Cliffs, Tooth Fairies and The End of Year

FourBank of Agriculture and Commerce

Stockton, CaliforniaFebruary 6, 2013

John W. Mitchell

24th

Cliffs, Tooth Fairies and The End of Year

FourBank of Agriculture and Commerce

Modesto, CaliforniaFebruary 7, 2013

John W. Mitchell

Disasters Avoided-Cliff One, Euro Survived March1st and March 27th Deadlines Year Four of Upturn-Modest or Moderate 1/2013 Employment 3.23 Million below 1/2008 but 5.51 million

above 2/2010 Trough House Prices Rising Case Shiller up 5.5% to November California with Clean Budget? Fourth Quarter Output Decline Global Economy Weak But Stabilizing? S &P 500 up 6.1% to 2/1/13 Personal Income up 2.6% in December and 1% in November (SAAR) Largest Increase in Domestic Oil Production in History of Industry in

2012 Inflation Moderated Lone Ranger Back and Twinkies GONE!

February 2013

Q1 Q2 Q3 Q4

GDP 2 1.3 3.1 -.1

Consumption 2.4 1.5 1.6 2.2

Equip & Software

5.4 4.8 -2.6 12.4

Non-Res Structures

12.9 .6 0 -1.1

Residential 20.5 8.5 13.5 15.3

Federal -4.2 -.2 9.5 -15

State and Local -2.2 -1 .3 -.7

Exports 4.4 5.3 1.9 -5.7

Imports 3.1 2.8 -.8 -3.2

Real GDP (SAAR) Commerce Department2012 (SAAR,%)

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

Contributions to GDP GrowthQ3( Blue) and Q4(Red) 2012

Janu

ary

Mar

chMay Ju

ly

Sept

embe

r

Novem

ber

Janu

ary

Mar

chMay Ju

ly

Sept

embe

r

Novem

ber

Janu

ary

0

50

100

150

200

250

300

350

Source: BLS

2011-13 Nonfarm Payroll Employment Change(,000 SA) Average 181,000 Per Month in

2012

Mining

& Log

ging

Constru

ction

Man

ufac

turin

g

Trad

e

Tran

s, W

are

& Util

Info

rmat

ion

Finan

ce

Prof

essio

nal S

ervic

es

Ed &

Hea

lth

Leisu

re &

Hospita

lity

Other

Ser

vices

Fede

ral

Stat

eLo

cal

tota

l

-500,000

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Annual Job Change January, 2012-January, 2013 (1.6%)

Janu

ary

Mar

chMay Ju

ly

Sept

embe

r

Novem

ber

Janu

ary

Mar

chMay Ju

ly

Sept

embe

r

Novem

ber

-0.40%

-0.20%

0.00%

0.20%

0.40%

0.60%

0.80%

Source:BLS

Consumer Price Index Monthly Changes 2011-121.7% in December

Core 1.9%, Annual Average 3.2% in 2011

Beige Book January 16, 2013 Stable Price Pressures

Energy Commodities 8.6% in Aug, 6.7% in Sept. -.5% in October and -6.9% in November and -2.2 in December

Compensation 12 Months to December 1.9%, Wages1.7%, Benefits 2.5%

Inflation

1 m

onth

3 m

onth

s

6 m

onth

s

1 ye

ar

2 ye

ars

3 ye

ars

5 ye

ars

7 ye

ars

10 y

ears

20 y

ears

30 y

ears

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

2/1/20137/25/2012

Interest Rates Source: US Treasury

Seven Years of Zero Short Term Rates ? 30 Year Mortgage 3.42% Week Ending

1/25/13 10 Year 1.9% on Week Ending 1/25/13 Fed will tolerate 2.5% Inflation All Treasuries Under 5 Years Yield Less than

1% Personal Interest Income Q4 2007 $1.32

Trillion in December 2012 $1.012 Trillion Pension Obligations?

Rates

GDP Growth Fed Central Tendency for 2013 2.3-3% and 3-3.5% in 2014 ( 2012 2.2% First Est.)

Consensus Moving from 2% in 2013 to 2.6% in 2014

Inflation Staying Near 2% Through 2014

Fed on Hold Until at Least Mid 2015

Prospects

What happens Overseas ? Dealing with the debt ceiling and

sequesters in the next few months? How will the actors behave ?

Known Unknowns

Jan-

05

Jul-0

51-

Jan

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09 July

Janu

ary

July

Janu

ary

July

Janu

ary

July

0

500

1,000

1,500

2,000

2,500

Residential Permits (SAAR) Census Bureau December 2012 Up 30.3% For the Year

Residential Permits 2004 to 2012 California Up 28.7% in 2012

Source: Census

2004 2005 2006 2007 2008 2009 2010 2011 20120

50,000

100,000

150,000

200,000

250,000

207,390 205,020

160,502

110,073

62,681

35,069 43,716 45,47158,540

2006

/1 3

2007

/1 3

2008

/1 3

2009

/1 3

2010

/1 3

2011

/1 3

2012

/1 3

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

ModestoCalifornia

FHFA Purchase Only Index CAModesto All Transactions

The Centerpiece

Modesto Permits-2004-2012

Building Forces

2004

2006

2008

2010

2012

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000 Affordability

Price Declines Mortgage Rates Employment Household Formation Different Credit World More Renters Stanislaus County

Median Sales Price in December up 19.2% to $161,610 (CAR)

2007

/4 2 4 2 4 2 4 2 4 2

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

Source: Rockefeller Institute

Total State Tax Collections Above Previous Year for 11 Quarters

After Proposition 30 Governor Proposed Budget with a Spending

Increase of 5% Expecting Gains in Personal Income Tax of

1.8% ($1.1B), Sales Tax Receipts 12.3% ($2.55B), Corporate Taxes 20.4% ($1.55B)

What will Actually Appear-Getting Beyond the Cliff Impact

California Budget

The First Cliff Payroll Tax Holiday Ends Bush Tax Cuts Expire for Over $450,000 Sequester Process Delayed 2 Months New Medicare Taxes Start Phase Outs and Deduction Limitations Back Estate Tax Rate Bumped AMT Fix, Doc Fix

Long Term Spending Issues-Not Addressed Debt Ceiling Unresolved Short Term Problem-Long Term Problem Geithner-”And you can’t count indefinitely on the world having

more confidence in our political system than is justified”

Policy Cauldron

Twist Ended in December-Now Buying $45 Billion Per Month of Treasuries with maturities from 4 Years to 30 Years

Continuing to Buy $40 Billion Mortgage-Backed Securities Per Month

Total $85 Billion Per Month in New Acquisitions as well as Reinvesting Principal Payments

Exceptionally low rates as long as unemployment remains above 6.5% and inflation is no more than .5 point above 2% longer run goal (12/12/12) and (1/30/2013)

When does the buying program end? When the labor market improves!

How does the unwinding take place? “Balanced approach” 1/30/13

Monetary Policy

North Dakota 1 Utah 2 Arizona 3 Texas 4 Colorado 5 Oklahoma 6 Idaho 7 Montana 8 Indiana 9 Hawaii 10 Washington 11 Minnesota 12 Ohio 13 Georgia 14 South Carolina 15 North Carolina 16 California 17 Massachusetts 18 Nevada 19

Job Growth Update December 2012 Data-Year over Year Change-45 States Up, 1 Unchanged

Kentucky 20 Missouri 21 New York 22 Tennessee 23 Oregon 24 New Jersey 25 Florida 28 Virginia 32 Pennsylvania 34 Alabama 38 Alaska 39 Connecticut 44 Mississippi 45 Wyoming 46 Connecticut 47 Maine 48 New Mexico 49 West Virginia 50

13,500,00013,600,00013,700,00013,800,00013,900,00014,000,00014,100,00014,200,00014,300,00014,400,00014,500,000

Source: EDD

California Wage and Salary Employment 2/10 to 12/12

2009 2010 2011

California $8,462,343 $10,949,761 $16,304,937

Oregon $494,534 $510,793 $1,029,169

Washington $1,065,891 $1,903,302 $2,985,398

Source: USDA

Net Farm Income ($,000)

California Job Change Year to December, 2012 (1.7%) Source: EDD

Manufactur-ing

NR&MNG

Construc-tion

TradeInformation

TP,W,UtilFinance

Prof. Services

Ed&Health

Leisure&Hosp.

Othe Ser.Govt.Total

-50,000 0 50,000 100,000 150,000 200,000 250,000 300,000

NR&MNG

Trade

TP,W,Util

Prof. Services

Leisure&Hos.

Govt.

Job Change Percentage

Chico 400 .6

Fresno 4,600 1.6

Los Angeles 69,500 1.8

Modesto 1,000 .7

Napa -200 -.3

Oakland 21,500 2.2

Redding 1,800 3.1

Sacramento 10,800 1.3

San Diego 20,300 1.6

San Francisco 33,200 3.4

San Jose 27,600 3.1

Stockton 5,500 2.9

California Area Employment December 2012

Modesto Job Change Year to December, 2012 (.7%) Source: EDD

Manufactur-ing

NR,Mine&Con

TradeInformation

TP,W,UtilFinance

Prof. Services

Ed&Health

Leisure&Hosp.

Othe Ser.Govt.Total

-200 0 200 400 600 800 1,000 1,200

Trade

TP,W,Util

Prof. Services

Leisure&Hos.

Govt.

2004 2005 2006 2007 2008 2009 2010 2011 2012135,000

140,000

145,000

150,000

155,000

160,000

165,000

Source: EDD

Modesto Annual Average Wage and Salary EmploymentFlat in 2012

Youth Un and Underemployment –Scarring January U-6 14.4%, Mean Duration 35.3

Weeks Labor Force Participation Rate January 63.6%-

The last Time it was there was December 1981. Recession Start 66%

Real Family Median Net Worth Down 38.8% 2007-2010 Survey of Consumer Finances

California Jobs Gap 1,791,000 In October Brookings

CoreLogic Underwater in CA 28.3% in Q3

Leftovers

How Does the Fiscal Situation End? Simpson-Bowles, Confidence Collapse as in

John Mauldin’s–Endgame, Rogoff and Reinhart’s This Time is Different- Slow Growth

Do we still have the recipe for growth? (Lots of Gloom, but Remember the Late 1970s!)

Nagging Questions

Stella and The Fairies

Stella Fairies

The Tooth Fairy Free Medical Services

Fairy The No New Taxes

Fairy The Rich Will Pay Fairy The Entitlement Fairy

Uncertainty Reduced, But Remains Most likely Growth 2-2.5% California Job Growth 1.5-2% Falling Debt Burdens, Housing, Rising

Income and Employment, Balance Sheets, Financial Institutions Strength, ISM both Manufacturing and Non-Manufacturing, Energy Developments, Initial Claims, Global Glimmers

2013

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