The California Economy Recession, Forecast, Budget, Issues City National Bank Annual Economic Forecast Conference Stephen Levy, CCSCE February 2, 2010
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
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.
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% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 California United States
Annual Change in Personal Income 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 California United States
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% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Population Jobs Personal Income
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
California Loses A Million Jobs 40,000 20,000 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 Dec 07 Apr 08 Aug 08 Dec 08 Apr 09 Aug 09 Dec 09
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
California Construction Spending 120 100 $Billions 80 60 40 20 0 2005 2006 2007 2008 2009 2010 Residential Non Residential Public Total Construction
Residential Permits in California 250 200 Thousands 150 100 50 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
CA Job Losses Driven by Construction Decline 40.0% % Job Loss Dec 07 Dec 09 30.0% 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.
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?
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 Q4 2009 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?
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 2010 2011 California United States
Job Growth in CA from Q4 2009 103.5% 103.0% 102.5% 102.0% 101.5% 101.0% 100.5% 100.0% 99.5% 99.0% 98.5% Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 UCLA DOF
Income Growth From Q4 2009 110.0% 108.0% 106.0% 104.0% 102.0% 100.0% 98.0% 96.0% 94.0% Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 UCLA DOF
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
Share of U.S. Venture Capital 60% 50% 40% 30% 20% 10% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 CA % of US Bay Area % of US
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
California Median Resale Home Price $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Dec 89 Dec 93 Dec 97 Dec 01 Dec 05 Dec 09
California Home Prices and Income 3.50 3.00 2.50 1989=1.0 2.00 1.50 1.00 0.50 0.00 1989 1993 1997 2001 2005 2009 Median Resale Price Median HH Income
CA Budget and Economy Two budget problems structural deficit from 2000 and deep recession In 2000 CA spent peak revenues on new spending and tax cuts huge majority votes Unlike businesses, when government revenues fall, the number of customers rises We are in gridlock about how the budget affects the economy and what choices to make
General Fund Tax Revenue ($Billions) $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
$30 $25 $20 $15 $10 $5 General Fund Shortfall ($Billions) $0 2010 11 2011 12 2012 13 2013 14 2014 15
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
General Fund as % of Personal Income 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1979 1980 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Taxes as % of Income Spending as % of Income
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
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
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?