There s something happening here...

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Juniper Watson
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1 There s something happening here what it is, ain t exactly clear For What it s Worth -- Buffalo Springfield, 1966 September 15, 2015 Mark Schniepp Director

2 A turbulent summer ü Series of crashes on the Shanghai Stock Market down 33 percent, from mid-june to early July, then another 9 percent on July 27, and another 8.5 percent on August 24 ü U.S. and other world financial markets correspondingly reacted to China s collapse ü Dow free falls 1,000 points on August 24 ü China devalues Yuan on August 11 ü Will the slowdown in China drag down the world?

3 Agenda -- today q Extraordinary observations q Is financial market volatility justified? q 3 Quizzes.... re: FE q Social and Economic changes q The building spree in California q The California Budget and Recession Watch q There s life in the housing market q The 2016 forecast for California

4 Extraordinary Observations / Sept Prices and interest rates Oil prices Gasoline prices Treasury yields Inflation Rates The drought 4 years and very little impact 6 + years after the end of the recession and we are approaching full employment economy El Nino news....

5 West Texas Intermediate Crude Oil Price: Daily dollars per barrel March September 14, $ Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15

6 Average Price per Gallon (regular gas) U.S. and California California U.S. $2.30 $3.16 Gasbuddy.com September 14, 2015

7 percent 2.6 Daily 10 year U.S. Treasury Bond Yield September September 14, % Sep-14 Nov-14 Feb-15 Apr-15 Jul-15 Sep-15

8 Yield on 10 year U.S. Treasury December % July %

9 percent 4 U.S. Consumer Price Inflation July July Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

10 thousands of workers 420 Farm Employment / California

11 Real Total Value of Agriculture / California billions of constant 2014 dollars

12 millions of constant 2014 dollars 17 Real Farm Income / California

250 Producer Price Index of Cattle index (2002=100) July 2007 - July 2015 225 200 43 % 175 150

13 250 Producer Price Index of Cattle index (2002=100) July July % Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Source: Bureau of Labor Statistics

index (2002=100) 200 Producer Price Index of Milk July 2007 - July 2015 180 58 % 160 140 120 100

14 index (2002=100) 200 Producer Price Index of Milk July July % Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Source: Bureau of Labor Statistics

index (2002=100) 1600 Producer Price Index of Tree Nuts July 2007 - July 2015 1400 60 % 1200 1000

15 index (2002=100) 1600 Producer Price Index of Tree Nuts July July % Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Source: Bureau of Labor Statistics

16 The Mother of all El Ninos may be brewing in the Pacific /07/21/2015-el-ninoversus-1997/ September 2, 2015

17 July 2015

18 Weekly Nino 3 index at 2.3C. Only two El Ninos since 1950 have had monthly Nino 3 values >= 2.3C ('82-'83, '97-'98). 90 percent chance El Nino conditions will be present for the winter July 2015

19 index 18,500 Dow Jones Industrial Average September 12, September 14, ,250 18,000 17,750 17,500 17,250 17,000 16,750 16,500 16,250 16,000 Sep-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Jul-15 Sep-15

20 Summary / Positive Signals corporate profits near/at record highs the unemployment rate is nearly full business investment is soaring inflation running less than 1% retail spending at all time record high world tourism at record levels gasoline prices have tumbled ~ except in california

21 rate 7% 6% 5% Federal Funds Rate and Discount Rate March September 2015 The Discount Rate Federal Funds Rate 4% 3% 2% 1% 0% Mar-94 Jun-99 Sep-01 May-05 Dec-06 Apr-08 Nov-09 Jun-11 Jan-13 Sep-15

22 trillions of dollars 2.2 Corporate Profits / U.S Q Q Q2 2008Q3 2010Q Q Q2

23 millions of jobs 4 Jobs Created / US

24 index 1985= Consumer Confidence & Sentiment Conference Board / U. of Michigan Surveys August August Sentiment Confidence Aug-07 Aug-09 Aug-11 Aug-13 Aug-15

25 Real Retail Sales / U.S. billions of 2015 dollars, SAAR July July Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

26 Unemployment Rate / U.S. percent August August % Aug-11 Aug-12 Aug-13 Aug-14 Aug-15

27 percent 13 Unemployment Rate / California

28 Unemployment Rates / July 2015 San Mateo 3.6 Marin 3.7 San Francisco 3.8 Santa Clara 4.3 Napa 4.4 Sonoma 4.6 Orange County 4.7 San Luis Obispo 4.9 Alameda County 5.0 Placer County 5.2 San Diego 5.4 Sacramento 6.2 Fresno 9.6 Stanislaus 9.4

29 Meaning of Full Employment Employers have a tough time filling job vacancies, and they start to bid up wages, either to keep their employees from leaving, or to recruit skilled employees from other firms.... Since wages are not generally rising much, there is still slack in the labor force However, particular regions are at FE Bay Area, and parts of Southern California

30 thousands of jobs 500 Technology Services Employment / California July July Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15

31 thousands of jobs 195 Technology Equipment Mfg Employ / California July July Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15

32 Quiz: How easy is it for you to recruit skilled workers? (a) We get many qualified applications and it s a snap (b) Only some of our applicants are qualified but we fill most positions (c) We can t find qualified applicants (d) Even people working for us now aren t qualified

33 percent change Inflation in Wages and Salaries per Worker Los Angeles and Bay Area regions 2006 Q Q2 Bay Area Los Angeles / Orange County Region Q Q Q Q Q Q Q2

34 Quiz: Did or will your wage or salary increase this year? (a) nope, and I m just lucky I m not fired (b) no, but an increase is coming soon (c) not for me but for other workers or new recruits of the firm (d) yes, 3 to 5 percent (e) Every week I laugh all the way to the bank

35 millions of sales New Car & Light Truck Sales / U.S

36 thousands of sales New Home Sales / U.S ,200 1,

37 Quiz: What happened to the Demand for housing? (a) We are demanding housing It s called rental housing (b) We like having our 20-something kids live at our house (c) We like living with our parents (d) We like our parents living with us

38 Social & Economic Changes We are now seeing change more frequently and it s redefining normal.. Due to Global influences - Manufacturing going abroad - Geopolitical issues But mostly as a result of - Technology and Demographics - The aging baby boomer generation, and Generation Y now becoming more economically relevant

39 Social & Economic Changes Who was Kathleen Casey?

40 Social & Economic Changes Who was Kathleen Casey? 76 million for the next 19 years.... That surge in population proved to be a major societal and economic changing force in America Boomers grew up in the 50s and 60s and were responsible for the explosion of roads, highways, and particularly: school construction in 50s Onset of popular Toys: Barbie ( 56), Hula Hoop ( 57) EtchaSketch ( 60), Easy Bake ( 63), GI Joe ( 64)

41 Social & Economic Changes Social changes of the 60s and 70s the Drug Culture and Rock Music explosion of the 60s Civil rights movement and the Environmental movement

42 Social & Economic Changes Social changes of the 60s and 70s the Drug Culture and Rock Music explosion of the 60s Civil rights movement and the Environmental movement Entered colleges and universities in record numbers in the late 60s to the mid 80s Boomers became the spendthrift consumers Were responsible for the housing booms of the 70s and 80s, and the first real inflation in housing prices Personal computer booms of the 80s and 90s

43 Social & Economic Changes Principal among their many inventions: Small electronics, cell phones, and video games the internet in the 90s Viagra in 1998 The housing bubble in The technology boom of the new millennium and insatiable demand for electronics and gadgets Boomers are now growing old. and their impact on the economy should be less, in favor of the next generation

births in thousands 4,500 4,000 wwii generation Births in the United States silent generation 1901-2013 baby boom generation X

44 births in thousands 4,500 4,000 wwii generation Births in the United States silent generation baby boom generation X generation Y or "millenials" Z 3,500 3,000 2,500 2,

45 The Baby Boom Population 1946 to 2060 Now aged 50 to 68 U.S. Census Bureau / Purple bars actual; green bars projected

thousands of people 12,000 Population by Generation / California Generaton Y 2015 10,000

46 thousands of people 12,000 Population by Generation / California Generaton Y ,000 8,000 Generaton Z Generaton X Baby Boomers 6,000 4,000 Under to to to 69

47 Generation Y.... born ~ Currently in their 20s and early 30s Have grown up with technology, connectedness, and immediate information Expectation for immediacy Boomer parents have provided them every emotional, educational, and physical need and want Including shelter, which is often still the case today.. Nevertheless, they were impacted by the Great Recession, the stock market crash, and directly experienced unemployment and financial problems

48 Generation Y Boomer parents advised them to seek an education field that they loved and that a job would be waiting for them upon graduation..... The unemployment rate for 18 to 24 year olds is extraordinarily high, as Gen Y is ill prepared and entry level jobs have been replaced by robots Consequently, their behavior toward purchasing housing, autos, and bigger ticket items has been affected... They will buy homes later (if at all)

49 thousands of units 2,500 2,250 2,000 1,750 1,500 1,250 1, Boomers: 13 to 31 New Housing Starts / U.S Boomers: 22 to 40 Boomers: 41 to 59 Gen Y: Ages 16 to

50 The Atlantic May 19, 2015

51 percent Unemployment Rate in California / By Age July Age Age Age & over

52 Generation Y Implications Millennials have delayed adulthood They will be employed in their ultimate career field later (and they ll likely switch jobs and even careers many times.... ) So they don t want to be tied down with a home, a dog and two kids.... They don t have much money now and they re carrying debt, so staying at home in their boomer parent homes is smart living

53 Generation Y --- A reluctance to buy Share of 18 to 34 year olds that own homes Home ownership lowest in 25 years

54 to 34 year olds living with their parents.....

55 percent 7.5 Average Rental Vacancy Rate / California

56 Delaying adulthood also... means delaying marriage and children In 2014, Millennials aged 20 to 34: 26% Gen X: 36 % Boomers: 48 % Silents: 65 % Delaying marriage/children means delaying household formation which delays economic impacts...

57 The New Normal for housing Don t expect a sharp housing market recovery Owning vs renting preferences have changed Boomers are pretty much set in their housing now and Gen Y is in no condition to replace their parents propensity to spend. on housing or anything else yet Regarding new development of non-housing, there is no new normal.... California is experiencing a building boom

58 billions of dollars 14 Investment in New C&I Building California

59 thousands of jobs 600 Total Jobs Created / California ,

60 percent change in non-farm employment Cumulative Job Growth by Region July July 2015 Bay Area Inland Counties Coastal Southern California Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15

61 Recent Evidence: California Housing now rebounding More residents working Unemployment rate approaching full Jobs, Income, Spending.... Wages rising More housing projects starting up Office vacancy improving to best levels of the current cycle

62 millions of dollars 3,500 New Commercial & Industrial Investment Los Angeles County ,000 2,500 2,000 1,500 1,

63 Non-Residential Development Commercial and industrial development has rebounded sharply in California Much of the increase in non-residential development has been in infrastructure and energy projects. Also: parking garages, hospitals, retail stores including amusement facilities Half of total investment in structures was in remodel activity

64 thousands of units permitted 200 New Housing Production / California

65 Largest Housing Projects Tejon Ranch, Kern County Grapevine Project 12,000 Tejon Mountain Village 3,400 Centenniel Project (LA County) 23,000 Quay Valley, Kings County 25,000 Entire solar powered community Newhall Ranch, Santa Clarita Valley 21,420 West Jackson Highway Master Plan 17,000 Otay Ranch, San Diego County 15,000 Placer Vineyards, Placer County 14,000

66 Largest Housing Projects Rancho Mission Viejo, Orange County 14,000 Concord Reuse Project, Contra Costa 12,272 Redwood City Saltworks, San Mateo 12,000 - located between Oracle and Facebook Yokohi Ranch, Tulare County 10,000 Folsom Specific Plan, Sacramento County 10,210 Treasure Island, SF County 8,000 Coliseum City, Alameda County 5,700

67 / Dept of Finance California Budget

68 Budget in The May revision added $7 billion to General Fund Revenues Prop 98 increased K-14 funding by $5.5 billon $1 billion more in than for the Community College System More support to students More full time faculty Increased operation and deferred maintenance budgets

69 / Dept of Finance Calif Budget

70 Demands on the California Budget Deferred maintenance on roads, and other infrastructure Future retiree health care benefits for state employees Future pension benefits for state employees Proposition 2 Rainy Day Fund Emergency Drought Response

71 Page 3 of the May Revision Budget Document

72 billions of dollars 3.0 General Fund Surplus / California FY FY

73 Community College Update Current Enrollment & Future Demand

74 millions of students 3.0 Total Enrollment California Community Colleges to

75 thousands of students Distance Education / FTES California Community Colleges to

76 dollars per unit 50 Fees per Unit California Community Colleges Fall Fall

77 thousands of students 1,500 1,300 1, Enrollment by Age California Community Colleges to and Under 25 to to and Up

78 Factors Affecting CC Enrollment Pool of graduating 12 th graders in the region Per unit fees - larger impact on Part Time than FTE students Economy had a negative impact on part time student enrollment - Less enrollment of PT students when the economy created more jobs and the unemployment rate fell year old population growth - 25 to 34 population growth a factor for some colleges

79 millions of people 4.1 Population Age 18 to 24 / California

80 In search of the next....

81 The Next Recession? Due to China? Greece? No, China is not the problem.... Our interpretation of the situation is the problem And Greece is just too small.... Recession appears far enough away to predict with any confidence Statistically, it would occur in 2018

82 percent 8.0 Real Gross Domestic Product Growth / U.S years 10 years 7 years 9 years

83 The Next Recession? 2 ½ years away ? in 2018? There is nothing that we can see now that would necessarily lead us into recession Asset prices rising in the Bay Area that model a bubble No observable excesses elsewhere And the world economy is forecast to strengthen However, geopolitical instabilities are always a threat Technology and demographics are rapidly changing.... clouding the future

84 Yogi Berra The future isn t what it used to be

86 thousands of sales Existing Home Sales / California. July July 2015 Southern California: 8 percent increase Bay Area: 11 percent increase Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

87 thousands of homes 290 For-Sale Housing Inventory / California July July Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

88 500 Median Home Selling Price / California. thousands of dollars July July Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

89 County San Diego Orange Los Angeles Inland Empire Kern San Francisco Santa Clara California Median Home Selling Prices California Counties July 2015 Price $562,650 $722,170 $486,310 $294,710 $229,700 $1,312,500 $965,000 $488,260 % change % Change From Peak

90 The 2016 Forecast

91 2016 Forecast Notes / A Recap The environment today is the result of demographic forces..which has impacted the housing market Full employment in CA by mid Already full in many other counties Therefore, hiring trails off Consequently, salaries will be rising adding to inflation pressures

92 units authorized New Housing Units / California , , , , , ,000 75,000 50,000 25,

93 in-migrants minus out-migrants Net In-Migration / California , , ,000 50, , ,

94 thousands of jobs 600 Job Creation / California ,

95 billions of constant 2015 dollars 28 Real Investment in Non-Residential Structures California

96 constant 2015 dollars 60,000 Per Capita Personal Income / California ,000 54,000 51,000 48,000 45,000 42,

97 thousands of dollars 600 Median Home Selling Price / California

98 Expectations: next 12 months Another year of economic expansion Housing extends and accelerates growth Despite the volatility in the financial markets, there is no recession in sight.... Hiring will get tougher from this point on Full employment by late this year or early 16 Rising salaries for skilled workers Rising incomes for families in general

99 Expectations: next 12 months Virtually no possibility of recession Another solid year where the California budget benefits and a surplus should occur

100 The END

A comment on recent events, and...

A comment on recent events, and... where we are in the current economic cycle November 15, 2016 Mark Schniepp Director Likely Trump Policies $4 to $5 Trillion in tax cuts over 10 years to corporations,