Santa Barbara $52,911 $1,526 35% Orange $63,849 $1,827 34% Riverside $45,219 $1,293 34% San Bernardino $45,762 $1,293 34% Inland Empire Orange County MD Los Angeles MD San Diego San Diego $60,887 $1,696 33% San Luis Obispo $44,816 $1,147 31% Source: REIS, QCEW

41 Homeownership Rate Low. Future Course? 70 Homeownership Rate 65 Percentage California United States Source: Census Bureau

42 Housing: CA s Biggest Challenge Signs of stress: Homeownership rate at lowest in decades Rising prices, Escalating rents Not just about affordable housing: all income levels, renter and for-sale housing How to Address Chronic Housing Problems Less about making housing affordable to households (demand) Really about supply: Construction: Need 200,000/yr Actual: 15: 95,000, 16: 101,000, 17: 111,000 Aligning construction with actual needs Social & Economic Concerns Vitality of CA and Region: Growth, Incomes, Tax Revenues

43 Conclusion/Outlook

44 U.S. Outlook Continued US Growth: 2017: 2.3%, 2018: % Domestic Spending Will Continue Oil Prices: Steady in $55-70/barrel range Inflation: Low, But Rising Financial Markets: Rates Up, Volatility in Equities Policy Uncertainty

45 CA/Local Outlook Growth constrained by limited increases in labor force Leading sectors: Construction, Consumer-serving Sectors, Tourism, Health Care, Def/Aero Housing shortages: owner-occupied and rentals Time to invest in future growth, long-run stability

46 Thank You

Outlook 2018: IE and Southern California So Cal Economic Summit Corona Chamber of Commerce March 29, 2018

Outlook 2018: IE and Southern California 2018 So Cal Economic Summit Corona Chamber of Commerce March 29, 2018 Robert A. Kleinhenz, Ph.D. Economist/Exec Director of Research UCR Business Forecast Outline