Analysis. Answers.

Analysis. Answers

Beacon Economics, LLC

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So…Should We Be Worrying?Economic & Industry Outlook, 2017

Robert A. Kleinhenz, Ph.D.

Economist & Executive Director of Research

Beacon Economics, LLC

California Association of School Business Officials CASBO Annual Conference

April 15, 2017

Analysis. Answers.

Outline

• U.S. Economy

• California Economy

• Observations on K-12 Education

• Conclusion/Policy Concerns

Analysis. Answers.

U.S. Economy

Analysis. Answers.

2014 2015 2016

GDP 2.4 2.6 1.6

Final Domestic Demand 2.5 3.2 1.7

Consumption 2.9 3.2 2.7

Goods 3.9 4.0 3.6

Services 2.3 2.8 2.3

Investment 4.5 5 -1.6

Structures 10.3 -4.4 -3.0

Equipment 5.4 3.5 -2.9

Intellectual Property 3.9 4.8 4.9

Residential 3.5 11.7 4.9

Change Inventories -26.7 45.6 -74.9

Net Exports -0.1 -4.5 -0.7

Exports 4.3 0.1 0.4

Imports 4.4 4.6 1.1

Government -0.9 1.8 0.8

Federal -2.5 0 0.6

State and local 0.2 2.9 1.0

Two Views of GDP (% Change)

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Gross Domestic Product (Annualized QTQ% Change)

Analysis. Answers.

Labor Market – Full Employment (Unemployment rate ~4.5-5%)

1.9

2.1

1.7

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2014 2015 2016

Yr-To-Yr % Change in Jobs

0

50

100

150

200

250

300

350

400

14

.01

14

.04

14

.07

14

.10

15

.01

15

.04

15

.07

15

.10

16

.01

16

.04

16

.07

16

.10

17

.01

MTM Jobs

Analysis. Answers.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

CPI % Change

Inflation Historically Low But Rising

Kyser Center for Economic Research

Analysis. Answers.

Financial Markets

0

1

2

3

4

5

6

7

8

20

06

.01

20

07

.01

20

08

.01

20

09

.01

20

10

.01

20

11

.01

20

12

.01

20

13

.01

20

14

.01

20

15

.01

20

16

.01

20

17

.01

Fed Funds Rate 10 Year Yield 30 Year Mort

0

4,000

8,000

12,000

16,000

20,000

24,000

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

DJIA

Analysis. Answers.

Fiscal Policy

• Proposed By Trump Administration– Tax Cuts– Investment in Infrastructure– Challenging the Status Quo in Trade– Immigration Reform– Repealing ACA (Obamacare)

• When Reality Sets In– Republican factions in Congress– Lessons from Schwarzenegger– Populist backlash– Back to the future: Gridlock in DC?

Analysis. Answers.

Monetary Policy

• Rock-bottom federal funds rate 2008-2016

• Rate hike: 3 expected this year

• Adjusting to labor market, inflation, GDP

• Market rates less tied to FFR than before

• Balance sheet activity affect long rates

Analysis. Answers.

U.S. Outlook

• Continued US Econ Growth: 2017-18: 2%+

• Domestic Spending Intact

• Energy: Prices Steady; Cap-Ex Plunge Over?

• Inflation: Low, But Rising

• Financial Markets: Volatility, Fed Actions

• Any Global Surprises?

Analysis. Answers.

California Economy

Analysis. Answers.

CA Adding Jobs Faster than U.S.

-8

-6

-4

-2

0

2

4

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

US: +1.5% CA: +1.9

YTY % change in nonfarm jobs, seasonally adjusted

Analysis. Answers.

California Among Fastest Growing States

3 Year Change in Payroll Jobs by State

Abs Growth Share

Florida 792.8 3.3% 10.0%

Utah 131.6 3.2% 1.7%

Nevada 117 3.2% 1.5%

Oregon 167.6 3.2% 2.1%

Colorado 219 2.9% 2.8%

Washington 273.7 2.9% 3.5%

Georgia 349.6 2.8% 4.4%

California 1309.1 2.8% 16.5%Idaho 52.6 2.6% 0.7%

South Carolina 150.7 2.6% 1.9%

Tennessee 211.9 2.5% 2.7%

Texas 828.3 2.4% 10.4%

Arizona 179.4 2.3% 2.3%

North Carolina 264.9 2.1% 3.3%

Delaware 27.9 2.1% 0.4%

Massachusetts 198.6 1.9% 2.5%

Michigan 220.8 1.7% 2.8%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

20

06

Q1

20

06

Q4

20

07

Q3

20

08

Q2

20

09

Q1

20

09

Q4

20

10

Q3

20

11

Q2

20

12

Q1

20

12

Q4

20

13

Q3

20

14

Q2

20

15

Q1

20

15

Q4

Real GDP Growth (Y-o-Y)

US CA

Analysis. Answers.

CA Job Adding Jobs Across Industries

Analysis. Answers.

Job Growth Across the State

0% 1% 2% 3% 4%

Bakersfield MSA

Anaheim-Santa Ana-Irvine Metro Div

Santa Rosa MSA

San Jose-Sunnyvale-Santa Clara MSA

Los Angeles-Long Beach-Glendale Metro Div

Sacramento--Roseville--Arden-Arcade MSA

San Diego-Carlsbad MSA

Oakland-Hayward-Berkeley Metro Div

Stockton-Lodi MSA

Oxnard-Thousand Oaks-Ventura MSA

San Francisco-Redwood City-South San Francisco…

Fresno MSA

Riverside-San Bernardino-Ontario MSA

YTY % Change Jobs (Feb.'17)

Analysis. Answers.

California Home Prices and Sales

PriceChange SalesChange

County Feb'16 Jan'17 Feb'17 MTM% YTY% MTM% YTY%

LAMetroArea $429,980 $450,710 $454,270 0.8% 5.6% -4.9% 3.1%

InlandEmpire $290,270 $312,500 $327,510 4.8% 12.8% -2.3% 7.1%

S.F.BayArea $698,950 $730,200 $784,470 7.4% 12.2% -4.3% -2.7%

SanDiego $523,500 $550,000 $559,950 1.8% 7.0% 6.4% 6.8%

Sacramento $299,000 $305,000 $324,900 6.5% 8.7% -6.8% -5.4%

CASFH(SAAR) $444,780 $489,680 $478,790 -2.2% 7.6% -4.7% 4.9%

Analysis. Answers.

CA Existing Home Sales & Price

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Jan

-00

No

v-0

0

Sep

-01

Jul-

02

May

-03

Mar

-04

Jan

-05

No

v-0

5

Sep

-06

Jul-

07

May

-08

Mar

-09

Jan

-10

No

v-1

0

Sep

-11

Jul-

12

May

-13

Mar

-14

Jan

-15

No

v-1

5

Sep

-16

Sales (SAAR) Median Price

Analysis. Answers.

Housing Not Yet Normal

• Demand– Drivers: demographics, job/income growth, low

but rising rates– Constraints: credit standards, high down payment

requirements

• Supply– Drivers: rising prices, low cost of capital, shortage

of housing in many markets– Constraints: weak demand, time/development

Analysis. Answers.

Apartment Rents

Wages Rents Share

Santa Cruz $48,280 $1,937 48%

Sonoma $50,648 $1,578 37%

San Joaquin $44,628 $1,073 29%

Orange $59,923 $1,781 36%

Monterey $44,960 $1,407 38%

Tulare $38,010 $864 27%

Santa Barbara $50,006 $1,490 36%

San Bernardino $44,116 $1,245 34%

Riverside $42,223 $1,245 35%

Contra Costa $65,055 $1,789 33%

San Diego $57,527 $1,639 34%

San Francisco $101,194 $2,548 30%

Alameda $70,697 $1,789 30%

Fresno $42,006 $904 26%

Kern $43,961 $956 26%

Sacramento $57,113 $1,157 24%

Santa Clara $121,314 $2,111 21%

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

Q2

-05

Q1

-06

Q4

-06

Q3

-07

Q2

-08

Q1

-09

Q4

-09

Q3

-10

Q2

-11

Q1

-12

Q4

-12

Q3

-13

Q2

-14

Q1

-15

Q4

-15

Q3

-16

Rents in Southern California

Inland Empire Los Angeles (MD)

Orange County (MD) San Diego

Analysis. Answers.

State Housing Construction

California 4.1 Tulare 4.0

Ventura 6.8 Los Angeles 4.0

Contra Costa 6.6 Fresno 4.0

Sonoma 6.1 San Mateo 3.4

Alameda 5.9 Kern 3.0

Santa Barbara 5.3 Santa Clara 3.0

San Bernardino 5.0 Orange 2.8

Solano 4.6 Placer 2.1

Riverside 4.5 San Francisco 2.1

San Diego 4.2 Sacramento 0.7

New Pop / Permits

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Q1

-03

Q4

-03

Q3

-04

Q2

-05

Q1

-06

Q4

-06

Q3

-07

Q2

-08

Q1

-09

Q4

-09

Q3

-10

Q2

-11

Q1

-12

Q4

-12

Q3

-13

Q2

-14

Q1

-15

Q4

-15

Q3

-16

State Residential Permits (Units)

Single Family Multi-Family

Analysis. Answers.

Housing, Migration, & Economic Growth

• CA affordability lower than elsewhere• State-to-state migration

– CA: negative net state-to-state migration– Inbound: higher incomes and greater ed attainment– Outbound: lower incomes, lower ed attainment, retirees

• International migration– CA: positive international migration– More than offsets state-to-state outmigration– Spectrum of education and skill levels

• Conclusions:– CA workforce is increasingly homegrown– CA continues to rely on international migration to augment

labor force– High cost of living drives some out of state=impedes growth

Analysis. Answers.

Observations on K-12 Education

Analysis. Answers.

Local Education: Enrollment & Employment

977,400965,900

952,100

96.0

97.0

98.0

99.0

100.0

101.0

102.0

103.0

104.0

105.0

106.0

107.0

840,000

860,000

880,000

900,000

920,000

940,000

960,000

980,000

1,000,000

K-12 Empl Enrollment (1999-00=100)

Analysis. Answers.

Expense per ADA

6,188 6,360 6,719 6,822 6,919 7,127

7,521 8,117

8,594 8,736 8,452 8,323 8,382 8,448

8,867

9,794

10,795

99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16

Analysis. Answers.

Current $ vs Inflation Adjusted Expense per ADA (1999=100)

0

20

40

60

80

100

120

140

160

180

200

99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16

Nominal Inflation-Adjusted

CA in 2014 (US Census):• 34th out of 50 states• 13% below US average

Analysis. Answers.

K-12 Reliance on General Fund

Analysis. Answers.

Income Tax Driving The Trend

0

5000

10000

15000

20000

25000

Q1

-95

Q2

-96

Q3

-97

Q4

-98

Q1

-00

Q2

-01

Q3

-02

Q4

-03

Q1

-05

Q2

-06

Q3

-07

Q4

-08

Q1

-10

Q2

-11

Q3

-12

Q4

-13

Q1

-15

Q2

-16

Major Sources State Revenues

Pit Sales Corp

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

Q1

-95

Q2

-96

Q3

-97

Q4

-98

Q1

-00

Q2

-01

Q3

-02

Q4

-03

Q1

-05

Q2

-06

Q3

-07

Q4

-08

Q1

-10

Q2

-11

Q3

-12

Q4

-13

Q1

-15

Q2

-16

PIT Share General Fund

Analysis. Answers.

Prop 55 = Greater Budget Volatility

90

100

110

120

130

140

150

160

170

180

19

95

I

III

19

98

I

III

20

01

I

III

20

04

I

III

20

07

I

III

20

10

I

III

20

13

I

III

20

16

I

Price Government Services / Consumer Goods

Analysis. Answers.

Conclusion/Policy Concerns

Analysis. Answers.

K-12 Education

• Playing catchup relative to other states

• Increased volatility of general fund revenue

• Core programs need stable support

• Replacing retiring teachers and staff

• Educating tomorrow’s workforce

Analysis. Answers.

California Outlook

• Continued but Slower Growth in State/Regions• Labor & Other Input Markets Tightening• Job Gains Across Most Industries• Leaders:

– Healthcare, Tech, Construction, Tourism, Education

• Housing Market/Homeownership– Challenges to CA economy once again– Groundhog Day: 1980s, early 2000s, Now

So…should we be worrying?

Analysis. Answers.

Economic & Revenue Forecasting

Regional Intelligence Reports

Business & Market Analysis

Real Estate Market Analysis

Ports & Infrastructure Analysis

Economic Impact Analysis

Public Policy Analysis

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www.BeaconEcon.com

Contact Robert KleinhenzRobert@BeaconEcon.com310-571-3399

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