March 01, 2011

Economics Group

Special Commentary

Scott A. Anderson, Senior Economist

scott.a.anderson@wellsfargo.com ● (612) 667-9281

California Economic Outlook: March 2011

Economic Performance Will Improve, but Recovery Is Still Abnormal
California’s economic recovery, for the most part, will remain painfully slow. While California’s
economic performance is expected to improve by a touch in 2011, the state will continue to
perform somewhat below the national average. California’s employment growth should accelerate
to 1.0 percent in 2011, following a 1.5 percent decline in 2010. Private sector service employers
are expected to create more jobs in 2011. Service jobs comprise about 87 percent of total nonfarm California’s
employment in the state, so this could be an important support for California’s overall job economic recovery
creation. Moreover, the drag from construction payroll declines will finally begin to dissipate. will be more visible
Not that California’s housing market is gearing up for a roaring revival, but there is little scope for in 2011 as private
further double digit construction payroll declines given how far homebuilding has already fallen sector job growth
across the state. California’s commercial real estate construction is already in hibernation so improves, but by
there will be fewer construction job losses in that sector as well. historical
standards the
Still the legacy of the California debt/housing bubble and Great Recession remains, lurking just state’s recovery
below the surface. The aftermath of these crises will continue to hold back economic growth in remains painfully
California for another year. Nowhere is this more visible than in the state’s unemployment slow.
problems. California’s unemployment rate at 12.5 percent is more than 3.0 percentage points
above the U.S. average. California’s 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, California’s housing troubles are not over. Foreclosed and distressed sales of
homes will remain historically high and home values and local tax revenues continue to be at risk.
California’s
Home value declines of around 7.0 to 10.0 percent are likely in many California metro areas over
housing troubles
the coming year. According the California Association of Realtors, California median home prices
are not over.
have 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 month’s supply of existing home
inventory is on the rise for properties below $1 million. At the same time, housing inventories of
higher priced properties above $1 million remain historically high.
The new California governor, Jerry Brown, is facing a daunting fiscal challenge. The State of
California estimates an operating deficit of $25.4 billion in FY 2011-12 without corrective action. State and local
Longer-term, if changes aren’t made to the budget, the state faces annual budget deficits of budget cuts will be
around $20 billion a year for at least the next five years. One-time budgetary maneuvers have a significant drag
largely been exhausted in past budget cycles, narrowing the options to fix the state’s deficits. on the economic
outlook for the
The governor is proposing $12.5 billion in expenditure cuts for 2011-12, comprising about half of state.
the shortfall. The bulk of the rest of the shortfall will be closed by extending four temporary tax
increases adopted in February 2009. Approval of the tax extensions will require a June special
election. The pace of state and local job losses in California will likely intensify again in 2011.

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

 California Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

Figure 1 Figure 2
California Nonfarm Employment California Employment Growth
Year-over-Year Percent Change Year-over-Year Percent Change
6% 6% 5% 5%
Forecast
4% 4%
4% 4%
3% 3%

2% 2%
2% 2%
1% 1%

0% 0% 0% 0%

-1% -1%
-2% -2% -2% -2%

-3% -3%
-4% -4%
-4% -4%

-5% -5%
-6% -6%
Total CA: Dec @ 0.6%
-6% -6%
Total US: Dec @ 0.7% California: 2010 @ -1.5%
-8% -8% -7% -7%
00 01 02 03 04 05 06 07 08 09 10 96 98 00 02 04 06 08 10

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

California’s Problem: Jobs, Jobs, Jobs

California’s prominent position in the housing and construction bubble and its subsequent crash
has left a deep gash in California’s job engine, leaving in its wake economic and financial hardship
for many California households. If the nation’s job market has fallen into a deep economic hole,
California has fallen into an abyss where little if any amount of sunshine penetrates.
As we expected, California’s job growth in 2010 was spotty. Over the past twelve months only a
handful of California industries have created net jobs. Professional and business services has
created 66,900 net jobs since December 2009 with 47,600 jobs coming from administrative,
California job support, and waste services, primarily employment services jobs. But job growth also resumed
growth will return for higher wage professional, scientific, and technical service positions with California adding
to a broader cross- 21,400 net jobs in this important sector. Last year this sector lost 66,500 jobs. Education and
section of healthcare has added 30,700 jobs with about half the jobs coming from education and the other
industries in 2011. half coming from healthcare. Leisure and hospitality has added 26,700 net jobs, primarily
accommodation and food service jobs, as business travel and international & domestic leisure
travel returned robustly in 2010. Modest job gains occurred in manufacturing, financial services,
and information services.
Net job losses were substantial in 2010 in construction. The industry lost another 32,900 jobs
over the past twelve months, but that is only one-fifth the number of jobs lost in California
construction the year before. We expect 2011 will be another year of improvement in construction
payroll losses as housing and commercial construction bounces around the bottom and begins a
gradual climb higher. Trade, transportation and utilities shed 4,600 jobs over the past twelve
months, less than one-tenth the number of jobs lost in 2009. Stronger consumer spending over
the holidays and into 2011 should allow for more jobs in this sector in 2011. State and local
government 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 budget
woes that will have real impacts on state payrolls.
California’s unemployment rate increased a tenth to 12.5 percent in December, just one tenth of a
percentage 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 five
of the last six months. Further reflecting the dismal job prospects, California’s labor force has
shrunk since May 2010, falling in five of the last seven months. California’s labor force
participation rate fell another tenth of a percentage point in December to 63.9 percent, the lowest
level of labor force participation in the state since 1977. The labor market participation often rises

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California Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

as job prospects improve and previous discouraged workers and marginally attached workers
return to job hunting. We expect California’s unemployment rate to remain uncomfortably high at
more than 12.0 percent in 2011. This will keep political pressure on the new governor to address
the jobs issue. California’s
unemployment rate
California nonfarm payrolls increased year-on-year through December 0.6 percent or 87,500 will remain
jobs, but private sector jobs have increased even more, rising 1.0 percent in 2010. Private sector uncomfortably
job growth should strengthen in the months ahead as the drag from construction job losses high.
subside and more retail and service businesses that rely on consumer spending for revenue
growth start to see improved conditions and start adding to payrolls again. Expect to see job
growth return to a broader cross-section of industries in 2011. Looking ahead, California payrolls
slipped 1.5 percent in 2010, but should rebound by 1.0 percent in 2011.

Figure 3 Figure 4
California Employment Growth Unemployment Rates
X axis: Y/Y Job Growth (Ths.), Y axis: Avg. Hourly Earnings ($/Hr) Percent
$30 14% 14%
December 2009 - December 2010 United States: Dec @ 9.4%
Info. Svcs. California: Dec @ 12.5%
12% 12%
$25
Construction Prof/Bus Svcs.
Financial 10% 10%
Ed/Hlth Svcs.
$20
Mfg.
Trade/Trans/Ut Other Svcs. 8% 8%
$15
6% 6%
Leis/Hosp
$10
4% 4%

$5
2% 2%

$0 0% 0%
-60 -40 -20 0 20 40 60 80 00 01 02 03 04 05 06 07 08 09 10

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

Searching For a State Budget That Works

California’s state budget problems have been well documented. The state is trying to close a
projected $25.4 billion deficit for FY 2011-12. The trick every year is getting one that closes the
state’s chronic budget gap, one that can pass through the state’s fractious legislature, and one that
tries to address the state budget problems that are likely to emerge down the road. After much
anticipation, Governor Jerry Brown laid his cards on the table, releasing details on how he would
like to see the state’s budget problems resolved. On January 10, the governor released his budget California will try
for the state. His plan calls for further cuts in state employee pay, state social services spending and balance its
and a plan to extend expiring tax increases for at least the next five years to help close the deficit. budget deficit with
The Governor needs the legislature to agree to the plan by March for the proposed tax extensions a combination of
to go to a vote of the people by June. State voters rejected some tax increase proposals in deep spending cuts
November, so it will take quite a bit of educating and selling to get the tax proposals through in and an extension of
one piece. The biggest selling point of the tax extensions is that without it, the state will need to temporary tax
pass even deeper spending cuts. The governor has already ruled out more state borrowing to hikes that will
address the looming imbalances, arguing that the state needs to take its fiscal medicine now. require a vote of
the people.
Anti-tax Republicans in the legislature are likely to take issue with the tax extension, while the
Democrats in the legislature fight the steep cuts in the state’s social safety net. The fact that no
one wins under the governor’s budget plan might increase the odds of passage in California’s
zero-sum legislature, though getting the electorate to go along for the ride is probably the biggest
wildcard.
The governor proposes to cut the pay of state employees of between 8.0 and 10.0 percent in six
bargaining units. These units account for more than a third of the state’s general fund payrolls.

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 California Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

This should bring the pay in-line with agreements reached by the Schwarzenegger administration
last year and with the state’s 15 other bargaining units. These six units would also remain on
three day per month furloughs through June.
The governor’s plan also calls for $1.7 billion in cuts to the state’s health program and $1.5 billion
in cuts for its Welfare-to-Work program. There are also large cuts to programs for the disabled,
mentally disabled and autistic.
The State’s colleges and universities will also see substantial cuts in funding to the tune of $1.0
billion dollars. The governor’s plan spared further cuts to public elementary and secondary
schools.
The tax extension includes, continuing current personal income and sales taxes as well as the
vehicle license fee. More specifically, the governor’s plan calls for extending four temporary tax
increases adopted in February 2009 for another five years. The voters will have to approve
extending the one percent sales tax increase, the 0.5 percentage point increase in the vehicle
license fee, the 0.25 percentage point personal income tax surcharge, and a reduction in the
dependent exemption credit for the next five years.
There is little doubt stronger economic growth and more private sector job creation will help to
further repair the damage that has been visited on the state’s finances. The latest financial report
California tax from the State Controller for January shows that state revenues are recovering.1 Personal income
revenues are taxes over the past seven months, the largest category of tax revenues, are running higher by 19.0
recovering, but percent to $29.9 billion. More modest gains are visible in retail and sales taxes, which have
unfortunately total increased by 3.4 percent to $14.5 billion. On the other side, corporate tax revenues remained
spending is also on moribund, decreasing 0.1 percent over the first seven months of the fiscal year to $4.0 billion.
the rise. This lackluster performance for corporate tax revenues is partly due to a revised allocation
schedule for tax payments that held down tax payments in the last quarter of the 2010, but even
accounting for this change, corporate taxes are lagging past expansion cycles. Overall, the top
three revenue sources still increased by 12.2 percent from the year before.
Figure 5 Figure 6
California Tax Revenues California Tax Revenues
Year-over-Year Percent Change Index of 4-month moving sum, Q1 2003=100
50% 50% 260 260
Total: Q3 @ 3.99% Property: Q3 @ 161.50
40% 40% 240 Personal Income: Q3 @ 136.34 240
Corporate Income: Q3 @ 141.63
220 Sales: Q3 @ 136.91 220
30% 30%

200 200
20% 20%
180 180
10% 10%
160 160
0% 0%
140 140

-10% -10%
120 120

-20% -20% 100 100

-30% -30% 80 80
95 98 01 04 07 10 03 04 05 06 07 08 09 10

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 billion.
Local assistance increased 5.4 percent to $46.5 billion, while state operations spending increased
11.9 percent to $15.2 billion. Local K-12 education expenditures jumped 10.7 percent, and
community college disbursements increased 8.8 percent. There were some categories where
spending declined from the year before. Department of Corrections spending fell 7.8 percent.
Legislative/Judicial/Executive dropped 2.3 percent, while debt service payments fell 8.0 percent.

1See California State Controller’s Office Monthly statement of General Fund Cash Receipts and
Disbursements Fiscal Year 2010-2011; January 2011.

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California Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

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 its
government finances. The possibility of large credit losses in the state and municipal bond
markets has emerged as a potential risk to the U.S. financial system and the U.S. economic
recovery. Municipal bond yields have been trending higher as investors have gotten more nervous
and some have run to the exits. Moody’s Investors Service gives California its lowest credit rating,
a rating that is shared by only one other financially challenged state, Illinois. California’s bonds
are still in relatively high demand nevertheless. California bond yields remain about 0.85
percentage points below Illinois and have fallen more than a quarter percentage point from where
they were a year ago. So while California’s state and local financial problems will continue to be
in the headlines, the state now appears to be on the right track toward improving the situation.
Setting Records for International Trade and Exports
Looking for a good news story on the California economy, look no further than California’s trade
performance over the past year. California exports hit a new December record at $13.3 billion, a
14.8 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 gain
from 2009 levels and the second highest total in history. Clearly, California is getting its fair
share of global growth and sales abroad. Further gains will be necessary to help rebalance the California is setting
state’s economy away from consumer spending and housing toward more productive drivers of records for exports
economic growth going forward. California’s growth in exports is comparable to what we are and international
seeing nationally, suggesting that California has not yet lost its competitiveness against other trade.
states when it comes to its export prowess. California held its position as the second largest
exporting state in the nation behind Texas. New York and Washington State came in third and
fourth.

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

Figure 7 Figure 8
California Exports California Exports by Destination Country
Millions of Dollars
$15,000 $15,000 December 2010 Mexico
14%
Dec @ $13,342

Canada
10%
$12,000 $12,000

Other
53%
China
$9,000 $9,000 10%

Japan
8%

$6,000 $6,000 Korea

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 5%

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

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 California Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

California Housing – No Hollywood Ending in Sight?

California appeared to put in a solid bottom in its housing market in 2009. California single-
family median existing home prices hit bottom in February 2009 at $245,230, according to the
California Association of Realtors. By that point, California single-family home sales were already
running 77 percent above their 2008 levels. California home prices continued to rise though out
the rest of 2009, peaking in December 2009 at $306,860, a full 25.1 percent or $61,630 above the
February 2009 low. In our July 2010 California report, we argued that California had reached its
ultimate bottom in housing, but with the expiration of the homebuyer tax credit, more signs of
weakness would emerge. Home inventories would start rising again as more foreclosures and
Weakness in distressed sales hit the market, and we forecast some modest single digit median home price
housing demand declines would once again begin to occur across much of the state.
has re-emerged in
the aftermath of Through December of 2o1o, the latest housing data available, that is exactly what appears to have
the homebuyer tax happened. Since May 2010, median existing single-family home prices have slipped by $22,580
credit expiration. or 7.0 percent. Seasonally adjusted single-family home sales fell for six of the first seven months
of the year, but have since begun to stabilize at still historically low levels. As of December,
single-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 has
been enough to push the month’s supply of existing homes back up from the relatively low levels
witnessed in 2009. California’s inventory of detached homes sat at 5.0 months in December,
while attached home inventories increased to 5.8 months. Months of inventory are the highest
for detached properties in Northern Wine Country at 6.1 months, Orange County at 6.0 months,
and San Diego at 5.9 months. Months of inventory are below the statewide average in
Sacramento 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 $1.0
Months of million and below. For homes valued at more than $1.0 million, months of inventory remain
inventory are about the same as a year ago at 8.0 months. The largest increases in months supply have
higher in every occurred in $750 to $300 thousand range. This is consistent with more supply coming on the
price category for market due to foreclosures of distressed properties in the second half of the year. As Figure 10
housing priced at illustrates, California’s foreclosure rates have jumped higher once again for both prime and
$1.0 million and subprime loans. The leading indicator of foreclosures, mortgage delinquencies shown in Figure 9,
below. appear 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 of
California. Housing supply will remain a pressing concern over the near-term as housing demand
continues to struggle to gain momentum. Thirty year mortgage rates, which have already risen
about a percentage point from their October 2010 levels, are becoming an important factor
holding back a more normal recovery in housing demand.
Figure 9 Figure 10
California Mortgage Delinquencies California Foreclosures
Percent Delinquent, SA Percent Entering Foreclosure During Quarter, SA
10% 30% 2.00% 8%
Prime Del. Rate CA: Q4 @ 6.92% (Left Axis) Prime Fcls. Rate CA: Q4 @ 1.56% (Left Axis)
Subprime Del. Rate CA: Q4 @ 22.41% (Right Axis) Subprime Fcls. Rate CA: Q4 @ 3.25% (Right Axis)
1.75% 7%

8% 24%
1.50% 6%

1.25% 5%
6% 18%

1.00% 4%

4% 12%
0.75% 3%

0.50% 2%
2% 6%

0.25% 1%

0% 0% 0.00% 0%
00 01 02 03 04 05 06 07 08 09 10 00 01 02 03 04 05 06 07 08 09 10

Source: Mortgage Bankers Association and Wells Fargo Securities, LLC

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California Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

Conclusion: Building a Foundation for Growth

California is slowly extricating itself from the Great Recession. Private sector job growth will be
more visible across that state, even in the most troubled metro areas. More service businesses
will be adding to payrolls this year as stronger consumer spending improves revenues and smaller
businesses 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 led
by solid gains in some Southern California metro areas, especially in Orange County and San
Diego. Net job losses continue to plague the Los Angeles metropolitan division and the Inland
Empire, but even here declines are diminishing and signs of broader job growth are beginning to
emerge. Northern California continues to hold back the state’s recovery as job losses linger in Jobs and
construction and financial services and retail sales remain moribund. Sacramento’s economy is unemployment
getting hammered. Sacramento’s unemployment rate has risen further over the past year and the across the state
metro has lost 18,600 net jobs or 2.25 percent of its employment over the past twelve months. will remain the
However, it is not because of state government job cuts. Sacramento job cuts are centered biggest economic
primarily on construction, professional & business services and financial services. Government problem for the
employment in Sacramento is up 500 jobs over the past twelve months. California housing state’s
remains a considerable drag on California’s ability to grow. Weak housing demand will continue policymakers.
and could intensify if mortgage rates shoot higher over the coming year. The level of foreclosures
and distressed sales will remain historically high, keeping housing supplies elevated. Further
single-digit home price declines are likely in the months ahead. At the same time, state and local
budget cuts will loom large on the economic outlook. The governor is anticipating at least $12.5
billion in additional state spending cuts, and it could be twice that amount if voters reject the
extension of temporary tax hikes at the polls. This will hit Sacramento’s 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 state’s outlook
has improved due to a stronger national economy. We now expect California employment growth
of 1.0 percent in 2011. Still the improved job outlook will not be enough to push the state’s
average unemployment below 12.0 percent in 2011. Jobs and unemployment across the state will
remain the biggest economic problem for the state’s policymakers.

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California Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

Los Angeles Nonfarm Employment

Los Angeles 6%
Year-over-Year Percent Change
6%
Total LOS: Dec @ -0.1%
 The Los Angeles metro area continued to add 4%
Total US: Dec @ 0.7%
4%
jobs at a modest pace through December 2010.
Year-on-year employment declines have 2% 2%
moderated this year, though the pace of
improvement has continued to lag the national 0% 0%

average and the unemployment rate has

continued to rise. Los Angeles nonfarm payrolls -2% -2%

are still below year ago levels by 0.1 percent,

while the nation has added 0.9 percent to -4% -4%

payrolls over the same period. The economy

-6% -6%
appears to have regained some momentum over
the past three months. The Los Angeles metro -8% -8%
has added net jobs over the past three months. 00 01 02 03 04 05 06 07 08 09 10
December job gains were led by retail trade,
information services, and financial services.
Unemployment Rates
 Over the past year, four industries have led the
14%
Percent
14%
jobs recovery in Los Angles. Information added United States: Dec @ 9.4%
19,900 jobs with 71 percent of the gain coming Los Angeles: Dec @ 13.0%
12% 12%
from motion pictures and sound recording.
Leisure and hospitality added 11,200 jobs, 10% 10%
almost all of them in accommodation and food
service industries, and education & health 8% 8%
services added 8,300 positions.
 Unemployment has been slow to recede, 6% 6%

however. In fact, the Los Angles metro’s

unemployment rate hit a new cyclical high in 4% 4%

December at 13.0 percent more than 3.6

2% 2%
percentage points above the U.S. average, and
well above the California average of 12.5
0% 0%
percent. The Los Angeles labor force continues 00 01 02 03 04 05 06 07 08 09 10
to grow faster than new jobs are being created.
 Housing markets in L.A. are still quite weak. Home Prices
The median home price gains of around 10 40%
Case-Shiller Index: Year-over-Year Percent Change
40%
percent year-on-year recorded around the
expiration of the homebuyer tax credit last April 30% 30%

are rapidly slowing. According the Case-Shiller

HPI, Los Angeles home prices are 0.2 percent 20% 20%

below year ago levels as of December and 10% 10%

rapidly decelerating along with the nation’s.
 The California Realtor’s data for Los Angeles 0% 0%

appears even dourer for attached homes. Los -10% -10%

Angeles median home prices of attached homes
at $252,358 as of December 2010 were 21.1 -20% -20%

percent below December 2009 levels which

-30% -30%
were already 30.0 percent below 2007 levels. United States 20-City Composite: Dec @ -2.4%
Los Angeles: Dec @ -0.2%
December attached home sales continued to -40% -40%
trend about 18.5 percent below year ago levels, 01 02 03 04 05 06 07 08 09 10

though that’s a marked improvement over

October’s 25.0 percent shortfall in existing Source: U.S. Department of Labor, Standard & Poor’s
attached home sales. and Wells Fargo Securities, LLC

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California Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

San Francisco Nonfarm Employment

San Francisco 6%
Year-over-Year Percent Change
6%
Total SAF: Dec @ -1.4%
 The San Francisco Bay Area continues to badly 4% Total US: Dec @ 0.7% 4%

lag the economic growth occurring in other

2% 2%
areas of the country and state. Moreover, the
pace of job growth appears to have slowed in 0% 0%
recent months. Nonfarm payrolls in the San
Francisco metro area are still 1.4 percent below -2% -2%

a year ago. Northern California job growth has

-4% -4%
been noticeably weaker over the past year than
in Southern California. The region continues to -6% -6%
struggle with sizable net job losses in
construction and financial services. Over the -8% -8%

past year, most industries saw net job losses, led -10% -10%
by declines in financial services (-3,000), 00 01 02 03 04 05 06 07 08 09 10
construction (-2,100), and trade, transportation
and utilities (-1,600). Government and
information, mostly publishing, shed 1,400 jobs Employment Growth
Index: 1996 = 100
each. There are a few standout growth drivers in 125 125
United States: 2010 @ 108.5 Forecast
the Bay Area. Computer systems design added
San Francisco: 2010 @ 96.6
1,000 jobs over the past twelve months. 120 120
Manufacturers added a net 100 jobs over the
past year as technology and business spending 115 115
grew rapidly.
 The promise that seemed to shine on San 110 110
Francisco in the late Nineties is now a distant
memory. Employment in the Bay Area jumped 105 105
15 percent between 1996 and 2000 as the dot-
com and technology bubble took hold in the
100 100
region, but a broader view tells a different story.
Since 2000, the metro has shed all the nonfarm
jobs added, leaving a legacy of squandered 95 95
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
opportunity and no net job growth in San
Francisco over the past fifteen years. Indeed,
the region has actually been a serious Home Prices
Case-Shiller Index: Year-over-Year Percent Change
underperformer of U.S. average job creation. 40% 40%

 The Bay Area housing market recovery is 30%

United States 20-City Composite: Dec @ -2.4%
San Francisco: Dec @ -0.4% 30%
struggling, though sales appear to be stabilizing
at low levels. Home price appreciation has 20% 20%

stalled. Median home prices declined 0.4

10% 10%
percent from a year ago in December, according
to the Case-Shiller index, after appreciating 0% 0%
about 20.0 percent prior to the homebuyer tax
credit expiration in April. The California -10% -10%

Association of Realtors show the median home

-20% -20%
price in the San Francisco metro dropping 2.9
percent from a year ago through December. -30% -30%
Existing home sales were running about 2.8
percent below year ago levels in December but -40% -40%
01 02 03 04 05 06 07 08 09 10
that is a marked improvement since October
when sales lagged by 21.0 percent from October
Source: U.S. Department of Labor, Standard & Poor’s
2009. and Wells Fargo Securities, LLC

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California Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

San Diego Nonfarm Employment

San Diego 6%
Year-over-Year Percent Change
6%
Total SAN: Dec @ 0.5%
 San Diego employment has increased modestly 4% Total US: Dec @ 0.7% 4%
over the past year, beating the L.A. and San
Francisco metro areas. Nonfarm employment 2% 2%

managed to rise by 6,300 jobs over the past

0% 0%
year. Professional and business services lead
job gains as employment services added 4,100 -2% -2%
jobs. Professional, scientific and technical
services added a modest 800 jobs over the past -4% -4%

twelve months. Healthcare added 3,300 jobs,

-6% -6%
mostly from ambulatory health care service
providers. Construction lost another 2,600 jobs -8% -8%
lead by commercial construction which shed
1,100 jobs. The San Diego unemployment fell to -10% -10%
00 01 02 03 04 05 06 07 08 09 10
10.1 percent in December, down two tenths
from a year ago, further illustrating the trending San Diego Job Growth by Industry
water nature of the jobs recovery so far. Thousands of Jobs, Year-over-Year Change

 San Diego’s housing market remains far from Prof/Bus Svcs. 5.7

normal and a true bottom in housing appears a Ed/Health Svcs. 3.5

ways off. According to the California Realtors
Trade/Trans/Ut 2.1
Association, San Diego’s months supply of
existing homes at the current sales pace Other Svcs. 0.2

remained well above the California average at Financial 0.1

5.9 months for detached homes and 6.4 months
Leis/Hosp -0.1
for attached homes. Home prices appreciation
is decelerating rapidly, though home prices are Gov't -0.4

still 1.7 percent higher than a year ago. Further Info. Svcs. -0.8
price declines are expected in the months ahead.
Existing home sales in San Diego jumped 25.5 Mfg. -1.4
December 2009 - December 2010
percent in December from November, but sales Constr/Mining -2.6
were still 9.5 percent below a year ago.
-4 -2 0 2 4 6 8
 San Diego’s defense industry is a bit of a mixed
picture though there is no doubt defense will
Home Prices
remain an important driver of San Diego’s Case-Shiller Index: Year-over-Year Percent Change
economic future. With the Pentagon planning 40% 40%

significant declines in procurement spending 30% 30%

there will be some layoffs and shuffling of
personnel from the major military contractors 20% 20%

in the region, though so far at least, the

10% 10%
downside risks appear surmountable. Helping
to offset the drop in procurement spending, 0% 0%
military spending on San Diego’s many bases is
likely to grow as the Navy increases the number -10% -10%

of ships based in San Diego and operations are

-20% -20%
streamlined in other locations.
 Tourism looks to be a more significant support -30% United States 20-City Composite: Dec @ -2.4% -30%

for the local economy in 2011 as investments in San Diego: Dec @ 1.7%
-40% -40%
a new cruise ship terminal begin to pay off. 01 02 03 04 05 06 07 08 09 10
Rising hotel room rates and rising occupancy
rates are already visible. Source: U.S. Department of Labor, Standard & Poor’s
and Wells Fargo Securities, LLC

10
California Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

Orange County Job Growth by Industry

Orange County Thousands of Jobs, Year-over-Year Change

Prof/Bus Svcs. 8.4

 The Orange Country metro area is recovering Leis/Hosp 7.4

faster than other parts of Southern California
Ed/Health Svcs. 3.2
and far quicker than Northern California.
Nonfarm employment has risen 1.5 percent over Financial 3.1

the past twelve months through December. This Mfg. 2.7

compares to a 0.9 percent increase in nonfarm
Other Svcs. 2.4
payrolls nationally and a statewide average gain
of 0.6 percent. Professional and business Trade/Trans/Ut 1.6

services employment led the advance, adding Info. Svcs. -0.9

8,600 jobs from a year ago with about 60
percent coming from temporary help firms and Gov't -2.3

the rest coming from high skilled and high wage Constr/Mining -4.9 December 2009 - December 2010

professional, scientific and technical services.

-10 -5 0 5 10 15
Year-over-year job gains also occurred in trade,
financial services, manufacturing, leisure &
hospitality, and education & healthcare, Unemployment Rates
Percent
illustrating the broader nature of the economic 14% 14%
United States: Dec @ 9.4%
expansion in Orange County. Orange Co.: Dec @ 9.3%
 Orange County’s unemployment rate has moved
12% 12%

below the national jobless rate as better job 10% 10%

creation has emerged. The County’s
unemployment rate at 9.3 percent is now well 8% 8%
below the peak of 10.1 percent reached in 2009.
Prior to the Great Recession, Orange County’s 6% 6%
unemployment rate consistently hovered about
a percentage point below the national average. 4% 4%

 Orange County’s home values have slid further

2% 2%
over the past year. Orange County detached
home values have fallen 7.5 percent over the
0% 0%
past twelve months through December to a 00 01 02 03 04 05 06 07 08 09 10
median price of $458,695. The median price in
December 2008 was $442,640. A desirable
Existing Single-Family Home Prices
location and improving economy should help to Median Prices, Thousands, Seasonally Adjusted
stabilize home prices though fragility remains $800
United States: 2009 @ $172.5
$800

just below the surface. Existing home $700 Orange Co.: 2009 @ $474.1 $700
inventories remain elevated compared to
historical and statewide averages at 6.0 months $600 $600

for detached homes and 6.4 months for

$500 $500
attached properties. The California average in
December was 5.0 months for detached homes $400 $400
and 5.8 months for attached properties.
Moreover, housing demand remains depressed $300 $300

as existing home sales for December remained

$200 $200
5.6 percent below year ago levels. Additional
modest home prices declines cannot be $100 $100
completely ruled out for 2011, especially if
mortgage rates continue to rise as we expect. $0 $0
96 97 98 99 00 01 02 03 04 05 06 07 08 09

Source: U.S. Department of Labor, California Association of Realtors

and Wells Fargo Securities, LLC

11
California Outlook: March 2011 WELLS FARGO SECURITIES, LLC
March 01, 2011 ECONOMICS GROUP

Riverside Job Growth by Industry

Inland Empire Thousands of Jobs, Year-over-Year Change

Prof/Bus Svcs. 2.3

December 2009 - December 2010

 Riverside and San Bernardino counties saw net Leis/Hosp 2.0

payrolls decline yet again in 2010. The pace of
Trade/Trans/Ut 1.5
job losses is decelerating, however, and there
are now a handful of industries that managed to Ed/Health Svcs. 0.4

add net jobs from a year ago. Surely, the seeds Other Svcs. -0.2
of better job growth in 2011 are being sown
Info. Svcs. -0.5
though the aftermath of the deep declines in
employment, housing and commercial real Financial -0.7

estate will continue to weigh on the region over Mfg. -2.0

the forecast horizon.
 Over the twelve months through December,
Constr/Mining -6.0

nonfarm employment in the Inland Empire Gov't -6.1

slipped by 9,300 jobs or 0.8 percent. -8 -6 -4 -2 0 2 4

Construction led the job declines shedding
another 5,90o jobs. Specialty trade contractors Unemployment Rates
cut 4,100 jobs, and commercial construction Percent
16% 16%
lost 1,300 jobs. Local government jobs losses United States: Dec @ 9.4%
have been severe, dropping 6,100, as property 14% Riverside: Dec @ 14.4% 14%
values plunge and tax revenues collapse. Job
growth has been led by professional and 12% 12%

business services, adding 2,300 positions.

10% 10%
Leisure and hospitality added another 2,000
jobs partially offsetting the continued declines 8% 8%
in construction.
 Unemployment remains the most pressing
6% 6%

concern for the Inland Empire economy. With a 4% 4%

seasonally unadjusted unemployment rate in
December of 13.9, just two-tenths below year 2% 2%

ago levels, the economic and financial costs of

0% 0%
idle labor and economic slack continue to grow. 00 01 02 03 04 05 06 07 08 09 10
Unemployment is likely to remain high, as the
massive number of construction jobs eliminated
Existing Single-Family Home Prices
over the past three years will not soon return, Median Prices, Thousands, Seasonally Adjusted
putting further pressure on the local housing $450
United States: 2009 @ $172.5
$450

market and local government tax revenue. Riverside: 2009 @ $169.7

$400 $400
 Rising international trade and better consumer
spending growth in the United States in 2011 $350 $350
should benefit the Inland Empire’s
transportation industry. The Inland Empire is $300 $300

an important transportation hub for Southern

California and an important export and import $250 $250

link with Asia.

 A true housing recovery will take longer to
$200 $200

materialize, unfortunately. Residential housing $150 $150

will remain a drag on the local economy in 2011.
Existing home sales in December remained 11.5 $100 $100
percent below a year ago, and home prices are 96 97 98 99 00 01 02 03 04 05 06 07 08 09

giving up the gains made over the past year.

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

12
Wells Fargo Securities, LLC Economics Group

Diane Schumaker-Krieg Global Head of Research (704) 715-8437 diane.schumaker@wellsfargo.com

& Economics (212) 214-5070
John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wellsfargo.com
Mark Vitner Senior Economist (704) 383-5635 mark.vitner@wellsfargo.com
Jay Bryson, Ph.D. Global Economist (704) 383-3518 jay.bryson@wellsfargo.com
Scott Anderson, Ph.D. Senior Economist (612) 667-9281 scott.a.anderson@wellsfargo.com
Eugenio Aleman, Ph.D. Senior Economist (704) 715-0314 eugenio.j.aleman@wellsfargo.com
Sam Bullard Senior Economist (704) 383-7372 sam.bullard@wellsfargo.com
Anika Khan Economist (704) 715-0575 anika.khan@wellsfargo.com
Azhar Iqbal Econometrician (704) 383-6805 azhar.iqbal@wellsfargo.com
Ed Kashmarek Economist (612) 667-0479 ed.kashmarek@wellsfargo.com
Tim Quinlan Economist (704) 374-4407 tim.quinlan@wellsfargo.com
Michael A. Brown Economist (704) 715-0569 michael.a.brown@wellsfargo.com
Tyler Kruse Economic Analyst (704) 715-1030 tyler.kruse@wellsfargo.com
Joe Seydl Economic Analyst (704) 715-1488 joseph.seydl@wellsfargo.com
Sarah Watt Economic Analyst (704) 374-7142 sarah.watt@wellsfargo.com

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