California Economic Outlook-Mar 2011

8/7/2019 California Economic Outlook-Mar 2011

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This report is available on wellsfargo.com/research and on Bloom berg WFEC

March 01, 2011

Econ om i cs Grou p

Economic Perfor man ce Will Impr ove, but Recovery Is Still Abnorma lCalifornias economic recovery, for the most part, will remain painfully slow. While Californiaseconomic performance is expected to improve by a touch in 2011, the state will continue toperform somewhat below the national average. Californias employment growth should accelerate

to 1.0 percent in 2011, following a 1.5 percent decline in 2010. Private sector service employersare expected to create more jobs in 2011. Service jobs comprise about 87 percent of total nonfarmemployment in the state, so this could be an important support for Californias overall jobcreation. Moreover, the drag from construction payroll declines will finally begin to dissipate.Not that Californias housing market is gearing up for a roaring revival, but there is little scope forfurther double digit construction payroll declines given how far homebuilding has already fallenacross the state. Californias commercial real estate construction is already in hibernation sothere will be fewer construction job losses in that sector as well.

Still the legacy of the California debt/housing bubble and Great Recession remains, lurking justbelow the surface. The aftermath of these crises will continue to hold back economic growth inCalifornia for another year. Nowhere is this more visible than in the states unemploymentproblems. Californias unemployment rate at 12.5 percent is more than 3.0 percentage pointsabove the U.S. average. Californias unemployment rate is expected to remain above 12.0 percent

in 2011, keeping the states financial and housing problems very much front and center.

Unfortunately, Californias housing troubles are not over. Foreclosed and distressed sales ofhomes will remain historically high and home values and local tax revenues continue to be at risk.Home value declines of around 7.0 to 10.0 percent are likely in many California metro areas overthe coming year. According the California Association of Realtors, California median home priceshave been falling for three of the past four months through December and are now down year-on-year as well for the second consecutive month after 22 months of consistent improvement.California existing home sales fell about 9.5 percent in 2010, and months supply of existing homeinventory is on the rise for properties below $1 million. At the same time, housing inventories ofhigher priced properties above $1 million remain historically high.

The new California governor, Jerry Brown, is facing a daunting fiscal challenge. The State ofCalifornia estimates an operating deficit of $25.4 billion in FY 2011-12 without corrective action.

Longer-term, if changes arent made to the budget, the state faces annual budget deficits ofaround $20 billion a year for at least the next five years. One-time budgetary maneuvers havelargely been exhausted in past budget cycles, narrowing the options to fix the states deficits.

The governor is proposing $12.5 billion in expenditure cuts for 2011-12, comprising about half ofthe shortfall. The bulk of the rest of the shortfall will be closed by extending four temporary taxincreases adopted in February 2009. Approval of the tax extensions will require a June specialelection. The pace of state and local job losses in California will likely intensify again in 2011.

Special Commentary

Scott A. Anderson, Senior [email protected] (612) 667-9281

California Econom ic Outlook: March 2011

Cali forniasecon om ic recov ew i l l be m or e v isibin 2 0 11 as pr iva tesec tor j ob gr ow thim prov es , bu t byh i s t or i ca ls t a n d a r d s t h es ta tes recoveryrem a ins pa in fu l lslo w .

Cali forniash o u s i n g t r o u b l esa r e n o t o v e r .

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a s i g n i f ic a n t d r a gon t he econo m i co u t l o o k f o r t h es t a t e .


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California Outlook: March 2011 WELLS FARGO SECURITIES, LLCMarch 0 1, 2011 ECONOMICS GROUP

2

Figure 1

California Nonfarm EmploymentYear-over-Year Percent Change

-8%

-6%

-4%

-2%

0%

2%

4%

6%

00 01 02 03 04 05 06 07 08 09 10

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Total CA: Dec @ 0.6%

Total US: Dec @ 0.7%

Figure 2

California Employment GrowthYear-over-Year Percent Change

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

96 98 00 02 04 06 08 10

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

California: 2010 @ -1.5%

Forecast

Source: U.S. Department of Labor and W ells Fargo Securities, LLC

Californias Problem : Jobs, Jobs, JobsCalifornias prominent position in the housing and construction bubble and its subsequent crashhas left a deep gash in Californias job engine, leaving in its wake economic and financial hardshipfor many California households. If the nations job market has fallen into a deep economic holeCalifornia has fallen into an abyss where little if any amount of sunshine penetrates.

As we expected, Californias job growth in 2010 was spotty. Over the past twelve months only ahandful of California industries have created net jobs. Professional and business services hascreated 66,900 net jobs since December 2009 with 47,600 jobs coming from administrative,support, and waste services, primarily employment services jobs. But job growth also resumedfor higher wage professional, scientific, and technical service positions with California adding21,400 net jobs in this important sector. Last year this sector lost 66,500 jobs. Education andhealthcare has added 30,700 jobs with about half the jobs coming from education and the other

half coming from healthcare. Leisure and hospitality has added 26,700 net jobs, primarilyaccommodation and food service jobs, as business travel and international & domestic leisuretravel returned robustly in 2010. Modest job gains occurred in manufacturing, financial servicesand information services.

Net job losses were substantial in 2010 in construction. The industry lost another 32,900 jobsover the past twelve months, but that is only one-fifth the number of jobs lost in Californiaconstruction the year before. We expect 2011 will be another year of improvement in constructionpayroll losses as housing and commercial construction bounces around the bottom and begins agradual climb higher. Trade, transportation and utilities shed 4,600 jobs over the past twelvemonths, less than one-tenth the number of jobs lost in 2009. Stronger consumer spending overthe holidays and into 2011 should allow for more jobs in this sector in 2011. State and localgovernment job losses were a noticeable drag on California payrolls over the past twelve months.Government shed 21,700 jobs over the past twelve months, but more government jobs are at risk

in 2011 and beyond as state budget cuts take a more prominent position in resolving state budgetwoes that will have real impacts on state payrolls.

Californias unemployment rate increased a tenth to 12.5 percent in December, just one tenth of apercentage point lower than the peak 12.6 percent unemployment rate recorded in March 2010.There remains 2.27 million unemployed Californians and that number has risen modestly in fiveof the last six months. Further reflecting the dismal job prospects, Californias labor force hasshrunk since May 2010, falling in five of the last seven months. Californias labor forceparticipation rate fell another tenth of a percentage point in December to 63.9 percent, the lowestlevel of labor force participation in the state since 1977. The labor market participation often rises

Cal i forn ia jobr ow th w i l l re tu rno a b r o a d e r c r o s s -ec t i on o f

nd u s tr ies in 20 11.


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as job prospects improve and previous discouraged workers and marginally attached workersreturn to job hunting. We expect Californias unemployment rate to remain uncomfortably high atmore than 12.0 percent in 2011. This will keep political pressure on the new governor to addressthe jobs issue.

California nonfarm payrolls increased year-on-year through December 0.6 percent or 87,500

jobs, but private sector jobs have increased even more, rising 1.0 percent in 2010. Private sectorjob growth should strengthen in the months ahead as the drag from construction job lossessubside and more retail and service businesses that rely on consumer spending for revenuegrowth start to see improved conditions and start adding to payrolls again. Expect to see jobgrowth return to a broader cross-section of industries in 2011. Looking ahead, California payrollsslipped 1.5 percent in 2010, but should rebound by 1.0 percent in 2011.

Figure 3

California Employment GrowthX axis: Y/Y Job Growth (Ths.), Y axis: Avg. Hourly Earnings ($/Hr)

Construction Prof/Bus Svcs.

Ed/Hlth Svcs.

Trade/Trans/Ut

Leis/Hosp

Financial

Info. Svcs.

Mfg.

Other Svcs.

$0

$5

$10

$15

$20

$25

$30

-60 -40 -20 0 20 40 60 80

December 2009 - December 2010

Figure 4

Unemployment RatesPercent

0%

2%

4%

6%

8%

10%

12%

14%

00 01 02 03 04 05 06 07 08 09 10

0%

2%

4%

6%

8%

10%

12%

14%

United States: Dec @ 9.4%

California: Dec @ 12.5%

Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Searching For a State Budget That Wo rksCalifornias state budget problems have been well documented. The state is trying to close aprojected $25.4 billion deficit for FY 2011-12. The trick every year is getting one that closes thestates chronic budget gap, one that can pass through the states fractious legislature, and one thattries to address the state budget problems that are likely to emerge down the road. After muchanticipation, Governor Jerry Brown laid his cards on the table, releasing details on how he wouldlike to see the states budget problems resolved. On January 10, the governor released his budgetfor the state. His plan calls for further cuts in state employee pay, state social services spendingand a plan to extend expiring tax increases for at least the next five years to help close the deficit.The Governor needs the legislature to agree to the plan by March for the proposed tax extensionsto go to a vote of the people by June. State voters rejected some tax increase proposals inNovember, so it will take quite a bit of educating and selling to get the tax proposals through inone piece. The biggest selling point of the tax extensions is that without it, the state will need topass even deeper spending cuts. The governor has already ruled out more state borrowing to

address the looming imbalances, arguing that the state needs to take its fiscal medicine now.

Anti-tax Republicans in the legislature are likely to take issue with the tax extension, while theDemocrats in the legislature fight the steep cuts in the states social safety net. The fact that noone wins under the governors budget plan might increase the odds of passage in Californiaszero-sum legislature, though getting the electorate to go along for the ride is probably the biggestwildcard.

The governor proposes to cut the pay of state employees of between 8.0 and 10.0 percent in sixbargaining units. These units account for more than a third of the states general fund payrolls.

Cali forniasu n em ploy m en t raw ill re m ainun com for tab l yh i g h .

Cal iforn ia w i ll t ra n d b a l a n c e i tsbu dge t de f i ci t w ia com b ina t i on o fd e e p s p e n d i n g c ua n d a n e x te n s io nt em pora ry t a xh i k es t ha t w i ll

r e q u i r e a v o t e o f t he peop l e .


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This should bring the pay in-line with agreements reached by the Schwarzenegger administrationlast year and with the states 15 other bargaining units. These six units would also remain onthree day per month furloughs through June.

The governors plan also calls for $1.7 billion in cuts to the states health program and $1.5 billionin cuts for its Welfare-to-Work program. There are also large cuts to programs for the disabled

mentally disabled and autistic.The States colleges and universities will also see substantial cuts in funding to the tune of $1.0billion dollars. The governors plan spared further cuts to public elementary and secondaryschools.

The tax extension includes, continuing current personal income and sales taxes as well as thevehicle license fee. More specifically, the governors plan calls for extending four temporary taxincreases adopted in February 2009 for another five years. The voters will have to approveextending the one percent sales tax increase, the 0.5 percentage point increase in the vehiclelicense fee, the 0.25 percentage point personal income tax surcharge, and a reduction in thedependent exemption credit for the next five years.

There is little doubt stronger economic growth and more private sector job creation will help tofurther repair the damage that has been visited on the states finances. The latest financial report

from the State Controller for January shows that state revenues are recovering.1 Personal incometaxes over the past seven months, the largest category of tax revenues, are running higher by 19.0percent to $29.9 billion. More modest gains are visible in retail and sales taxes, which haveincreased by 3.4 percent to $14.5 billion. On the other side, corporate tax revenues remainedmoribund, decreasing 0.1 percent over the first seven months of the fiscal year to $4.0 billionThis lackluster performance for corporate tax revenues is partly due to a revised allocationschedule for tax payments that held down tax payments in the last quarter of the 2010, but evenaccounting for this change, corporate taxes are lagging past expansion cycles. Overall, the topthree revenue sources still increased by 12.2 percent from the year before.

Figure 5

California Tax RevenuesYear-over-Year Percent Change

-30%

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10%

20%

30%

40%

50%

95 98 01 04 07 10

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Total: Q3 @ 3.99%

Figure 6

California Tax RevenuesIndex of 4-month moving sum, Q1 2003=100

80

100

120

140

160

180

200

220

240

260

03 04 05 06 07 08 09 10

80

100

120

140

160

180

200

220

240

260

Property: Q3 @ 161.50

Personal Income: Q3 @ 136.34Corporate Income: Q3 @ 141.63

Sales: Q3 @ 136.91

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

Unfortunately, total disbursements are also on the rise, increasing 4.4 percent to $61.6 billionLocal assistance increased 5.4 percent to $46.5 billion, while state operations spending increased11.9 percent to $15.2 billion. Local K-12 education expenditures jumped 10.7 percent, andcommunity college disbursements increased 8.8 percent. There were some categories wherespending declined from the year before. Department of Corrections spending fell 7.8 percentLegislative/Judicial/Executive dropped 2.3 percent, while debt service payments fell 8.0 percent.

1 See California State Controllers Office Monthly statement of General Fund Cash Receipts andDisbursements Fiscal Year 2010-2011; January 2011.

Cal i forn ia t axe v e n u e s a r ee c o v e r in g , b u t n f o r t u n a t e l y t o t a lp e n d i n g i s a ls o o nhe r i s e .


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California has the eighth largest economy in the world and it is the largest issuer of debt in the$2.8 trillion dollar municipal bond market, so all eyes are on the state as it tries to stabilize itsgovernment finances. The possibility of large credit losses in the state and municipal bondmarkets has emerged as a potential risk to the U.S. financial system and the U.S. economicrecovery. Municipal bond yields have been trending higher as investors have gotten more nervous

and some have run to the exits. Moodys Investors Service gives California its lowest credit rating,a rating that is shared by only one other financially challenged state, Illinois. Californias bondsare still in relatively high demand nevertheless. California bond yields remain about 0.85percentage points below Illinois and have fallen more than a quarter percentage point from wherethey were a year ago. So while Californias state and local financial problems will continue to bein the headlines, the state now appears to be on the right track toward improving the situation.

Setting Records for International Trade and ExportsLooking for a good news story on the California economy, look no further than Californias tradeperformance over the past year. California exports hit a new December record at $13.3 billion, a14.8 percent increase from a year ago and the 14th consecutive month of year-on-year increases.For the year as a whole, California merchandise exports were $143.3 billion, a 19.3 percent gainfrom 2009 levels and the second highest total in history. Clearly, California is getting its fairshare of global growth and sales abroad. Further gains will be necessary to help rebalance the

states economy away from consumer spending and housing toward more productive drivers ofeconomic growth going forward. Californias growth in exports is comparable to what we areseeing nationally, suggesting that California has not yet lost its competitiveness against otherstates when it comes to its export prowess. California held its position as the second largestexporting state in the nation behind Texas. New York and Washington State came in third andfourth.

Export gains jumped in several of Californias largest trading partners. California exports toChina and Mexico increased the most in 2010, both rising 21.4 percent from a year ago throughDecember. South Korea, Californias fifth largest market, had the third largest increase up 14.6percent. Exports to Canada, Californias second largest trading partner, increased 11.1 percent.Chinas meteoric economic rise puts it neck and neck with Canada as Californias second largesttrading partner, though Canada still edged out China in December. These growth rates arecomparable to what we are seeing nationally.

Figure 7

California ExportsMillions of Dollars

$6,000

$9,000

$12,000

$15,000

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

$6,000

$9,000

$12,000

$15,000

Dec @ $13,342

Figure 8

California Exports by Destination Country

Other

53%

Korea

5%

Japan

8%

China10%

Canada

10%

Mexico14%

December 2010

Source: U.S. Department of Commerce and W ells Fargo Securities, LLC

Cal i forn ia i s s e t

r e c o r d s f o r e x pa n d i n t er n a t i o nt r a d e .

Ch i n a i s n e c k aneck w it h C anaas Cal iforn iass e co n d l a r g e s t t r a d in g p a r t n e r


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California Housing No Ho llywoo d Ending in Sight?California appeared to put in a solid bottom in its housing market in 2009. California singlefamily median existing home prices hit bottom in February 2009 at $245,230, according to theCalifornia Association of Realtors. By that point, California single-family home sales were alreadyrunning 77 percent above their 2008 levels. California home prices continued to rise though outthe rest of 2009, peaking in December 2009 at $306,860, a full 25.1 percent or $61,630 above theFebruary 2009 low. In our July 2010 California report, we argued that California had reached itsultimate bottom in housing, but with the expiration of the homebuyer tax credit, more signs ofweakness would emerge. Home inventories would start rising again as more foreclosures anddistressed sales hit the market, and we forecast some modest single digit median home pricedeclines would once again begin to occur across much of the state.

Through December of 2o1o, the latest housing data available, that is exactly what appears to havehappened. Since May 2010, median existing single-family home prices have slipped by $22,580or 7.0 percent. Seasonally adjusted single-family home sales fell for six of the first seven monthsof the year, but have since begun to stabilize at still historically low levels. As of Decembersingle-family home sales were still running 6.8 percent below year ago levels.

The weakness in demand that has re-emerged in the aftermath of the homebuyer tax credit hasbeen enough to push the months supply of existing homes back up from the relatively low levels

witnessed in 2009. Californias inventory of detached homes sat at 5.0 months in Decemberwhile attached home inventories increased to 5.8 months. Months of inventory are the highesfor detached properties in Northern Wine Country at 6.1 months, Orange County at 6.0 monthsand San Diego at 5.9 months. Months of inventory are below the statewide average inSacramento at 3.4 months and San Francisco Bay at 3.8 months.

By price level, months of inventory are higher in every price category for housing priced at $1.0million and below. For homes valued at more than $1.0 million, months of inventory remainabout the same as a year ago at 8.0 months. The largest increases in months supply haveoccurred in $750 to $300 thousand range. This is consistent with more supply coming on themarket due to foreclosures of distressed properties in the second half of the year. As Figure 10illustrates, Californias foreclosure rates have jumped higher once again for both prime andsubprime loans. The leading indicator of foreclosures, mortgage delinquencies shown in Figure 9appear to have peaked, but remain at very high levels, suggesting that foreclosures and distressed

sales will remain a major impediment to achieving a normal housing recovery in the state ofCalifornia. Housing supply will remain a pressing concern over the near-term as housing demandcontinues to struggle to gain momentum. Thirty year mortgage rates, which have already risenabout a percentage point from their October 2010 levels, are becoming an important factorholding back a more normal recovery in housing demand.

Figure 9

California Mortgage DelinquenciesPercent Delinquent, SA

0%

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00 01 02 03 04 05 06 07 08 09 10

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18%

24%

30%

Prime Del. Rate CA: Q4 @ 6.92% (Left Axis)

Subprime Del. Rate CA: Q4 @ 22.41% (Right Axis)

Figure 10

California ForeclosuresPercent Entering Foreclosure During Quarter, SA

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

00 01 02 03 04 05 06 07 08 09 10

0%

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8%

Prime Fcls. Rate CA: Q4 @ 1.56% (Left Axis)

Subprime Fcls. Rate CA: Q4 @ 3.25% (Right Axis)

Source: Mortgage Bankers Association and Wells Fargo Securities, LLC

W eak ness i no u s i n g d e m a n d a s re-em erged inhe a f t e rm a th o f he h om ebuy er t axred i t exp i ra t i on .

M on ths o f n v e n t o r y a r ei g h e r i n e v e r yr ice categ ory for o u s i n g p r i ce d a t 1.0 m il l ion a n delo w .


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Conclusion: Building a Foundation for Grow thCalifornia is slowly extricating itself from the Great Recession. Private sector job growth will bemore visible across that state, even in the most troubled metro areas. More service businesseswill be adding to payrolls this year as stronger consumer spending improves revenues and smallerbusinesses see improved top-line growth for the first time in this expansion. Manufacturing and

exports will remain an important source of economic activity. Statewide job growth is being ledby solid gains in some Southern California metro areas, especially in Orange County and SanDiego. Net job losses continue to plague the Los Angeles metropolitan division and the InlandEmpire, but even here declines are diminishing and signs of broader job growth are beginning toemerge. Northern California continues to hold back the states recovery as job losses linger inconstruction and financial services and retail sales remain moribund. Sacramentos economy isgetting hammered. Sacramentos unemployment rate has risen further over the past year and themetro has lost 18,600 net jobs or 2.25 percent of its employment over the past twelve months.However, it is not because of state government job cuts. Sacramento job cuts are centeredprimarily on construction, professional & business services and financial services. Governmentemployment in Sacramento is up 500 jobs over the past twelve months. California housingremains a considerable drag on Californias ability to grow. Weak housing demand will continueand could intensify if mortgage rates shoot higher over the coming year. The level of foreclosuresand distressed sales will remain historically high, keeping housing supplies elevated. Furthersingle-digit home price declines are likely in the months ahead. At the same time, state and localbudget cuts will loom large on the economic outlook. The governor is anticipating at least $12.5billion in additional state spending cuts, and it could be twice that amount if voters reject theextension of temporary tax hikes at the polls. This will hit Sacramentos economy especially hard,given its already weak economic position compared to other regions of the state. Overall,California will lag the national performance over the forecast horizon, though the states outlookhas improved due to a stronger national economy. We now expect California employment growthof 1.0 percent in 2011. Still the improved job outlook will not be enough to push the statesaverage unemployment below 12.0 percent in 2011. Jobs and unemployment across the state willremain the biggest economic problem for the states policymakers.

J o b s a n d u n em ploy m ent a c r o s s t h e s t a t ew i l l rem ain th eb igges t econ om icpro b l em for t hestatespo l icy m ak ers .


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Los AngelesLos Angeles Nonfarm Employment

Year-over-Year Percent Change

-8%

-6%

-4%

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2%

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00 01 02 03 04 05 06 07 08 09 10

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Total LOS: Dec @ -0.1%



0%

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8%

10%

12%

14%

00 01 02 03 04 05 06 07 08 09 100%

2%

4%

6%

8%

10%

12%

14%United States: Dec @ 9.4%

Los Angeles: Dec @ 13.0%

Home PricesCase-Shiller Index: Year-over-Year Percent Change

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United States 20-City Composite: Dec @ -2.4%

Los Angeles: Dec @ -0.2%

The Los Angeles metro area continued to addjobs at a modest pace through December 2010.Year-on-year employment declines havemoderated this year, though the pace ofimprovement has continued to lag the nationalaverage and the unemployment rate hascontinued to rise. Los Angeles nonfarm payrollsare still below year ago levels by 0.1 percent,while the nation has added 0.9 percent topayrolls over the same period. The economyappears to have regained some momentum overthe past three months. The Los Angeles metrohas added net jobs over the past three months.December job gains were led by retail trade,information services, and financial services.

Over the past year, four industries have led thejobs recovery in Los Angles. Information added19,900 jobs with 71 percent of the gain comingfrom motion pictures and sound recording.Leisure and hospitality added 11,200 jobs,almost all of them in accommodation and foodservice industries, and education & healthservices added 8,300 positions.

Unemployment has been slow to recede,however. In fact, the Los Angles metrosunemployment rate hit a new cyclical high inDecember at 13.0 percent more than 3.6percentage points above the U.S. average, andwell above the California average of 12.5

percent. The Los Angeles labor force continuesto grow faster than new jobs are being created.

Housing markets in L.A. are still quite weak.The median home price gains of around 10percent year-on-year recorded around theexpiration of the homebuyer tax credit last Aprilare rapidly slowing. According the Case-ShillerHPI, Los Angeles home prices are 0.2 percentbelow year ago levels as of December andrapidly decelerating along with the nations.

The California Realtors data for Los Angelesappears even dourer for attached homes. LosAngeles median home prices of attached homesat $252,358 as of December 2010 were 21.1percent below December 2009 levels whichwere already 30.0 percent below 2007 levels.December attached home sales continued totrend about 18.5 percent below year ago levels,though thats a marked improvement overOctobers 25.0 percent shortfall in existingattached home sales.

Source: U.S. Department of Labor, Standard & Poorsand Wells Fargo Securities, LLC


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San FranciscoSan Francisco Nonfarm Employment


-10%

-8%

-6%

-4%

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4%

6%

00 01 02 03 04 05 06 07 08 09 10

-10%

-8%

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6%

Total SAF: Dec @ -1.4%


Employment GrowthIndex: 1996 = 100

95

100

105

110

115

120

125

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1195

100

105

110

115

120

125United States: 2010 @ 108.5

San Francisco: 2010 @ 96.6

Forecast


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01 02 03 04 05 06 07 08 09 10

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San Francisco: Dec @ -0.4%

The San Francisco Bay Area continues to badlylag the economic growth occurring in otherareas of the country and state. Moreover, thepace of job growth appears to have slowed inrecent months. Nonfarm payrolls in the SanFrancisco metro area are still 1.4 percent belowa year ago. Northern California job growth hasbeen noticeably weaker over the past year thanin Southern California. The region continues tostruggle with sizable net job losses inconstruction and financial services. Over thepast year, most industries saw net job losses, ledby declines in financial services (-3,000),construction (-2,100), and trade, transportationand utilities (-1,600). Government andinformation, mostly publishing, shed 1,400 jobs

each. There are a few standout growth drivers inthe Bay Area. Computer systems design added1,000 jobs over the past twelve months.Manufacturers added a net 100 jobs over thepast year as technology and business spendinggrew rapidly.

The promise that seemed to shine on SanFrancisco in the late Nineties is now a distantmemory. Employment in the Bay Area jumped15 percent between 1996 and 2000 as the dot-com and technology bubble took hold in theregion, but a broader view tells a different story.Since 2000, the metro has shed all the nonfarm

jobs added, leaving a legacy of squanderedopportunity and no net job growth in SanFrancisco over the past fifteen years. Indeed,the region has actually been a seriousunderperformer of U.S. average job creation.

The Bay Area housing market recovery isstruggling, though sales appear to be stabilizingat low levels. Home price appreciation hasstalled. Median home prices declined 0.4percent from a year ago in December, accordingto the Case-Shiller index, after appreciatingabout 20.0 percent prior to the homebuyer taxcredit expiration in April. The California

Association of Realtors show the median homeprice in the San Francisco metro dropping 2.9percent from a year ago through December.Existing home sales were running about 2.8percent below year ago levels in December butthat is a marked improvement since Octoberwhen sales lagged by 21.0 percent from October2009.

Source: U.S. Department of Labor, Standard & Poorsand Wells Fargo Securities, LLC


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San DiegoSan Diego Nonfarm Employment


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

00 01 02 03 04 05 06 07 08 09 10

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Total SAN: Dec @ 0.5%


San Diego Job Growth by IndustryThousands of Jobs, Year-over-Year Change

5.7

3.5

2.1

0.2

0.1

-0.1

-0.4

-0.8

-1.4

-2.6

-4 -2 0 2 4 6 8

Prof/Bus Svcs.

Ed/Health Svcs.

Trade/Trans/Ut

Other Svcs.

Financial

Leis/Hosp

Gov't

Info. Svcs.

Mfg.

Constr/MiningDecember 2009 - December 2010


-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

01 02 03 04 05 06 07 08 09 10

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%


San Diego: Dec @ 1.7%

San Diego employment has increased modestlyover the past year, beating the L.A. and SanFrancisco metro areas. Nonfarm employmentmanaged to rise by 6,300 jobs over the pastyear. Professional and business services leadjob gains as employment services added 4,100jobs. Professional, scientific and technicalservices added a modest 800 jobs over the pasttwelve months. Healthcare added 3,300 jobs,mostly from ambulatory health care serviceproviders. Construction lost another 2,600 jobslead by commercial construction which shed1,100 jobs. The San Diego unemployment fell to10.1 percent in December, down two tenthsfrom a year ago, further illustrating the trendingwater nature of the jobs recovery so far.

San Diegos housing market remains far fromnormal and a true bottom in housing appears aways off. According to the California RealtorsAssociation, San Diegos months supply ofexisting homes at the current sales paceremained well above the California average at5.9 months for detached homes and 6.4 monthsfor attached homes. Home prices appreciationis decelerating rapidly, though home prices arestill 1.7 percent higher than a year ago. Furtherprice declines are expected in the months ahead.Existing home sales in San Diego jumped 25.5percent in December from November, but sales

were still 9.5 percent below a year ago. San Diegos defense industry is a bit of a mixedpicture though there is no doubt defense will

remain an important driver of San Diegoseconomic future. With the Pentagon planningsignificant declines in procurement spendingthere will be some layoffs and shuffling ofpersonnel from the major military contractorsin the region, though so far at least, thedownside risks appear surmountable. Helpingto offset the drop in procurement spending,military spending on San Diegos many bases islikely to grow as the Navy increases the number

of ships based in San Diego and operations arestreamlined in other locations.

Tourism looks to be a more significant supportfor the local economy in 2011 as investments ina new cruise ship terminal begin to pay off.Rising hotel room rates and rising occupancyrates are already visible. Source: U.S. Department of Labor, Standard & Poors

and Wells Fargo Securities, LLC


11/13


11

Orange CountyOrange County Job Growth by Industry

Thousands of Jobs, Year-over-Year Change

8.4

7.4

3.2

3.1

2.7

2.4

1.6

-0.9

-2.3

-4.9

-10 -5 0 5 10 15

Prof/Bus Svcs.

Leis/Hosp

Ed/Health Svcs.

Financial

Mfg.

Other Svcs.

Trade/Trans/Ut

Info. Svcs.

Gov't

Constr/Mining December 2009 - December 2010


0%

2%

4%

6%

8%

10%

12%

14%

00 01 02 03 04 05 06 07 08 09 100%

2%

4%

6%

8%

10%

12%


Orange Co.: Dec @ 9.3%

Existing Single-Family Home PricesMedian Prices, Thousands, Seasonally Adjusted

$0

$100

$200

$300

$400

$500

$600

$700

$800

96 97 98 99 00 01 02 03 04 05 06 07 08 09

$0

$100

$200

$300

$400

$500

$600

$700

$800

United States: 2009 @ $172.5

Orange Co.: 2009 @ $474.1

The Orange Country metro area is recoveringfaster than other parts of Southern Californiaand far quicker than Northern California.Nonfarm employment has risen 1.5 percent overthe past twelve months through December. Thiscompares to a 0.9 percent increase in nonfarmpayrolls nationally and a statewide average gainof 0.6 percent. Professional and businessservices employment led the advance, adding8,600 jobs from a year ago with about 60percent coming from temporary help firms andthe rest coming from high skilled and high wageprofessional, scientific and technical services.Year-over-year job gains also occurred in trade,financial services, manufacturing, leisure &hospitality, and education & healthcare,

illustrating the broader nature of the economicexpansion in Orange County.

Orange Countys unemployment rate has movedbelow the national jobless rate as better jobcreation has emerged. The Countysunemployment rate at 9.3 percent is now wellbelow the peak of 10.1 percent reached in 2009.Prior to the Great Recession, Orange Countysunemployment rate consistently hovered abouta percentage point below the national average.

Orange Countys home values have slid furtherover the past year. Orange County detachedhome values have fallen 7.5 percent over the

past twelve months through December to amedian price of $458,695. The median price inDecember 2008 was $442,640. A desirablelocation and improving economy should help tostabilize home prices though fragility remainsjust below the surface. Existing homeinventories remain elevated compared tohistorical and statewide averages at 6.0 monthsfor detached homes and 6.4 months forattached properties. The California average inDecember was 5.0 months for detached homesand 5.8 months for attached properties.Moreover, housing demand remains depressed

as existing home sales for December remained5.6 percent below year ago levels. Additionalmodest home prices declines cannot becompletely ruled out for 2011, especially ifmortgage rates continue to rise as we expect.

Source: U.S. Department of Labor, California Association of Realtorsand Wells Fargo Securities, LLC


12/13


12

Inland EmpireRiverside Job Growth by Industry

Thousands of Jobs, Year-over-Year Change

2.3

2.0

1.5

0.4

-0.2

-0.5

-0.7

-2.0

-6.0

-6.1

-8 -6 -4 -2 0 2 4

Prof/Bus Svcs.

Leis/Hosp

Trade/Trans/Ut

Ed/Health Svcs.

Other Svcs.

Info. Svcs.

Financial

Mfg.

Constr/Mining

Gov't

December 2009 - December 2010


0%

2%

4%

6%

8%

10%

12%

14%

16%

00 01 02 03 04 05 06 07 08 09 100%

2%

4%

6%

8%

10%

12%

14%


Riverside: Dec @ 14.4%

Existing Single-Family Home PricesMedian Prices, Thousands, Seasonally Adjusted

$100

$150

$200

$250

$300

$350

$400

$450

96 97 98 99 00 01 02 03 04 05 06 07 08 09

$100

$150

$200

$250

$300

$350

$400

$450

United States: 2009 @ $172.5

Riverside: 2009 @ $169.7

Riverside and San Bernardino counties saw netpayrolls decline yet again in 2010. The pace ofjob losses is decelerating, however, and thereare now a handful of industries that managed toadd net jobs from a year ago. Surely, the seedsof better job growth in 2011 are being sownthough the aftermath of the deep declines inemployment, housing and commercial realestate will continue to weigh on the region overthe forecast horizon.

Over the twelve months through December,nonfarm employment in the Inland Empireslipped by 9,300 jobs or 0.8 percent.Construction led the job declines sheddinganother 5,90o jobs. Specialty trade contractorscut 4,100 jobs, and commercial constructionlost 1,300 jobs. Local government jobs losseshave been severe, dropping 6,100, as propertyvalues plunge and tax revenues collapse. Jobgrowth has been led by professional andbusiness services, adding 2,300 positions.Leisure and hospitality added another 2,000jobs partially offsetting the continued declinesin construction.

Unemployment remains the most pressingconcern for the Inland Empire economy. With aseasonally unadjusted unemployment rate inDecember of 13.9, just two-tenths below yearago levels, the economic and financial costs of

idle labor and economic slack continue to grow.Unemployment is likely to remain high, as themassive number of construction jobs eliminatedover the past three years will not soon return,putting further pressure on the local housingmarket and local government tax revenue.

Rising international trade and better consumerspending growth in the United States in 2011should benefit the Inland Empirestransportation industry. The Inland Empire isan important transportation hub for SouthernCalifornia and an important export and importlink with Asia.

A true housing recovery will take longer tomaterialize, unfortunately. Residential housingwill remain a drag on the local economy in 2011.Existing home sales in December remained 11.5percent below a year ago, and home prices aregiving up the gains made over the past year.

Source: U.S. Department of Labor, California Association of Realtorsand Wells Fargo Securities, LLC


13/13

W ells Fargo Securities, LLC Econom ics Group

Diane Schumaker-Krieg Global Head of Research

& Economics

(704) 715-8437

(212) 214-5070

[email protected]

John E. Silvia, Ph.D. Chief Economist (704) 374-7034 [email protected]

Mark Vitner Senior Economist (704) 383-5635 [email protected]

Jay Bryson, Ph.D. Global Economist (704) 383-3518 [email protected]

Scott Anderson, Ph.D. Senior Economist (612) 667-9281 [email protected]

Eugenio Aleman, Ph.D. Senior Economist (704) 715-0314 [email protected]

Sam Bullard Senior Economist (704) 383-7372 [email protected]

Anika Khan Economist (704) 715-0575 [email protected]

Azhar Iqbal Econometrician (704) 383-6805 [email protected]

Ed Kashmarek Economist (612) 667-0479 [email protected]

Tim Quinlan Economist (704) 374-4407 [email protected]

Michael A. Brown Economist (704) 715-0569 [email protected]

Tyler Kruse Economic Analyst (704) 715-1030 [email protected]

Joe Seydl Economic Analyst (704) 715-1488 [email protected]

Sarah Watt Economic Analyst (704) 374-7142 [email protected]

Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealerregistered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and theSecurities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and throughsubsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Advisors, LLC, and Wells FargoSecurities International Limited. The information and opinions herein are for general information use only. Wells FargoSecurities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume anyliability for any loss that may result from the reliance by any person upon any such information or opinions. Suchinformation and opinions are subject to change without notice, are for general information only and are not intended asan offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. WellsFargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary ofWells Fargo & Company 2011 Wells Fargo Securities, LLC.

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Documents

California Economic Outlook-Mar 2011