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
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?
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
Extraordinary Observations / Sept. 2015 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....
107 99 91 83 West Texas Intermediate Crude Oil Price: Daily dollars per barrel March 2014 -- September 14, 2015 75 67 $44 59 51 43 35 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
Average Price per Gallon (regular gas) U.S. and California California U.S. $2.30 $3.16 Gasbuddy.com September 14, 2015
percent 2.6 Daily 10 year U.S. Treasury Bond Yield September 2014 -- September 14, 2015 2.18 % 2.4 2.2 2.0 1.8 1.6 Sep-14 Nov-14 Feb-15 Apr-15 Jul-15 Sep-15
Yield on 10 year U.S. Treasury December 1940 1.9 % July 2012 1.5 %
percent 4 U.S. Consumer Price Inflation July 2010 - July 2015 3 2 1 0-1 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15
thousands of workers 420 Farm Employment / California 1993-2015 410 400 390 380 370 360 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
50 48 46 44 42 40 38 36 34 32 Real Total Value of Agriculture / California billions of constant 2014 dollars 1990-2014 30 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
millions of constant 2014 dollars 17 Real Farm Income / California 1990-2014 16 15 14 13 12 11 10 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
250 Producer Price Index of Cattle index (2002=100) July 2007 - July 2015 225 200 43 % 175 150 125 100 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 80 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 800 600 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Source: Bureau of Labor Statistics
The Mother of all El Ninos may be brewing in the Pacific http://mashable.com/ 2015/07/21/2015-el-ninoversus-1997/ September 2, 2015
http://mashable.com/2015/07/21/2015-el-nino-versus-1997/ July 2015
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 2015-2016 winter http://mashable.com/2015/07/21/2015-el-nino-versus-1997/ July 2015
index 18,500 Dow Jones Industrial Average September 12, 2014 - September 14, 2015 18,250 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
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
rate 7% 6% 5% Federal Funds Rate and Discount Rate March 1994 - 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
trillions of dollars 2.2 Corporate Profits / U.S. 2006 Q2-2015 Q2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 2006Q2 2008Q3 2010Q4 2013 Q1 2015 Q2
millions of jobs 4 Jobs Created / US 2000-2015 3 2 1 0-1 -2-3 -4 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
index 1985=100 110 Consumer Confidence & Sentiment Conference Board / U. of Michigan Surveys August 2007 - August 2015 100 90 80 Sentiment 70 60 50 40 Confidence 30 20 Aug-07 Aug-09 Aug-11 Aug-13 Aug-15
440 430 420 410 400 390 380 370 Real Retail Sales / U.S. billions of 2015 dollars, SAAR July 2008 - July 2015 360 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15
Unemployment Rate / U.S. percent August 2011 - August 2015 9.0 8.5 8.0 7.5 7.0 6.5 5.1 % 6.0 5.5 5.0 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15
percent 13 Unemployment Rate / California 2000-2020 11 9 7 5 3 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
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
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
thousands of jobs 500 Technology Services Employment / California July 2005 - July 2015 475 450 425 400 375 350 325 Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15
thousands of jobs 195 Technology Equipment Mfg Employ / California July 2005 - July 2015 192 189 186 183 180 177 174 Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15
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
percent change 5.0 4.5 4.0 3.5 Inflation in Wages and Salaries per Worker Los Angeles and Bay Area regions 2006 Q2 -- 2015 Q2 Bay Area Los Angeles / Orange County Region 3.0 2.5 2.0 1.5 1.0 0.5 2006 Q2 2007 Q4 2009 Q2 2010 Q4 2012 Q2 2013 Q4 2015 Q2
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
millions of sales New Car & Light Truck Sales / U.S. 1994-2015 18 17 16 15 14 13 12 11 10 1994 1997 2000 2003 2006 2009 2012 2015
thousands of sales New Home Sales / U.S. 1994-2015 1,200 1,000 800 600 400 200 1994 1997 2000 2003 2006 2009 2012 2015
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
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
Social & Economic Changes Who was Kathleen Casey?
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)
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
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
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 2004 2007 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 generation Y or "millenials" Z 3,500 3,000 2,500 2,000 1901 1909 1917 1925 1933 1941 1949 1957 1965 1973 1981 1989 1997 2005 2013
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 8,000 Generaton Z Generaton X Baby Boomers 6,000 4,000 Under 16 16 to 35 36 to 50 51 to 69
Generation Y.... born ~ 1980-1999 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
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)
thousands of units 2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 Boomers: 13 to 31 New Housing Starts / U.S. 1959-2015 Boomers: 22 to 40 Boomers: 41 to 59 Gen Y: Ages 16 to 35 500 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
The Atlantic May 19, 2015
percent 25 22.5 Unemployment Rate in California / By Age July 2015 20 15 10 5 11.3 7.0 5.1 0 Age 16-19 Age 20-24 Age 25-34 35 & over
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
Generation Y --- A reluctance to buy Share of 18 to 34 year olds that own homes Home ownership lowest in 25 years
.... 18 to 34 year olds living with their parents.....
percent 7.5 Average Rental Vacancy Rate / California 2000-2015 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2000 2003 2006 2009 2012 2015
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...
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
billions of dollars 14 Investment in New C&I Building California 1988-2015 12 10 8 6 4 2 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
thousands of jobs 600 Total Jobs Created / California 2001-2015 400 200 0-200 -400-600 -800-1,000 2001 2003 2005 2007 2009 2011 2013 2015
percent change in non-farm employment 8.0 7.0 6.0 Cumulative Job Growth by Region July 2013 - July 2015 Bay Area 5.0 4.0 3.0 Inland Counties 2.0 1.0 0.0 Coastal Southern California Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15
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
millions of dollars 3,500 New Commercial & Industrial Investment Los Angeles County 1995-2015 3,000 2,500 2,000 1,500 1,000 500 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
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
thousands of units permitted 200 New Housing Production / California 1999-2015 175 150 125 100 75 50 25 99 01 03 05 07 09 11 13 15
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
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
http://www.ebudget.ca.gov / Dept of Finance California Budget
Budget in 2015-2016 The May revision added $7 billion to General Fund Revenues Prop 98 increased K-14 funding by $5.5 billon $1 billion more in 2015-16 than 2014-2015 for the Community College System More support to students More full time faculty Increased operation and deferred maintenance budgets
http://www.ebudget.ca.gov / Dept of Finance Calif Budget
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
Page 3 of the May Revision Budget Document
billions of dollars 3.0 General Fund Surplus / California FY 2005 - FY 2020 0.0-3.0-6.0-9.0 2005 2008 2011 2014 2017 2020
Community College Update Current Enrollment & Future Demand
millions of students 3.0 Total Enrollment California Community Colleges 1994-95 to 2014-2015 2.8 2.6 2.4 2.2 2.0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
thousands of students Distance Education / FTES California Community Colleges 1993-1994 to 2014-2015 125 100 75 50 25 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
dollars per unit 50 Fees per Unit California Community Colleges Fall 1987 - Fall 2015 40 30 20 10 0 1987 1991 1995 1999 2003 2007 2011 2015
thousands of students 1,500 1,300 1,100 900 700 Enrollment by Age California Community Colleges 1994-95 to 2014-2015 24 and Under 25 to 34 500 300 100 35 to 49 50 and Up 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
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 18-24 year old population growth - 25 to 34 population growth a factor for some colleges
millions of people 4.1 Population Age 18 to 24 / California 1985-2030 3.9 3.7 3.5 3.3 3.1 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
In search of the next....
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
percent 8.0 Real Gross Domestic Product Growth / U.S. 1975-2019 6.0 4.0 2.0 0.0-2.0 9 years 10 years 7 years 9 years -4.0 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019
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
Yogi Berra The future isn t what it used to be
thousands of sales 41 39 Existing Home Sales / California. July 2009 - July 2015 Southern California: 8 percent increase Bay Area: 11 percent increase 37 35 33 31 29 27 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15
thousands of homes 290 For-Sale Housing Inventory / California July 2008 - July 2015 265 240 215 190 165 140 115 90 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15
500 Median Home Selling Price / California. thousands of dollars July 2010 - July 2015 450 400 350 300 250 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15
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 7.6 3.9 5.4 6.8 9.4 19.9 12.1 5.4 % Change From Peak -9.6-6.9-22.3-24.3-23.4 35.0 11.6-17.9
The 2016 Forecast
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 2016 - Already full in many other counties Therefore, hiring trails off Consequently, salaries will be rising adding to inflation pressures
units authorized New Housing Units / California 2000-2020 225,000 200,000 175,000 150,000 125,000 100,000 75,000 50,000 25,000 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
in-migrants minus out-migrants Net In-Migration / California 2000-2020 200,000 150,000 100,000 50,000 0-50,000-100,000 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
thousands of jobs 600 Job Creation / California 2000-2020 400 200 0-200 -400-600 -800-1,000 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
billions of constant 2015 dollars 28 Real Investment in Non-Residential Structures California 2000-2020 26 24 22 20 18 16 14 12 10 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
constant 2015 dollars 60,000 Per Capita Personal Income / California 2000-2020 57,000 54,000 51,000 48,000 45,000 42,000 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
thousands of dollars 600 Median Home Selling Price / California 2000-2020 550 500 450 400 350 300 250 200 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
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
Expectations: next 12 months Virtually no possibility of recession Another solid year where the California budget benefits and a surplus should occur
The END