2017 Economic Outlook

1

Ray MajorChief Economist

Jan 5, 2017

It’s not 2016 anymore……..

AgendaJobsWagesHousing

2

Demography Economy Outlook

SAN DIEGO REGION 2017: POISED FOR CONTINUED PROSPERITY

Diverse population of 3.2 million projected to continue growing

5th largest countyin the nation

Younger:Median AgeSD-35.3, US-37.7

Richer:Per-capita incomeSD-$51,459, US-$46,030

Better Educated: % of 25+ Pop with BA+ SD-37.1%, US-30.1%

$219 billion economy:San Diego would rank 26th as a state

Diverse:No sector represents more than 20% ofthe economy

Forward-looking:Positioned for the 21st

century in biotech and other innovative sectors

Resilient:More than halfthe economy is in recession-resilient sectors

Population:Ongoing growth adding 30,000 residents on average per year fornext 20 years

Jobs:Continued growth ofa diversified and balanced economy

Housing:Recovered housing market focused on revitalization of the urban core

San Diego region is diversified, with a resilient economy is uniquely positioned for long-term growth and prosperity.

SAN DIEGO 2017: Diverse and Expanding Economic Base

Innovation

Defense

Tourism

Economic Drivers

33%

General Dynamics – design/construction of ships General Atomics – precision laser weapons, “Predator” drone ViaSat – satellite communication, real-time intel, video, voice

San Diego Zoo – rated #1 in the worldSea World, Legoland, Balboa Park,

Qualcomm – pioneered CDMA mobile technology Illumina – revolutionized DNA sequencing ESET, Northrup Grumman, SPAWAR–

leaders in cyber security

PopulationDriven

29%Recession Resilient

62%

Government

Military

Health Care

Education

Trade, Trans,Utilities, Services

FI, Prof, Info

ManufacturingConstruction, RE

Tourism

Innovation

2016 Select Employers

12%

9%

10%

7%

19%

12%

9%

7%4%

12%

5

Trumponomics

YEA, BUT WHAT ABOUT ……….

6

Economists Warn of Global Recession Following Trump Victory

•Martha C. White Money Magazine

Updated: Nov. 9, 2016 10:19 AM

Trump Administration to Rev Up Global Growth, Says OECD

The OECD has revised its U.S. and global economic outlooks to reflect the projected effects of a Trump administration.

By Andrew Soergel | Economy Reporter Nov. 28, 2016, at 10:35 a.m.

Personal Tax CutsCorporate Tax CutsInfrastructure ProgramsDefense SpendingBuild up the MilitaryRepel/Modify Obama CareRelax Regulations – Energy, Environment, Financial PolicyTradeImmigrationForeign PolicyDrain the SwampBuild the wall (now with doors)

7

TrumponomicsWhat is:

“It takes time, It takes consensus”

= Fiscal Stimulus

Fiscal Stimulus

Employment

Unemployment National Debt

Inflation

Interest Rates

= Tax Cuts + Spending

Trumponomics

GDP Growth

Employment

Unemployment National Debt

Inflation

Interest Rates

GDP Growth +3%

National Forecast for 2017/ 2018

+2%

+2% +3%

$1 Trillion4.5%

+2%

A massive fiscal stimulus on any economy that is at or near full employment will lead to more

growth, higher levels of inflation and higher interest rates and then …….

San Diego Outlook: Jobs

10

Jobs, Jobs, JobsCorporate Tax cutsLoosening regulationsEncouraging businesses to stay in the USDefense Spending (disproportionately weighted towards

California and San Diego)

Infrastructure Spending (sanctuary state?)

Trade – Repeal NAFTA, TPP

11

on Employment (Jobs)Trumponomics

1313

1410

89

417

1030

25

91010101010

611

2118

51

222324

201819

102831

48762008-14

2001-031990-911981-8219801974-751969-701960-611957-581953-541948-49

Months of Job Decline

Months Until Return to Previous Jobs Peak

Total Decline/Recovery PeriodJobs

Recession

Pre 2008 RecessionAverage Decline 11.5 mo.Average Return 12.8 mo.Average Cycle 24.3 mo.

Job Decline and Recovery Throughout U.S. Recessions

Recovery Length of CycleDecline

San Diego Total Employment 2000-2016

1,150,000

1,200,000

1,250,000

1,300,000

1,350,000

1,400,000

1,450,000

Jan-

00Ap

r-00

Jul-0

0O

ct-0

0Ja

n-01

Apr-

01Ju

l-01

Oct

-01

Jan-

02Ap

r-02

Jul-0

2O

ct-0

2Ja

n-03

Apr-

03Ju

l-03

Oct

-03

Jan-

04Ap

r-04

Jul-0

4O

ct-0

4Ja

n-05

Apr-

05Ju

l-05

Oct

-05

Jan-

06Ap

r-06

Jul-0

6O

ct-0

6Ja

n-07

Apr-

07Ju

l-07

Oct

-07

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-

09Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-

11Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

Apr-

13Ju

l-13

Oct

-13

Jan-

14Ap

r-14

Jul-1

4O

ct-1

4Ja

n-15

Apr-

15Ju

l-15

Oct

-15

Jan-

16Ap

r-16

Jul-1

6O

ct-1

6

Total, All Industries

Peak (Dec-07) Recovery (Jun-14)

Trough (Jan-10)

78 months

Recovery from the Great Recession took six times longer than the average recovery, now 7 years into an expansion. 70% of job creation was from low-paying jobs

SAN DIEGO 2017: Diverse and Expanding Economic Base

Government

Military

Health Care

Education

Trade, Trans,Utilities, Services

FI, Prof, Info

ManufacturingConstruction, RE

Tourism

Innovation 12%

9%

10%

7%

19%

12%

9%

7%4%

12%

Driving Sectors

Supporting Sectors

Traditional Sectors

‹#›

San Diego, Employment: Supporting Sectors

60

70

80

90

100

110

120

130

140

0 1 2 3 4 5 6 7 8

Health Care & Social Assistance

Educational Services

Government

Number of Years since 2007

Employment, 2007 =100

+34

+11

+4

o

-

-

‹#›

San Diego Region, 2017 Select Sector Forecasts

Economic Drivers: Innovation sector continues to thrive.Travel and Hospitality will outpace GDP growth in 2017. Military expands its strong presence.

Population-Driven Sectors: Health Care grows as population ages. Education remains stable. Government grows proportional to population.

Other Economic Sectors: Retail trade Brick & mortar weak / Increases spending.Financial and Professional very slow growth. Construction and Real Estate strong growth through 2018. Manufacturing continues steady recovery.

Government

Military

Health Care

Education

Trade, Trans,Utilities, Services

FI, Prof, Info

ManufacturingConstruction, RE

Tourism

Innovation 12%

9%

10%

7%

19%

12%

9%

7%4%

12%

Employment: 40,000 new jobs (2.7% growth) Unemployment: drops below 4.5%

San Diego Outlook: Wages

19

Note: Near Full Employment

Immigration (H1b Visas)Immigration (unskilled labor)Deportations Opposed to minimum wage

20

on WagesTrumponomics

San Diego County Wages

100105110115120125130135140145

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 201625th Median 75th

Nominal Hourly Wages

Index: 2004 = 100

+23%

+18%

+16%

San Diego County Wages

98

100

102

104

106

108

110

112

114

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

25th Median 75th

Real Hourly Wages

Index: 2004 = 100

+5.7%

+1.3%

+0%

Skilled (Visa program) vs nonskilled workersWages increase to induce workers to move to

California domestically Growth in real wages up 2% in 2017, 2.5% in 2018Deportations/ The Wall

o Impact on Central/Imperial Valley (farming)o Increase in wages for documented labor

$15 hr minimum wage , might be prevailing wage

23

SAN DIEGO 2017 OUTLOOK ON WAGES

San Diego Outlook: Housing

24

Relaxed regulations – may not impact Californiao Financialo Environmentalo Energy

Interest rates increase

25

on HousingTrumponomics

“Housing permits and prices”

0

50

100

150

200

250

300

01/0

1/20

00

11/0

1/20

00

09/0

1/20

01

07/0

1/20

02

05/0

1/20

03

03/0

1/20

04

01/0

1/20

05

11/0

1/20

05

09/0

1/20

06

07/0

1/20

07

05/0

1/20

08

03/0

1/20

09

01/0

1/20

10

11/0

1/20

10

09/0

1/20

11

07/0

1/20

12

05/0

1/20

13

03/0

1/20

14

01/0

1/20

15

11/0

1/20

15

09/0

1/20

16

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Single Family Permits Multi-Family Permits

Q3

SAN DIEGO 2016

June 2006

May 2009

Sept. 2016

55% SF

66% MF

Permits Issued Housing Prices

0%

10%

20%

30%

40%

50%

60%

Apr

-91

Jan-

92O

ct-9

2Ju

l-93

Apr

-94

Jan-

95O

ct-9

5Ju

l-96

Apr

-97

Jan-

98O

ct-9

8Ju

l-99

Apr

-00

Jan-

01O

ct-0

1Ju

l-02

Apr

-03

Jan-

04O

ct-0

4Ju

l-05

Apr

-06

Jan-

07O

ct-0

7Ju

l-08

Apr

-09

Jan-

10O

ct-1

0Ju

l-11

Apr

-12

Jan-

13O

ct-1

3Ju

l-14

Apr

-15

Jan-

16

Source: California Association of Realtors

46%

San Diego Region, Housing Affordability

27

Median Priced Home$557,000

Dual income $79,200Affordability Index

9%

24%

$433,000

Dual Income $55,300(all jobs 2015)

Avg. Income $55,300$232,000

Interest rates increase (mortgages hit 6%)Housing affordability falls below 20%Housing starts soften, possibly decreaseConstruction employment starts to slows and fails

to get back to pre 2007 levels.Increased demand for housingPrices increase in the short-termRents flat or decrease (if deportation)

28

SAN DIEGO 2017/2018 OUTLOOK ON HOUSING

Strengths Challenges

SAN DIEGO REGION 2017: OPTIMISM DESPITE SOME CHALLENGES

Underlying Economy is Sound

Diversified economy

Near full employment

Could benefit from some of the proposed spending

National• Unknown and possibly volatile

policies that affect San Diego

State• California vs Trump

• State regulations hamper local growth

• Water shortage/distribution

Locally• Job creation predominantly low paying • Decline in purchasing power• Housing affordability