California Forecast Highlights 2010 Q1

Dan Hamilton
March 22, 2010

California’s economy continues to exhibit weakness with January year-on-year job levels down
4.6 percent from a year ago and an unemployment rate of 12.5 percent. Retail sales continue
to disappoint, declining nine percent in real year-on-year terms in 2009 quarter 3 despite the
popular Cash for Clunkers program. While Cash for Clunkers and other government programs
were able to restore household spending for the United States, they did not have this effect for
California.

Economic Growth Rates: California vs. United States

2009 Quarter 1 - 2010 quarter 4

2009 | Qtr 1 | | Qtr 2 | | Qtr 3 | | Qtr 4 |

U.S. -6.4 -0.7 2.2 5.9

CA -5.3 -3.4 0.8 2.1

2010 | Qtr 1 | | Qtr 2 | | Qtr 3 | | Qtr 4 |

U.S. 3.0 1.7 1.5 1.1

CA 0.7 0.2 -0.2 0.2

Units: seasonally-adjusted annualized growth rates

CERF: Center for Economic Research & Forecasting, CLU

Our estimates of quarterly GDP do show that California’s economy picked up some in the fourth
quarter of 2009. Despite this, California’s forecasted growth rate slows in the first quarter of
2010 and remains near zero for the remainder of 2010.

CLU Center for Economic Research & Forecasting 1

California Forecast Highlights 2010 Q1

Real Retail Sales Growth

1.1 1.2
0.7 0.7 1.0

-0.3 -0.4 -0.3 -0.3

-1.2 -1.0
-1.6
-2.1

-4.4 -4.2

-6.4

-9.0

-11.6 -11.6
-12.8

2007Q1 2008Q1 2009Q1 2010Q1 2011Q1

Center for Economic Research and Forecasting
California - (y-o-y percent change)

Other indicators of future economic growth include residential and commercial building
activity. We are pessimistic on California building activity. Historical permit data continue to be
incredibly low, but the reality is that starts are even lower. Builders are getting permits for new
homes but they do not build, rather they hold them and extend them for as long as possible.
This is particularly true for residential permits in coastal California as these permits are difficult
to obtain. While residential real estate might have bottomed, if the market is lucky,
commercial real estate has yet to reach its nadir. The forecast for these imply weakness
throughout 2011, contributing to weak California economic growth. See the charts nearby.

CLU Center for Economic Research & Forecasting 2

California Forecast Highlights 2010 Q1

New Home Building Permits

33.1
31.6

27.2

21.2
20.2

16.4
14.9
13.5

10.1
9.1 9.2 8.6
8.0 7.6 7.4
6.9 6.2 6.3
5.7
3.5

2007Q1 2008Q1 2009Q1 2010Q1 2011Q1

Center for Economic Research and Forecasting
California - (millions of units, NSA)

New Commercial Building Permit

Value
1.18
1.12 1.11
1.03 1.02
0.97

0.82

0.57

0.38
0.34 0.33
0.28 0.29 0.29 0.29 0.30 0.29 0.29 0.32
0.24

2007Q1 2008Q1 2009Q1 2010Q1 2011Q1

Center for Economic Research and Forecasting
California - (billions of dollars, NSA)

CLU Center for Economic Research & Forecasting 3

California Forecast Highlights 2010 Q1

California’s budgetary problems are likely to eventually lead to a decline in state and local jobs.
This has started but really has not occurred on a scale commensurate with the scale of the
state’s budgetary problems. This is another contributing factor to our forecast of weak
California economic growth in 2010.

California Public Sector Job Growth year-on-year

growth
2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

-2.5
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

CLU Center for Economic Research & Forecasting 4