2007: Mid Expansion Slowdown or Something

More?

2007 Economic Forecast ConferenceNortheastern California SBDC

Chico, CaliforniaJanuary 11, 2007

John MitchellEconomist Western Region

U.S. Bank

Where are we now? 6th Year Unemployment 4.5% Year old Housing Contraction Net Worth Increasing Energy Prices off Highs Fed on Hold Inflation above the Fed’s Comfort Zone Inverted Yield Curve New Political Landscape

Real GDP Growth-After Five Years

-2.00%-1.00%0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%

Q100

Q300

Q101

Q301

Q102

Q302

Q103

Q303

Q104

Q304

Q105

Q305

Q106

Q306

The Last Six Quarters05/2 05/3 05/4 06/1 06/02 06/3

GDP 3.3% 4.2% 1.8% 5.6% 2.6% 2%

Consumer 4.2 3.9 .8 4.8 2.6 2.8

Equip 7.9 11 2.8 15.6 -1.4 7.7

Structures -2 -7 12 8.7 20.3 15.7

Residential 20 7.1 -.9 -.3 -11.1 -18.7

Federal .4 9.6 -4.6 8.8 -4.5 1.3

S&L 1.5 -.1 1 2.7 4 1.9

Exports 9.4 3.2 9.6 14 6.2 6.8

Imports 1.4 2.5 13.2 9.1 1.4 5.6

Payroll Job Change 2003-20064.5% Unemployment Rate December

-300000

-200000

-100000

0

100000

200000

300000

400000

Jan Sept May January Sept May

Jobs

U.S. Employment Year to December 2006 (1.4%)

Construction

Trade

Pro&Bus Ser

Lei&Hosp

Other Ser.

Info

-500,000 0 500,000 1,000,000 1,500,000 2,000,000

NR&MNG

Manu

T,W,U

Finance

Ed&Health

Govt

Total

Jobs

Consumer Price Index and Core 2005-2006 Year over

Year

00.5

11.5

22.5

33.5

44.5

5

Jan July Jan July

TotalCore

Inflation-The Long View1979- November 2006

0

2

4

6

8

10

12

14

1979 1988 1997 2006/ Nov

Annual CPI Change

Inflation Review Information Quality Redistributions that serve no

economic purpose Transactions that extend over time

involve a price level expectation! Accounting and Tax System

Distortions Managerial Attention Diversion Short Term Focus

Yield Curve: Benign or Ominous?

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

1 mon

th

3 mon

th

6 mon

th

1 ye

ar

2 ye

ar

3 ye

ar

5 ye

ar

7 ye

ar

10 yea

r

20 yea

r

30 Y

ear

1/ 4/ 2007

6/ 30/ 2004

2006-2007 Life at Edge! Changing Leaders, Capacity Constraints

Growth Moderating to 2.5% Back towards the Comfort Zone 2-2.5% Rates: Fed may or may not be finished-“The

extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth as implied by incoming information.” 12/12/2006

Headwinds Tailwinds Housing/Autos Energy Shock ARMS Adjusting External Shock?

Global Growth Falling Energy

Prices Net Worth Gains

2006-2007 Questions How will the housing correction play out? Will business investment and trade hold up? What does the inversion mean? What is the

bond market telling us? Will energy bite us again? How tight are labor markets? What is the speed limit? Will financial conditions remain supportive?

Housing

The Drag Not Just Construction-Mortgage,

Title, Furniture, Realtors, Appraisers etc.

Consumption Implications Wealth and Mortgage Equity Withdrawal

Adjustables Adjusting!

Residential/Nonresidential Structures GDP Contribution % Pts.

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

Q103

Q303

Q104

Q304

Q105

Q305

Q106

Q306

ResidentialNonresidentialSource:BEA

Residential Permits 2001-2006 (000, SAAR)

0

500

1,000

1,500

2,000

2,500

March June Sept Dec March

Census

House Price Appreciation Annual to 9/30/2006 and ( Q3 06) OFHEO Q3/2006 US 7.73% (.86%) Idaho 17.52% (3%) Utah 17.41% (4.7%) Oregon 16.9% (2.85%) Arizona 16.37% (1.02%) Washington 16.35% (3.14%) Florida 15.11% (1.15%) Wyoming 14.39% (4.61%) Hawaii 13.33% (1.27%) California 10.16% (.62%) Nevada 8.63% (.85%)

Illinois 6.95% (1.18%) Texas 6.79% (1.83%) New York 6.53% (-.33%0 Minnesota 3.38% (.34%) Nebraska 3.22% (1.07%) Massachusetts 1.11%

(-.49%) Ohio 1.02%(.12%) Michigan -.55% (-.52%) Anderson, Indiana -

6.05% Source: OFHEO NAR Q3 Median -1.2%

Resales Q3 (SAAR)

Q3 2005 Q3 2006 % Change

US 7,180,000

6,270,000

-12.7%

Nevada 100,800 62,500 -38%

Oregon 109,600 89,700 -18.2%

California 612,400 437,500 -28.6%

Arizona 204,400 130,800 -36%

Florida 558,000 367,300 -34.2%

Source:NAR

Changes in Net Worth Households and Nonprofits (Billions)

$0.00

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

$1,400.00

$1,600.00

05Q1

05Q2

05Q3

05Q4

06Q1

06Q2

06Q3

Change in NetWorthGains in Real EstateValuesSource: Fed

How does the housing drag end?

Construction Decline/Inventory Reduced

Increased Affordability: Prices, Rates, Income

Changed Expectations

Annual Average Labor Force Growth Rates 1984-2014 BLS

Age 1984-1994

1994-2004

2004-2014

16 Plus 1.4% 1.2% 1%

16-24 -1% .3% 0

25-54 2.3% .8% .3%

55 Plus .4% 4% 4.1%

Energy Price Increases Decline in Standard of Living-Income

Transfer Overseas- Give up more to get oil.

Decreased Demand for US Goods and Services-short run

Composition of Demand-SUVs, Energy Saving Devices

Allocation of Resources Shifts Policy Changes?

Job Growth Update –November 2006 Data-49 States Growing Wyoming 1 Nevada 2 Arizona 3 Utah 4 Montana 5 Idaho 6 Louisiana 7 South Carolina 8 Washington 9 Florida 10

Oregon 15 Virginia 25 CALIFORNIA 31 Tennessee 32 New York 37 Massachusetts 40 New Jersey 45 Rhode Island 48 Ohio 49 Michigan 50

Longer Term

Policy Changes from New Cast of Characters: Immigration? Trade? Energy? Tax? Entitlements?

354 Days from Today First Boomer Gets Social Security