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THE UCLA ANDERSON FORECAST
FOR THE NATION AND CALIFORNIA



December 2011 Report




FORECASTS:
         2011 4th Quarter
         2013 4th Quarter

60th Year
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Published quarterly by the UCLA Anderson Forecast, a unit of
The UCLA Anderson School of Management.

Copyright 2011 by the Regents of the University of California.

UCLA Anderson Forecast

Director:
Edward E. Leamer
Professor of Global Economics and Management and
Chauncey J. Medberry Chair in Management




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Management. It is funded by subscriptions to the Project and through corporate and
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The UCLA Anderson Forecast Staff:
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David Shulman, Senior Economist
William Yu, Economist
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THE UCLA ANDERSON FORECAST
FOR THE NATION AND CALIFORNIA



December 2011 Report


Nation                            California

The Long Slump               11   California: Recovery Part Deux?   79
David Shulman                     Jerry Nickelsburg

Understanding the Risks to   19   Charts                            89
China's Economy                   Recent Evidence
William Yu
                                  Charts                            94
Charts                       45   Forecast
Recent Evidence
                                  Tables                            101
Charts                       53   Summary
Forecast
                                  Tables                            105
Tables                       61   Detailed
Summary

Tables                       67
Detailed
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THE UCLA ANDERSON FORECAST
FOR THE NATION



December 2011 Report



The Long Slump

Understanding the Risks to China's Economy
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                                                                                                       The Long Slump




The Long Slump
David Shulman
Senior Economist
UCLA Anderson Forecast
December 2011




  “But for a lot of people, I know it doesn’t feel like the recession ever ended. The unemployment rate remains
  painfully high, and more than two-fifths of the unemployed have been out of work for longer than six months,
  by far the highest ratio since World War II.”1

                                                                                                         Ben S. Bernanke




      Let’s face it, despite a modestly growing GDP,        Figure 1       Unemployment Rate, 2005Q1-2013Q4F
the labor market remains mired in a long slump. Next
year will mark the fourth year in a row with an unem-         (Percent)
ployment rate exceeding 9%, the worst performance             10%
of the postwar era. (See Figure 1) Indeed, the broader
U-6 series, which takes into account part-time work-           9%
ers seeking full time employment and discouraged
workers, has consistently been above 16%. Put sim-             8%
ply, there are currently 25 million Americans look-
                                                               7%
ing for full-time work. Moreover the employment-
population ratio remains below the level reached
                                                               6%
at the official bottom of the recession in 2009. (See
Figure 2) Unfortunately, although we are forecast-             5%
ing modest job growth on the order of 150,000 jobs
a month, total payroll employment will still be about          4%
three million jobs below the late 2007 peak. (See                   2005 2006 2007 2008 2009 2010 2011 2012 2013
Figure 3) Given the decidedly weak labor market, it
is not a coincidence that real personal income is still
                                                            Source: Bureau of Labor Statistics and UCLA Anderson Forecast
below the level reached in 2008. (See Figure 4)



UCLA Anderson Forecast, December 2011                                                                              Nation–11
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The Long Slump



Figure 2        Employment/Population Ratio, 1948 – October 2011, Monthly Data




Source: Federal Reserve Bank of St. Louis




Figure 3        Payroll Employment 2005Q1-2013Q4F                     Although recent data has improved and the no-
                                                                tion of a double-dip recession now appears to be off
   (Millions, SAAR)                                             the table, we continue to forecast real GDP growth at
   138                                                          a below trend rate over the next five quarters. Spe-
                                                                cifically we are forecasting a 2% growth rate for the
   136                                                          current quarter and a sub-2% growth rate for most of
                                                                2012. (See Figure 5) However, for 2013 we envision
                                                                growth to exceed 3% as several of the contractionary
   134
                                                                forces discussed below abate.

   132
                                                                Policy in a Trap: The Ghost of David Ricardo

   130                                                                Pimco’s Bill Gross asked the following question
                                                                in his latest missive to investors, “Can you solve a
   128
                                                                debt crisis with more debt?”2 The answer is usu-
          2005 2006 2007 2008 2009 2010 2011 2012 2013          ally you can, except when sovereign debt in excess
                                                                of 80-90% of GDP becomes a barrier to growth.3 In
                                                                that case, the concept of Ricardian Equivalence may
Source: Bureau of Labor Statistics and UCLA Anderson Forecast
                                                                come into play.4 David Ricardo, the great early 19th




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                                                                                                    The Long Slump



Figure 4        Real Personal Income, 2000 – September 2011, In $Billions, Monthly Data




Sources: Federal Reserve Bank of St. Louis



Figure 5        Real GDP Growth, 2005Q1 – 2013Q4                 century English political economist offered up the
                                                                 theory that the issuance of government debt is essen-
  (Percent Change, SAAR)
                                                                 tially equivalent to a promise to increase taxation in
    6%
                                                                 the future. Realizing that, taxpayers save more today
    4%                                                           to meet their projected tax obligations. When debt
    2%
                                                                 is low, taxpayers do not worry about the prospect of
                                                                 future taxation because they rightly believe that it will
    0%                                                           remain outstanding forever and hence never be paid
   - 2%
                                                                 off. As a historical matter, most folks have not had
                                                                 kitchen table conversations about how high deficits
   - 4%                                                          will increase their taxes in the future.
   - 6%
                                                                       However, when debt is high, there is a very
   - 8%
                                                                 real prospect that it will have to be paid off in the
  - 10%                                                          future and the funds to make the required pay-
          2005 2006 2007 2008 2009 2010 2011 2012 2013
                                                                 ments will come from increased taxation and re-
                                                                 duced government spending. All of a sudden, the
Source: U.S. Department of Commerce and UCLA Anderson Forecast   deficit becomes real! (E.g. Greece) A similar process


UCLA Anderson Forecast, December 2011                                                                         Nation–13
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The Long Slump



occurs in corporate finance where a modest increase                   a result of the high-deficit fiscal policy of the past
in leverage will actually lower the cost of capital.                  decade and the projection of mega-deficits as far as
However, once leverage is deemed to be excessive by                   the eye can see, Super Committee or not. (See Figure
the financial markets, the cost of capital skyrockets.                6) In fact, the high deficits will occur against a back-
                                                                      drop of declining real federal purchases, but rapidly
      Closer to home, the Obama Administration’s                      increasing transfer (entitlement) payments.
proposals to stimulate the economy with social
security tax cuts and infrastructure spending today                         Similarly, the Fed has been following a full
to be financed by tax increases in the future is an                   throttle expansionary monetary policy since 2008.
example of Ricardian Equivalence. In this case, the                   The Federal Funds rate has been set at zero since
government is explicitly promising taxpayers that                     early 2009 and will remain there through 2013. (See
their taxes will go up in the future; no guesswork is                 Figure 7) With the policy rate set at zero the Fed has
required. For the American consumer already reeling                   engaged in two massive quantitative easing programs
from home and stock price declines, the prospect of                   and recently put in place an “operation twist” to lower
future tax increases would weigh on current spending.                 long-term interest rates.
Similarly, the Ricardian result holds true, to a lesser
extent, with financing the stimulus with future cuts in                     Another quantitative easing program looms on
long-term reductions in entitlement programs.                         the horizon. However, it remains to be seen whether
                                                                      further policy measures will stimulate the economy.
      Thus, it is unlikely the economy would receive                  To be sure the earlier policies likely put a floor under
the stimulative effects of the fiscal policy that nor-                the 2007-09 recession and planted the seeds for
mally would be predicted by the standard economet-                    recovery; it is not clear whether or not the policy has
ric models. In other words, fiscal policy as we have                  been all that efficacious of late. Remember the imple-
known has come to a dead end. This eventuality is                     mentation of the second round of quantitative easing


Figure 6         Federal Surplus/Deficit,                             Figure 7       Federal Funds vs. 10 Year U.S. Treasury
                 FY 2000 – FY 2021F                                                  Yields, 2005Q1- 2013Q4F
 (Annual Data, Billions $)                                             (Rates)
   $500                                                                 6%

                                                                        5%
      $0
                                                                        4%

  $ - 500
                                                                        3%

                                                                        2%

 $ - 1000
                                                                        1%

                                                                        0%
 $ - 1500
                                                                       -1%
                                                                             2005 2006 2007 2008 2009 2010 2011 2012 2013
 $ - 2000                                                                                   Fed Funds      10-Yr. T -bonds
            2001        2005   2009      2013      2017      2021


Sources: Office of Management and Budget and UCLA Anderson Forecast   Sources: Federal Reserve Board and UCLA Anderson Forecast


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                                                                                                  The Long Slump



in September 2010 triggered inflationary fears with                 With that, U.S exports to the Euro region will
a run-up in commodity prices that worked to depress           slow and similarly for Asian and Latin American
consumer spending. It appears that the Fed might be           exports thereby depressing activity world-wide. Thus,
pushing on a string, the bane of monetary policy.             the global economy will grow more slowly in 2012
                                                              than 2011. And this assumes that we avoid a full
       Another factor inhibiting monetary policy is the       blown banking crisis in Europe that could bring with
notion that very low interest rates can be contraction-       it a world-wide restriction in credit analogous to the
ary. I know this goes against the grain of Keynesian          Lehman Brothers collapse of 2008.
theory, but there may be a new kind of paradox
of thrift at work. A year ago we wrote about the                    Therefore, it is not an accident that most of the
phenomenon of how low interest rates actually can             world’s stock markets have suffered declines this
encourage savings and reduce consumption.5 How                year. In fact, even with the August and November
so? With very low interest rates, pension plans require       swoons in U.S. share prices, the U.S. stock market
increased contributions to meet their actuarial ob-           has held up far better than its counterparts around the
ligations. The same principle holds true for defined          world. For example, as of late-November, the U.S.
contribution plans where a target level of savings has        market was down 8% year-to-date, while Germany
to be reached in order to fund the desired amount of          was down 21%, France down 25%, Japan down 20%,
retirement income. Because the retirement planning            China down 16%, and Brazil down 21%. (See Figure
for most Americans never contemplated a 2% 10-Year            8)
U.S. Treasury bond, the average American facing re-
tirement over the next 10-15 years is between a rock
                                                              Figure 8        Global Stock Market Performance,
and a hard place. Indeed, for those already retired,
                                                                              2011 through Nov. 25
low interest rates act as a depressant on consumption.

       Thus, while low interest rates work to stimulate
purchases of homes, consumer durables and busi-
                                                                                                            -8%
ness equipment, there is a very real drag coming
                                                                                                           -15%
from reduced everyday consumption for current and
prospective retirees. Because we are in a whole new
world with respect to interest rates, it is still too early                                                -21%
to tell how powerful in suppressing demand the new                                                         -25%
paradox of thrift is.                                                                                      -31%
                                                                                                           -13%

The Crisis in Europe
                                                                                                           -16%
      The economic situation in Europe continues                                                           -20%
to deteriorate with the Eurozone placing its mem-                                                          -24%
ber countries in straight jacket similar to the gold                   South Korea                         -13%
standard rules of a century ago. Without the ability
to devalue their respective currencies, the troubled
countries of Portugal, Italy, Ireland, Greece, Spain                                                       -10%
                                                                                                           -21%
and perhaps France are forced to deflate their domes-
tic economies. Austerity is the rule of the day and it is
                                                              Sources: The Wall Street journal
likely that the continent will be in recession next year.

UCLA Anderson Forecast, December 2011                                                                      Nation–15
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The Long Slump



Figure 9      Real Exports, 2000 – 2013F,                         construction as the backlog of excess supply is eaten
              Percent Change                                      into. (See Figure 12)

    (Percent Change, Annual Data)                                       Although investment in equipment and software
     15%
                                                                  will continue to grow in 2013, it will come off of its
     10%                                                          heady double-digit pace of the past two years. (See
                                                                  Figure 13) We are forecasting growth of 6.7% and
      5%                                                          7.1% in 2012 and 2013, respectively. Nevertheless,
                                                                  this sector will be growing three times faster than the
      0%                                                          overall economy.
     -5%
                                                                        Of course as we have noted for many years, the
                                                                  state and local sector is undergoing a fundamental
    -10%
                                                                  restructuring as real spending continues to decline.
    -15%                                                          (See figure 14) Because of the prevalence of defined
             2001 2003 2005 2007 2009 2011 2013                   benefit plans, this sector is being especially harmed
                                                                  by the very low interest rates we are experiencing.
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
                                                                  Last month, Rhode Island, under the weight of a huge
                                                                  unfunded liability, radically reformed its pension
     As a result, we forecast that after increasing               plans that included cuts for existing beneficiaries.
11.3% in 2010 and an estimated 6.6% this year, we                 Put bluntly, the laws of arithmetic are overcoming
forecast that real exports will increase by only 3.4%
in 2012 and rebound to a healthy 7.7% in 2013.(See                Figure 10      Real Consumer Spending,
Figure 9) The recently announced $40 billion airplane                            2005Q1 – 2013Q4F
orders announced by Boeing certainly augers well for
export growth later in the decade.                                   (Percent Change)
                                                                     6%

The Domestic Economy
                                                                     4%

      Despite the scare coming from the recent de-
                                                                     2%
cline in stock prices, consumer spending, especially
on automobiles is continuing to grow. (See Figures                   0%
10 and 11) To be sure, the recent gains in consumer
spending might not be maintained, but, unlike the                    - 2%
sluggishness earlier in the year, it will remain a
source of modest strength. Moreover, automobile                      - 4%
sales are being buoyed by pure replacement demand
as the fleet is reaching the limits of aging. Further-               - 6%
more, housing starts have bottomed and while this                           2005 2006 2007 2008 2009 2010 2011 2012 2013

sector won’t be a major source of growth in 2012
                                                                  Sources: U.S. Cepartment of Commerce and UCLA Anderson Forecast
we suspect that 2013 will bring with it a rebound in




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                                                                                                            The Long Slump



Figure 11      Automobile Sales, 2005Q1 – 2013Q4                  Figure 13      Real Investment in Equipment and
                                                                                 Software, 2000 -2013F
 (Millions, SAAR)
 18                                                                  (Percent Change, Annual Data)
                                                                      15%

 16                                                                   10%

                                                                       5%
 14
                                                                       0%

 12                                                                   -5%

                                                                     -10%
 10
                                                                     -15%


  8
                                                                     -20%
                                                                               2001   2003    2005   2007    2009   2011   2013
        2005 2006 2007 2008 2009 2010 2011 2012 2013


Sources: UCLA Anderson Forecast                                   Sources: U.S. Department of Commerce and UCLA Anderson Forecast




Figure 12      Housing Starts, 2005Q1 – 2013Q4F,                  Figure 14      Real State and Local Government
               in thousands, SAAR                                                Spending, 2005 – 2013F, Percent Change
 (Thousands, SAAR)
 2500
                                                                      (Percent Change, Annual Data)
                                                                       2%

 2000
                                                                       1%

 1500
                                                                       0%


 1000
                                                                      -1%


  500                                                                 -2%


      0                                                               -3%
          2005 2006 2007 2008 2009 2010 2011 2012 2013                      2005 2006 2007 2008 2009 2010 2011 2012 2013



Sources: U.S. Department of Commerce and UCLA Anderson Forecast   Sources: U.S. Department of Commerce and UCLA Anderson Forecast




UCLA Anderson Forecast, December 2011                                                                                  Nation–17
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The Long Slump



the laws of politics, even in the very unionized and                   to lower the unemployment rate much below 9%
very Democratic state of Rhode Island.                                 through 2013. Furthermore, government policy seems
                                                                       to be incapable of noticeably improving the situa-
Conclusion                                                             tion. Indeed the Federal government will be reducing
                                                                       purchases during the forecast period. The economy
      The United States is facing an unemployment                      will be sustained by modest increases in consumption
crisis in a slow growth economy. A modestly grow-                      and business investment along with the beginnings of
ing GDP on the order of 2% will not be sufficient                      a housing recovery in 2013.




Endnotes
1. Bernanke, Ben S., Remarks, At the Town Hall Meeting with Soldiers and Their Families, Fort Bliss, Texas, November 10, 2011, Board of
   Governors of the Federal Reserve System.
2. Gross, William H., “Pennies from Heaven,” Pimco Investment Outlook, November 2011.
3. See Reinhart, Carmen M., and Kenneth S. Rogoff, “This Time is Different,” Princeton, Princeton University Press, 2009.
4. See Ricardo, David (1820), “Essay on the Funding System,” in “The Works of David Ricardo on the Life and Writings of the Author, J.R.
   McColloch, London, John Murray, 1888. For the modern version of Ricardian Equivalence see, Barro, Robert J., “Are Government
   Bonds Net Wealth,” Journal of Political Economy, 82:6, 1095-1117 and “On the Determination of the Public Debt,” Journal of Political
   Economy, 87:5, 940-971.
5. See Shulman, David, “Risky Business,” UCLA Anderson Forecast, December 2010.




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                                                               Understanding the Risks to China's Economy




Understanding the Risks to
China's Economy
William Yu
Economist
UCLA Anderson Forecast
December 2011




  “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was
  the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it
  was the spring of hope, it was the winter of despair,…”

                                                                       Charles Dickens, A Tale of Two Cities, 18591




      Over the past three decades, China has experi-           with which a developed country strives to accurately
enced a period of persistent and remarkable economic           collect and measure real-time economic variables, the
growth. However, recent evidence suggests that                 strain of this task for an emerging country with a rap-
China is likely to face an economic slowdown. The              idly changing society and a population of 1.3 billion
question is: Will China’s economy encounter a soft             is substantial. Second, before 1992 China’s GDP mea-
landing or a hard landing? In light of our research,           surement was based on the Soviet material product
we suggest that both scenarios are equally likely. This        system (MPS). In 1992, China officially adopted the
article will present our reasons for the likelihood of         worldwide system of national accounts (SNA), yet it
a hard landing and will illustrate how the result of           still does not fully follow the SNA standard. There-
China’s landing affects the U.S. economy.                      fore, inconsistencies are inherent in China’s data.

      Our analysis begins with the ten risks facing                  Third, and most importantly, as an authoritarian
Chinese economic development and growth. It is                 regime controlled by the Chinese Communist Party,
important to note the interconnectivity of several of          China intends—and is able—to adjust their data re-
these risks.                                                   leases so as to display government control in a favor-
                                                               able light. In addition to this skewing of data to the
                                                               government’s liking, as economic growth becomes
1.      Data Risk                                              the foremost political goal of the government, those
                                                               who achieve this end are rewarded politically. With-
      It should not be surprising to find the quality
                                                               out an alternative way to climb up the political ladder,
and reliability of Chinese economic data challenged
                                                               e.g. by election, Chinese officials have an incentive
for three reasons. First, considering the difficulty
                                                               to boost economic performance, either in reality or by


UCLA Anderson Forecast, December 2011                                                                        Nation–19
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Understanding the Risks to China's Economy



paper, under their jurisdiction. This could potentially      Table 1        The Mean and Standard Deviation of GDP
lead to compromised data.                                                   Growth Rates from 1980 to 2009 for the 25
                                                                            Largest Economies
     For instance, let’s look at the most important                                                  Standard      Ratio of
economic data, real GDP growth, to decipher the                                            Mean     D eviation   Mean/S.D.
possible moderation/manipulation of China’s eco-              US                            1.62         2.27          0.71
nomic data. Table 1 and Figure 1 show the mean and            China                         8.60         3.29         2.62
standard deviation (SD) of annual real GDP per capita         Japan                         1.61         2.27          0.71
growth rates adjusted for purchasing power parity             Germany                       1.44         1.80          0.80
from 1980 to 2009 for the current largest 25 econo-           France                        1.33         1.48          0.90
mies in the world.
                                                              UK                            1.84         2.17          0.85
                                                              Brazil                        0.77         3.62          0.21
     The first column of Table 1 is the mean of real
                                                              Italy                         1.28         2.05          0.63
GDP growths for these 25 countries. The highest
                                                              India                         4.08         3.28          1.25
average growth rate is China’s at 8.6% per year over
                                                              Canada                        1.46         2.20          0.67
the past 30 years, which reflects the breathtaking
                                                              Russia                        1.47         6.67          0.22
economic growth and rising standard of living in
                                                              Spain                         2.02         2.16          0.93
China. Number two is Korea’s 5.16% growth rate;
number three is Taiwan’s 4.88%; and number four is            Australia                     2.20         1.69          1.30

India’s 4.08%. The major developed country's aver-            Mexico                        1.03         4.66          0.22
age growth rates all lie between 1% and 2%.                   Korea                         5.16         4.83          1.07
                                                              Netherlands                   1.77         1.73          1.03
      The second column of Table 1 presents the SD            Turkey                        2.05         4.28          0.48
of GDP growth, which represents the volatility of             Indonesia                     3.43         4.29          0.80
GDP growth for these countries. The larger the value,         Switzerland                   1.12         1.83          0.62
the more volatile the economy. The largest SD is Rus-         Poland                        2.02         4.98          0.40
sia’s 6.67%, indicative of the colossal collapse of the       Belgium                       1.71         1.96          0.88
Soviet Union in the 1990s. The third column of Table          Sweden                        1.59         2.23          0.71
1 is the ratio of GDP mean to SD. A high ratio implies        Saudi Arabia                  1.51         5.65          0.27
that either the economy’s mean growth is high or its          Taiwan                        4.88         3.51          1.39
volatility is low, or both. Therefore, a higher ratio         Norway                        2.37         1.92          1.24
is desirable because it suggests that the economy is
growing at a stable rate. In contrast, a lower ratio is       Japan (1951 -79)              6.62         3.46          1.91
undesirable because it suggests that the economy is           Taiwan (1960 -89)             6.92         3.10          2.23
either growing slowly or in an unsteady variation.
                                                              Korea (1960 -89)              5.99         4.17          1.44

      Figure 1 illustrates the ratio of growth to volatil-   Source: Penn World Table Version 7.0
ity with the SD along the x-axis and the mean growth
along the y-axis. The middle oval encircles the major-
ity of the countries. The ratios range from the U.S.’s       ing Asian economies—India, Indonesia, Taiwan, and
0.71 to Taiwan’s 1.39. Developed countries with              Korea—with higher growths and volatilities in the
lower growths and smaller volatilities are located in        center. The bottom-right oval including Russia, Saudi
the bottom-left corner of the oval. We see four emerg-       Arabia, Mexico, Brazil, Poland, and Turkey shows



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                                                                                Understanding the Risks to China's Economy



countries encountering higher volatilities but lower                             pan from 1951 to 1979 is 1.91; and Taiwan from 1960
growths. Therefore, they have a relatively smaller                               to 1989 is 2.33. Even so, China’s ratio is much higher.
ratio of mean to SD ranging from 0.21 to 0.48.
                                                                                        It is possible that the ratio reveals a reality of
      China is located above and beyond all the other                            unprecedented economic growth in China. We believe
countries with a stunning ratio of 2.62. One might                               it is more likely that the GDP data has been modified
presume that China’s pro-growth and fine-tuning poli-                            in either of two ways: (1) GDP growths have been
cies do indeed contribute to the size of this number.                            overstated, or (2) the fluctuations of GDP growth
If history is any guide, we can go back to look at the                           have been smoothed out. If we use Taiwan’s 2.33
previous economic miracles of Asian economies:                                   ratio as a more realistic indicator, Chinese GDP mean
Japan, Korea, and Taiwan. We see that these highly                               and S.D. combination should be either (8.6, 3.69) or
growing economies did experience higher mean to                                  (7.67, 3.29) instead of the currently reported (8.6,
volatility ratios. Korea from 1960 to 1989 is 1.44; Ja-                          3.29).


Figure 1        The Mean and Standard Deviation of GDP Growth Rates from 1980 to 2009




                9
                                                                  China,2.62
                8


                7
                                                                    Japan, 1.91
                                                  Taiwan, 2.33
                                                                     1951-79 Korea, 1.44
                                                   1960-89                      1960-89
                6

                                                                                                Korea, 1.07
         GDP 5                                                       Taiwan, 1.39
        Growth
         Mean
               4
                                                           India, 1.25             Indonesia, 0.8

                3

                           AUS, 1.3 Norway, 1.24
                2                                                                                   Poland , 0.4
                    Germany, 0.8           US, 0.71                              Turkey, 0.48
                                             Japan, 0.71
                                                                                                         Saudi Arabia, 0.27   Russia, 0.22
                1 France, 0.9                                            Brazil, 0.21
                                                                                         Mexico, 0.22

                0
                    1                  2               3               4                 5                          6              7
                                                       GDP Growth Standard Deviation (Volatility)




Source: Penn World Table Version 7.0




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      Maddison and Wu (2008)2 provide a detailed                                     It is also worth noting that when our analysis
analysis of China’s GDP measuring problem. Figure                             uses China’s official data, the focus should be more
2 displays their estimates and those from the official                        on average levels than on short-term dynamics.
source, the National Bureau of Statistics of China                            Moreover, China eventually will have to pay the price
(NBS). They argue that China’s official GDP data                              for its resource misallocation based consistently on
between 1992 and 2003 has been overstated and                                 misinformed data.
smoothed out; the official data has mean: 10.2 and
SD: 2.34 with mean/SD ratio: 4.36 compared to their
estimates of mean: 8.83, SD: 4.61, and ratio: 1.92.
                                                                              2. Overinvestment Risk
In other words, they suggest that China’s real GDP
                                                                                     The most imminent risk China faces right now
growth rate was overstated by at least 1%. Their
                                                                              is its overinvestment, including both private and
conclusion reconciles our suspicions as detailed in
                                                                              public investment. Figure 3 presents the annual real
this report.
                                                                              and nominal GDP growth rates of China. Figure 4
                                                                              shows the percentage of nominal GDP components
        Make no mistake, without government window
                                                                              in China from 1980 to 2010 by the expenditure ap-
dressing, the record of China’s economic growth is
                                                                              proach. It is clear to see that the percentage of invest-
still phenomenal. In terms of economic fluctuations,
                                                                              ment over GDP, including private and public, was
it is ironic to see that governments and economists
                                                                              over 40% from 1993 to 1995, hovered from 35% to
all over the world work hard to stabilize the business
                                                                              39% between 1996 to 2002, and rose to over 40%
cycle while China can simply achieve it by this “data
                                                                              again in 2003 and to 49% in 2010. If we calculate the
moderation.” However, in summary of this section,
                                                                              contribution of investment growth to GDP growth,
one should be careful when interpreting not only GDP
                                                                              the investment growth contributes 56% of China’s
but all Chinese economic data in which there might
                                                                              GDP growth on average from 2001 to 2010 (private
be systematic biases given the unusual nature of insti-
                                                                              consumption growth contributes 27%, government
tution in China.
                                                                              consumption contributes 12%, and net export contrib-
                                                                              utes 5%). Despite measurement bias and error in the
Figure 2          The Chinese GDP Growth Rates from                           data, the large and widening investment percentage of
                  Different Estimates                                         GDP in China is unusual.
   16
   %
   14                                                                               According to the Penn World Table 7, from
   12
                                                                              1950 to 2009 only a few dozen countries had a record
                                                                              of investment to GDP ratio over 40% in addition to
   10
                                                                              China. Most of these countries are either former So-
    8                                                                         viet Union allies, Middle East countries, or small and
    6                                                                         poor African countries. Over the past two decades, we
    4
                                                                              do see more recognizable country names in this 40%
                                                                              investment boom club: Singapore (1960 to 1997),
    2
                                                                              Thailand (1989 to1997), South Korea (1989 to 1997),
    0                                                                         and Malaysia (1993 to 1997). All of these Asian in-
        92   93   94   95   96   97    98   99    00   01    02   03
                                                                              vestment booms ended in the Asian financial crisis of
     China's Offical Number (Mean: 10.2, SD: 2.34, Mean/SD Ratio: 4.36)
     Maddison and Wu's Estimate (Mean: 8.83, SD: 4.61, Mean/SD Ratio: 1.92)
                                                                              1997. The more recent countries are Vietnam (2007-
                                                                              2009) and the United Arab Emirates (2007-2009).
Sources: National Bureau of Statistics of China and Maddison and Wu           The latter has suffered a serious real estate slump
(2008)


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                                                                                                                                                                                                                                                                                                                                                                                     Understanding the Risks to China's Economy



in the past two years. The only western developed                                                                                                                                                                                                                                                                                                                                          Next, let’s look at the annual real investment
country to have had a record of an over 40% invest-                                                                                                                                                                                                                                                                                                                                  growth rates of China, Japan, and the U.S., the largest
ment ratio is Iceland in 2006, and we all know what                                                                                                                                                                                                                                                                                                                                  three economies in the world, from 1980 to 2010.
happened to Iceland after 2006.                                                                                                                                                                                                                                                                                                                                                      (Figure 5) The bars represent China’s real invest-
                                                                                                                                                                                                                                                                                                                                                                                     ment growth. Since 2001, investment has grown
                                                                                                                                                                                                                                                                                                                                                                                     above 10% most of the time with an annual average
Figure 3                                                   The Annual Nominal and Real GDP
                                                           Growth Rates of China                                                                                                                                                                                                                                                                                                     of 14.1% from 2001 to 2010. Two investment booms
                                                                                                                                                                                                                                                                                                                                                                                     in the U.S.—(1) 1996 to 2000 with an average 8.5%
   35
   %
                                                                                                                                                                                                                                                                                                                                                                                     growth and (2) 2003 to 2006 with an average 4.9%—
    30                                                                                                                                                                                                                                                                                                                                                                               are no comparison to China’s runaway investment
                                                                                                                                                                                                                                                                                                                                                                                     bubble. It is worth noting that Japan experienced a
    25
                                                                                                                                                                                                                                                                                                                                                                                     similar investment craze from 1984 to 1990 with an
    20                                                                                                                                                                                                                                                                                                                                                                               average annual growth rate of 8.5% followed by its
                                                                                                                                                                                                                                                                                                                                                                                     anemic “lost decade.” All these bubbles end up burst-
    15
                                                                                                                                                                                                                                                                                                                                                                                     ing. Will China’s be different?
    10
                                                                                                                                                                                                                                                                                                                                                                                           Isn’t investment beneficial to economic growth?
     5
                                                                                                                                                                                                                                                                                                                                                                                     Yes, adequate investment is not only healthy but
     0                                                                                                                                                                                                                                                                                                                                                                               also crucial to economic growth. However, persis-
         1980                                              1985                                                      1990                                                     1995                                                         2000                                                          2005                                                    2010                tent overinvestment will lead to failure in repaying
                                                                                                                                           Real GDP Growth
                                                                                                                                           Nominal GDP Growth
                                                                                                                                                                                                                                                                                                                                                                                     Figure 5         The Annual Real Investment Growth Rates
Source: National Bureau of Statistics of China                                                                                                                                                                                                                                                                                                                                                        of China, Japan, and the U.S.
                                                                                                                                                                                                                                                                                                                                                                                          %
Figure 4                                                   Components of Nominal GDP of China                                                                                                                                                                                                                                                                                            30
    100       1 0 0 .0
              1 0 0 .4
                         1 0 0 .0
                          9 9 .7
                                           3
                                    19080. . 0
                                                        2
                                                 19090. . 0
                                                              1 0 0 .0
                                                              1 0 0 .0
                                                                         1 0 0 .0
                                                                         1 0 4 .0
                                                                                    1 0 0 .0
                                                                                    1 0 2 .5
                                                                                               1 0 0 .0
                                                                                                9 9 .9
                                                                                                          1 0 0 .0
                                                                                                          1 0 0 .9
                                                                                                                     1 0 0 .0
                                                                                                                     1 0 1 .1   1 0 0 .0
                                                                                                                                 9 7 .3
                                                                                                                                           1 0 0 .0
                                                                                                                                            9 7 .2
                                                                                                                                                             0
                                                                                                                                                      19090. . 0
                                                                                                                                                                   1 0 0 .0
                                                                                                                                                                   1 0 1 .8   19080. . 0
                                                                                                                                                                                     7            4
                                                                                                                                                                                           19080. . 0   19080. . 0
                                                                                                                                                                                                               0     1 0 0 .0   1 0 0 .0   1 0 0 .0
                                                                                                                                                                                                                                            9 7 .2
                                                                                                                                                                                                                                                      19070. . 0
                                                                                                                                                                                                                                                             5     19070. . 0
                                                                                                                                                                                                                                                                          8     1 0 0 .0
                                                                                                                                                                                                                                                                                 9 7 .4
                                                                                                                                                                                                                                                                                           19070. . 0
                                                                                                                                                                                                                                                                                                  8     1 0 0 .0
                                                                                                                                                                                                                                                                                                         9 7 .5    1 0 0 .0   1 0 0 .0   1 0 0 .0   1 0 0 .0   1 0 0 .0   1 0 0 .0

                                                                                                                                                                                                                      9 5 .6     9 5 .8                                                                                                                         9 5 .6     9 6 .0
                                                                                                                                                                                                                                                                                                                    9 4 .5




    %                                                                                                                                                                                                                                                                                                                                                                                    20
                                                                                                                                                                                                                                                                                                                               9 2 .5                9 2 .3
                                                                                                                                                                                                                                                                                                                                          9 1 .2
                                                                          8 9 .7
                                                                                     8 8 .0                8 8 .1
                                                                                                                      8 7 .5
                                                                                                                                                                    8 6 .9
                                                                                                8 6 .2
               8 5 .6                                                                                                                                                                       8 5 .2
                          8 5 .0                  8 4 .8       8 5 .0                                                                                                                                    8 4 .6
                                     8 3 .8                                                                                      8 3 .7                8 3 .8                  8 4 .0                                                                                                                    8 3 .6
                                                                                                                                                                                                                                                                                            8 3 .2                                                              8 2 .8
                                                                                                                                            8 2 .3                                                                                                                                                                                                                         8 2 .4



     80
                                                                                                                                                                                                                      8 1 .9                8 2 .2                  8 1 .8       8 1 .8
                                                                                                                                                                                                                                 8 1 .5                8 1 .7
                                                                                                                                                                                                                                                                                                                    8 0 .4
                                                                                                                                                                                                                                                                                                                               7 8 .7                7 9 .0
                                                                                                                                                                                                                                                                                                                                          7 7 .7




                                                                                                                                                                                                                                                                                                                                                                                         10

     60
                                                                                                                                                                                                                                                                                                                                                                                          0
                                                                                                                                                                                                                                                                                                                                                                           4 8 .6
                                                                                                                                                                                                                                                                                                                                                                4 7 .7



                                                                                                                                                                                                                                                                                                                                                     4 3 .9
                                                                                                                                                                                                                                                                                                         4 3 .0
                                                                                                                                                                    4 2 .5



     40
                                                                                                                                                                                                                                                                                                                    4 1 .6     4 1 .8     4 1 .7



                                                                                                                                                                                                                                                                                                                                                                                         -10
                                                                                                                                                                               4 0 .5                                                                                                       4 1 .0
                                                                                                                                                                                            4 0 .3
                                                                                                                                                                                                         3 8 .8
                                                                          3 8 .1                                                                                                                                                                                                 3 7 .8
                                                                                     3 7 .5
                                                                                                           3 7 .0     3 6 .6                           3 6 .6                                                         3 6 .7
                                                                                                3 6 .3                                                                                                                           3 6 .2     3 6 .2                  3 6 .5
               3 4 .8                                                                                                            3 4 .9     3 4 .9                                                                                                     3 5 .3
                                                               3 4 .2
                          3 2 .5                  3 2 .8
                                     3 1 .9




     20                                                                                                                                                                                                                                                                                                                                                                                  -20
                                                                                                                                                                                                                                                                                                                                                                                               1980   1985     1990     1995      2000     2005     2010

                                                                                                                                                                                                                                                                                                                                                                                                               China        US        Japan
         0
             1980                                               1985                                                   1990                                                     1995                                                         2000                                                         2005                                                   2010

                                                                                                                                                                                                                                                                                                                                                                                     Sources: National Bureau of Statistics of China; Economic and Social
                                                 Investment (Private & Gov't)                                                                                                                                                              Private Consumption
                                                 Government Consumption                                                                                                                                                                    Net Export                                                                                                                                Research Institute of Japan; Bureau of Economic Analysis of the U.S.

                                                                                                                                                                                                                                                                                                                                                                                     Note: The investments are from both private and public (government) sec-
Sources: National Bureau of Statistics of China, CEIC Data for 2010                                                                                                                                                                                                                                                                                                                  tors; shaded periods are U.S. recessions




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Understanding the Risks to China's Economy



that which was borrowed and an eventual collapse                  investment is from SOEs. 64.4% of investment is for
because the return and marginal product of invest-                structure while 20.4% is for purchasing equipment
ment will diminish as the investment and the capital-             and instruments. Note that the nominal transportation
labor ratio increase. For example, from Figure 5 we               infrastructure investment increased by a sharp 47% in
can see that China had an investment boom in the                  2009 with a total of 2,498 billion yuan ($886 billion).
early 1990s, most of which was conducted by state-                This reflects the colossal size of China’s stimulus into
owned enterprises (SOEs), resulting in an almost                  airports, highways, high-speed railroads, etc. amid the
0% return on assets for SOEs in 1998. The aver-                   global financial crisis.
age non-performing bank loan ratio was probably
around 30 – 50% in the late 1990s. This triggered the                   One might wonder how China could invest so
privatization/consolidations of SOEs and banking                  much for so long. Some controversial evidence, i.e.
restructures. Later the total number of SOEs declined             Bai et al. (2006)3, shows that the exceptionally per-
from 300,000 to less than 100,000. And as shown by                sistent and high investment return is the main driver;
Maddison and Wu (2008) in Figure 2, China had a                   therefore they conclude that China does not invest
significantly hard landing in 1998 in contrast to the             too much. Knight and Ding (2011)4 provide three
soft landing portrayed by the official report.                    assumptions to explain Chinese exceptionalism. First,
                                                                  the economic reform starting in 1978 began with an
       Figure 6 exhibits the percentage of China’s                exceptionally low level of capital, so there has been
total investment in fixed assets in September of 2011.            much more room for China’s investment to grow
The biggest sector of investment is the manufactur-               before reaching its steady state.
ing sector with 34% of total investment. The second
largest sector is real estate with 25%, and the third                    Second, two sources supply the abundant labor
largest sector is transportation with 9%. 34.6% of the            that accommodates the rapid capital accumulations
                                                                  and contain a relatively stable capital-labor ratio: (1)
                                                                  since the dismantling of inefficient SOEs in the late
Figure 6            The Percentage of China’s Total               1990s, tremendous underemployed labor from former
                    Investment in Fixed Assets,                   SOEs were released into more productive private
                    September 2011                                sectors; (2) the land reform of 1975 to 1985 drove a
                                                                  massive relocation of rural peasants into urban indus-
                                                                  trial sectors. Both sources have prevented China from
                                  Others                          being subject to diminishing returns to capital in the
                    Mining         15%
                                                                  past. Even if this hypothesis is true, we know that the
                     4%
 Electricity, Gas                                                 windfall gain of labor supply from urbanization and
   and Water
    Facilities
                                                  Manufacturing   sector restructure is not indefinitely sustainable.
                                                     34%
       5%
     Environment                                                        Third, central and local governments have been
      and Public
       Facilities                                                 subsidizing production factors such as capital, energy,
         8%                                                       land, etc.; as well as repressing their costs below ap-
                Transportation
                     9%
                                           Real Estate
                                              25%
                                                                  propriate market prices. Huang (2011)5 calculated all
                                                                  of these value distortions of factor markets, e.g. labor
                                                                  market: 411 billion yuan, capital market: 607 billion
                                                                  yuan, land market: 120 billion yuan, energy market:
Source: National Bureau of Statistics of China
                                                                  204 billion yuan, and environment cost: 591 billion



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yuan for 2008. The total cost distortions sum up to       growth and production: the Great Leap Forward from
2,138 billion yuan, or 7.2% of GDP. Distorted factor      1958 to 1961.
markets created incentives for massive investment for
accumulating physical capital.
                                                          3. Real Estate Bubble Risk
      Knight and Ding (2011) provide another expla-
                                                                As mentioned in the previous section, next to
nation for the Chinese investment mania, in particular
                                                          manufacturing, real estate is the second largest com-
for SOEs. Similar to our argument of Chinese data
                                                          ponent of investment, accounting for 25.5% of the
moderation/manipulation, the main goal of SOEs is
                                                          total with 5.4 trillion yuan for the first three quarters
not profit maximization but investment and output
                                                          of 2011 at a nominal 32.6% growth rate compared to
maximization. The reward to managers in SOEs
                                                          the same period in 2010. Is this a property bubble?
takes the form of prestige, commanding power, and
the perks of managing SOEs, in which the larger the
                                                                According to Wu, Gyourko, and Deng (2011)6,
SOE, the greater the reward. Moreover, state-owned
                                                          real housing prices in Beijing, Chengdu, Hangzhou,
banks provide easier and cheaper credit to SOEs than
                                                          Shanghai, and Shenzhen have appreciated by at least
to small and medium-sized private enterprises. For
                                                          10% per year between 2003 and 2010, with Beijing’s
example, SOEs stand for one-third of the national
                                                          growth rate appreciating closer to 20%. The real
output but account for two-thirds of bank loans. The
                                                          housing prices in Tianjin, Wuhan and Xian have risen
misplaced incentive of SOEs has led to overinvesting
                                                          between 5.9% and 8.7% per year. The real housing
and SOE size expansion.
                                                          price index for newly-built private homes in 35 major
                                                          cities has risen 118% from 2003 to 2010, with an
Japan Déjà Vu?                                            annual 9.7% compounded growth for eight years. To
                                                          get a better picture of how the Chinese property price
      Looking back at Figures 3 and 5, China needs to     appreciation compares to other real estate bubbles in
rethink its potential GDP growth rate. A GDP growth       the past, let’s take a look at the following list:
rate above 10% is not sustainable. In the aftermath of
Japan’s burst bubble, Japanese scholars and officials     •   U.S.: According to the Case-Shiller Home Com-
pondered what went wrong in the 1980s. Their con-             posite 10 city price index, the real housing price
fessions sum up in two points: (1) Japanese preferred         in the U.S. rose 137% for nine consecutive years
high growth rather than low growth amid a stable              from 1997 to 2005, with an average 9.6% com-
inflation environment. What is wrong with this?               pounded growth annually. The housing bubble
There was no concern for a bubble economy then.               began to burst in 2006. Since then, the real hous-
(2) Japanese cannot resist the temptation of a flood of       ing price has declined 39%. The real housing
cheap money from lax lending policies. The distorted          price is back to 2001’s level.
demand for investment is accommodated by the dis-
torted supply for investment: low costs of funds. We      •   Japan: According to the Japan Real Estate In-
will discuss this risk in the following section.              stitute, the real residential housing price rapidly
                                                              increased 146% over a five-year period from
     Currently, China is walking down the same                1985 to 1990, with an average 18% compounded
bubble path as Japan, but hopes for a better ending.          appreciation per year during the bubble period.
The Chinese should know better than others after              The bubble exploded in 1991. Since then the real
having experienced in its own history the catastrophic        residential property price has declined 67% over
consequence of a blind and distorted pursuit of high          20 years.



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•   Hong Kong: The average real private domestic           raising real estate transaction taxes, introducing new
    housing price7 in Hong Kong increased 156% for         property taxes in some major cities, and increasing
    seven years from 1990 to 1997, with an average         mortgage rates.
    13% compounded appreciation annually. The
    bubble burst with the Asian financial crisis in              This tightening policy has been effective. Hous-
    1997. Since then, the real housing price declined      ing sales and price appreciation have slowed down in
    54% over the following 6 years.                        2011. In recent months, the price has actually stag-
                                                           nated. Now, like many other countries have asked
      If we can call these property price churn-ups in     after their governments began popping the bubbles,
the U.S., Japan, and Hong Kong housing bubbles in          the Chinese may wonder—Will the property market
hindsight, what has been happening in China’s real         in China stabilize or will it collapse? We suggest that
estate market is not far away from a bubble. To access     China is more likely to face a real estate hard landing
the housing affordability in China, the International      than soft landing. Even if China can avoid a housing
Monetary Fund (IMF) computes the housing price-            crash in the near future, this does not guarantee that
to-income ratio for various Chinese cities and other       China’s economy will be off the hook. Neverthe-
countries. The higher the ratio, the less likely housing   less, we will not see massive mortgage defaults and
is affordable. In 2010, at the whole-nation level the      foreclosures occurring in China like we did in the
U.S. ratio was around 2.5 while China was near 5. At       U.S. because Chinese homebuyers have much higher
the city level, Singapore was around 6.5, and Tokyo        down payments and home equity to buffer the declin-
was about 9 while Hangzhou and Shanghai were               ing housing price. The deleveraging crisis will come
about 13, and Beijing was near 20. The ratios show         from other players in this bubble game: real estate
that the current high housing prices are not sustain-      developers.
able in major Chinese cities.
                                                           4. Credit Risk
       An asset bubble, by definition, will always
burst. The relevant question is how quickly it will              One might wonder this: Where does the money
burst, and how deep and fast the price adjustment will     to support China’s investment boom come from? We
be. Based on the history record, we find that, by and      suggest that the money is from four separate chan-
large, the bigger the bubble, the deeper the crash will    nels.
be in the aftermath. Nevertheless, whenever the asset
bubble is concerned, we hear the following counterar-      1) High Domestic Savings: China is a country with
gument: “No, this time is different. The ABC market           a very high savings rate. In 2010, China’s gross
is different because of XYZ. Therefore, we should not         domestic savings as a percentage of GDP was
worry about the bubble.”                                      52%, much higher than 11.5% in the U.S. and
                                                              20.8% in Japan. Three components of domestic
      Despite some denial of the possibility of Chi-          savings—government savings, enterprise savings
na’s property bubble, the Chinese government has              (including SOEs) and household savings—have
imposed a number of policies in an attempt to con-            all increased in the past decade. High savings in
tain the runaway housing prices all over the nation.          the government and banks allow for the funding
Cooling measures include raising down payments                of various public and private investments. High
for second homes (from 50% to 60%), increasing the            household savings are accompanied with low
number of areas where home purchases are limited,             household consumption. We will discuss why



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     Chinese households are so frugal in the following       sides of the PBC’s balance sheet are equal to
     section.                                                $207 billion, $208 billion, $249 billion, $466 bil-
                                                             lion, $420 billion, $487 billion, and $461 billion
2) Currency Intervention: To keep China’s ex-                from 2004 to 2010, respectively.
   ports competitive, China’s central bank (People’s
   Bank of China, PBC) intervenes in the foreign             To prevent this money supply and inflation explo-
   currency market to keep the value of Chinese              sion, the Chinese government issues government
   currency—Renminbi or yuan—lower than the                  bonds to take money away from the market. This
   foreign exchange market’s equilibrium price, in           is called “sterilization.” Moreover, the PBC can
   particular against the U.S. dollar. To achieve this       press state-controlled banks to keep their extra
   goal, the PBC prints yuan to buy into outstand-           reserves in the PBC from lending out. But the
   ing U.S. dollars gained from Chinese exporters or         sterilization policy does not work in the long run.
   from foreign investors (both from foreign direct          We have seen that the increased money supply
   investment and speculators’ hot money). Figure            eventually fuels investment projects all over
   7 displays the rapid accumulation of Chinese for-         China and causes rising inflation, as experienced
   eign reserves’ value in terms of the U.S. dollar. It      in 2007 and 2008.
   increases exponentially from $623 billion in 2004
   to $2,914 billion in 2010 to $3,202 billion by the     3) Credit Boom: Figure 8 shows the growth rate of
   end of the third quarter of 2011.                         domestic credit in China and other selected coun-
                                                             tries that have encountered overinvestment and
     In other words, the PBC needs to issue the same         bubble burst problems. The dashed lines in Figure
     amount of yuan as the foreign reserve increment         8 represent the eruptions of either the financial
     each year. These ballooned components on both           crisis or bubble burst in these countries. Most
                                                             countries have elevated credit growth before the
                                                             crisis, e.g. Korea, Singapore, Hong Kong, Thai-
Figure 7       Foreign Exchange Reserve of China             land, Malaysia, and in particular the UAE (over
  $billion
                                                             40% growths from 2005 to 2008). Excepting
     3500                                                    Korea, all countries saw their credit growth slump
     3000
                                                             in the aftermath of the bubble burst.
     2500
                                                             On average, China had the highest credit growth
     2000
                                                             among these countries with a 20% annual rate
     1500                                                    over the past three decades. Similar to the real
     1000
                                                             investment cycle shown in Figure 5, China
                                                             experienced several credit spikes in four peri-
      500
                                                             ods: (1) 1984-1986, (2) 1993, (3) 2002, and (4)
        0
                                                             2009. The latest one in 2009 came in the midst
                                                             of the global financial crisis. To bolster a teeter-
                    Reserve Increase   Foreign reserve
                                                             ing economy, China launched a stimulus program
Source: World Development Indicators                         that unleashed the massive state-controlled bank
                                                             reserves and expanded bank lending to local gov-
                                                             ernments and SOEs by more than 30%.




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Figure 8             Growth Rate of Net Domestic Credit for Various Countries


                                 CHINA                                                   JAPAN                                                   US
       50                                                     50                                                      50
 (%)
       40                                                     40                                                      40

       30                                                     30                                                      30

       20                                                     20                                                      20

       10                                                     10                                                      10

        0                                                      0                                                       0

    -10                                                       -10                                                     -10

    -20                                                       -20                                                     -20
            1980   1985   1990    1995   2000   2005   2010         1980   1985   1990    1995   2000   2005   2010         1980   1985   1990   1995   2000   2005   2010


                                 KOREA                                             SINGAPORE                                                     HK
       50                                                     50                                                      50

       40                                                     40                                                      40

       30                                                     30                                                      30

       20                                                     20                                                      20

       10                                                     10                                                      10

        0                                                      0                                                       0

    -10                                                       -10                                                     -10

    -20                                                       -20                                                     -20
            1980   1985   1990    1995   2000   2005   2010         1980   1985   1990    1995   2000   2005   2010         1980   1985   1990   1995   2000   2005   2010


                            THAILAND                                                MALAYSIA                                                     UAE
       50                                                     50                                                      50

       40                                                     40                                                      40

       30                                                     30                                                      30

       20                                                     20                                                      20

       10                                                     10                                                      10

        0                                                      0                                                       0

    -10                                                       -10                                                     -10

    -20                                                       -20                                                     -20
            1980   1985   1990    1995   2000   2005   2010         1980   1985   1990    1995   2000   2005   2010         1980   1985   1990   1995   2000   2005   2010



Source: World Development Indicators




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   According to the PBC, total official outstand-              lenders in the 1980s and American lenders in the
   ing loans in China have increased 23 trillion               2000s -- hope the collateral will help recover their
   yuan ($3.6 trillion) from 30 trillion yuan (97%             losses if defaults happen. If defaults come with
   of GDP) in the end of 2008 to 53 trillion yuan              property price corrections, the lenders would bear
   (124% of GDP) in the third quarter of 2011. Most            more loss, which could further trigger a wide-
   of the lending went to the construction binges of           spread domestic panic and financial crisis.
   China’s local government’s infrastructure and real
   estate companies’ developments. China’s Na-             4) Local Land Sales Revenue: Land sales, often in
   tional Audit Office reported that local government         the form of farmlands owned by the state being
   had amassed 10.7 trillion yuan ($1.65 trillion)            turned over to real estate developers, are a major
   of debt by the end of 2010, about 27% of GDP.              source of funding for Chinese local government
   The debt defaults are expected to range from an            public infrastructure projects. With the occur-
   optimistic 2.5 trillion yuan to a pessimistic 8 tril-      rence of property price correction in major cities
   lion yuan.                                                 and accumulating inventory, local governments
                                                              will find it harder and harder to sell new lands
   Making matters worse, like the U.S.’s shadow               to SOEs and other private developers. If the real
   banking system, China has undergone an explo-              estate market cannot recover, we will see two
   sion of off-balance-sheet lending activities over          problems on the horizon as a result.
   the past two years in order to avoid government
   scrutiny or to circumvent new regulations. These            First, local cities will default on their debts to
   informal lending activities—such as letters of              state banks. Given the unified nature of China’s
   credit, securitizing acceptance bills, entrusted            political system, China’s central government will
   loans, and trust loans, which are repackaged as             then bail out the battered banks suffering from a
   so-called wealth-management products—became                 spike of nonperforming loans. A decade ago, the
   popular for wealthy individuals and cash-rich               Beijing government transferred tens of billions of
   institutions because of their more attractive yields        dollars to help recapitalize state banks. Second,
   than a normal deposit interest.                             local governments will have to cut back their
                                                               infrastructure investment spree, which could lead
   UBS AG estimate that the size of China’s infor-             to an investment slump. To postpone the outbreak
   mal shadow banking stands at about 12 trillion              of local government defaults, the central govern-
   yuan (about 23% of formal lending). Fitch Rat-              ment recently began allowing the local govern-
   ings estimates that the total new financing for             ments to issue bonds. It remains to be seen how
   2011, consisting of official banking (45%) and              this kick-the-can-down-the-road policy could
   shadow banking with additional loans from Hong              affect the timing of the default.
   Kong banks (55%), will amount to 18 trillion
   yuan.                                                       Credit is to a bubble economy what alcohol is
                                                               to a party gone wild. When the alcohol is gone,
   In summary, China’s credit boom could explode               the party is over. And what remains is nothing
   like a time bomb at any moment if borrowers                 more than an unpleasant hangover. The end of the
   fail to repay. Most of the collateral for loans is in       credit boom is the end of the investment bubble.
   real estate. Chinese lenders -- just like Japanese




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5. Inflation Risk                                                     Unfortunately, we must point out that this is another
                                                                      example of China’s “data moderation.” Why? Like
      An easy way to tell whether or not an economy                   other countries, China’s CPI tracks the general goods
is overheating is to look at the country’s inflation rate.            and services of a typical Chinese consumer, including
Figure 9 exhibits the year-over-year monthly Con-                     food, residence, recreation, education, transporta-
sumer Price Index (CPI) inflation rate and food infla-                tion, communication, healthcare, clothing, household
tion rate in China. From 1987 to date, we have seen                   facilities, etc.
four sharp rises of inflation in 1988, 1994, 2008, and
2011. These inflation peaks are highly-correlated with                      Unlike most other countries, however, the NBS
investment and credit growths as shown in Figures 5                   does not publish the weights assigned to these CPI
and 8. This suggests that the inflation cycle is driven               components. We cannot know how the headline CPI
mostly by the accelerating investment boom and esca-                  is calculated. It is well believed by the public in
lating money supply in China.                                         China that the official number understates the true
                                                                      change in cost of living. For instance, if we compare
      Looking at Figure 9, it seems that China has                    the difference of food inflation and CPI inflation in
contained CPI inflation better over the past decade                   Figure 9, we find it hard to understand why the gap
than in the 1980s and the 1990s. According to the                     is so large. Food inflation is mostly twice as much as
most recent official report, the CPI inflation in Octo-               CPI inflation. The only explanation is that the weight
ber 2011 is 5.5%, down from 6%-plus over the past                     of food in the consumption basket is too low to
few months. The inflation number seems not be too                     impact the headline CPI. But this is inconsistent with
bad when compared to other developing countries’.                     the fact that, given the standard of living in China,
                                                                      food consumption should be a major proportion of
                                                                      household spending. Therefore, we suggest that food
Figure 9        Year-over-Year Inflation Rates in China               inflation rates might reflect true inflation rates more
    30
                                                                      closely than the currently released CPI inflation rate.
    %
    25                                                                      Figure 10 displays the one-year benchmark
                                                                      deposit and lending interest rates, one of the main
    20
                                                                      monetary policy instruments of the PBC. To cool
    15                                                                down the overheating economy and property bubble,
                                                                      over the past year the PBC has raised the lending
    10                                                                interest rate from 5.31% to 6.56%. If high inflation
     5
                                                                      in China persists, it could complicate China’s future
                                                                      government stabilization policy. The contractionary
     0                                                                policy is targeting both the rising inflation and the
                                                                      asset bubble. If the inflation does not come down,
    -5
          88   90   92   94   96   98   00   02   04   06   08   10   China will not be able to easily loosen its tightening
                                                                      policy to mitigate the growing stress in the real estate
                     Consumer Price Index         Food Price
                                                                      market.
Sources: National Bureau of Statistics of China, CEIC Data




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Figure 10      One-Year Benchmark Deposit and Lending          In contrast, China has seen its trade share increasing
               Interest Rates in China                         from about 20% in the early 1980s to above 40% in
                                                               2000, and accelerating to 70% in 2006 after enter-
                                                               ing the World Trade Organization (WTO). It is this
   12
   %                                                           upward trend of international trade and openness that
    10                                                         has partly driven the investment boom in China over
                                                               the past two decades because investors expect that
     8                                                         the growing global market will be able to absorb their
                                                               increasing manufacturing capacity and products.
     6


     4
                                                               Figure 11       Trade as a Percentage of GDP
     2                                                             70
                                                                   %
     0                                                             60
     1980     1985    1990     1995     2000     2005   2010
                                                                   50
                       Deposit Rate     Lending Rate

                                                                   40
Sources: People’s Bank of China, CEIC Data
                                                                   30


                                                                   20
6. Export-Oriented Risk
                                                                   10

      Like Japan and other East Asian economies, the                0
export sector has been the engine of economic growth                    1980   1985    1990     1995       2000   2005   2010
and employment creation for China over the past two                                   CHINA           US      JAPAN
decades. The net export, export minus import, as a
percentage of GDP has been above 4% since 2005                 Source: World Development Indicators
as shown in Figure 4. The current account surplus
results in a mounting foreign reserve in China as pre-
sented in Figure 7. Although the net export consists of              According to China’s official data, in 2010
only 4% of China’s GDP in 2010, international trade            China’s export value to the world was $1.58 trillion
has a far more important role for China’s economy              and the import value from the rest of the world was
than it appears in terms of its employment impact and          $1.39 trillion, resulting in a $186 billion trade surplus.
its derived demand on manufacturing investment.                Among China’s export markets, advanced economies
                                                               count for 70%. Figure 12 presents major trading part-
      Figure 11 indicates trade, or the sum of export          ners with China in 2010. The European Union is the
and import of goods and services, as a percentage of           largest export market for China with $311 billion. The
GDP for China, the U.S., and Japan. Over the past              second largest market and the single largest coun-
three decades, we have seen the trade share in the             try for China’s export is the U.S. with $284 billion.
U.S. and Japan fluctuating between 15% and 30%.                For the past five years, on average, China’s export




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value to Europe has been growing 18% annually and        appetite for Chinese export goods in the near future.
growing 13% annually to the U.S. China’s growth          A lukewarm export market will directly hamper
dependence on export received quite the blow in 2009     China’s GDP growth. When the expectation of a
when the global financial crisis spread around the       weak export market materializes, it could hinder
world. China’s real net export stumbled by more than     long-lasting manufacturing investment sprees because
37% and had a -2.9% contribution to its GDP growth.      of a concern of overcapacity. Therefore, the external
China swiftly initiated real estate and infrastructure   shock to export-oriented nature of Chinese economy
investment to diminish this loss for the export sec-     will be another blow to China’s economic growth.
tor. But this question remains: Will China be able to
engineer another investment boost when exports fall      Is Chinese Currency Undervalued?
in the future?
                                                               One of the most controversial political economy
      With the ongoing European debt crisis and the      questions over the past several years has been wheth-
bleak U.S. employment market, it is hard to predict      er or not Chinese currency, yuan or Renminbi, is
that these two major markets will have a favorable       undervalued. Before answering this question, we need
                                                         to clearify the definition of “value.” There are two
Figure 12       Major Trading Partners with China        kinds of value: (1) fundamental value and (2) equilib-
                in 2010                                  rium value. The fundamental value will be uncovered
                                                         in the long run by rational market forces with perfect
         300                                             information, while the equilibrium value will be
         250                                             decided by day-to-day demand and supply driven by
                                            Export
         200                                             available and imperfect information, expectation, or
 $Billion 150                                            noises. By and large, equilibrium value will convert
         100                                             to the long-term fundametal value.
          50
           0                                                    If the question is whether or not Chinese cur-
                                                         rency is under its fundamental value, it is not an easy
                                                         one to answer because many factors that determine
                                                         the fundamental value of Chinese currency and prod-
                                                         ucts in the international trade and finance markets,
         300                                             e.g. productivity and prices in tradable goods, are
                                                         neither stable nor observable in real time. However,
         250
                                             Import      if the question is whether or not Chinese currency is
         200
                                                         under its equilibrium value, the answer is yes. China
 $Billion 150
                                                         heavily intervenes in the foreign exchange market to
         100                                             prevent Renminbi from appreciating in order to main-
           50
                                                         tain its export sector’s competitiveness. According to
                                                         economic theory, if a country manages to undervalue
            0
                                                         its currency—or nominal exchange rate—for a long
                                                         time, the country’s inflation rates will eventually rise.
                                                         Indeed, we have seen surging inflation in China in
                                                         2008 and 2011.
Source: CEIC Data




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      Figure 13 presents the nominal exchange rates                                 Chinese consumers have seen income growth, they do
between the Chinese yuan and the U.S. dollar and                                    not want to spend too much for four reasons:
the euro from 1987 to date. China pegged the dollar
to yuan exchange at $0.12 from 1995 to 2005. From                                   1) Since the SOE reform in the late 1990s, declin-
2005 to 2008, Renminbi appreciated from $0.12 to                                       ing public employment leads to a reduction in
$0.146 (about 22%) and then remained at the same                                       benefit coverage for public education, health care,
rate through the financial crisis. In 2010, it started ap-                             and housing services, which Chinese employees
preciating again, going from $0.146 to $0.157 (about                                   previously received. Without a comprehensive
7.5%). Since the dollar has been depreciating much                                     social safety net, such as unemployment insur-
more against the euro than against the yuan, the yuan                                  ance, social security or pension funds, Medicare,
has not appreciated much against the euro over the                                     etc., you are on your own if you lose your job, get
past decade.                                                                           sick, or retire. The government will not provide
                                                                                       the necessary help for you. As a result, Chinese
                                                                                       households need to save a portion of their income
Figure 13. Nominal Exchange Rate USD/Yuan and                                          to prepare for rainy days. Furthermore, rising
            Euro/Yuan
                                                                                       education and health care expenditures have
                 .28
                                                                                       beefed up the need for more savings in the past
   USD per yuan
         or                                                Going up means              few years8.
   Euro per yuan .24                                       yuan appreication
                                                                                    2) Facing soaring housing prices, those Chinese who
                                                                                       want to buy a house have to save more in order
                .20                                                                    to afford one. On the other hand, in contrast to
                                                                                       American consumers who increased their spend-
                .16                                                                    ing after watching their home equity and housing
                                                                                       wealth balloon, Chinese homeowners do not have
                .12
                                                                                       the same propensity to spend with rising housing
                                                                                       wealth. Putting this together, a real estate bubble
                .08
                       88   90   92   94    96   98   00   02   04   06   08   10      restrains household consumption and propels
                                           USD/CNY         EUR/CNY                     savings.
                                                                                    3) China’s financial market is underdeveloped, so
Sources: CEIC Data, Federal Reserve                                                    credit and consumer loans are not easily acces-
                                                                                       sible to normal households. To buy big-ticket
                                                                                       items, one needs to save a sufficient amount of
7. Consumption Imbalance Risk                                                          money ahead of time. In addition, there are few
                                                                                       choices for reliable financial investment in China.
       If China’s investment boom is not sustainable
                                                                                       Bank deposits are the most common household fi-
and if foreigners’ appetites for Chinese exports are
                                                                                       nance. As seen in Figure 10, the current one-year
reducing, the only savior for China’s economic mo-
                                                                                       deposit interest rate is 3.5%, which is below the
mentum is domestic private consumption. However,
                                                                                       official CPI inflation rate. Facing a declining real
this hope is not easily realized. As shown in Figure
                                                                                       interest rate, Chinese households have to save
4, it is stunning to see that the percentage of private
                                                                                       more to cover their purchasing power loss amid a
consumption over GDP has been shrinking over the
                                                                                       surging inflation environment.
past decade from 46% in 2000 to 34% in 2010. Mean-
                                                                                    4) Consumers are frugal because of several invisible
while, the domestic saving rates over GDP have in-
                                                                                       factors. For example, facing overall macroeco-
creased from 38% in 2000 to 50% in 2010. Although
                                                                                       nomic uncertainty, Chinese consumers need to

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    prepare additional precautionary savings. More-       As the Chinese economy is getting bigger, foreign
    over, in Chinese culture, thrift is acknowledged as   consumers will not be able to digest China’s products.
    a virtue, which explains relatively higher savings    Looking forward, China has no choice but to boost its
    in other East Asian countries as well.                domestic consumption demand by improving those
                                                          factors that repress private consumption.
      In the aftermath of the Great Recession, by
looking at painfully deleveraging American consum-        All Good Things Come to an End
ers, we all agree that living beyond our means is not
desirable. But it is also distorted to live way below           Examining the history of fast-growing econo-
our means like Chinese consumers. Depressed con-          mies in the world over the past five decades, Eichen-
sumption and overinvestment is not a sustainable way      green et al. (2011)10 suggest that rapidly growing
to grow an economy. Niall Ferguson (2011)9 suggests       economies will slow down by at least 2% in GDP
six elements to make the West a source of economic        growth rates as the country’s per capita incomes reach
dynamism and political stability: (1) Competition, (2)    certain levels (they suggest $15,000 on average).
Science, (3) Rule of Law, (4) Medicine, (5) Consum-       They propose the following reasons:
erism, and (6) Work Ethic.
                                                          •   Eventually the pool of underemployed rural labor
       Consumerism is one contributing element to             will be drained;
an economy that continually dominates and prospers        •   The share of employment in manufacturing will
in this capitalism world. Why? Because household              peak;
consumption is the ultimate goal of economy growth.
It is the fundamental driver of government spending,      •   Growth will come to depend on the difficult pro-
private and public investment, export, import, grow-          cess of raising productivity in the service sector;
ing income, enhancing technology and innovation.          •   A larger capital stock will bring more depricia-
In 2010, China, the second largest economy in the             tion; and
world, had a GDP of $5.88 trillion, about 40% of the      •   When the economy approaches the technology
U.S. GDP of $14.58 trillion, while China’s household          froniter, it will transit from relying on imported
consumption—$2.26 trillion—is only about 22% of               technology to indigenous innovation.
U.S. consumption—$10.42 trillion.
                                                               China will face these challenge points one by
      When a country has a larger proportion of
                                                          one. Their empirical evidence also reveals three
consumption, the economy will grow steadily due to
                                                          predictors of economy slowdown, all fitting China’s
a stable consumption growth. It is rather difficult for
                                                          current status.
a nation’s consumption to decline sharply because
the nature of consumption (nondurable goods and
                                                          1) When the consumption share of GDP increases,
services) is smoothing. But investment is different. It
                                                             the probability of economic slowdown will
is very volatile, and it will reduce substantially from
                                                             decrease. But when the consumption share
time to time. After all, we cannot expand factories,
                                                             becomes too large, e.g. the consumption spree
skyscrapers, highways, and high-speed rails every
                                                             in the U.S. from 2000 to 2006, the probability of
day. In sum, China’s current high-investment-low-
                                                             GDP growth slowdown will increase, as shown in
consumption model is fragile and risky. It worked for
                                                             Figure 14.
China over the past decade because developed econo-
                                                          2) When the investment share of GDP increases, the
mies, especially American consumers, were absorbing
                                                             probablity of economic slowdown will decrease.
rapid capacity build-up in China through its exports.

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Figure 14        Probability of Growth Slowdown


               Probability
                                    China                                                                China
               of Growth
               Slowdown

                        0%           62-64%     80%                         0%          30%         60%
                       Consumption Share of GDP                             Investment Share of GDP



   This is absolutely correct because investment will                    8. Rule of Law Risk
   accumulate physical capital, which will bolster
   producitivity. But when the investment share be-                            The above risks are either short term or medium
   comes too big, e.g. the investment spree in China                     term, which would trigger a hard landing and a down-
   from 2003 to 2011, the probability of economic                        turn for China’s business cycle. The Chinese econ-
   slowdown will increase.                                               omy is also exposed to some long-term risks, which
3) Countries with more dramatically undervalued                          will undermine its economic growth in the long
   currencies are more likely to experience growth                       run. The most serious risk is its lack of rule of law.
   slowdowns. The possible reason for this is that                       Although China’s rule of law is better than in some
   these countries, which are more dependent on                          third-world countries, it is still far behind a developed
   exports, are more vulnerable to external shocks.                      country’s standard. For instance, the World Bank


Table 2          The World Bank’s Worldwide Governance Indicators for 2010

        Rank                  1               2             3      4          5         6          7                  8          9

 Voice and                   US             Japan    Taiwan     Korea      Brazil    India     Mexico            Singapore    China
 Accountability              1.16           1.05        0.9      0.71       0.5       0.42       0.08              - 0.29     - 1.65
 Political              Singapore           Japan    Taiwan       US       Korea     Brazil     China             Mexico      India
 Stability and
 Absence of
 Violence                    1.12           0.87       0.79      0.31       0.1       0.05      - 0.77             - 0.79     - 1.31

 Government             Singapore            US       Japan     Taiwan     Korea    Mexico      China              Brazil     India
 Effectiveness               2.25           1.44        1.4      1.21       1.19      0.17       0.12               0.07         0

 Regulatory             Singapore            US      Taiwan     Japan      Korea    Mexico      Brazil            China       India
 Quality                     1.8            1.42       1.18      0.98       0.91      0.28       0.1 9             - 0.23     - 0.39
                        Singapore            US       Japan     Taiwan     Korea     Brazil      India            China      Mexico
 Rule of Law                 1.69           1.58       1.31      1.01       0.99        0       - 0.06             - 0.35     - 0.56

 Control of             Singapore           Japan       US      Taiwan     Korea     Brazil    Mexico              India      China
 Corruption                  2.18           1.54       1.23      0.75       0.42      0.06      - 0.37             - 0.52      - 0.6

Source: World Bank Worldwide Governance Indicators, 2011.



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developed an indicator to grasp a country’s institution     the polluters. To have a sustainable economic growth,
quality and its rule of law. Table 2 displays China and     China needs to pay more attention to the externalities
eight other economies with ratings ranging from 2.5         created by its economic development and growth.
(the best) to -2.5 (the worst). China is located near the
bottom in all categories.                                         The upper panel of Figure 15 provides the
                                                            energy use efficiency of major economies in 2008.
      If China cannot improve their rule of law,            The higher the value is, the more energy a country
China’s economic growth will eventually stumble and         consumes to generate the same GDP. China uses
fall behind other countries in the future. A nation with    279.7 kg per $1000 GDP, which is much higher than
a stable rule of law guaranteed by the government           other countries. This could partly explain the global
that enforces contracts and protect property rights will
more likely promote technology progress and innova-
tion. Without technology progress, when the labor           Figure 15      Energy Use Efficiency and CO2 Intensity
migration and the capital accumulation reach their
                                                                              Energy Use Efficiency, 2008
tipping points, China will lose its growth traction.                   kg of oil equivalent per $1000 GDP (PPP
                                                                                        adjusted)
       Additionally, China has to improve, at least,          300
two rules of law: (1) constitution and (2) intellectual
                                                              250
property right, which are not currently followed or
implemented. Without fair practice and protection             200
of human rights and civil rights written into China’s         150
constitution, two unwanted outcomes could occur.
                                                              100
First, social unrest could explode and stymie invest-
ment and economic growth because there is no impar-            50
tial institution, e.g. court, to settle growing disputes.          0
Second, an uncertain and unfair environment will
drive away the best talents of the nation, resulting
in brain drain and human capital loss. Without the
protection of intellectual property rights, China will
                                                                                   CO2 Intensity, 2007
not create indigenous innovations because there is no                     kg per kg of oil equivalent energy use
incentive to induce significant research and develop-
                                                               4
ment, which require long-term and expensive invest-
                                                             3.5
ment.
                                                               3
                                                             2.5
9. Environmental Risk                                          2
                                                             1.5
      GDP is not a perfect barometer of a country’s            1
standard of living because, for example, it does not         0.5
measure the forgone value of leisure activities or
                                                               0
long-term costs of pollution and environmental dam-
age that accompany GDP growth. As China continues
its breakneck GDP growth, the environmental cost is
usually either ignored or not appropriately shared by       Source: World Development Indicators




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commodity price run-up over the past decade not only        Figure 16       Dependence Ratio History and Forecast
because China has stellar economy growth but also             100
because it has such an energy-intensive method of               %
economic growth. Figure 15’s lower panel presents              90

the Carbon emission intensity for each unit of energy          80
used by major economies in 2007. Again, China is the           70
highest one, emitting $3.5 kg of CO2 for each kg of
energy use. China should improve its energy efficien-          60

cy as well as reduce its pollution output in order to          50
foster the health, welfare, and prosperity of its nation.      40


10. Demographic Risk
                                                               30




      Over the past three decades, China has had a                                China          US          Japan

demographic advantage for economic growth. Figure           Source: United Nations Population Division, World Population Prospects,
16 depicts the dependence ratio, which is the ratio of      2010 Revision

population of young (below age 15) and old (above
age 65) over the working group (age 15 to 64) for           Figure 17       Population Growth Rate History and
China, the U.S., and Japan. The higher the ratio is, the                    Forecast
bigger the burden for the working age adult to support         2
the children and the retired. For China, its depen-           %
                                                             1.5
dence ratio has been declining from 69% in 1980 to
38% in 2010. The growing working population trend              1

will be reverted in 2015. Starting then, China will          0.5
see a climbing dependence ratio, just as Japan did in
1995.                                                          0

                                                             -0.5
      Moreover, the total population growth rate,
as shown in Figure 17, does not look promising                -1

for China. In 2010, China’s population growth rate
declined below 0.5%, similar to Japan’s level in 1986.                                China        US        Japan
And China’s population growth is projected to decline
                                                            Source: United Nations Population Division, World Population Prospects,
rapidly to zero growth in 2028 and continue to drop         2010 Revision
to -0.5% in 2046. In contrast, U.S. population growth,
although declining, is expected to remain above 0.5%
for the next four decades. The good news is that            Leading Economic Indicators
China still has a relatively higher urban population
growth (migrating from rural areas) projected for the             Currently, the Conference Board and the Orga-
future. In 2010, China’s urban population growth rate       nization for Economic Cooperation and Development
was 2.5%, which is higher than 1% in the U.S. and           (OECD) produce China’s economic leading indicators
0.2% in Japan.                                              including the following components: (1) Conference




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Understanding the Risks to China's Economy



Board: consumer expectation index, China Federa-           Treasury bill yield, is a relatively simple and usefully
tion of Logistics and Purchasing (CFLP) Purchas-           leading indicator of the recession (when the spread
ing Managers Index (PMI): export orders subindex,          closes to zero or turns to negative). Therefore, let’s
CFLP PMI: supplier deliveries subindex, total loans        look at the Chinese government bond’s yield curves
issued by financial institutions, 5,000 industrial         and spread though the Chinese bond market might
enterprises diffusion index (raw materials), and total     not be liquid and efficient enough because of insuf-
floor space started. (2) OECD: M2, chemical fertilizer     ficient trading volume and market participants. Figure
production, production of crude steel, 5,000 indus-
trial enterprises (overseas order level), real estate
under construction, production of motor vehicles, and      Figure 18         The Market Prices of Copper and Iron Ore
Shanghai stock exchange turnover. Since these lead-
ing indicators are newly born, their forecasting ability      US cent
                                                                      480                                                           320
                                                                                                                                          US cent
                                                                                                                                          Iron Ore
remains to be examined.                                       Copper 440
                                                                                                                                    280
                                                                     400
                                                                                                                                    240
                                                                     360
      At this point, we suggest three simple indexes                 320                                                            200
to get a hold of the current state of China’s economy:               280
(1) HSBC China PMI, (2) the market price of iron
                                                                                                                                    160
                                                                     240

ore and copper, which shed light on China’s heavily                  200
                                                                                                                                    120


dependent sector—manufacturing and construction                      160                                                            80

investment, and (3) China’s export growth to the                     120
                                                                            2005    2006   2007     2008       2009   2010   2011
European Union and the U.S. The HSBC flash China
                                                                                           Copper          Iron Ore
PMI in November, 2011 is 48, a 32-month low, de-
clining from 51 in October. Figure 18 shows that two
                                                           Sources: Global Finance Data; copper is the high-grade copper price
commodities, of which China is the main buyer in the       from New York Mercantile Exchange, and iron ore is from Brazil’s market.
global market, had prices that plunged in the out-
break of the global financial crisis and that rebounded    Figure 19         Monthly Year-over-year Growth Rates
sharply in the deepest chaos of late 2008 as China                           of China’s Nominal Export Values to the
launched a massive construction boom. Now we can                             European Union and the U.S., January
see both prices are heading downwards. The global                            2006 to September 2011
price of these raw materials may reflect Chinese con-          %
                                                               50
struction investment.
                                                               40

      Moreover, as shown in Figure 19, year-over-              30
year monthly Chinese export values to the E.U. and
                                                               20
the U.S. have dwindled to below 10%. In particular,
China’s export growth to the E.U. has gone negative            10

as of late. Over the past five years, China’s export to         0
the E.U. contributed one-fifth of total Chinese export
                                                               -10
growth. With a likely E.U. recession approaching, the
languid export engine foretells an ominous future for          -20

China’s growth.                                                       2006         2007      2008            2009       2010        2011

                                                                                                  EU            US
     In the U.S., the yields spread, say the difference
between 10-year Treasury bond yield and 3-month            Sources: Eurostat, U.S. Census Bureau



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Figure 20      Chinese Government Bond Yields and Spreads, 5/18/2009 to 11/24/2011




Source: Global Finance Data



20 displays the Chinese government bond yields in 1          the looming risks mentioned above, we suggest that
year, 5 year, and 10 year as well as the yield spread        it is possible to see China’s hard landing, especially
between 1-year and 10-year bonds. Since December             if China still keeps its pursuit of high growth in the
2010, the yield spread has declined below than 1%.           future. However, given the currently available market
Not that in September 2011, the yield spread has been        indicators and limited data, we cannot make a specific
dropped below 0.2%.                                          forecast regarding the probability, the timing, and the
                                                             depth of China’s hard landing.
Hard Landing or Soft Landing?
                                                             Medium-Term Growth
      When the economy slows down smoothly and
orderly without causing a significant decline of output           Another question is: Will China return to its
growth and employment, we call this a soft landing.          splendid economic growth after its short-term land-
In contrast, if the economy slows down abruptly with         ing? We suggest that it is very unlikely. Here we list
a painful and significant reduction of output growth         several studies that present China’s medium- or long-
and employment, it is called a hard landing. Based on        term forecast:


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•   Lee and Hong (2010)11 project that China will         China’s GDP per capita will pass the U.S.’s by 2035
    grow 6.1% to 7.0% per annum in the 2010s and          and become not only the largest but also the richest
    5.0% to 6.2% in the 2020s.                            economy in the world. Is it possible? Now, let’s look
•   Maddison (2009)12 predicts that China will grow       at other country’s catch-up stories.16
    5% per annum on average between 2004 and
    2030.                                                       From 1950 to 1970, Japan had spectacular
                                                          growth. If we were in 1970 assuming that the past
•   Buiter and Rahbari (2011)13 anticipate that China
                                                          growth rate in Japan would continue, we would
    will grow 5% per annum between 2010 and 2050.
                                                          expect to see Japan surpass the U.S. in 1975. This did
•   Fogel (2007)14 conjectures that China will grow       not happen, however, because Japan’s growth rate
    7.9% per annum between 2011 to 2040.                  started to slow down in 1970. Despite slowing down,
•   The Conference Board (2011)15 forecasts that          Japan had decent growth in the 1970s and 1980s.
    China will grow according to three scenarios:         Again, if we were in 1989, we would not be able to
    o   Optimistic: 9.7% per annum in 2012 to 2016;       help but predict that Japan would overpass the U.S.
        4.9% in 2017 to 2025.                             to become the richest major economy in 1990. Yet
                                                          again, this did not occur because Japan had another
    o   Base: 7% per annum in 2012 to 2016; 3.5%          growth slowdown starting in 1990. Germany is simi-
        in 2017 to 2025.                                  lar to Japan in that it seems to have had a hard time
    o   Pessimistic: 3.8% per annum in 2012 to            breaking through the U.S.’s “glass ceiling.”
        2016; 3% in 2017 to 2025.
                                                                Similarly, Taiwan and Korea have shown splen-
      Given the analysis we present above, we agree       did growth over the past several decades, especially
more with the first three forecasts as well as the base   in the 1970s, 1980s, and 1990s. If we were in 1996,
or pessimistic view from the Conference Board about       assuming no change in the past growth trajectory, we
China’s trajectory rather than with Fogel or the Con-     would be tempted to predict that the standard of liv-
ference Board’s optimistic view. We predict that on       ing in Taiwan and Korea would surpass Japan before
average China will grow 5.5% in the medium term. In       2005. Again, this did not happen. The Asian Tigers
the long run, it is likely that China will face another   did not break through Japan’s glass ceiling. Taiwan
slowdown because long-term factors will kick in,          and Korea, however, did successully break through
such as an aging population and maturing urbaniza-        Mexico’s and Brazil’s in the 1980s. How? Taiwan and
tion.                                                     Korea both had an impressive institution transforma-
                                                          tion while Mexico and Brazil did not.
      It may be hard to convince some of the slow-
down in China’s growth forecast. Figure 21 may                  China’s economic growth will soon face a glass
make this easier by showing that the high growths in      ceiling imposed by Mexico, Brazil and Russia, which
late-developing economies do not last forever. Figure     are global competitors with China, in particular
21 shows the GDP per capita, an indicator of a na-        for labor wages and production costs. If China can
tion’s standard of living, for the U.S. and nine other    conduct the necessary reforms for its rule of law and
major catching-up economies from 1950 to 2010.            institution quality and establish a healthy and steady
The U.S. remains on top with the highest standard         consumer market, it will have a chance to surpass
of living among these economies. China grew rap-          Mexico and Brazil in terms of standard of living.
idly over the past three decades; it surpassed India in   Failing these two changes, China’s economic wonder
1992. If China continues this stunning growth rate,       will stop and stagnate in the middle-income area like
                                                          many other countries.

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Figure 21         Per Capita GDP for 10 Economies, PPP                                        Figure 22. U.S. Exports to China and Trade Deficit
                  Adjusted, at 2005 $ Price                                                               with China
                                                                                                    400
   60,000
                                                                                                 $ Billion
   40,000                                                                                           350
     ($)
   20,000             US                                       Taiwan
                            Germany                                             Russia                300
   14,000
   10,000              Japan
                                    Mexico
                                                                                                      250
    6,000
                                                  Korea                                               200
    4,000
                  Brazil

    2,000                                                                                             150
    1,400
    1,000                               India
                                                                                                      100
      600
                                China                                                                  50
      400

      200                                                                                               0
            50   55    60      65     70     75    80     85   90   95     00     05     10                  99    00    01    02        03    04    05    06    07   08   09   10

                                                                                                                                     Export to China
                               China                Brazil              Germany
                                                                                                                                     Trade Deficit with China
                               India                Japan               Korea
                               Mexico               Russia              Taiwan
                               US                                                             Source: US Bureau of Economic Analysis


Source: Penn World Table 7.0
                                                                                              Figure 23. U.S. Exports to China Growth, U.S.
                                                                                                          Exports to China and European Union as
                                                                                                          Percentage of Total Exports, U.S. Deficit
Impacts of China’s Slowdown on the U.S.                                                                   with China as Percentage of the Whole
                                                                                                          Deficit
      We believe that the interaction between the                                                60
economies of the U.S. and China favors one country                                                %
over the other. Via international trade, changes in the                                          50
U.S. economy will affect and spill over more to China
than Chinese economic changes will influence the                                                 40
U.S. Figure 22 presents U.S. exports to China (the
blue shaded bar) and the U.S. trade deficit with China                                           30

(the red bar). The combined value of the two bars
are U.S. imports from China. It is apparent that the                                             20

U.S. imports much more from China than it exports
                                                                                                 10
to China. In 2010, the U.S. export to China was $114
billion while the import from China was $376 billion,
                                                                                                  0
resulting in a trade deficit of $262 billion.                                                           99    00    01    02        03        04    05    06    07    08   09   10

                                                                                                                              Export to China Growth Rate
      In Figure 23, the bars represent the U.S. exports                                                                       Export to China / Total Export
to China annual growth rate. Over the past decade,                                                                            Export to EU / Total Export
                                                                                                                              Deficit with China / Total Deficit
the growth rate average has been around 15%.
Despite U.S. export growth to China, the share of                                             Source: US Bureau of Economic Analysis
exports to China over total exports of the U.S. is only



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about 6%. Because its share is not substantial yet, we     Conclusions
believe that the possible slowdown or hard landing of
the Chinese economy will not have much of an affect             In summary, the take-away points from our
on the U.S. economy.                                       report on China are as follows:

      By contrast, U.S. exports to the European Union      •   We should take heed when reading China’s data.
have been above 20% over the past decade, meaning              There is a high tendency for window dressing
Europe’s economy will have more influence on U.S.              through “data moderation.”
exports if it is worsened. Moreover, the black dashed      •   The overinvestment in manufacturing capacity,
line is the share of trade deficit with China over the         real estate market, and infrastructure are not sus-
whole U.S. trade deficit. It rose sharply and went             tainable. The bubble is going to burst.
above 50% in 2009 and 2010. That said, trading with
China alone constitutes about half of our trade deficit.   •   Amid the looming risks, it is possible to see a
                                                               hard landing of China’s economy in the future
                                                               although its probability, timing, and depth remain
       It is therefore reasonable for the U.S. and China
                                                               unclear at this point.
to settle this unbalanced and unsustainable trade
relationship. If, unfortunately, a trade war happens,
it is clear that China will lose much more than the              For better or for worse, China will be sitting as
U.S. Moreover, we suggest that U.S. exports to China       the second largest economy for some time. If China
will see more growth on consumption goods than on          can face and resolve ten risks in the future, China will
capital goods.                                             grow to be an advanced economy sooner than later.




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Endnotes

1. In Modern Chinese history, one could say that two hundred years before 1842, it was the best of times for China. From 1842 to 1978, it
   was the worst of times. Since 1978, it has been the best of times as well as the worst of times.
2. Maddison, Angus, and Harry X. Wu, 2008. “Measuring China’s Economic Performance,” World Economics, 9(2): 13-44.
3. Bai, Chong-en, Chang-Tai Hsieh, and Yingyi Qian, 2006. “The Return to Capital in China,” Brookings Papers on Economic Activity,
   2(2): 61-88.
4. Knight, John, and Sai Ding, 2010. “Why Does China Invest So Much?” Asian Economic Papers, 9(3): 87-117.
5. Huang, Yiping, 2010. “China’s Great Ascendancy and Structural Risks: Consequences of Asymmetric market Liberalization,” Asian-
   Pacific Economic Literature, 24(1): 65-85.
6. Wu, Jing, Joseph Gyourko, and Yongheng Deng, 2011. “Evaluating Conditions in Major Chinese Housing Markets,” Regional Science
   and Urban Economics, doi: 10.1016/j.
7. The data is from Rating and Valuation Department of Hong Kong SAR.
8. Chamon, Marcos, and Eswar Prasad, 2010. “Why Are Saving Rates of Urban Households in China Rising?” American Economic
   Journal: Macroeconomics, 2(1): 93-130.
9. In his book, 2011, Civilization: The West and the Rest.
10. Eichengreen, Barry, Donghyun Park, and Kwanho Shin, 2011. “When Fast Growing Economies Slow Down: International Evidence
   and Implications for China,” NBER Working Paper 16919.
11. Lee, Jong-Wha, and Kiseok Hong, 2010, “Economic Growth in Asia: Determinants and Prospects,” Asian Development Bank Working
   Paper 220.
12. Maddison, Angus, 2009, Chinese Economic Performance in the Long Run, 960-2030 AD, Paris: OECD.
13. Buiter, William and Ebrahim Rehbari, 2011. “Global Growth Generators: Moving Beyond Emerging Markets and BRICs,” Citigroup
   Global Markets.
14. Fogel, Robert, 2007. “Capitalism and Democracy in 2040: Forecasts and Speculations,” NBER Working Paper 13184.
15. Conference Board, 2011, Global Economic Outlook, New York: Conference Board.
16. Economic growth theory calls this “unconditional convergence.”




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THE UCLA ANDERSON FORECAST
FOR THE NATION



December 2011 Report




Charts
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                                                                                Charts – Recent Evidence




                    Price Inflation                                            Interest Rates
           Consumer vs. Producers' Price Index                   3-Mo. T-Bills vs. Long Gov't Bond Yields
                     Jan. 1999 to Oct. 2011                              Jan. 1999 to Oct. 2011
   (% Change Year Ago)                                      (Percent)
    10                                                      7
                                                                             3-Month
                                                            6                Long Gov'ts
     5                                                      5
                                                            4
     0
                                                            3
    -5                                                      2
                                                            1
   -10                                                      0
      99 00 01 02 03 04 05 06 07 08 09 10 11
            Consumer Prices   Producer Prices-Fin. Goods   -1
                                                             99 00 01 02 03 04 05 06 07 08 09 10 11




                       Automobile Sales
                     Jan. 2000 to Oct. 2011                                 Industrial Production
   (Mil. Units)                                                             Jan. 1999 to Oct. 2011
   14                                                      (Index 2002 = 100)
                                                           105
                     Cars
   12                Trucks
                                                           100
   10
                                                            95
    8

    6                                                       90

    4                                                       85
    2
     00 01 02 03 04 05 06 07 08 09 10 11                    80
                                                              99 00 01 02 03 04 05 06 07 08 09 10 11




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Charts – Recent Evidence




                   Total Nonfarm Employment                         Employment in Manufacturing
                     Jan. 1999 to Oct. 2011                            Jan. 1999 to Oct. 2011
   (Thous.)                                          (Thous.)
   138000                                            18000

   136000                                            17000
                                                     16000
   134000
                                                     15000
   132000
                                                     14000
   130000
                                                     13000
   128000                                            12000
   126000                                            11000
            99 00 01 02 03 04 05 06 07 08 09 10 11           99 00 01 02 03 04 05 06 07 08 09 10 11




                     Employment in Services                         Employment in Construction
                      Jan. 1999 to Oct. 2011                          Jan. 1999 to Oct. 2011
   (Thous.)                                          (Thous.)
   118000                                            8000
   116000
                                                     7500
   114000
                                                     7000
   112000
   110000                                            6500
   108000
                                                     6000
   106000
                                                     5500
   104000
   102000                                            5000
            99 00 01 02 03 04 05 06 07 08 09 10 11          99 00 01 02 03 04 05 06 07 08 09 10 11




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                                                                        Charts – Recent Evidence




                      Crude Oil Price                              Core Consumer Price Index
                  West Texas Intermediate                            Jan. 1999 to Oct. 2011
                   Jan. 2000 to Oct. 2011            (% Change Year Ago)
   ($/Barrel)                                        3.0
   140                                               2.7
   120                                               2.4
   100                                               2.1
    80                                               1.8
                                                     1.5
    60
                                                     1.2
    40                                               0.9
    20                                               0.6
     0                                               0.3
      00 01 02 03 04 05 06 07 08 09 10 11               99 00 01 02 03 04 05 06 07 08 09 10 11




          Composite Indexes of Economic Indicators         Ceridian-UCLA Pulse of Commerce Index
                   Jan. 1999 to Oct. 2011                           Jan. 1999 to Oct. 2011
   (Index 2004=100)                                  (Index 2007=100)
   120                                               105
                                                     100
                Leading
   110          Coincident                            95
                                                      90
   100
                                                      85

    90                                                80
                                                      75
    80                                                70
         99 00 01 02 03 04 05 06 07 08 09 10 11         99 00 01 02 03 04 05 06 07 08 09 10 11




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Charts – Recent Evidence




              Total Business Inventory-to-Sales Ratio                   Real Disposable Personal Income
                      Jan. 1997 to Sept. 2011                                Jan. 1999 to Oct. 2011
   1.50                                                  (Bil. 2005$)
                                                         11000
   1.45
                                                         10500
   1.40                                                  10000

   1.35                                                   9500
                                                          9000
   1.30
                                                          8500
   1.25                                                   8000
   1.20                                                   7500
          97 98 99 00 01 02 03 04 05 06 07 08 09 10 11           99 00 01 02 03 04 05 06 07 08 09 10 11




                            Retail Sales                                  Real Personal Consumption
                      Jan. 1999 to Oct. 2011                                Jan. 1999 to Oct. 2011
   (Bil. $)                                              (Bil. 2005$)
   400                                                   9600
                                                         9300
   350
                                                         9000
   300                                                   8700
                                                         8400
   250
                                                         8100
   200                                                   7800
                                                         7500
   150
                                                         7200
   100                                                   6900
      99 00 01 02 03 04 05 06 07 08 09 10 11                    99 00 01 02 03 04 05 06 07 08 09 10 11




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                                                                         Charts – Recent Evidence




                Single-Family New Home Sales                              Housing Starts
                    Jan. 1999 to Sept. 2011                           Jan. 1999 to Oct. 2011
   (Thous.)                                        (Mil. Units)
   1400                                            2.5

   1200                                            2.0
   1000
                                                   1.5
    800
                                                   1.0
    600

    400                                            0.5

    200                                            0.0
          99 00 01 02 03 04 05 06 07 08 09 10 11      99 00 01 02 03 04 05 06 07 08 09 10 11




                    Rate of Unemployment                          Unemployment Insurance Claims
                    Jan. 1999 to Oct. 2011                         Jan. 1, 2000 to Nov. 19, 2011
   (Percent)                                       (Thous.)
   11.0                                            700
   10.1
                                                   600
    9.1
    8.2                                            500
    7.3
                                                   400
    6.3
    5.4                                            300
    4.4
    3.5                                            200
       99 00 01 02 03 04 05 06 07 08 09 10 11         00 01 02 03 04 05 06 07 08 09 10 11




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Charts – Recent Evidence




                      Japanese and European                           U.S., Japanese and German
                          Exchange Rates                                     Stock Markets
                      Jan. 2000 to Oct. 2011                            Jan. 1999 to Oct. 2011
   (Deutschmark/$)                          (Yen/$)      (Index Jan.'90 = 1.00)
   1.20                                        140        6
   1.10                                        130        5
   1.00                                        120        4
                                               110        3
   0.90
                                               100        2
   0.80                                        90         1
   0.70                                        80         0
   0.60                                        70        -1
          00 01 02 03 04 05 06 07 08 09 10 11              99 00 01 02 03 04 05 06 07 08 09 10 11
               Euro/U.S. $ (Left)   Yen/U.S. $ (Right)         U.S.   Japan    Germany




                       U.S. and Japanese                              U.S., Japanese and German
                  Long Term Gov't Bond Yields                           Consumer Price Index
                     Jan. 1999 to Oct. 2011                             Jan. 2000 to Oct. 2011
   (Percent)                                             (% Change Year Ago)
   8                                                      6

   6                                                     4
                                                         2
   4
                                                         0
   2                                                     -2
   0                                                     -4
    99 00 01 02 03 04 05 06 07 08 09 10 11                 00 01 02 03 04 05 06 07 08 09 10 11
           U.S.     Japan                                      U.S.   Japan    Germany




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                                                                                           Charts – Forecast




            Real Disposable Income and Consumption           Consumer Expenditures on Medical Services:
   (4-Qtr. % Ch.)                                              Quantity % + Price % = Expenditure %
    8                                                (3-Yr. % Ch.)
                                                     10
    6
                                                         8
    4
                                                         6
    2

    0                                                    4

   -2                                                    2

   -4                                                    0
          1992 1995 1998 2001 2004 2007 2010 2013            1999 2001 2003 2005 2007 2009 2011 2013
             Consumption      Disposable Income                 Quantity    Price




                    Real Export and Import Growth                         Real GDP Growth
   (4-Qtr. % Ch.)                                                      Developed World vs. U.S.
   20                                                (5-Yr. % Ch.)
                                                     6
   10
                                                     5
     0                                               4
                                                     3
   -10
                                                     2
   -20
                                                     1
   -30                                               0
           1992 1995 1998 2001 2004 2007 2010 2013       1993        1997     2001       2005   2009     2013
              Exports      Imports                            U.S.     Developed World




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Charts – Forecast




                    Real GDP Growth                                           Actual Real GDP
   (4-Qtr. % Ch.)                                                          Vs. Potential Real GDP
    6                                              (Bil. 2005 $)
                                                   16000
    4
                                                   14000
    2
                                                   12000
    0
                                                   10000
   -2
                                                    8000
   -4
                                                    6000
                                                               1992 1995 1998 2001 2004 2007 2010 2013
   -6                                                              Actual Real GDP   Potential Real GDP
         1992 1995 1998 2001 2004 2007 2010 2013




                    Defense Spending                           Real Purchases of Goods and Services
                    As A Share of GDP                               by the Federal Government
   (Percent)                                       (% Ch. 12-Qtr. Mov. Avg.)
   10                                              8
                                                   7
    8
                                                   5
    6                                              4
                                                   2
    4                                              1
                                                   -1
    2
                                                   -3
    0                                              -4
         1978 1983 1988 1993 1998 2003 2008 2013        1997 1999 2001 2003 2005 2007 2009 2011 2013




54–Nation                                                      UCLA Anderson Forecast, December 2011
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                                                                                                           Charts – Forecast




                  Change in Real Business Inventories                    Real Investment-Producers Durable Equip.
                       (3-yr. Moving Average)                             Info. Processing Equip. vs. Other Equip.
   (% of Real GDP)                                              (3-yr. % Ch.)
    0.8                                                          30
    0.6                                                          20
    0.4
                                                                 10
    0.2
                                                                  0
    0.0
   -0.2                                                         -10
   -0.4                                                         -20
                                                                        1992 1995 1998 2001 2004 2007 2010 2013
   -0.6                                                                     Total Less Info. Equip.    Information Processing Equip.
          1995 1997 1999 2001 2003 2005 2007 2009 2011 2013




    Business Fixed Investment Share of Real GDP Vs.                     Real Investment in Nonresidential Structures
   Producers Durable Equip. Share of Bus. Fixed Invest.                         Total vs. Commercial Bldgs.
   (Percent)                                        (Percent)   (3-Yr. % Ch.)
   12                                                    80     10
   11                                                    75
                                                                  0
   10                                                    70
    9                                                    65     -10
    8                                                    60
    7                                                    55     -20
    6                                                    50
           1992 1995 1998 2001 2004 2007 2010 2013              -30
               Bus. Fixed Investment Share                        1995          1998   2001     2004       2007   2010     2013
               Prod. Dur. Share/Bus. Fixed                                 Total       Commercial Bldgs.




UCLA Anderson Forecast, December 2011                                                                                    Nation–55
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Charts – Forecast




        Business Fixed Investment Share of Real GDP                           Real Investment in Residential Structures
                  Vs. Capital Stock Growth                                            Vs. New Housing Starts
   (Invest. Share %)                                  (4-Qtr. % Ch.)   (Bil. 2005 $)                                        (Mil. Units)
   12                                                            8     800                                                          2.5
   11                                                            6     700                                                          2.0
   10                                                                  600
                                                                 4                                                                  1.5
    9                                                                  500
                                                                 2                                                                  1.0
    8                                                                  400
    7                                                            0     300                                                          0.5

    6                                             -2                   200                                                          0.0
           1992 1995 1998 2001 2004 2007 2010 2013                           1989 1993 1997 2001 2005 2009 2013
             Bus. Fixed Investment Share     Capital Stock Growth                 Real Investment (Left)     Housing Starts (Rt.)




                     Real Hourly Wage Compensation                                        Federal Surplus or Deficit
                    Vs. Productivity in Nonfarm Sector                 (Percent of GDP)
   (10-Yr. % Ch.)                                                        2
   3.0
   2.5                                                                   0
   2.0                                                                  -2
   1.5
                                                                        -4
   1.0
   0.5                                                                  -6
   0.0
                                                                        -8
   -0.5
           1973 1978 1983 1988 1993 1998 2003 2008 2013
               Real Wage      Productivity                             -10
                                                                              1989     1993     1997       2001   2005     2009     2013




56–Nation                                                                        UCLA Anderson Forecast, December 2011
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                                                                                                               Charts – Forecast




                    Consumer Price Index Inflation                                      Real Refiner's Cost of Crude Oil
   (Percent of GDP)                                                   (2005$/barrel)
    6                                                                 90
    5                                                                 80
    4                                                                 70
                                                                      60
    3
                                                                      50
    2
                                                                      40
    1                                                                 30
    0                                                                 20
   -1                                                                 10
         1989      1993     1997   2001     2005    2009       2013               1978 1983 1988 1993 1998 2003 2008 2013




                Real and Nominal Exchange Rate                                         Treasury Yields Vs. CPI Inflation
          Industrial Countries Trade Weighted Average                 (Percent)
   (Indexed: 2000 = 1.00)                                             15
   1.4
   1.2                                                                11
   1.0
   0.8                                                                 7
   0.6
   0.4                                                                 2
   0.2
   0.0                                                                -2
            1989 1993 1997 2001 2005 2009 2013                              1964 1971 1978 1985 1992 1999 2006 2013
              Nominal Exchange Rate       Real Exchange Rate                       Inflation   30-Year Bonds    90-Day Bills




UCLA Anderson Forecast, December 2011                                                                                          Nation–57
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Charts – Forecast




         Unemployment and Capacity Utilization Mfg.                                          Federal Transfers to Persons
                 Postwar Business Cycles                                (Percent of GDP)
   (%)                                        (100% - Capacity Util.)   12
   10                                                            95
    9                                                            90     11
    8                                                            85
    7                                                            80     10
    6                                                            75
                                                                         9
    5                                                            70
    4                                                            65      8
    3                                           60
          1964 1971 1978 1985 1992 1999 2006 2013
            Unemployment Rate      Capacity Util. Mfg. Rate              7
                                                                               1989 1992 1995 1998 2001 2004 2007 2010 2013




                      Federal Transfers to Persons                                               U.S. Housing Starts
                         For Health Insurance                                                    Vs. Mortgage Rate
   (Percent of GDP)                                                     (Mil. Units)                                        (Percent)
   4.0                                                                  2.5                                                      18
                                                                                                                                 16
   3.5                                                                  2.0
                                                                                                                                 14
                                                                        1.5                                                      12
   3.0                                                                                                                           10
                                                                        1.0                                                      8
   2.5
                                                                                                                                 6
                                                                        0.5
   2.0                                                                                                                           4
                                                                        0.0                                                      2
                                                                              1981 1985 1989 1993 1997 2001 2005 2009 2013
   1.5                                                                                 Housing Starts   Mortgage Rate
          1989   1993      1997   2001    2005      2009      2013




58–Nation                                                                              UCLA Anderson Forecast, December 2011
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                                                                                                   Charts – Forecast




                       U.S. Retail Sales of                                    Federal Net Interest Payments on
                   Automobiles and Light Trucks                                         National Debt
   (Mil. Units)                                                  (Percent of National Income)
   20                                                            4.5
                                                                 4.0
   15
                                                                 3.5
   10                                                            3.0
                                                                 2.5
    5
                                                                 2.0

    0                                                            1.5
           1989    1993     1997   2001     2005   2009   2013
              Automobiles    Light Trucks                        1.0
                                                                        1989     1993    1997   2001   2005   2009   2013




UCLA Anderson Forecast, December 2011                                                                             Nation–59
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THE UCLA ANDERSON FORECAST
FOR THE NATION



December 2011 Report




Tables
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                                                                                               Forecast Tables - Summary



Table 1.    Summary of the UCLA Anderson Forecast for the Nation
                                 2002      2003    2004    2005      2006   2007    2008    2009    2010   2011    2012    2013

                                                          Monetary   Aggregates and GDP (% Ch.)
Money Supply (M1)                 4.9       6.5     5.5     2.0       0.2    -0.1     4.4    14.2    6.3   15.8    11.6     5.7
Money Supply (M2)                 7.5       6.9     4.7     4.3       5.3     6.3     7.1     7.9    2.3    7.4     6.2     4.2
GDP Price Index                   1.6       2.1     2.8     3.3       3.2     2.9     2.2     1.1    1.2    2.1     1.4     1.3
Real GDP                          1.8       2.5     3.5     3.1       2.7     1.9    -0.3    -3.5    3.0    1.8     1.7     2.5
                                                                      Interest Rates (%) on:
Federal Funds                     1.7       1.1     1.3     3.2       5.0     5.0     1.9     0.2    0.2    0.1     0.1     0.2
90-day Treasury Bills             1.6       1.0     1.4     3.1       4.7     4.4     1.4     0.2    0.1    0.1     0.1     0.2
10-year Treasury Bonds            4.6       4.0     4.3     4.3       4.8     4.6     3.7     3.3    3.2    2.8     2.4     3.4
30-year Treasury Bonds            5.4       5.1     5.1     4.6       4.9     4.8     4.3     4.1    4.3    3.9     3.3     4.2
Moody’s Corporate Aaa Bonds       6.5       5.7     5.6     5.2       5.6     5.6     5.6     5.3    4.9    4.6     4.3     5.1
30-yr Bond Less Inflation         4.1       3.0     2.5     1.6       2.2     2.1     1.0     3.9    2.5    1.4     2.0     2.6
                                                                           Federal Fiscal Policy
Defense Purchases (% Ch.)
     Current $                   11.4      13.8    10.6     6.9       6.1    6.0    11.4     5.0     5.7    1.3    -1.8    -2.6
     Constant $                   7.4       8.7     5.7     1.5       1.6    2.2     7.5     5.8     3.3   -1.9    -3.3    -4.1
Other Expenditures (% Ch.)
      Transfers to Persons        9.8       7.0     4.9     6.1     6.4     6.5      9.0    16.9     7.4     -0.1   1.3     2.9
     Grants to S&L Gov’t         10.2      11.1     3.3     3.5    -0.6     6.0      3.9    22.0    10.2     -7.3  -7.2     1.3
                                              Billions of Current Dollars, Unified Budget Basis, Fiscal Year
Receipts                       1853.2    1782.1 1879.8 2153.4 2406.7 2567.7 2523.6 2104.4 2161.7 2302.5 2535.1 2823.3
Outlays                        2011.0    2159.2 2292.6 2472.1 2654.9 2729.2 2978.4 3520.1 3455.9 3601.1 3594.7 3629.3
Surplus or Deficit (-)         -157.8    -377.1 -412.8 -318.7 -248.2 -161.5 -454.8 -1415.7 -1294.2 -1298.6 -1059.7 -806.0
                                                                As Shares of GDP (%), NIPA Basis
Revenues                         17.5      16.9    17.0    18.1    18.9    18.9     17.5    16.0    16.7     17.0  17.6    18.8
Expenditures                     19.8      20.3    20.2    20.4    20.4    20.7     21.8    24.8    25.5     25.0  24.2    23.7
     Defense Purchases            4.1       4.5     4.6     4.7     4.7     4.7      5.2     5.6     5.6      5.5   5.2     4.9
     Transfers to Persons        11.8      12.0    11.9    11.8    11.9    12.0     12.9    15.5    15.9     15.3  15.0    14.9
Surplus or Deficit (-)           -2.4      -3.4    -3.2    -2.2    -1.5    -1.7     -4.3    -8.7    -8.8     -7.9  -6.6    -4.8
                                                               Details of Real GDP (% Ch.)
Real GDP                          1.8       2.5     3.5     3.1     2.7     1.9     -0.3    -3.5     3.0      1.8   1.7     2.5
Final Sales                       1.3       2.5     3.1     3.2     2.6     2.2      0.1    -2.7     1.4      2.0   1.6     2.4
Consumption                       2.7       2.8     3.3     3.4     2.9     2.3     -0.6    -1.9     2.0      2.3   2.0     1.8
Business Fixed Investment        -7.9       1.4     6.2     6.7     8.0     6.5     -0.8   -17.9     4.4      9.0   5.8     6.1
    Equipment and Software       -4.2       3.1     7.9     8.5     7.6     3.3     -4.3   -16.0    14.6     10.6   6.7     7.1
    Structures                  -17.7      -3.8     1.1     1.4     9.2    14.1      6.4   -21.2   -15.8      4.9   3.4     3.3
Residential Construction          5.3       8.2     9.8     6.3    -7.5   -18.9    -24.3   -22.5    -4.6     -2.3   2.9    18.5
Exports                          -2.0       1.6     9.5     6.8     9.0     9.3      6.1    -9.4    11.3      6.6   3.4     7.7
Imports                           3.4       4.4    11.1     6.1     6.1     2.4     -2.7   -13.6    12.5      4.8   2.4     3.2
Federal Purchases                 7.3       6.6     4.1     1.3     2.1     1.2      7.2     6.0     4.5     -1.7  -2.9    -3.6
State & Local Purchases           3.3      -0.1    -0.2    -0.2     0.9     1.4     -0.0    -0.9    -1.8     -2.3  -2.6    -0.9
                                                                  Billions of 2005 Dollars
Real GDP                      11543.1   11836.4 12246.9 12622.9 12958.5 13206.4 13161.9 12703.1 13088.0 13317.5 13540.9 13874.5
Final Sales                   11530.4   11819.1 12180.6 12573.0 12899.1 13178.7 13198.2 12848.1 13029.2 13291.6 13505.3 13830.8
Inventory Change                 12.8      17.3    66.4    49.9    59.4    27.7    -36.3 -145.0     58.8     26.0  35.5    43.6




UCLA Anderson Forecast, December 2011                                                                                 Nation–63
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Forecast Tables - Summary



Table 2.    Summary of the UCLA Anderson Forecast for the Nation
                               2002    2003    2004     2005    2006   2007   2008    2009   2010    2011    2012    2013

                                                      Industrial Production and Resource Utilization
Industrial Prod. (% Ch.)        0.2     1.3     2.3       3.2    2.2    2.7   -3.7 -11.2     5.3    3.8       2.2     3.6
Capacity Util. Manuf. (%)      72.9    73.9    76.1      78.2   78.6   79.2   74.9   66.2   71.7   74.7      75.8    77.4
Real Bus. Investment
   as % of Real GDP            15.5    15.7    16.3     16.8    16.8   16.1    15.0   12.6  12.6     13.2    13.7    14.5
Nonfarm Employment (mil.)     130.3   130.0   131.4    133.7   136.1  137.6 136.8 130.8 129.8       131.1   132.2   134.1
Unemployment Rate (%)           5.8     6.0     5.5      5.1     4.6     4.6    5.8    9.3   9.6      9.1     9.2     9.0
                                                                     Inflation (% Ch.)
Consumer Price Index            1.6     2.3     2.7      3.4    3.2      2.9    3.8   -0.3   1.6      3.2     1.6     1.9
   Total less Food & Energy     2.3     1.5     1.8      2.1    2.5      2.3    2.3    1.7   1.0      1.7     1.7     1.9
Consumption Chain Index         1.4     2.0     2.6      3.0    2.7      2.7    3.3    0.2   1.8      2.5     1.4     1.7
GDP Chain Index                 1.6     2.1     2.8      3.3    3.2      2.9    2.2    1.1   1.2      2.1     1.4     1.3
Producers Price Index          -2.3     5.3     6.2      7.3    4.7      4.8    9.8   -8.7   6.9      8.5    -0.4     1.9
                                                           Factors Related to Inflation (% Ch.)
Nonfarm Business Sector
   Wage Compensation            3.2     4.7     3.3      3.9    3.8    4.0    3.4     1.6   2.0    2.7        2.6     3.1
   Productivity                 4.5     3.7     2.6      1.6    0.9    1.5    0.6     2.3   4.1    1.0        1.2     1.0
   Unit Labor Costs            -1.3     1.0     0.7      2.3    2.9    2.4    2.8    -0.7  -2.0    1.7        1.3     2.0
Farm Price Index               -4.6    12.6    10.5     -3.8   -1.2   22.5   12.4 -16.5    12.2   22.9       -2.6    -4.3
Crude Oil Price ($/bbl)        26.1    31.1    41.5     56.5   66.1   72.3   99.6    61.7  79.4   93.3       96.3   108.7
New Home Price ($1000)        185.0   191.4   217.8    234.2 243.1 243.7 230.4 214.5 221.2 220.9            225.6   229.0
                                                         Income, Consumption and Saving (% Ch.)
Disposable Income               4.7     4.6     6.1      4.4    6.9    5.1    5.8    -2.1   3.6    3.7        2.7     2.8
Real Disposable Income          3.3     2.5     3.4      1.4    4.0    2.4    2.4    -2.3   1.8    1.2        1.4     1.1
Real Consumption                2.7     2.8     3.3      3.4    2.9    2.3   -0.6    -1.9   2.0    2.3        2.0     1.8
Savings Rate (%)                3.6     3.5     3.6      1.6    2.6    2.4    5.4     5.2   5.3    4.5        3.9     3.2
                                                       Housing and Automobiles--millions of units
Housing Starts                1.710   1.854   1.949    2.073 1.812 1.342 0.900 0.554 0.585 0.597            0.664   0.958
Auto & Light Truck Sales       16.8    16.6    16.9     16.9   16.5   16.1   13.2    10.4  11.6   12.6       13.2    14.5
                                                                    Corporate Profits
Billions of Dollars
   Before Taxes               765.3   903.5 1229.4 1640.2 1822.7 1738.4 1359.9 1455.7 1819.5 1929.6 2042.7 2287.0
   After Taxes                573.0   659.7 923.3 1227.8 1349.5 1292.9 1050.9 1183.3 1408.4 1503.5 1569.3 1729.7
Percent Change
   Before Taxes                 7.4    18.1    36.1     33.4   11.1   -4.6 -21.8     7.0   25.0       6.1     5.9    12.0
   After Taxes                 12.5    15.1    40.0     33.0    9.9   -4.2 -18.7    12.6   19.0       6.8     4.4    10.2
                                                               International Trade Factors
Nominal
U.S. Dollar--% change
     Industrial Countries      -1.5   -12.3    -8.2     -1.9    -1.5   -5.6   -4.5     4.3   -3.0    -6.1     3.7    -2.3
     Developing Countries       3.3     2.3    -0.1     -3.1    -2.5   -3.8   -2.6     7.2   -4.1    -3.6     1.1    -5.2
   Exports                     -2.4     3.8    13.4     10.6    12.7   13.0   11.1   -14.3   16.2    13.6     4.3     8.8
   Imports                      2.3     8.0    16.4     12.7    10.5    6.0    7.7   -22.8   19.4    13.3     2.6     5.9
   Net Exports (bil. $)        -427    -504    -619     -723    -769   -713   -710    -392   -517    -579    -559    -529
Real
U.S. Dollar--% change
     Industrial Countries      -0.4   -12.4    -8.0     -2.4    -2.5   -6.3   -5.1     7.7   -0.7    -7.4     3.4    -2.1
     Developing Countries       2.5    -1.6    -4.5     -6.1    -5.1   -7.4   -9.5     6.2   -5.1    -8.1    -4.3    -9.8
   Exports                     -2.0     1.6     9.5      6.8     9.0    9.3    6.1    -9.4   11.3     6.6     3.4     7.7
   Imports                      3.4     4.4    11.1      6.1     6.1    2.4   -2.7   -13.6   12.5     4.8     2.4     3.2
   Net Exports (bil. ‘05$)     -548    -604    -688     -723    -729   -649   -495    -359   -422    -412    -405    -337




64–Nation                                                                            UCLA Anderson Forecast, December 2011
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                                                                                              Forecast Tables - Summary



Table 3. Quarterly Summary of the UCLA National Anderson Forecast for the Nation
                               2011:2   2011:3    2011:4   2012:1 2012:2 2012:3 2012:4 2013:1       2013:2   2013:3   2013:4
                                                           Monetary Aggregates and GDP (% Ch.)
Money Supply (M1)                12.1     37.0      22.2      4.5     3.5     5.4     6.2     6.3      5.9      5.3      4.0
Money Supply (M2)                 6.2     21.4       8.0      3.2     2.6     3.1     3.7     4.5      4.8      4.9      4.9
GDP Price Index                   2.5      2.5       1.0      1.7     1.0     0.9     1.0     1.7      1.4      1.5      1.6
Real GDP                          1.3      2.5       2.0      1.5     1.2     1.5     2.2     2.4      3.1      3.3      3.3
                                                                     Interest Rates (%) on:
Federal Funds                     0.1      0.1       0.1      0.1     0.1     0.1     0.1     0.1      0.1      0.2      0.3
90-day Treasury Bills             0.0      0.0       0.0      0.1     0.1     0.1     0.1     0.1      0.1      0.1      0.3
10-year Treasury Bonds            3.2      2.4       2.1      2.1     2.3     2.5     2.8     3.0      3.2      3.5      3.8
30-year Treasury Bonds            4.3      3.7       3.0      3.1     3.3     3.4     3.7     3.9      4.1      4.3      4.6
Moody’s Corporate Aaa Bonds       5.0      4.5       3.9      4.1     4.2     4.3     4.6     4.8      5.0      5.2      5.5
30-yr Bond Less Inflation         1.0      1.3       1.9      2.2     2.3     2.1     2.4     1.9      2.2      2.4      2.8
                                                                          Federal Fiscal Policy
Defense Purchases (% Ch.)
     Current $                   11.1      6.6      -3.7     -3.7    -4.6    -3.9    -3.7    -1.5     -2.1     -2.0     -2.0
     Constant $                   7.0      4.8      -5.3     -5.5    -5.5    -4.8    -4.8    -4.2     -3.4     -3.3     -3.3
Other Expenditures (% Ch.)
     Transfers to Persons         6.0     -9.2       0.4     4.3     2.5     3.0      2.4     4.2     1.9    3.0     3.0
     Grants to S&L Gov’t         10.7    -36.8     -11.0    -2.5     1.3     2.9      0.1     0.4     0.2    3.6     3.7
                                                  Billions of Current Dollars, Unified Budget Basis, NSA
Receipts                        714.1    568.5     561.9   534.9   803.3   635.0    614.9   609.0   884.3  715.0   686.2
Outlays                         855.2    896.6     895.6   933.5   880.2   885.5    903.9   935.1   891.0  899.2   919.6
Surplus or Deficit (-)         -141.1   -328.1    -333.7 -398.6    -76.9 -250.4 -289.0 -326.1        -6.7 -184.2 -233.3
                                                                As Shares of GDP (%), NIPA Basis
Revenues                         17.1     17.1      17.0    17.4    17.5    17.6     17.8    18.8    18.9   18.9    18.8
Expenditures                     25.5     24.6      24.6    24.4    24.3    24.2     24.0    23.9    23.8   23.6    23.4
     Defense Purchases            5.5      5.6       5.5     5.4     5.3     5.2      5.1     5.0     5.0    4.9     4.8
     Transfers to Persons        15.6     15.1      15.0    15.0    15.0    15.1     15.0    15.0    14.9   14.9    14.8
Surplus or Deficit (-)           -8.4     -7.6      -7.6    -7.0    -6.8    -6.6     -6.2    -5.2    -4.9   -4.7    -4.6
                                                               Details of Real GDP (% Ch.)
Real GDP                          1.3      2.5       2.0     1.5     1.2     1.5      2.2     2.4     3.1    3.3     3.3
Final Sales                       1.6      3.5       1.8     0.9     1.0     1.4      2.2     2.5     3.0    3.1     3.1
Consumption                       0.7      2.4       2.1     2.0     2.2     2.1      2.1     1.6     1.5    1.6     1.3
Business Fixed Investment        10.3     16.3       7.3     2.8     3.3     1.4      6.5     3.8     9.4    9.4     9.3
    Equipment and Software        6.2     17.4       7.7     2.4     5.3     5.5      8.9     4.0     9.3    9.2     8.0
    Structures                   22.6     13.3       6.4     3.9    -2.2    -9.0      0.1     3.3     9.6   10.0    13.2
Residential Construction          4.2      2.5      -4.7     1.1     5.0    11.7      9.4    15.8    27.4   32.9    29.1
Exports                           3.6      4.0       2.9     2.5     2.6     4.8      6.9     9.3     8.9    8.2     9.3
Imports                           1.4      1.9       0.3     2.8     3.9     3.2      3.7     1.9     3.8    4.1     3.6
Federal Purchases                 1.9      2.0      -3.1    -4.4    -4.4    -3.9     -3.9    -3.7    -3.2   -3.1    -3.1
State & Local Purchases          -2.8     -1.3      -3.4    -2.8    -3.0    -1.8     -1.6    -0.8     0.1   -0.1     0.3
                                                                  Billions of 2005 Dollars
Real GDP                      13271.8 13352.8    13417.6 13467.5 13507.3 13557.8 13630.9 13711.1 13815.7 13928.6 14042.5
Final Sales                   13232.7 13347.4    13407.4 13437.9 13471.2 13519.7 13592.5 13675.4 13776.6 13882.3 13989.0
Inventory Change                 39.1     5.4       10.3    29.6    36.1    38.1     38.4    35.7    39.1   46.2    53.5




UCLA Anderson Forecast, December 2011                                                                                     Nation–65
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Forecast Tables - Summary



Table 4. Quarterly Summary of The UCLA National Anderson Forecast for the Nation
                              2011:2   2011:3   2011:4 2012:1 2012:2 2012:3 2012:4 2013:1 2013:2               2013:3   2013:4
                                                    Industrial Production and Resource Utilization
Production--% change             0.5      5.1      1.1     1.5     2.1     3.3     2.5     3.8     4.4            4.6      4.2
Capacity Util. Manuf. (%)       74.3     74.9     75.1    75.3    75.6    75.9    76.3    76.5    77.1           77.7     78.3
Real Bus. Investment
   as % of Real GDP             13.1     13.4     13.5     13.6    13.6     13.7    13.9    14.0        14.3     14.6     15.0
Nonfarm Employment (mil.)      131.0    131.2    131.5    131.7   132.0    132.4   132.7   133.2       133.7    134.4    135.0
Unemployment Rate (%)            9.1      9.1      9.1      9.2     9.2      9.2     9.2     9.2         9.1      8.9      8.8
                                                                   Inflation--% change
Consumer Price Index             4.1      3.1      1.8      0.8     1.1      1.5     1.4     2.3         2.1      2.1      2.0
   Total less Food & Energy      2.5      2.7      1.6      1.4     1.5      1.6     1.7     2.0         2.1      2.2      2.2
Consumption Deflator             3.3      2.4      1.2      0.8     1.0      1.3     1.2     2.0         1.9      1.9      1.9
GDP Deflator                     2.5      2.5      1.0      1.7     1.0      0.9     1.0     1.7         1.4      1.5      1.6
Producers Price Index            6.7     -2.5     -0.4     -2.5     0.4      0.3     1.8     3.9         1.5      1.0      2.3
                                                          Factors Related to Inflation--%change
Nonfarm Business Sector
   Wage Compensation             2.7      2.1      1.2      3.4     2.7      2.8      2.9   3.3          3.2      3.1      3.3
   Productivity                 -0.7      3.7      1.6      1.2     0.5      0.5      1.2   0.9          1.4      1.4      1.3
   Unit Labor Costs              3.3     -1.5     -0.4      2.2     2.3      2.3      1.7   2.4          1.8      1.7      2.0
Farm Price Index                 7.8      7.7    -13.0     -0.8    -2.1     -4.2     -4.4  -4.5         -4.5     -4.5     -4.5
Crude Oil Price ($/bbl)        102.6     89.7     87.1     90.4    98.1     97.7     99.0 109.3        110.3    110.4    104.8
New Home Price ($1000)         229.0    215.4    212.3    231.5   229.1    225.5    216.5 232.5        229.5    227.2    226.7
                                                         Income, Consumption and Saving--%change
Disposable Income                3.9      0.6      2.5      3.7     3.1      2.5      2.6   1.4          3.5      4.1      5.0
Real Disposable Income           0.6     -1.7      1.3      2.8     2.0      1.2      1.4  -0.6          1.6      2.2      3.1
Real Consumption                 0.7      2.4      2.1      2.0     2.2      2.1      2.1   1.6          1.5      1.6      1.3
Savings Rate (%)                 5.1      4.1      3.9      4.1     4.0      3.8      3.6   3.1          3.1      3.2      3.6
                                                       Housing and Automobiles--millions of units
Housing Starts                 0.572    0.615    0.618    0.617   0.640    0.676    0.721 0.795        0.911    1.017    1.108
Auto and Light Truck Sales      12.1     12.4     13.0     12.8    13.0     13.2     13.6  14.1         14.5     14.7     14.7
                                                                     Corporate Profits
Billions of Dollars
   Before Taxes               1890.6   1992.8   1957.9   2048.4   2029.2   2030.5   2062.7   2261.1   2279.1   2292.0   2315.9
   After Taxes                1470.1   1558.0   1531.0   1570.2   1557.1   1561.2   1588.7   1708.3   1724.7   1733.4   1752.4
Percent Change
   Before Taxes                  2.9     23.4     -6.8     19.8    -3.7     0.2     6.5        44.4      3.2      2.3      4.2
   After Taxes                   4.3     26.1     -6.8     10.6    -3.3     1.1     7.2        33.7      3.9      2.0      4.5
                                                                   International Trade
Nominal
U.S. Dollar--% change
     Industrial Countries      -12.2      1.0     12.0      8.2      4.6     -3.1     -3.1     -3.0     -2.9     -2.0     -0.8
     Developing Countries       -7.9      3.8     16.5      2.3     -4.4     -8.4     -5.6     -4.2     -5.3     -4.3     -3.0
   Exports--% change            12.7      6.2      3.7      1.7      2.7      5.1      7.8     11.0     10.2      9.5     10.6
   Imports--% change            14.1      1.1      3.1     -2.2      3.3      5.0      6.2      4.8      7.5      7.5      6.4
   Net Exports (bil. $)       -597.1   -572.8   -574.0   -549.8   -557.5   -563.7   -563.9   -537.6   -532.5   -531.1   -515.5
Real
U.S. Dollar--% change
     Industrial Countries      -14.0     -0.4     11.4      8.5      5.2     -3.5     -3.3     -2.9     -2.5     -1.3     -0.1
     Developing Countries      -12.6     -2.4      9.8     -2.8     -9.4    -13.2    -10.4     -9.0     -9.7     -8.4     -7.0
   Exports--% change             3.6      4.0      2.9      2.5      2.6      4.8      6.9      9.3      8.9      8.2      9.3
   Imports--% change             1.4      1.9      0.3      2.8      3.9      3.2      3.7      1.9      3.8      4.1      3.6
   Net Exports (bil. ‘05$)    -416.4   -409.4   -398.3   -402.3   -411.7   -408.0   -397.5   -366.1   -346.3   -330.4   -306.3




66–Nation                                                                             UCLA Anderson Forecast, December 2011
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                                                                                                      Forecast Tables - Detailed



Table 5.      Part A.   Gross Domestic Product
                               2002      2003      2004    2005    2006    2007    2008    2009    2010               2011     2012      2013
                                                              Billions of Current Dollars
Gross Domestic Product      10642.3   11142.2   11853.3 12623.0 13377.2 14028.7 14291.6 13938.9 14526.6            15096.8 15568.3    16164.6
Personal Consumption
Expenditures                 7439.2    7804.1    8270.6   8803.5   9301.0   9772.3 10035.5       9866.1 10245.5    10735.5 11100.9    11481.8
   Durable Goods              992.1    1019.9    1072.9   1123.4   1155.0   1188.4 1108.9        1029.6 1085.5      1156.3 1198.4      1253.3
   Autos and Parts            401.3     401.0     403.9    408.2    394.8    399.9   339.3        316.5   340.1      371.9   388.8      419.5
   Nondurable Goods          1617.9    1708.1    1819.3   1953.4   2069.8   2175.5 2272.8        2167.8 2301.5      2487.3 2563.5      2645.7
   Services                  4829.2    5076.1    5378.5   5726.8   6076.3   6408.3 6653.8        6668.7 6858.5      7091.9 7339.0      7582.8
Gross Private Domestic
Investment                   1647.0    1729.7    1968.6   2172.3   2327.2   2295.2    2087.6     1546.8   1795.1    1905.2   2022.2    2215.0
   Residential                509.5     577.6     680.6    775.0    761.9    628.7     472.4      354.6    338.1     334.4    348.4     421.9
   Nonres. Structures         282.8     281.9     306.7    351.8    433.7    524.9     586.3      449.9    374.4     409.9    429.5     448.5
   Producers Dur. Equip.      842.7     853.8     916.4    995.6   1071.7   1112.6    1070.0      903.0   1015.7    1125.6   1201.9    1293.3
   Change In Inv.              12.0      16.4      64.9     50.0     60.0     29.1     -41.1     -160.8     67.0      35.2     42.4      51.2

Net Exports                  -427.2    -504.1    -618.7   -722.7   -769.3   -713.1    -709.8     -391.5   -516.9    -578.8   -558.7    -529.2
Exports                      1003.0    1041.0    1180.2   1305.1   1471.1   1661.7    1846.8     1583.1   1839.8    2090.6   2179.8    2371.2
Imports                      1430.2    1545.2    1798.9   2027.8   2240.4   2374.8    2556.5     1974.6   2356.7    2669.4   2738.5    2900.4

Government Purchases         1983.4    2112.6    2232.8   2369.9 2518.4      2674.3    2878.1    2917.5   3002.8    3034.9   3003.9    2997.0
   Federal                    680.7     756.5     824.7    876.3  931.7       976.4    1080.1    1142.7   1222.9    1237.3   1220.4    1194.5
     Defense                  437.7     498.0     550.8    589.1  624.9       662.3     737.8     774.9    819.2     829.9    815.0     793.6
     Other                    243.0     258.6     273.9    287.3  306.9       314.1     342.3     367.8    403.7     407.5    405.4     400.9
   State and Local           1302.7    1356.1    1408.2   1493.6 1586.7      1697.9    1798.0    1774.8   1780.0    1797.6   1783.6    1802.5
                                                               Billions     of 2005   Dollars
Gross Domestic Product      11543.1   11836.4   12246.9 12622.9 12958.5     13206.4   13161.9   12703.1 13088.0    13317.5 13540.9    13874.5
Personal Consumption
Expenditures                 8018.3    8244.5    8515.8   8803.5   9054.5   9262.9    9211.7     9037.5   9220.9    9429.2   9619.5    9788.0
   Durable Goods              927.9     989.1    1060.9   1123.4   1174.2   1232.4    1171.8     1108.3   1188.3    1278.0   1340.8    1406.3
     Autos & Parts            394.0     404.8     410.4    408.2    394.4    401.4     346.8      322.5    330.1     350.2    362.8     387.3
   Nondurable Goods          1780.1    1840.7    1892.8   1953.4   2005.0   2042.9    2019.1     1983.4   2041.3    2078.8   2115.7    2148.2
   Services                  5318.5    5418.2    5562.7   5726.8   5875.6   5990.1    6017.0     5935.5   5991.8    6086.4   6186.4    6267.9
Gross Private Domestic
Investment                   1800.4    1870.1    2058.2   2172.3   2231.8   2159.5    1939.8     1454.2   1714.9    1787.8   1893.1    2054.3
   Residential                613.9     664.3     729.5    775.0    718.2    584.2     444.4      345.6    330.8     323.6    333.3     393.7
   Nonres. Structures         356.6     343.0     346.7    351.8    384.0    438.2     466.4      367.3    309.1     324.3    335.2     346.3
   Equipment & Software       824.2     850.0     917.3    995.6   1071.1   1106.8    1059.4      889.7   1019.4    1127.3   1203.0    1287.9
   Change In Inv.              12.8      17.3      66.4     49.9     59.4     27.7     -36.3     -145.0     58.8      26.0     35.5      43.6

Net Exports                  -548.5    -603.7    -687.9   -722.7   -729.4   -648.8    -494.8     -358.8   -421.8    -412.1   -404.9    -337.3
Exports                      1098.3    1116.0    1222.6   1305.1   1422.1   1554.4    1649.3     1494.0   1663.2    1773.0   1833.5    1973.9
Imports                      1646.8    1719.7    1910.4   2027.8   2151.5   2203.3    2144.0     1852.9   2085.0    2185.1   2238.4    2311.2

Government Purchases         2279.6    2330.4    2362.0   2369.9   2402.1   2434.2    2497.4     2539.6   2556.8    2504.5   2437.2    2388.7
   Federal                    779.5     831.1     865.0    876.3    894.9    906.1     971.1     1029.5   1075.9    1057.6   1027.1     990.0
     Defense                  505.3     549.3     580.4    589.1    598.4    611.8     657.7      695.6    718.3     704.7    681.3     653.0
     Other                    274.0     281.7     284.6    287.3    296.6    294.2     313.4      333.8    357.7     352.8    345.9     337.2
   State and Local           1500.7    1499.7    1497.1   1493.6   1507.2   1528.1    1528.1     1514.2   1487.0    1453.1   1416.1    1403.5




UCLA Anderson Forecast, December 2011                                                                                           Nation–67
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Forecast Tables - Detailed



Table 5.   Part B.     Gross Domestic Product
                            2002   2003   2004   2005   2006   2007   2008   2009   2010   2011   2012         2013
                                            Annual Rates of Change of Current Dollar GDP Components (%)
Gross Domestic Product       3.5    4.7    6.4    6.5    6.0    4.9    1.9   -2.5    4.2    3.9    3.1          3.8
Personal Consumption
Expenditures                 4.1    4.9    6.0    6.4      5.7     5.1     2.7    -1.7     3.8    4.8    3.4    3.4
   Durable Goods             4.8    2.8    5.2    4.7      2.8     2.9    -6.7    -7.1     5.4    6.5    3.6    4.6
     Autos and Parts         4.7   -0.1    0.7    1.1     -3.3     1.3   -15.2    -6.7     7.4    9.3    4.5    7.9
   Nondurable Goods          1.9    5.6    6.5    7.4      6.0     5.1     4.5    -4.6     6.2    8.1    3.1    3.2
   Services                  4.6    5.1    6.0    6.5      6.1     5.5     3.8     0.2     2.8    3.4    3.5    3.3
Gross Private Domestic
Investment                  -0.9    5.0   13.8   10.3      7.1    -1.4    -9.0   -25.9    16.1    6.1    6.1    9.5
   Residential               7.9   13.4   17.8   13.9     -1.7   -17.5   -24.9   -24.9    -4.7   -1.1    4.2   21.1
   Nonres. Structures      -14.2   -0.3    8.8   14.7     23.3    21.0    11.7   -23.3   -16.8    9.5    4.8    4.4
   Producers Dur. Equip.    -6.2    1.3    7.3    8.6      7.6     3.8    -3.8   -15.6    12.5   10.8    6.8    7.6

Exports                     -2.4    3.8   13.4   10.6     12.7   13.0     11.1 -14.3    16.2   13.6    4.3      8.8
Imports                      2.3    8.0   16.4   12.7     10.5    6.0      7.7 -22.8    19.4   13.3    2.6      5.9
Government Purchases         7.4    6.5    5.7    6.1      6.3    6.2      7.6    1.4    2.9    1.1   -1.0     -0.2
   Federal                  11.3   11.1    9.0    6.3      6.3    4.8     10.6    5.8    7.0    1.2   -1.4     -2.1
     Defense                11.4   13.8   10.6    6.9      6.1    6.0     11.4    5.0    5.7    1.3   -1.8     -2.6
     Other                  11.1    6.4    5.9    4.9      6.8    2.3      9.0    7.5    9.7    0.9   -0.5     -1.1
   State and Local           5.5    4.1    3.8    6.1      6.2    7.0      5.9   -1.3    0.3    1.0   -0.8      1.1
                                           Annual Rates   of Change of   Constant Dollar GDP Components (%)
Gross Domestic Product       1.8    2.5    3.5    3.1      2.7    1.9     -0.3   -3.5    3.0    1.8    1.7      2.5
Personal Consumption
Expenditures                 2.7    2.8    3.3    3.4      2.9     2.3    -0.6    -1.9     2.0    2.3    2.0    1.8
   Durable Goods             7.6    6.6    7.3    5.9      4.5     5.0    -4.9    -5.4     7.2    7.5    4.9    4.9
     Autos & Parts           5.3    2.7    1.4   -0.5     -3.4     1.8   -13.6    -7.0     2.3    6.1    3.6    6.8
   Nondurable Goods          2.0    3.4    2.8    3.2      2.6     1.9    -1.2    -1.8     2.9    1.8    1.8    1.5
   Services                  1.9    1.9    2.7    3.0      2.6     1.9     0.4    -1.4     0.9    1.6    1.6    1.3
Gross Private Domestic
Investment                  -1.4    3.9   10.1    5.5      2.7    -3.2   -10.2   -25.0    17.9    4.2    5.9    8.5
   Residential               5.3    8.2    9.8    6.2     -7.3   -18.7   -23.9   -22.2    -4.3   -2.2    3.0   18.1
   Nonres. Structures      -17.7   -3.8    1.1    1.4      9.2    14.1     6.4   -21.2   -15.8    4.9    3.4    3.3
   Equipment & Software     -4.2    3.1    7.9    8.5      7.6     3.3    -4.3   -16.0    14.6   10.6    6.7    7.1


Exports                     -2.0    1.6    9.5    6.8      9.0     9.3     6.1    -9.4    11.3    6.6    3.4    7.7
Imports                      3.4    4.4   11.1    6.1      6.1     2.4    -2.7   -13.6    12.5    4.8    2.4    3.2
Government Purchases         4.7    2.2    1.4    0.3      1.4     1.3     2.6     1.7     0.7   -2.0   -2.7   -2.0
   Federal                   7.3    6.6    4.1    1.3      2.1     1.2     7.2     6.0     4.5   -1.7   -2.9   -3.6
     Defense                 7.4    8.7    5.7    1.5      1.6     2.2     7.5     5.8     3.3   -1.9   -3.3   -4.1
     Other                   7.2    2.8    1.0    0.9      3.2    -0.8     6.5     6.5     7.1   -1.3   -2.0   -2.5
   State and Local           3.3   -0.1   -0.2   -0.2      0.9     1.4    -0.0    -0.9    -1.8   -2.3   -2.6   -0.9




68–Nation                                                                            UCLA Anderson Forecast, December 2011
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                                                                                                     Forecast Tables - Detailed



Table 6.   Employment
                           2002     2003     2004    2005     2006   2007   2008   2009   2010   2011       2012    2013
                                                                      Employment (Millions)
Total                    136.5     137.7   139.2    141.7    144.4 146.0 145.4 139.9 139.1 139.7         140.0     141.3
  Nonagricultural        130.3     130.0   131.4    133.7    136.1 137.6 136.8 130.8 129.8 131.1         132.2     134.1
  Natural Res. & Mining    0.6       0.6     0.6      0.6      0.7    0.7    0.8    0.7     0.7   0.8      0.8       0.8
   Construction            6.7       6.7     7.0      7.3      7.7    7.6    7.2    6.0     5.5   5.5      5.4       5.4
   Manufacturing          15.3      14.5    14.3     14.2     14.2   13.9   13.4   11.8   11.5   11.7     11.9      12.0
   Trans. Warehous. Util   4.8       4.8     4.8      4.9      5.0    5.1    5.1    4.8     4.7   4.8      4.9       5.1
   Trade                  20.7      20.5    20.7     21.0     21.3   21.5   21.2   20.1   19.9   20.1     20.4      20.7
   Financial Activities    7.8       8.0     8.0      8.2      8.3    8.3    8.1    7.8     7.6   7.6      7.6       7.7
   Information             3.4       3.2     3.1      3.1      3.0    3.0    3.0    2.8     2.7   2.7      2.6       2.7
   Professional & Busi.   16.0      16.0    16.4     17.0     17.6   17.9   17.7   16.6   16.7   17.2     17.5      18.2
   Education & Health     16.2      16.6    16.9     17.4     17.8   18.3   18.8   19.2   19.6   20.0     20.4      20.7
   Leisure & Hospitality 12.0       12.2    12.5     12.8     13.1   13.4   13.4   13.1   13.0   13.2     13.5      13.6
   Other Services          5.4       5.4     5.4      5.4      5.4    5.5    5.5    5.4     5.4   5.4      5.5       5.5
   Government             21.5      21.6    21.6     21.8     22.0   22.2   22.5   22.6   22.5   22.1     21.8      21.7
      Federal              2.8       2.8     2.7      2.7      2.7    2.7    2.8    2.8     3.0   2.8      2.8       2.7
      State & Local       18.7      18.8    18.9     19.1     19.2   19.5   19.7   19.7   19.5   19.2     19.0      19.0
                                                              Population and Labor Force (Millions)
Population aged 16+       223.6    226.1   228.6    231.2    234.0 236.8 239.4 241.8 244.3 246.8         249.3     251.7
Labor Force               145.1    146.5   147.4    149.3    151.4 153.1 154.3 154.2 153.9 153.6         154.2     155.2
Unemployment (%)            5.8      6.0     5.5      5.1      4.6    4.6    5.8    9.3     9.6   9.1      9.2       9.0


Table 7.   Personal Income and Its Disposition
                            2002      2003      2004     2005        2006    2007    2008    2009    2010    2011    2012    2013
                                                                     Billions of Current Dollars
Personal Income           9060.1    9378.2    9937.3 10485.9      11268.1 11912.3 12460.2 11930.2 12373.5 12989.0 13402.6 13898.9
Wages & Salaries          4997.3    5139.6    5425.7 5701.0        6068.9 6421.7 6550.9 6270.4 6408.2 6663.7 6861.9 7140.5
Other Labor Income         747.4     845.6     874.6   931.6        960.2   980.5 1052.4 1073.1 1090.0 1110.7 1148.3 1205.3
Nonfarm Income             871.9     894.1     984.1 1025.9        1103.6 1052.6 1046.1     902.1   984.2 1045.5 1091.3 1147.3
Farm Income                 18.5      36.5      49.7    43.9         29.4    37.8    51.8    39.2    52.2    66.5    70.2    69.4
Rental Income              218.8     204.2     198.4   178.2        146.5   143.7   231.6   305.9   350.2   402.6   411.4   369.9
Dividends                  397.7     423.1     548.3   555.0        702.2   791.9   783.4   598.8   717.7   791.4   868.1   923.8
Interest Income            911.9     889.8     860.2   987.0       1127.5 1265.1 1382.0 1108.9 1003.4       995.2   984.0 1030.8
Transfer Payments         1282.2    1341.8    1415.5 1508.6        1605.0 1718.5 1879.2 2138.1 2281.2 2340.1 2418.9 2513.8
Personal Contributions
  For Social Insurance     385.3     396.5     419.2    445.2       475.1   499.6   517.2   506.1   513.6     426.7    451.6     501.9

Personal Tax and Nontax
  Payments                1050.4    1000.3    1047.8   1208.6      1352.4 1488.7 1435.7 1141.4 1193.9 1398.9 1494.9 1656.1
Disposable Income         8009.7    8377.8    8889.4   9277.3      9915.7 10423.6 11024.5 10788.8 11179.7 11590.1 11907.7 12242.8
Consumption               7439.2    7804.1    8270.6   8803.5      9301.0 9772.3 10035.5 9866.1 10245.5 10735.5 11100.9 11481.8
Interest                   191.3     182.7     190.3    210.8       230.1   260.9   245.6   213.7   173.4   159.3   162.3   170.6
Transfers To Foreigners     40.6      41.2      43.6     48.4        51.6    59.4    66.2    67.4    72.9    73.9    76.2    80.2
Personal Saving            282.2     289.7     318.3    143.2       256.6   248.7   592.3   552.5   592.8   523.6   464.2   397.7

Personal Saving Rate(%)      3.6       3.5       3.6        1.6       2.6     2.4     5.4     5.2     5.3       4.5        3.9     3.2




UCLA Anderson Forecast, December 2011                                                                                            Nation–69
    EMBARGOED: DO NOT RELEASE UNTIL 1AM, DECEMBER 7, 2011 PST



Forecast Tables - Detailed



Table 8.   Personal Consumption Expenditures By Major Types
                              2002     2003     2004     2005      2006     2007    2008    2009  2010   2011    2012    2013
                                                                   Billions of Current Dollars
Personal Consumption        7439.2   7804.1   8270.6   8803.5    9301.0 9772.3 10035.5 9866.1 10245.5 10735.5 11100.9 11481.8
   Durable Goods             992.1   1019.9   1072.9   1123.4    1155.0 1188.4 1108.9 1029.6 1085.5 1156.3 1198.4 1253.3
     Autos and Parts         401.3    401.0    403.9    408.2     394.8    399.9   339.3   316.5 340.1  371.9   388.8   419.5
   Nondurable Goods         1617.9   1708.1   1819.3   1953.4    2069.8 2175.5 2272.8 2167.8 2301.5 2487.3 2563.5 2645.7
   Services                 4829.2   5076.1   5378.5   5726.8    6076.3 6408.3 6653.8 6668.7 6858.5 7091.9 7339.0 7582.8
                                                                     Billions of 2005 Dollars
Personal Consumption        8018.3   8244.5   8515.8   8803.5    9054.5 9262.9 9211.7 9037.5 9220.9 9429.2 9619.5 9788.0
   Durable Goods             927.9    989.1   1060.9   1123.4    1174.2 1232.4 1171.8 1108.3 1188.3 1278.0 1340.8 1406.3
     Autos and Parts         394.0    404.8    410.4    408.2     394.4    401.4   346.8   322.5 330.1  350.2   362.8   387.3
   Nondurable Goods         1780.1   1840.7   1892.8   1953.4    2005.0 2042.9 2019.1 1983.4 2041.3 2078.8 2115.7 2148.2
   Services                 5318.5   5418.2   5562.7   5726.8    5875.6 5990.1 6017.0 5935.5 5991.8 6086.4 6186.4 6267.9
                                                                   Annual Rates of Real Growth
Personal Consumption           2.7      2.8      3.3      3.4       2.9      2.3    -0.6    -1.9   2.0    2.3     2.0     1.8
   Durable Goods               7.6      6.6      7.3      5.9       4.5      5.0    -4.9    -5.4   7.2    7.5     4.9     4.9
     Autos and Parts           5.3      2.7      1.4     -0.5      -3.4      1.8   -13.6    -7.0   2.3    6.1     3.6     6.8
     Furniture                 7.3      5.6      7.9      5.7       4.3      0.7    -4.2    -8.4   8.1    5.0     3.0     2.9
     Other Durables            6.6      8.9      8.7      8.9       7.7      4.7    -3.3    -5.0   6.1    6.3     3.5     1.4
   Nondurable Goods            2.0      3.4      2.8      3.2       2.6      1.9    -1.2    -1.8   2.9    1.8     1.8     1.5
     Food and Beverages        0.2      1.2      1.2      3.3       2.9      1.5    -1.1    -1.3   2.4    1.5     1.5     2.6
     Gasoline and Oil          1.5      3.3      2.1      0.6      -1.7     -0.7    -4.1    -0.8   0.4   -2.9     2.9     1.2
     Fuel
     Clothing and Shoes        3.1      5.2      4.7      6.1      4.7       3.5    -0.6     -4.7     5.8     3.0     1.9     0.3
     Other Nondurables         3.3      4.9      4.1      3.4      3.8       2.8     0.3     -1.9     3.4     4.1     1.5     1.3
   Services                    1.9      1.9      2.7      3.0      2.6       1.9     0.4     -1.4     0.9     1.6     1.6     1.3
     Housing                   0.5      1.1      2.5      5.1      2.9       0.4     1.1      1.1     0.5     0.3     0.4     0.3
     Transportation Serv.     -2.7      0.4      2.5      0.8     -0.2       0.9    -5.5     -8.8     0.8     0.5     2.5     2.4
     Health Care               5.9      2.2      3.2      3.3      1.8       2.3     2.4      1.9     1.4     2.9     2.4     1.6
     Recreational Service      0.6      3.2      5.2      1.9      3.6       3.9    -1.3     -3.9     2.0     2.7     3.3     0.6
     Food Svcs. Accom.         1.6      3.7      4.1      3.7      3.3       1.3    -0.9     -3.5     3.1     3.8     1.8     0.8
     Financial Services       -0.4      0.0      2.5      3.4      2.6       3.3    -1.0     -7.7    -1.2     1.7     2.2     2.9
     Other Services            0.5      2.7      1.5      0.8      2.1       2.3    -1.8     -1.3    -0.0     0.3     1.5     1.7


Table 9.   Residential Construction and Housing Starts
                                2002    2003      2004    2005     2006      2007    2008     2009    2010    2011    2012    2013

                                                             Housing Starts (Millions of     Units)
Housing Starts                 1.710   1.854     1.949   2.073   1.812   1.342   0.900       0.554  0.585    0.597   0.664   0.958
   Single-family               1.363   1.505     1.604   1.719   1.474   1.036   0.616       0.442  0.471    0.422   0.431   0.655
   Multi-family                0.347   0.349     0.345   0.354   0.338   0.306   0.284       0.112  0.114    0.175   0.233   0.303

                                               Residential Construction Expenditures (Billions of Dollars)
Current Dollars                509.5   577.6    680.6 775.0    761.9   628.7   472.4   354.6   338.1   334.4         348.4   421.9
2005 Dollars                   613.9   664.3    729.5 775.0    718.2   584.2   444.4   345.6   330.8   323.6         333.3   393.7
   % Change                      5.3     8.2      9.8    6.2    -7.3   -18.7   -23.9   -22.2    -4.3    -2.2           3.0    18.1

                                                                          Related Concepts
Treas. Bill Rate                1.60    1.01      1.37    3.15     4.73       4.35    1.37    0.15    0.14    0.06    0.06    0.16
Conventional 30-year
   Mortgage Rate                6.54    5.82      5.84    5.87     6.41      6.34    6.04     5.04    4.69    4.44    4.09    4.87
Median Sales Price of
   New Homes (Thous $)         185.0 191.4       217.8 234.2      243.1   243.7   230.4   214.5   221.2   220.9   225.6   229.0
Real Disp. Income             8009.7 8377.8     8889.4 9277.3    9915.7 10423.6 11024.5 10788.8 11179.7 11590.1 11907.7 12242.8
   % Change                      3.3    2.5        3.4    1.4       4.0     2.4     2.4    -2.3     1.8     1.2     1.4     1.1



70–Nation                                                                                  UCLA Anderson Forecast, December 2011
    EMBARGOED: DO NOT RELEASE UNTIL 1AM, DECEMBER 7, 2011 PST



                                                                                              Forecast Tables - Detailed



Table 10.   Business Fixed Investment and Inventories
                                 2002     2003     2004    2005     2006    2007    2008   2009    2010     2011     2012     2013
                                                              Billions of Current Dollars
Business Fixed Investment      1125.4   1135.7   1223.0 1347.3 1505.3 1637.5 1656.3 1353.0 1390.1         1535.6   1631.4   1741.9
   Equipment & Software         842.7    853.8    916.4   995.6 1071.7 1112.6 1070.0      903.0 1015.7    1125.6   1201.9   1293.3
   Nonresidential Structures    282.8    281.9    306.7   351.8    433.7   524.9   586.3  449.9   374.4    409.9    429.5    448.5
      Buildings                 188.1    182.1    196.7   212.9    247.6   297.3   322.0  253.9   174.8    165.1    179.2    203.3
         Commercial              99.8     94.6    104.3   112.9    128.4   150.8   149.1   95.5    64.5     64.7     72.4     82.2
         Industrial              22.7     21.4     23.7    29.9     35.1    43.7    57.4   61.2    40.8     37.0     40.7     46.3
         Other Buildings         65.6     66.0     68.7    70.2     84.1   102.8   115.6   97.1    69.5     63.4     66.1     74.7
      Utilities                  56.3     53.5     48.6    51.4     61.1    85.6    99.5   98.6    89.4     98.4     93.7     89.7
      Mining Exploration         30.2     38.4     51.9    77.1    114.2   130.9   151.7   87.9   100.9    136.5    146.6    146.0
      Other                       8.1      7.8      9.4    10.4     10.7    11.0    13.1    9.5     9.4      9.9      9.9      9.5
                                                                Billions of 2005 Dollars
Business Fixed Investment      1173.7   1189.6   1263.0 1347.3 1455.5 1549.9 1537.7 1263.2 1319.2         1438.3   1521.9   1614.3
   Equipment & Software         824.2    850.0    917.3   995.6 1071.1 1106.8 1059.4      889.7 1019.4    1127.3   1203.0   1287.9
   Nonresidential Structures    356.6    343.0    346.7   351.8    384.0   438.2   466.4  367.3   309.1    324.3    335.2    346.3
      Buildings                 222.3    210.0    213.9   212.9    229.2   260.5   272.0  214.1   151.8    141.0    148.1    160.9
         Commercial             119.5    110.3    114.4   112.9    118.4   131.2   124.5   78.4    54.4     53.5     57.9     63.0
         Industrial              26.2     24.3     25.5    29.9     33.0    39.0    48.6   50.8    34.6     30.8     32.8     35.7
         Other Buildings         76.6     75.4     74.1    70.2     77.9    90.3    99.3   85.7    63.5     57.1     57.8     62.6
      Utilities                  66.0     61.3     52.1    51.4     56.2    75.6    82.5   82.4    71.9     75.4     71.3     67.5
      Mining Exploration         52.6     60.0     69.9    77.1     88.3    93.6   101.5   65.8    76.7     95.9    103.5    106.4
      Other                       9.3      8.7     10.1    10.4     10.1     9.9    11.6    8.7     9.0      9.5      9.3      8.6
                                                   Percent Change in Real Business Fixed Investment
Business Fixed Investment        -7.9      1.4      6.2     6.7      8.0     6.5    -0.8  -17.9     4.4      9.0      5.8      6.1
   Equipment & Software          -4.2      3.1      7.9     8.5      7.6     3.3    -4.3  -16.0    14.6     10.6      6.7      7.1
   Nonresidential Structures    -17.7     -3.8      1.1     1.4      9.2    14.1     6.4  -21.2   -15.8      4.9      3.4      3.3
      Buildings                 -19.0     -5.5      1.9    -0.5      7.7    13.6     4.4  -21.3   -29.1     -7.2      5.1      8.7
         Commercial             -19.5     -7.7      3.7    -1.3      4.9    10.8    -5.2  -37.0   -30.6     -1.6      8.1      8.9
         Industrial             -41.6     -7.3      4.9    17.3     10.3    18.2    24.8    4.5   -31.8    -10.9      6.3      8.9
         Other Buildings         -5.4     -1.6     -1.7    -5.4     11.0    15.9     9.9  -13.7   -25.8    -10.1      1.2      8.3
      Utilities                  -1.6     -7.2    -15.0    -1.4      9.5    34.4     9.1   -0.0   -12.8      4.9     -5.4     -5.3
      Mining Exploration        -26.9     14.1     16.4    10.3     14.5     6.1     8.4  -35.2    16.6     25.0      7.9      2.8
      Other                     -35.3     -5.9     15.5     3.4     -2.9    -1.8    17.1  -24.7     2.6      6.0     -1.7     -7.6
                                                                    Related Concepts
Annual Growth-Price Deflator For:
   Producers Dur. Equip.        -2.0    -1.8    -0.5     0.1     0.0     0.5     0.5     0.5    -1.8     0.2     0.1     0.5
   Structures                     4.2    3.6     7.6    13.1    12.9     6.1     4.9    -2.6    -1.1     4.3     1.4     1.1
Moody’s AAA Rate(%)               6.5    5.7     5.6     5.2     5.6     5.6     5.6     5.3     4.9     4.6     4.3     5.1
Capacity Utilization in
   Manufacturing(%)             72.9    73.9    76.1    78.2    78.6    79.2    74.9    66.2    71.7    74.7    75.8    77.4
Final Sales(Bil. 2005 $)     11530.4 11819.1 12180.6 12573.0 12899.1 13178.7 13198.2 12848.1 13029.2 13291.6 13505.3 13830.8
                                                         Change in Business Inventories
Current Dollars                 12.0    16.4    64.9    50.0    60.0    29.1   -41.1 -160.8     67.0    35.2    42.4    51.2
2005 Dollars                    12.8    17.3    66.4    49.9    59.4    27.7   -36.3 -145.0     58.8    26.0    35.5    43.6




UCLA Anderson Forecast, December 2011                                                                                  Nation–71
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Forecast Tables - Detailed



Table 11.   Federal Government Receipts and Expenditures
                                     2002      2003     2004     2005   2006    2007   2008    2009            2010     2011     2012     2013
                                                                   Billions of Current Dollars
 Unified Budget Basis, Fiscal Year
Receipts                           1853.2 1782.1 1879.8 2153.4          2406.7    2567.7 2523.6 2104.4 2161.7 2302.5 2535.1             2823.3
Outlays                            2011.0 2159.2 2292.6 2472.1          2654.9    2729.2 2978.4 3520.1 3455.9 3601.1 3594.7             3629.3
Surplus or Deficit (-)             -157.8 -377.1 -412.8 -318.7          -248.2    -161.5 -454.8 -1415.7 -1294.2 -1298.6 -1059.7         -806.0
 National Income & Products Accounts Basis, Calendar Year
Current Receipts                   1859.3 1885.1 2014.0 2290.1          2524.5    2654.7 2502.3    2232.5    2429.6   2571.7   2740.4   3041.5
   Current Tax Receipts            1073.5 1070.3 1153.8 1383.7          1558.3    1637.6 1447.7    1170.2    1340.7   1544.4   1675.4   1907.9
       Personal Current Taxes       828.6  774.2 799.2 931.9            1049.9    1165.6 1101.3     856.6     896.4   1071.9   1157.6   1308.2
       Taxes - Corporate Income     150.5  197.8 250.3 341.0             395.0     362.8 233.6      201.7     329.6    346.4    388.6    462.4
       Taxes - Production/Imports    86.8   89.3   94.3   98.8            99.4      94.5   94.0      97.3     101.5    110.4    112.2    119.3
   Contributions for Soc. Ins.      739.3  762.8 807.6 852.6             904.6     945.3 973.1      948.9     970.9    906.7    950.5   1022.6
   Income Receipts on Assets         20.3   22.8   23.2   23.7            26.1      29.8   30.7      48.1      53.1     54.9     48.7     42.1
   Current Transfer Receipts         26.1   25.6   29.0   33.6            38.3      44.8   54.4      69.8      69.8     67.2     66.8     69.4
   Surplus of Gov’t. Enterprises      0.2    3.7    0.3   -3.5            -2.9      -2.7   -3.7      -4.4      -4.8     -1.5     -0.9     -0.5

Current Expenditures             2112.1     2261.5 2393.4 2573.1 2728.3           2900.0 3115.7    3450.4    3703.3   3766.9   3774.7   3825.2
   Consumption Expenditures       590.5      660.3 721.4 765.8 811.0               848.9 931.8      986.7    1054.1   1077.1   1067.7   1046.3
      Defense                     380.7      435.2 481.2 514.8 543.9               575.4 633.3      664.1     702.1    722.0    712.3    693.9
      Nondefense                  209.9      225.1 240.2 251.0 267.1               273.6 298.5      322.5     352.0    355.1    355.3    352.4
   Transfer Payments             1252.1     1339.4 1405.1 1491.3 1587.1           1690.5 1841.9    2153.6    2313.6   2310.9   2340.2   2409.1
      Government Social Benefits 914.9       962.6 1014.3 1078.0 1180.7           1254.2 1385.7    1601.8    1708.3   1742.6   1807.0   1867.9
      To the Rest of the World      9.7       10.1   10.7   11.2   12.5             13.3   15.4      16.1      16.6     16.8     17.4     17.8
     Grants-in-Aid
      To S&L Governments          304.2       338.0    349.2    361.2    359.0     380.8   395.5    482.4     531.5    492.5    457.0    462.9
      To the Rest of the World     23.3        28.6     30.9     40.9     35.0      42.2    45.3     53.3      57.3     59.0     58.9     60.6
   Interest Payments              229.1       212.9    221.0    255.4    279.2     313.2   292.1    252.0     279.9    317.9    314.2    321.8
   Subsidies                       40.5        49.0     46.0     60.5     51.0      47.4    49.9     58.3      55.8     60.9     52.6     47.9

Surplus or Deficit (-)           -252.8     -376.4 -379.5 -283.0 -203.8           -245.2 -613.5 -1217.9 -1273.7 -1195.2 -1034.2         -783.7


Table 12.   State and Local Government Receipts and Expenditures
                              2002     2003     2004        2006
                                                         2005      2007   2008   2009    2010  2011   2012   2013
                                                             Billions of Current Dollars
Receipts                     928.7    977.7 1059.4 1163.1 1249.1 1313.6 1326.4 1252.8 1307.9 1367.6 1408.2 1464.3
   As Share of GDP             8.7      8.8    8.9    9.2    9.3    9.4    9.3    9.0     9.0   9.1    9.0    9.1
Personal Tax and Nontax
   Receipts                  221.8    226.2    248.6    276.7    302.5    323.1    334.4   284.8   297.5    327.0   337.3   347.9
Corporate Profits             30.9     34.0     41.7     55.0     59.1     57.8     47.4    47.4    57.9     53.4    56.8    65.5
Indirect Business Tax and
   Nontax Accruals           676.0    717.5    769.1    831.4    887.4    932.7    944.6   920.6   952.6    987.2 1014.0 1051.0
Contributions For Social
   Insurance                  15.9     20.1     24.1     24.8     21.8     18.9     19.0    20.2    20.8     21.6    22.3    23.3
Federal Grants-In-Aid        304.2    338.0    349.2    361.2    359.0    380.8    395.5   482.4   531.5    492.5   457.0   462.9

Expenditures                1466.8 1535.1 1609.3 1704.5 1778.6 1910.8 2017.1 2031.7 2090.0 2149.8 2157.6 2210.0
   As Share of GDP            13.8   13.8   13.6   13.5   13.3   13.6   14.1   14.6   14.4   14.2   13.9   13.7
Purchases                   1302.7 1356.1 1408.2 1493.6 1586.7 1697.9 1798.0 1774.8 1780.0 1797.6 1783.6 1802.5
Transfer Payments            333.0 353.4 384.3 404.8 402.9 433.7 456.7 498.1 534.6 557.7 572.5 606.4
Interest Received             12.0   20.6   19.0   10.9    2.1    0.5   16.2   28.0   35.4   42.9   43.1   43.4
Net Subsidies                 -5.2   -3.2   -0.6    0.3    1.7   16.2   15.3   11.9   12.4   13.7   11.9    9.9
Dividends Received             1.6    1.7    2.0    2.1    2.3    2.4    2.9    2.5    2.6    3.1    3.3    3.4
Net Wage Accruals              0.0    0.0    0.0    0.0    0.0    0.0    0.0    0.0    0.0    0.0    0.0    0.0

Surplus Or Deficit           -54.1    -38.8     -8.4     26.0     51.0     12.2    -72.3   -78.1   -25.3    -61.9   -52.3   -28.1


72–Nation                                                                                   UCLA Anderson Forecast, December 2011
    EMBARGOED: DO NOT RELEASE UNTIL 1AM, DECEMBER 7, 2011 PST



                                                                                                   Forecast Tables - Detailed



Table 13.   U.S. Exports and Imports of Goods and Services
                                     2002    2003   2004  2005   2006      2007   2008   2009   2010   2011   2012   2013
                                                             Billions    of Current Dollars
 Net Exports-Goods & Serv.         -427.2 -504.1 -618.7 -722.7 -769.3    -713.1 -709.8 -391.5 -516.9 -578.8 -558.7 -529.2
 Current Account Balance           -457.2 -519.1 -628.5 -745.8 -800.6    -710.3 -677.1 -376.6 -470.9 -461.3 -467.6 -449.5
 Merchandise Balance               -493.6 -562.4 -684.7 -801.9 -860.5    -838.7 -848.9 -522.6 -669.5 -765.2 -742.1 -726.8

 Exports-Goods & Services          1003.0 1041.0 1180.2 1305.1 1471.1 1661.7 1846.8 1583.1 1839.8 2090.6 2179.8 2371.2
    Merchandise                     700.3 726.8 817.0 906.1 1024.4 1162.0 1297.5 1064.7 1277.8 1477.9 1544.2 1692.9
      Food, Feeds & Beverages        49.6   55.0   56.6   59.0   66.0   84.3 108.3    93.9 107.7 126.8 123.8 125.6
      Industrial Supplies           153.5 168.3 199.5 227.5 267.3 316.2 386.9 293.8 388.7 489.9 503.8 538.9
      Motor Vehicles & Parts         78.9   80.7   89.2   98.4 107.3 121.3 121.5      81.7 112.0 132.7 139.5 153.3
      Capital Goods, Ex. MVP        240.0 247.0 281.5 302.5 339.5 360.0 383.7 315.7 374.6 413.0 440.0 498.3
        Computer Equipment           38.6   39.9   42.8   45.5   47.6   45.6   43.9   37.7   43.9   49.7   55.2   65.0
        Other                       201.5 207.1 238.7 257.0 291.9 314.5 339.8 278.0 330.8 363.2 384.8 433.3
      Consumer Goods, Ex. MVP        84.4   89.9 103.3 115.3 129.1 146.0 161.3 150.0 165.9 174.4 186.2 209.7
      Other                          43.5   39.4   41.0   47.5   50.8   61.3   61.8   54.8   56.9   61.6   60.4   65.3
    Services                        302.7 314.2 363.2 399.0 446.6 499.7 549.3 518.4 562.0 612.7 635.6 678.4

 Imports-Goods & Services          1430.2 1545.2 1798.9 2027.8 2240.4 2374.8 2556.5 1974.6       2356.7 2669.4 2738.5 2900.4
    Merchandise                    1193.9 1289.3 1501.7 1708.0 1884.9 2000.7 2146.3 1587.3       1947.3 2243.1 2286.3 2419.6
      Foods, Feeds & Beverage        49.7   55.8   62.1   68.1    75.0   81.7   90.4   82.9        92.5 108.0 109.8 114.3
      Petroleum & Products          103.5 133.1 180.5 251.9 302.5 346.7 476.1 267.7               353.7 463.3 436.3 423.1
      Indus Supplies Ex. Petr       159.6 175.7 226.4 266.0 291.4 295.7 318.9 197.1               250.4 298.8 299.7 329.7
      Motor Vehicles & Parts        203.8 210.1 228.2 239.5 256.6 256.6 233.2 159.2               225.6 257.8 274.0 299.2
      Capital Goods, Ex. MVP        258.5 272.4 320.2 355.0 391.6 411.6 423.2 342.0               418.7 479.8 498.8 533.0
        Computer Equipment           75.2   76.5   88.6   93.3 101.4 105.2 101.2       94.2       117.3 121.1 128.1 136.7
        Other                       183.3 195.8 231.6 261.7 290.2 306.5 322.0 247.8               301.5 358.6 370.7 396.3
      Consumer Goods, Ex. MVP       310.7 337.7 377.2 411.5 446.1 478.2 486.7 432.5               486.6 518.6 547.3 593.9
      Other                          82.7   80.5   82.9   90.3    93.5   95.9   82.3   75.4        88.6   83.3   83.9   86.8
    Services                        236.3 255.9 297.3 319.8 355.4 374.0 410.1 387.3               409.4 426.3 452.2 480.8
                                                               Billions of 2005 Dollars
 Net Exports-Goods & Serv.         -548.5 -603.7 -687.9 -722.7 -729.4 -648.8 -494.8 -358.8       -421.8 -412.1 -404.9 -337.3
 Exports-Goods & Services          1098.3 1116.0 1222.6 1305.1 1422.1 1554.4 1649.3 1494.0       1663.2 1773.0 1833.5 1973.9
 Imports-Goods & Services          1646.8 1719.7 1910.4 2027.8 2151.5 2203.3 2144.0 1852.9       2085.0 2185.1 2238.4 2311.2
                                                           Exports and Imports -- % Change
Current Dollars
    Exports                          -2.4     3.8   13.4   10.6   12.7     13.0   11.1   -14.3     16.2   13.6    4.3     8.8
    Imports                           2.3     8.0   16.4   12.7   10.5      6.0    7.7   -22.8     19.4   13.3    2.6     5.9
Constant Dollars
    Exports                          -2.0     1.6    9.5    6.8    9.0    9.3    6.1   -9.4        11.3    6.6    3.4     7.7
    Imports                           3.4     4.4   11.1    6.1    6.1    2.4   -2.7 -13.6         12.5    4.8    2.4     3.2
                                                           Production Indicators - % Change
U.S. Industrial Production            0.2     1.3    2.3    3.2    2.2    2.7   -3.7 -11.2          5.3    3.8    2.2     3.6
Real GDP -- Industrial Countries      2.0     1.7    2.8    2.5    2.8    2.7    0.4   -3.5         2.8    1.7    1.4     2.2
Real GDP -- Developing Countries      2.9     3.7    6.3    5.4    6.7    6.5    3.8   -0.6         7.3    5.2    4.3     5.2
                                                                   Price Indicators
Price Deflators (% Ch)
    Exports                          -0.4     2.1    3.5    3.6    3.4      3.3    4.7    -5.4      4.4    6.6    0.8     1.0
    Imports                          -1.1     3.5    4.8    6.2    4.1      3.5   10.6   -10.6      6.1    8.1    0.2     2.6

Crude Oil Prices ($/barrel)          26.1    31.1   41.5   56.5   66.1     72.3   99.6    61.7     79.4   93.3   96.3   108.7
Real U.S. Dollar
    Ex. Rate-Indust. Countries       1.27    1.11   1.02   1.00   0.97     0.91   0.87    0.93     0.93   0.86   0.89    0.87
    %Change                          -0.4   -12.4   -8.0   -2.4   -2.5     -6.3   -5.1     7.7     -0.7   -7.4    3.4    -2.1
    Ex. Rate-Dev. Countries          1.13    1.11   1.06   1.00   0.95     0.88   0.80    0.84     0.80   0.74   0.71    0.64
    %Change                           2.5    -1.6   -4.5   -6.1   -5.1     -7.4   -9.5     6.2     -5.1   -8.1   -4.3    -9.8



UCLA Anderson Forecast, December 2011                                                                                      Nation–73
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Forecast Tables - Detailed



Table 14.   Implicit Price Deflators and Other Inflation Indicators (Percent Change)
                         2002    2003    2004    2005   2006   2007   2008   2009    2010       2011    2012   2013
                                                                Implicit Price Deflators
GDP                       1.6     2.1     2.8     3.3    3.2    2.9    2.2    1.1     1.2        2.1     1.4    1.3

Consumption               1.4     2.0     2.6     3.0    2.7    2.7       3.3     0.2     1.8    2.5     1.4    1.7
   Durables              -2.6    -3.6    -1.9    -1.1   -1.6   -2.0      -1.9    -1.8    -1.7   -1.0    -1.2   -0.3
     Motor Vehicles      -0.5    -2.7    -0.7     1.6    0.1   -0.5      -1.8     0.3     5.0    3.1     0.9    1.1
     Furniture           -2.1    -2.8    -1.2     0.1   -0.4   -0.7      -0.8    -0.3    -4.2   -1.4    -0.5    0.0
     Other Durables      -1.8    -1.6    -0.4    -1.5    1.8    3.7       3.4     1.2     0.5    2.9     1.4    2.4

   Nondurables           -0.1     2.1     3.6     4.0    3.2    3.2       5.7    -2.9     3.2    6.1     1.3    1.6
     Food                 1.5     1.9     3.1     1.8    1.7    3.9       6.1     1.3     0.3    4.1     2.8    0.7
     Clothing & Shoes    -2.6    -2.5    -0.3    -0.9   -0.4   -1.0      -0.8     0.9    -0.7    1.3     0.7    1.1
     Gasoline            -6.5    16.8    17.5    22.6   12.9    9.7      18.1   -27.2    18.2   26.6    -2.5    1.2
     Fuel               -10.8    21.0    16.4    34.1   14.2    8.1      36.3   -32.2    17.3   27.3    -3.0    1.8
     Motor Vehicle Fuel -6.1     16.5    17.6    21.8   12.8    9.8      17.0   -26.8    18.3   26.5    -2.5    1.2

   Services               2.7     3.2     3.2     3.4    3.4    3.4       3.4     1.6     1.9    1.8     1.8    2.0
     Housing              4.0     2.5     2.3     2.5    3.6    3.5       2.8     1.8     0.1    1.2     1.9    2.1
     Utilities           -3.0     6.7     4.4     8.9    8.0    3.5       7.7    -2.0     1.4    2.2     2.5    3.9
       Electricity       -1.0     2.4     1.9     6.1   12.1    4.1       6.5     3.0     0.2    1.8     1.9    2.7
       Natural Gas      -14.6    22.9     8.4    19.8    2.4   -0.2      13.2   -22.0    -2.0   -1.3     1.4    8.7
       Water & Sanit.     3.2     3.7     6.0     5.3    4.9    5.1       5.8     6.2     6.4    5.3     4.2    3.3
     Health Care          2.6     3.8     3.7     3.2    3.1    3.7       2.7     2.7     2.5    1.7     2.2    2.3
     Transportation       0.5     2.1     1.5     3.7    4.2    2.3       5.5     2.9     2.1    2.7     1.5    1.6
     Recreation           2.9     3.1     2.6     2.8    3.4    2.8       3.1     1.2     1.1    1.7     1.2    1.3
     Food & Accomm.       2.4     2.1     3.3     3.2    3.4    3.9       3.9     2.3     1.4    2.6     2.3    1.5
     Financial & Insura   2.8     4.5     5.6     3.7    2.3    4.5       3.2     0.4     5.6    1.4     1.2    2.0
     Other Services       4.8     4.8     4.6     4.9    4.1    3.2       4.8     2.6     3.2    2.7     2.1    2.1

Investment Deflators:
   Nonresidential        -0.4    -0.4     1.4     3.3    3.4    2.1       2.0    -0.6    -1.6    1.3     0.4    0.6
     Structures           4.2     3.6     7.6    13.1   12.9    6.1       4.9    -2.6    -1.1    4.3     1.4    1.1
     Equip. & Software   -2.0    -1.8    -0.5     0.1    0.0    0.5       0.5     0.5    -1.8    0.2     0.1    0.5
   Residential            2.5     4.8     7.3     7.2    6.1    1.4      -1.2    -3.4    -0.4    1.1     1.1    2.5

Government Purchases      2.6     4.2     4.3     5.8    4.8    4.8       4.9    -0.3     2.2    3.2     1.7    1.8
   Federal                3.7     4.2     4.7     4.9    4.1    3.5       3.2    -0.2     2.4    2.9     1.6    1.5
   State & Local          2.1     4.2     4.0     6.3    5.3    5.5       5.9    -0.4     2.1    3.3     1.8    2.0

Exports                  -0.4     2.1     3.5     3.6    3.4    3.3       4.7    -5.4     4.4    6.6     0.8    1.0
Imports                  -1.1     3.5     4.8     6.2    4.1    3.5      10.6   -10.6     6.1    8.1     0.2    2.6

                                                           Other Inflation Related Indicators
Consumer Price Index
   All Urban              1.6     2.3     2.7     3.4    3.2    2.9       3.8    -0.3     1.6    3.2     1.6    1.9
Producers Price Index    -2.3     5.3     6.2     7.3    4.7    4.8       9.8    -8.7     6.9    8.5    -0.4    1.9

                                                               Nonfarm   Sector Indicators
Wage Compensation         3.2     4.7     3.3     3.9    3.8    4.0      3.4    1.6    2.0       2.7     2.6    3.1
Productivity              4.5     3.7     2.6     1.6    0.9    1.5      0.6    2.3    4.1       1.0     1.2    1.0
Unit Labor Costs         -1.3     1.0     0.7     2.3    2.9    2.4      2.8   -0.7   -2.0       1.7     1.3    2.0

                                                            Crude Oil Prices (dollars/barrel)
West Texas Intermediate 26.10   31.14   41.45   56.46   66.10 72.28 99.61 61.69 79.41 93.35            96.29 108.68




74–Nation                                                                               UCLA Anderson Forecast, December 2011
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                                                                                                       Forecast Tables - Detailed



Table 15.   Producers Price Indexes
                            2002    2003    2004     2005    2006    2007   2008   2009   2010       2011     2012    2013
                                                                      Annual Percent Change
All Commodities             -2.3     5.3     6.2      7.3     4.7     4.8    9.8   -8.7     6.9       8.5     -0.4     1.9
Industrial Commodities      -2.4     5.0     6.0      8.6     5.4     3.8    9.7   -9.0     7.0       7.7     -0.5     2.6
Textiles & Apparel          -1.2    -0.1     1.0      1.5     1.4     1.0    2.4    0.5     1.7       7.5     -0.0     0.2
Fuels                      -11.5    21.1    12.4     23.2     6.6     6.6   20.5 -25.7    17.3       15.4     -1.6     4.5
Chemicals                    0.0     6.6     7.8     10.1     7.2     4.4   14.2   -6.5     7.5      11.4     -1.2     1.9
Rubber & Plastics           -0.3     2.6     2.8      7.5     6.9     0.8    7.0   -0.4     3.3       7.2      1.1     1.4
Lumber & Wood               -0.6     2.4    10.2      0.4    -1.1    -1.0   -0.6   -4.4     5.4       0.3     -0.9     5.0
Pulp & Paper                 0.6     2.2     3.0      3.5     3.6     3.4    4.6   -0.5     5.0       3.8      0.9     2.1
Metals & Products            0.4     2.6    15.8      7.5    12.9     6.5   10.0 -12.2    11.1        8.0     -3.5     3.7
Equipment                   -0.6    -0.8     0.1      1.3     2.0     0.9    1.9    1.2   -0.1        1.3      0.2     0.7
Trans. Equipment            -0.4     0.8     2.0      1.6     1.1     1.6    2.3    2.3     0.7       1.7      2.8     2.3

Farm                        -4.6    12.6    10.5     -3.8    -1.2    22.5     12.4   -16.5   12.2    22.9     -2.6    -4.3
Processed Foods & Feeds     -0.8     5.3     5.5      1.3     0.4     7.3      9.3    -2.3    3.4     8.4      1.4    -1.5

 By Stage of Processing
Crude Materials            -10.6    25.1    17.6     14.6     1.4    12.2     21.5   -30.3   21.5    16.7     -0.9     3.5
Intermediate Materials      -1.5     4.6     6.6      8.0     6.4     3.9     10.3    -8.4    6.4     9.2     -0.6     1.9
Finished Goods              -1.3     3.2     3.6      4.9     2.9     3.9      6.4    -2.5    4.2     6.0      0.6     1.3
Consumers                   -1.5     4.2     4.4      5.8     3.4     4.5      7.4    -3.8    5.6     7.6      0.4     1.2
Producers                   -0.4     0.3     1.4      2.3     1.5     1.9      2.9     2.0    0.4     1.6      1.2     1.6


Table 16.   Money, Interest Rates and Corporate Profits
                                   2002    2003      2004     2005     2006    2007    2008         2009      2010     2011     2012    2013
                                                                       Billions of Dollars
Money Supply (M1)               1196.3 1273.5      1344.2   1371.6   1374.2 1372.2 1433.1        1636.8     1740.7   2016.2   2250.8 2378.1
Money Supply (M2)               5587.0 5971.9      6254.7   6521.9   6865.0 7297.6 7816.4        8432.3     8623.2   9258.1   9835.4 10247.9

                                                                         Percent Change
Money Supply (M1)                   4.9     6.5       5.5      2.0      0.2    -0.1     4.4         14.2       6.3     15.8     11.6     5.7
Money Supply (M2)                   7.5     6.9       4.7      4.3      5.3     6.3     7.1          7.9       2.3      7.4      6.2     4.2

                                                                     Interest Rates (Percent)
 Short-term Rates
   3-Month Treas. Bills            1.60    1.01      1.37     3.15     4.73      4.35     1.37      0.15      0.14     0.06     0.06    0.16
   Prime Bank Loans                4.68    4.12      4.34     6.19     7.96      8.05     5.09      3.25      3.25     3.25     3.25    3.32

 U.S. Government Bond Yields
   5 Year Maturity                 3.82    2.97      3.43     4.05     4.75      4.43     2.80      2.19      1.93     1.54     1.38    2.07
   10 Year Maturity                4.61    4.02      4.27     4.29     4.79      4.63     3.67      3.26      3.21     2.79     2.41    3.38
   30 Year Maturity                5.43    5.05      5.11     4.56     4.88      4.84     4.27      4.07      4.25     3.91     3.35    4.21

 State and Local Governments Bond Yields
   Domestic Municipal Bonds     5.03   4.74          4.68     4.40     4.40      4.39     4.86      4.62      4.29     4.50     4.19    4.87
 Corporate Bond Yields
  Moodys AAA Corp. Bonds        6.49   5.67          5.63     5.23     5.59      5.56     5.63      5.31      4.94     4.64     4.29    5.10
Conventional Mortgage Rate      6.54   5.82          5.84     5.87     6.41      6.34     6.04      5.04      4.69     4.44     4.09    4.87

                                                       Corporate Profits (Billions of Dollars)
Profits Before Taxes            765.33 903.48 1229.43 1640.15 1822.73 1738.38 1359.93 1455.68 1819.45 1929.59 2042.69 2287.02
Inventory Valuation Adj.         -2.58 -11.30 -34.28 -30.70 -38.03 -47.25 -44.45           0.60 -39.08 -52.92   17.22 -10.48
Profits After Taxes             573.00 659.73 923.30 1227.78 1349.45 1292.90 1050.90 1183.28 1408.38 1503.47 1569.31 1729.69




UCLA Anderson Forecast, December 2011                                                                                             Nation–75
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THE UCLA ANDERSON FORECAST
FOR CALIFORNIA



December 2011 Report




California: Recovery Part Deux?
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                                                                          California: Recovery Part Deux?




California: Recovery Part Deux?
Jerry Nickelsburg
Senior Economist
UCLA Anderson Forecast
December 2011




      The dog days of summer certainly were that for      but it will not reach, that of the U.S over the forecast
the California economy as unemployment and income         period. The preliminary indication of a new recovery
growth slowed substantially. As autumn arrived there      having begun in September yields a slightly more
were indications of more of the same. The California      optimistic forecast than that of last September. For
economy seemed to be poised for a continuation of         the most part, our increased optimism, such as it
somewhat tepid job growth along the coast and an          is, represents a sliding forward to 2011 some of the
erosion of labor markets in the inland region. This       recovery we were predicting in 2012. In reality the
led to our September forecast of a net gain of zero       numbers have not changed much.
jobs in the state for the balance of the 2011, followed
by a return to growth in the first or second quarter of          In this California report we will continue our
20121.                                                    ongoing examination of the bifurcated recovery. What
                                                          is different this time is that Inland California has
      But the September employment numbers,               finally begun to grow. By examining the employment
released in late October, turned out to be a pleasant     numbers in some detail together with trade and
surprise2. Although other indicators did not predict      housing data we find that while the news for Inland
stronger growth in payroll employment, there it was.      California is good, there remains a long road ahead.
October has now followed course yielding the first
signs of a nascent new recovery. Have we turned the              In some sense the employment numbers
corner in the Golden State? Perhaps we have. But          for Inland California may not be surprising.
a weak national and international outlook does not        Unemployment rates above 15% lead to falling wages
argue for the return of the recovery to be a robust       on the one hand, and entrepreneurship on the other.
return. What is important, however, is that the last      Eventually a bottom is reached and the economy
two months have yielded both job growth in excess         turns around. In the past, the engines of growth
of the U.S. rate and job growth which is widespread       for Inland California have been migration-induced
throughout the state.                                     construction and government. In the September and
                                                          October job numbers we find that neither of these
      Looking forward to the next six months we           is driving hiring, and unlike the past three decades,
expect net new additions to employment to be about        there are no clear engines of job growth throughout
at the same rate as the U.S. Thereafter, the December     Inland California.
California forecast calls for growth at a rate slightly
faster than that of the U.S. Consequently, California’s        These encouraging employment numbers for
unemployment rate will begin to converge towards,         payroll employment come from the Establishment



UCLA Anderson Forecast, December 2011                                                               California–79
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California: Recovery Part Deux?



Survey3 and they are confirmed by the Current                           represent an end to the growth hiatus in the private
Population Survey (Household Survey). The                               sector. By the numbers, the last two months have seen
Household Survey is generally considered less                           a return to recovery levels (at least 2010 recovery
reliable during times when the economy is changing                      level) in private sector job growth.
direction but it does include self employed
entrepreneurs and non-payroll family members                                  With respect to the public sector, the latest
working in a family business, groups not counted in                     California tax revenues are a good indication that
the Establishment Survey. The Household Survey                          contraction in public sector employment will continue
reports that California has added 176,000 jobs in                       for at least another fiscal year4. However, total
the last two months. If job creation were to continue                   (private and public sector) job growth in September
at this rate, the losses in the recession would be                      and October was much faster than the U.S.; so much
recouped by the end of 2012. All of this good news                      so that the gains in the total number of payroll jobs
might be cause for celebration except for the fact                      from October 2010 to October 2011 give the state
that neither the state nor the nation is forecast to                    bragging rights for the largest number of new payroll
be growing fast enough to support that kind of job                      jobs created in the U.S. To be fair, California remains
creation over the coming year.                                          second to Texas with respect to private sector payroll
                                                                        jobs, but not a distant second (Texas lost more public
Employment Retrospective                                                sector jobs than California).

      Private sector job growth in California stalled                         These recent gains in payroll and non-payroll
out in March and has been basically non-existent                        jobs have pushed California’s unemployment
since then. The gains in September and October                          rate down from 12.1% to 11.7% while the U.S.




                                            Change in Private Non-Farm Payroll Employment
                                                          (000 jobs, SA)

                            100


                              50
                Thousands




                               0


                             -50


                            -100


                            -150
                                Jan -08   Jul -08   Jan -09   Jul -09   Jan -10    Jul -10   Jan -11   Jul -11




80–California                                                                       UCLA Anderson Forecast, December 2011
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                                                                         California: Recovery Part Deux?




unemployment rate has only fallen by 0.1%. To             mean “recovered from a recession.” It only means
put this in perspective, the U.S. unemployment            the contraction has ended. The pain remains real
rate remains 2.7% below that of California, an            and persistent until solid and sustained gains occur.
improvement over July, but the gap remains wide.          Throughout the counties of Inland California, with
                                                          a few exceptions such as Tulare and Kern Counties,
      Looking behind the numbers we find more             employment after the gains of the last two months
good news. The employment gains over the last four        remains 8% to 12% below 2006-2007 levels. There
months were widespread throughout California. The         is clearly a long way to go and these trends in
Inland Empire, San Joaquin Valley and Sacramento          Inland California, if they were to prove to be trends,
Delta areas shared in the employment growth and           are only the beginning of the process. In the last
virtually all regions in California experienced           California report we presented some analysis that
employment growth at a faster rate than the U.S.          suggested that “a long way to go” is about five more
These data present the first solid indication that        years. Though gains in agriculture, food processing,
Inland California has bottomed out and a recovery in      energy, and education have begun this process
the hardest hit regions of California has begun.          the question remains, “what will be the engine of
                                                          economic growth in Inland California over the next
     But, before we start shooting off fireworks, we      decade in the absence of growth in construction and
must temper all of these very encouraging results         government?”
with a dose of reality. The end of a recession does not




                                         Percent of Pre-Recession Peak
                                            Non-Farm Employment
              100%

               98%
                                                                                     Inland Empire
               96%
                                                                                     Stanislaus
               94%                                                                   Fresno
                                                                                     San Joaquin
               92%
                                                                                     Solano
               90%                                                                   Sacramento
                                                                                     East Bay
               88%

               86%
                     2008         2009            2010       2011




UCLA Anderson Forecast, December 2011                                                                California–81
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California: Recovery Part Deux?




                                            Employment Gain July to Oct. 2011
                6.0%


                5.0%


                4.0%


                3.0%


                2.0%


                1.0%


                0.0%
                       SJ Valley   Inland   Bay Area   Mid Coast   Sac. Delta OC, SD, VC Los Angeles   U.S.
                                   Empire




Goods Movement Retrospective                                       particularly in Los Angeles, The Inland Empire and
                                                                   the East Bay, and therefore, the loss in volume is a
      The movement of goods across California’s                    down note in an otherwise encouraging set of data.
ports and highways is as much as anything a good                   The large inventory drawdown in the U.S. during the
indicator of current and future economic activity.                 third quarter of 2011 ought to generate an increase
Unfortunately the growth we are seeing in California               of orders for goods from Asia and therefore create
employment is not reflected in the trade data.                     more traffic through California’s seaports. Were this
While no decline in activity is depicted in the data,              to happen another recovery period in the logistics
no real recovery is either. It is for this reason that             industry could indeed begin, but there as yet are no
our forecast, in spite of encouraging employment                   ports data indicating this will happen in the current
numbers, has strengthened only slightly from the                   quarter5.
forecast released last September.
                                                                          International Air Cargo shows the same pattern
       At the seaports we find that seaborne exports               as seaborne imports and exports. Exports through
are showing a small amount of growth over the                      LAX and SFO have grown the last three months, but
last three months. This increase brings the level of               are not yet above the 2010 expansion peaks. Imports
exports (measured in TEUs or twenty foot equivalent                have fallen back in the last few months and given up
container units) back to where it was in 2010. It                  a little less than half of the 2010 gains. Domestic air
may indicate a trend, but it is entirely too early to              cargo, as evidenced by traffic through Ontario and
tell. As for seaborne imports, the past three months               Oakland airports show the same going nowhere blues.
have given back about half of the recovery gains                   At both airports total freight traffic remains stuck at
from late 2009 and 2010. Imports generate a demand                 recession levels6.
for California’s beleaguered logistics industry


82–California                                                                   UCLA Anderson Forecast, December 2011
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                                                                                   California: Recovery Part Deux?




                                                   California Seaport Traffic
                                                        (000 TEU's, SA)

                               900

                               800

                               700

                               600
                   Thousands




                               500

                               400

                               300

                               200

                               100

                                0
                                    2006    2007       2008       2009      2010          2011


                                                      Import By Sea      Exports By Sea




                                               California International Air Cargo
                                                 Title (Tons Loaded)


                               80

                               70

                               60

                               50
                   Thousands




                               40

                               30

                               20

                               10

                                0
                                     2006   2007       2008       2009      2010          2011

                                                         Outbound           Inbound




UCLA Anderson Forecast, December 2011                                                                  California–83
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California: Recovery Part Deux?




                                   California Regional Airport Freight Traffic (Monthly, S.A.,
                                                         Tons of cargo)

                              70

                              60

                              50
                  Thousands




                              40

                              30

                              20

                              10

                              0
                                   Jan    Jul    Jan     Jul    Jan    Jul       Jan    Jul
                                         2008           2009           2010            2011
                                                         Oakland             Ontario




                                   Ceridian-UCLA Pulse of Commerce Index, Jan 1999 to 2011
                                             Workday and Seasonally Adj., 2007=100

                110



                100



                90



                80



                70



                60



                50
                  1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011




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                                                                                                                                                                                                                           California: Recovery Part Deux?



      A third measure of goods movement is the                                                                                                                the inland parts of the state7. Even though economic
Ceridian-UCLA Pulse of CommerceTM. This is an                                                                                                                 contraction has ended and there are even signs of a
index of diesel fuel purchases by long haul truckers                                                                                                          corner being turned, housing markets inland look
as collected real time by Ceridian and analyzed                                                                                                               very much as they did three months ago.
by the UCLA Anderson Forecast. The index for
diesel fuel purchases in California showed a strong                                                                                                                 The foreclosure rate in San Francisco and Santa
upward trend during the 2010 recovery, but fell back                                                                                                          Clara Counties is about a third of that of nearby
as the economy stalled earlier this year. The last                                                                                                            Solano and San Joaquin Counties and that of Orange
month’s Ceridian-UCLA Pulse of CommerceTM                                                                                                                     and San Diego Counties a little more than half of
for California was higher than the previous month,                                                                                                            nearby Riverside and San Bernardino Counties. One
however one month does not a trend make. Over                                                                                                                 would then expect new construction in these lower
the last three months the Ceridian-UCLA Pulse of                                                                                                              stressed coastal counties before it comes to the inland
CommerceTM for California has moved sideways,                                                                                                                 counties. That is exactly what the permit data reveal.
consistent with the other indicators on the movement                                                                                                          The shift to multi-family housing in the more densely
of goods, but not consistent with a rapid recovery in                                                                                                         populated coastal cities continues while single-family
the current quarter.                                                                                                                                          housing has not begun to recover.

     Housing Retrospective                                                                                                                                          Home sales volumes have not moved in the past
                                                                                                                                                              20 months. Throughout the state, but particularly in
      One of the important differentiators between                                                                                                            the inland counties, we find stagnant sales. With a
Inland and Coastal California is the importance of                                                                                                            significant proportion of today’s home sales coming
residential construction in sustaining job growth in                                                                                                          from short sales and foreclosures there is continued




                                                             Foreclosures per 1,000 homes, September 2011

                    8
                    7
                    6
                    5
                    4
                    3
                    2
                    1
                    0
                        San Francisco




                                                                                                                                                                                                                                               Riverside
                                                                                                                                                         Contra Costa


                                                                                                                                                                                    Fresno
                                                                                                               Ventura
                                                             Orange County




                                                                                                                                                                                                              Sacramento




                                                                                                                                                                                                                                                                         Merced
                                                                                                     Alameda




                                                                                                                                                                                             San Bernardino
                                               Santa Clara




                                                                                                                                                Tulare




                                                                                                                                                                                                                                  Stanislaus
                                                                                                                                                                                                                           Kern
                                                                                                                                       Placer




                                                                                                                                                                                                                                                           San Joaquin


                                                                                                                                                                                                                                                                                  Solano
                                        Yolo




                                                                                                                                                                        El Dorado
                                                                             San Mateo
                                                                                         San Diego




                                                                                                                         Los Angeles




UCLA Anderson Forecast, December 2011                                                                                                                                                                                                                                                      California–85
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California: Recovery Part Deux?




                                 New Building Permits -- California (SA, 3 Mo. Average)

                        9,000
                        8,000
                        7,000
                        6,000
                        5,000
                        4,000
                        3,000
                        2,000
                        1,000
                           0
                                2007            2008              2009          2010            2011

                                              Single Family Permits              Multi-Family Permits




                                                       Home Sales 2010-2011
                5,000
                4,500
                4,000
                3,500
                3,000
                2,500
                2,000
                1,500
                1,000
                 500
                   0
                         Jan             May               Sep            Jan            May            Sep
                        2010             2010              2010          2011            2011           2011

                                  Riverside            San Bernardino       Solano          Contra Costa




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                                                                          California: Recovery Part Deux?




                                             FHFA Home Price Index
                   190

                   180

                                                                                   Solano
                   170
                                                                                   Riverside/SB
                   160                                                             Stockton
                                                                                   Fresno
                   150
                                                                                   Bakersfield
                   140                                                             Sacramento
                                                                                   Visalia
                   130

                   120
                         2010 Q1           2010 Q3        2011 Q1




downward pressure on prices. The FHFA price index         economy is right now. Inland California has begun to
for metropolitan areas in Inland California confirms      grow with the rest of the state, but the two transitional
this weakening of home prices, and we expect it to        sectors, government and housing, are far from
continue until such time as owner occupied home           turning a corner. Good news, but not fantastic news.
sales once again dominate the market.                     In coastal California export and technology growth
                                                          has been the key to recovery and a resurgence of
      Distressed housing sales, either REOs or short      investment and exports in 2012 will continue to drive
sales are still half or more of all home sales. What      the coastal economies.
this means is both normal home trading activity and
normal building activity is on hold until the ultimate          The employment numbers continue to be
price and appreciation properties of the post-crash       encouraging, but the trade numbers do not reflect a
housing markets are evident. Basically, developers        robust recovery. In the broader picture there is slow
won’t build until the price of housing is such that       growth in consumption in the U.S., there is a slowing
they are able to sell the homes at a profit. Unstable     of growth to the point of double dip recessions for
and uncertain markets keep them on the sidelines and      some of California’s trading partners abroad, and
prevent new hiring in the construction trades.            there is an economic policy in Washington, which is
                                                          now, for all intents and purposes, played out8.
The California Forecast
                                                                We might be witnessing the return of the
      One of the signs of a turning point is turbulence   recovery, indeed the indications are strong enough
in the data. Some data will show recovery while other     to slightly boost our forecast, but the headwinds are
data will not. That seems to be where the California      substantial and the resumption of employment growth




UCLA Anderson Forecast, December 2011                                                               California–87
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California: Recovery Part Deux?



we are seeing shifts our view of the recovery forward,                       Our forecast for 2012 is similar to last quarter’s
but it does not change our general view of how the                     forecast. Employment growth of 1.4% and 2.1% is
recovery will play out in the coming years.                            expected in 2012 and 2013 respectively. Payrolls
                                                                       will grow less rapidly, at 1.4%, 1.2% and 2.0% for
      The current forecast is for the surge in                         the last two forecast years. Real personal income
employment to abate and slow growth to persist on                      growth is forecast to be 3.9% in 2011 followed by
average through 2012. The U.S., California’s trading                   2.6% and 2.1% in 2012 and 2013 respectively. The
partners and consumer’s purchases will all pitch in                    unemployment rate will hover around 11.6% through
to generate faster growth in 2013 and though it is                     2012.
beyond the forecast horizon, even more robust growth
the following year. What this means is a steady                             Unemployment will fall through 2013, the last
decrease in the unemployment rate in California over                   year of our forecast, and will average approximately
the next two quarters followed by a slow trajectory                    10.5%. Employment growth in 2011 and 2012 will
towards, but not reaching, single digit unemployment                   push unemployment down marginally, and therefore,
the following four quarters.                                           we do not expect it to reach single digits until 2014.




Endnotes

1. Jerry Nickelsburg, “Bifurcated and Buffeted,” UCLA Anderson Forecast, September 2011
2. http://www.labormarketinfo.edd.ca.gov
3. Payroll employment estimates are derived from the Establishment Survey which measures employment by the domicile of the firm. Total
    employment and unemployment estimates are derived from the Household Survey which measures employment by the domicile of the
    employee.
4. http://www.dof.ca.gov/finance_bulletins/
5. Data Sources: Port of Long Beach, Port of Los Angeles, Port of Oakland.
6. Data Sources: LAWA, San Francisco Airport, Oakland Airport
7. Jerry Nickelsburg, “Buffeting and Bifurcation,” UCLA Anderson Forecast, September 2011.
8. David Shulman, “Stalled,” UCLA Anderson Forecast, September 2011.




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THE UCLA ANDERSON FORECAST
FOR CALIFORNIA



December 2011 Report




Charts
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                                                                                        Charts – Recent Evidence




         California Employment (6-mo. moving avg.)                            California Unemployment Rate
               Jan. 1997 to Oct. 2011 (Thous.)                                    Jan. 1993 to Oct. 2011
   15500                                           17500     (Percent)
                                                             14
   15000                                           17000
                                                   16500     12
   14500
                                                   16000
   14000                                                     10
                                                   15500
   13500
                                                   15000      8
   13000                                           14500
                                                              6
   12500                                           14000
        97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
     Wage & Salary Emp. (Left)      HH Survey Emp. (Right)    4
                                                                  93     95     97     99   01      03   05     07    09   11




                  Taxable Sales in California                          Ceridian-UCLA Pulse of Commerce Index
                     1998:1Q to 2010:Q2                                         Jan. 1999 to Oct. 2011
   (Bil. $)                                                  (Index 2007=100)
   600                                                       110

   550                                                       100

   500                                                        90
                                                              80
   450
                                                              70
   400
                                                              60
   350
                                                              50
                                                                99 00 01 02 03 04 05 06 07 08 09 10 11
   300                                                                   US, Overall    Pacific Region   California
         98 99 00 01 02 03 04 05 06 07 08 09 10




UCLA Anderson Forecast, December 2011                                                                             California–91
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Charts – Recent Evidence




                California New Car Registrations                         California Existing-Home Prices
                     Jan. 1999 to Aug. 2011                                    1987:1Q to 2011:3Q
 (Mil.)                                                     (Thous. $)
 1.8                                                        600
 1.6                                  (3-mo. moving avg.)   500
 1.4
                                                            400
 1.2
 1.0                                                        300
 0.8                                                        200
 0.6
                                                            100
 0.4                                                           87 89 91 93 95 97 99 01 03 05 07 09 11
       99 00 01 02 03 04 05 06 07 08 09 10 11                       Source: California Association of Realtors




                California Existing-Home Sales                            New One-Family Houses Sold
                     Jan. 2000 to Oct. 2011                                    Western Region
   (Thous.)                                                                 Jan. 2000 to Sept. 2011
   700                                                      (Thous.)
                                                            400
   600                                                                                     (3-mo. moving average)
                                                            300
   500

   400                                                      200

   300                                                      100
   200
      00 01 02 03 04 05 06 07 08 09 10 11                     0
       Source: California Association of Realtors                 00 01 02 03 04 05 06 07 08 09 10 11




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                                                                            Charts – Recent Evidence




                New Residential Units Through                          Building Permit Valuations
                 California Building Permits                              Total Nonresidential
                   Jan. 2000 to Sept. 2011                              Jan. 1999 to Sept. 2011
   (Thous.)                                           (Mil. $)
   300                                                24000
                                                                3-mo. moving avg.
   250                                                22000
   200                                                20000
                                                      18000
   150
                                                      16000
   100
                                                      14000
    50                                                12000
     0                                                10000
         00 01 02 03 04 05 06 07 08 09 10 11
            Single-Unit Multi-Unit                     8000
                                                             99 00 01 02 03 04 05 06 07 08 09 10 11




              California Construction Employment                 California Employment by Sector
                     Jan. 1998 to Oct. 2011                           Jan. 1998 to Oct. 2011
   (Thous.)                                           (Thous.)                                        (Thous.)
   1000                                               2800                                              13000
                                                      2600                                                12500
    900
                                                      2400
                                                                                                          12000
    800                                               2200
                                                                                                          11500
    700                                               2000
                                                      1800                                                11000
    600
                                                      1600                                                10500
                                                             98 99 00 01 02 03 04 05 06 07 08 09 10 11
    500                                                      Goods Producing (Left)    Services (Right)
          98 99 00 01 02 03 04 05 06 07 08 09 10 11




UCLA Anderson Forecast, December 2011                                                             California–93
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Charts – Forecast




                             Real Personal Income                            Nonfarm Employment
                             California versus U.S.                          California versus U.S.
   (% Change Year Ago)                                  (% Change Year Ago)
    10                                                   8
                                                         6
     5                                                   4
                                                         2
     0                                                   0
                                                        -2
    -5                                                  -4     California Usually Snaps Back With U.S. Recovery
                                                        -6
   -10                                                  -8
         1965 1971 1977 1983 1989 1995 2001 2007 2013        1965 1971 1977 1983 1989 1995 2001 2007 2013
               California       U.S.                            California     U.S.




                            Rates of Unemployment                       California Employment versus
                             California versus U.S.                         Real Personal Income
   (Percent)                                            (3-Yr. % Ch.)
   14                                                   10
   12
                                                          5
   10
    8                                                     0
    6
                                                         -5
    4
    2                                                   -10
         1965 1971 1977 1983 1989 1995 2001 2007 2013         1965 1971 1977 1983 1989 1995 2001 2007 2013
               California      U.S.                              Nonfarm Emp.         Real Personal Income




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                                                                                          Charts – Forecast




                     Real California Taxable Sales                  California Consumer Price Inflation
   (% Change Year Ago)                                  (4-Qtr Percent Change)
   20                                                   20

   10                                                   15

                                                        10
     0
                                                         5
   -10
                                                         0
   -20
                                                        -5
                                                             1965 1971 1977 1983 1989 1995 2001 2007 2013
   -30                                                           California U.S.
         1965 1971 1977 1983 1989 1995 2001 2007 2013




                      California Share of U.S.                         California Nonfarm Employment
                     Employment and Population                                History & Forecast
   (Percent)                                                            Vs. 2.3% Trend from 1990:3
   13                                                   (Thous)
                                                        22000
   12                                                   20000
                                                                  6.5 Million Jobs Below Trend
                                                        18000             by Year 2013
   11
                                                        16000
   10                                                   14000
                                                        12000
    9
                                                        10000
    8                                                    8000
         1965 1971 1977 1983 1989 1995 2001 2007 2013             1985 1989 1993 1997 2001 2005 2009 2013
               Emp    Population                                    History & Forecast   2.3% Trend Line




UCLA Anderson Forecast, December 2011                                                                California–95
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Charts – Forecast




                         Growth in Population                            California Net Natural Increase and
   (4-Qtr Percent Change)                                                          Net Inmigration
   4.0                                                  (Thous.)
                                                         500
                                                         400
   3.0                                                   300
                                                         200
   2.0                                                   100
                                                           0
                                                        -100
   1.0
                                                        -200
                                                        -300
                                                               1965 1971 1977 1983 1989 1995 2001 2007 2013
   0.0                                                                Immigration       Natural Increase
         1965 1971 1977 1983 1989 1995 2001 2007 2013




                  Population of California vs. U.S.                   Gross Labor Force Participation Rate
   (Ca. Mil.; U.S. 10 Mil.)                                              Labor Force/Total Population
   40                                                   (Percent)
                                                        52
   35                                                   50
                                                        48
   30                                                   46
                                                        44
   25
                                                        42
   20                                                   40
                                                        38
   15                                                   36
         1965 1971 1977 1983 1989 1995 2001 2007 2013        1965 1971 1977 1983 1989 1995 2001 2007 2013
            California        U.S.                                  California   U.S.




96–California                                                        UCLA Anderson Forecast, December 2011
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                                                                                                  Charts – Forecast




           U.S. Median Price of Single-Family Homes                       New Residential Units Through
   (Thous. $)                                                              California Building Permits
   300                                                  (Thous. Units)
                                                        400
   250
                                                        300
   200

   150                                                  200

   100                                                  100
    50
                                                          0
                                                          1983           1989       1995        2001      2007    2013
     0                                                             Single-Unit     Multi-Unit
         1965 1971 1977 1983 1989 1995 2001 2007 2013




                   Real Value of Nonresidential                                  California Employment
                    Construction in California                                       in Construction
   (Bil. 2005 $)                                        (Thous.)
   35                                                   1000

   30                                                    900
                                                         800
   25
                                                         700
   20
                                                         600
   15
                                                         500
   10                                                    400
    5                                                    300
         1985 1989 1993 1997 2001 2005 2009 2013           1983       1988        1993     1998    2003    2008   2013




UCLA Anderson Forecast, December 2011                                                                      California–97
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Charts – Forecast




                     California Employment                                     California Employment
                in Education and Health Services                                 in Manufacturing
   (Thous.)                                                (Thous.)
   2000                                                    2200
   1800                                                    2000
   1600
                                                           1800
   1400
                                                           1600
   1200
                                                           1400
   1000
    800                                                    1200

    600                                                    1000
      1983    1988    1993   1998   2003     2008   2013      1983      1988    1993   1998   2003     2008   2013




                     California Employment                                     California Employment
                         in Information                                               in Trade
   (Thous.)                                                (Thous.)
   600                                                     2600

   550                                                     2400

                                                           2200
   500
                                                           2000
   450
                                                           1800
   400                                                     1600

   350                                                     1400
     1983     1988   1993    1998   2003     2008   2013      1983      1988    1993   1998   2003     2008   2013




98–California                                                         UCLA Anderson Forecast, December 2011
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                                                                                              Charts – Forecast




                     California Employment                                     California Employment
                     in Financial Activities                               in State and Local Government
   (Thous.)                                                  (Thous.)
   950                                                       2400
   900                                                       2200
   850
                                                             2000
   800
                                                             1800
   750
                                                             1600
   700
   650                                                       1400

   600                                                       1200
     1983     1988   1993    1998    2003      2008   2013      1983    1988    1993   1998    2003    2008   2013




                     California Employment                                     California Employment
               in Professional & Business Services                             in Federal Government
   (Thous.)                                                  (Thous.)
   2400                                                      380
   2200                                                      360
   2000                                                      340
   1800                                                      320
   1600                                                      300
   1400                                                      280
   1200                                                      260
   1000                                                      240
    800                                                      220
      1983    1988    1993    1998   2003      2008   2013     1983     1988   1993    1998   2003     2008   2013




UCLA Anderson Forecast, December 2011                                                                  California–99
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THE UCLA ANDERSON FORECAST
FOR CALIFORNIA



December 2011 Report



Tables
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                                                                                                Forecast Tables - Summary

Table 1. Summary of the UCLA Forecast for California
                            2003     2004     2005    2006    2007     2008    2009    2010    2011    2012      2013
                                              Personal Income, Taxable Sales, and Price Inflation (%Change)
Personal Income (Bil.$)   1233.0     1312.2   1387.7 1495.5 1566.4 1610.3 1528.5 1590.3 1683.8 1747.2            1821.8
   Calif. (% Ch)             3.8        6.4      5.7     7.8      4.7     2.8    -5.1      4.0    5.9     3.8       4.3
   U.S.(% Ch)                3.5        6.0      5.5     7.5      5.7     4.6    -4.3      3.7    5.0     3.2       3.7
Pers. Income (Bil. 2005$) 1305.9     1354.2   1387.0 1445.4 1468.2 1467.7 1390.2 1426.3 1482.2 1521.1            1553.6
   Calif. (% Ch)             1.7        3.7      2.4     4.2      1.6    -0.0    -5.3      2.6    3.9     2.6       2.1
   U.S. (% Ch)               1.4        3.3      2.5     4.6      2.9     1.3    -4.4      1.9    2.4     1.8       2.0
Taxable Sales (Bil.$)      459.9      499.8    536.3   559.5   561.3    532.3   456.6    471.1  488.8   505.2     525.0
   (% Ch)                    4.3        8.7      7.3     4.3      0.3    -5.2   -14.2      3.2    3.8     3.4       3.9
   (Bil. 2005$)            487.1      515.8    536.0   540.8   526.2    485.2   415.2    422.5  430.3   439.8     447.8
   (% Ch)                    2.2        5.9      3.9     0.9    -2.7     -7.8   -14.4      1.7    1.8     2.2       1.8
Consumer Prices (% Ch)       2.3        2.6      3.6     3.9      3.3     3.4    -0.3      1.3    2.5     1.3       2.2
                                                Employment and Labor Force (Household Survey, % Change)
Employment                     0.0      1.1      1.9     1.4      0.9    -0.5    -4.3     -1.4    0.1     1.4       2.1
Labor Force                    0.2      0.5      1.0     0.8      1.4     1.5     0.1     -0.2   -0.5     1.0       1.0
Unemployment Rate (%)          6.9      6.2      5.4     4.9      5.3     7.2    11.3     12.4   11.9    11.6      10.5
   U.S.                        6.0      5.5      5.1     4.6      4.6     5.8     9.3      9.6    9.1     9.2       9.0
 Total Nonfarm                                Nonfarm Employment (Payroll Survey, % Change)
   Calif.                     -0.5      1.0      1.8     1.8      0.8    -1.2    -6.0     -1.3    1.4     1.2       2.0
   U.S.                       -0.3      1.1      1.7     1.8      1.1    -0.6    -4.4     -0.7    1.0     0.9       1.4
Construction                   2.9      6.7      6.4     3.2    -4.4    -11.7   -20.9    -10.3    1.4     0.2       0.7
Manufacturing                 -5.5     -1.4     -1.2    -1.0    -1.6     -2.7   -10.1     -3.1    0.9     1.3       2.4
   Nondurable Goods           -3.2     -1.5     -2.1    -0.6    -1.1     -2.0    -8.1     -2.2    0.1     1.2       1.6
   Durable Goods              -6.7     -1.3     -0.7    -1.2    -1.8     -3.0   -11.2     -3.6    1.4     1.4       2.9
Trans. Warehousing & Util     -2.1      0.4      0.9     1.8      2.3    -0.6    -6.1     -1.9    0.8     0.2       2.2
Trade                          0.2      1.6      2.7     2.0      1.0    -2.5    -7.5     -0.7    1.3     0.5       1.7
Information                   -4.3      1.3     -1.8    -1.6      1.0     1.0    -7.4     -2.6    5.7     3.1       3.4
Financial Activities           3.8      1.9      2.8     0.8    -3.4     -6.1    -7.0     -3.0   -0.6    -0.4       1.4
Professional Busi. Serv.      -1.6      0.6      3.0     3.8      1.0    -1.2    -8.0      0.5    3.3     2.6       3.8
Edu. & Health Serv.            2.5      1.5      1.7     1.8      3.5     3.3     1.5      1.5    2.7     2.2       1.5
Leisure & Hospitality          1.3      2.8      2.5     3.0      2.7     0.8    -4.4     -0.6    2.2     1.7       1.7
Other Services                -0.3     -0.1      0.3     0.3      1.0    -0.2    -4.9     -0.3   -0.3     1.7       3.1
Federal Gov’t                  0.6     -1.7     -0.2    -0.7    -0.6      0.5     1.1      6.6   -5.6     1.4       1.6
State & Local Gov’t           -1.0     -1.1      1.1     1.6      2.0     1.0    -1.9     -3.1   -0.8    -0.3       0.9
                                                       Nonfarm Employment (Payroll Survey, Thous.)
Total Nonfarm              14394      14533    14801   15061   15175    14985   14085    13896  14085   14254     14542
Construction                 797        850      905     934      893     788     624      560    568     569       573
Manufacturing               1542       1521     1503    1488    1464     1425    1282     1242   1254    1271      1302
    Nondurable Goods         566        557      546     543      536     526     483      472    473     478       486
    Durable Goods            976        964      957     945      928     900     799      770    781     792       815
Trans. Warehousing & Util    481        483      487     496      508     505     474      465    469     470       480
Trade                       2238       2273     2335    2382    2405     2345    2168     2152   2180    2191      2228
Information                  476        482      473     466      471     475     440      429    453     467       483
Financial Activities         879        895      920     928      897     842     783      760    756     752       762
Professional Busi. Serv.    2085       2098     2160    2242    2265     2239    2059     2069   2138    2195      2279
Edu. & Health Serv.         1543       1567     1593    1621    1678     1733    1760     1787   1834    1875      1903
Leisure & Hospitality       1400       1439     1475    1519    1560     1573    1503     1494   1527    1552      1579
Other Services             504.3      503.8    505.4   507.0   512.1    511.3   486.1    484.7  483.0   491.1     506.4
Federal Gov’t              255.4      251.0    250.4   248.7   247.1    248.4   251.3    267.8  252.8   256.2     260.3
State & Local Gov’t       2170.6     2146.7   2169.9 2203.9 2247.9 2271.0 2227.9 2159.0 2141.7 2134.7            2153.7
                                                                 Population and Migration
Net Inmigration(Thous)          71        7      -79    -130      -83       26      83      88      72      67       85
Population (Thous)           35252    35560    35797   35982   36229    36584   36965    37351  37713   38059     38417
   (% Ch)                      1.1      0.9      0.7     0.5      0.7     1.0     1.0      1.0    1.0     0.9       0.9
                                                                   Construction Activity
Residential Building
   Permits (Thous. Un.)      197.2    213.0    208.8   163.5   113.1    65.4     36.3    44.5     45.1    52.7    109.2
Nonres.Permits (Mil.’05$)    16986    17699    18236   18728   18886   15309     8893    9222    10000   10006    11801


UCLA Anderson Forecast, December 2011                                                                               California–103
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Forecast Tables - Summary

Table 2. Quarterly Summary of the UCLA Forecast for California
                             2011:1   2011:2    2011:3 2011:4 2012:1 2012:2 2012:3 2012:4 2013:1 2013:2            2013:3   2013:4
                                               Personal Income, Taxable Sales, and Price Inflation (%Change)
Personal Income (Bil.$)      1664.9   1682.2    1685.5 1702.5 1721.5 1738.5 1755.2 1773.6 1788.8 1810.1            1832.5   1855.7
   Calif.(% Ch)                 9.9      4.2       0.8     4.1      4.5     4.0     3.9     4.3     3.5      4.8      5.1      5.2
   U.S. (% Ch)                  8.8      4.6       0.9     2.2      4.3     3.5     3.4     3.5     3.0      4.3      4.4      4.5
Pers. Income (Bil. 2005$)    1470.2   1479.2    1485.8 1493.7 1507.5 1518.2 1525.2 1533.3 1538.0 1547.9            1558.7   1569.9
   Calif.(% Ch)                 5.6      2.5       1.8     2.1      3.7     2.9     1.9     2.2     1.2      2.6      2.8      2.9
   U.S. (% Ch)                  4.8      1.3      -1.4     1.0      3.4     2.5     2.1     2.3     1.0      2.4      2.5      2.6
Taxable Sales (Bil. $)        482.7    487.6     490.3   494.6    499.0   502.9   507.2   511.7   516.5   521.9     527.7    533.9
   (% Ch)                       5.7      4.1       2.3     3.5      3.6     3.2     3.5     3.6     3.8      4.3      4.5      4.8
   (Bil. 2005$)               426.3    428.8     432.2   433.9    436.9   439.2   440.8   442.4   444.1   446.4     448.9    451.7
   (%Ch)                        1.5      2.4       3.2     1.6      2.8     2.1     1.5     1.5     1.5      2.1      2.3      2.5
Consumer Prices (% Ch)          5.4      2.5      -0.6     2.1      0.9     1.2     2.2     2.2     2.4      2.3      2.4      2.2
                                                  Employment and Labor Force (Household Survey, % Change)
Employment                      0.7      0.6      -1.7     4.0      0.9     1.3     1.7     2.1     2.1      2.4      2.6      2.6
Labor Force                    -0.7     -1.2      -0.7     2.4      1.3     1.0     1.0     1.1     0.9      1.1      0.8      0.7
Unemployment Rate (%)          12.2     11.8      12.0    11.7     11.8    11.7    11.5    11.3    11.1    10.8      10.4     10.0
   U.S.                         8.9      9.1       9.1     9.1      9.2     9.2     9.2     9.2     9.2      9.1      8.9      8.8
 Total Nonfarm                                                 Nonfarm Employment (Payroll Survey, % Change)
   Calif.                       3.4      0.2       1.8     1.0      0.9     1.2     1.6     1.9     2.0      2.2      2.4      2.5
   U.S.                         1.3      1.4       0.7     0.7      0.7     1.0     1.1     0.9     1.4      1.7      1.8      1.9
Construction                    9.5     -0.2       2.5     0.9     -0.1    -0.6    -0.5    -0.3     1.4      1.3      1.3      1.3
Manufacturing                   1.8      0.8       0.8     0.7      1.2     1.8     1.9     2.6     2.7      2.6      2.5      2.2
   Nondurable Goods            -2.8      0.4       1.4     0.3      1.2     1.8     1.6     1.4     1.7      1.7      1.7      1.6
   Durable Goods                4.6      1.0       0.4     0.9      1.2     1.8     2.0     3.4     3.3      3.1      2.9      2.5
Trans. Warehousing & Util.      1.1      3.1      -1.6    -0.7     -0.5     0.7     1.8     1.8     2.1      3.3      1.8      2.9
Trade                           4.7      0.5       0.9     0.4      0.2     0.2     0.6     1.5     2.0      2.3      2.2      2.5
Information                    10.6      5.6       0.8     5.1      1.4     2.9     4.2     3.9     3.1      2.7      3.5      3.9
Financial Activities           -0.7     -0.8      -1.4    -0.4     -0.6    -0.3     0.4     0.3     1.6      2.1      2.9      2.0
Professional Busi. Serv.        7.8      0.3       1.8     2.1      2.6     3.4     3.9     3.5     3.5      3.8      4.7      4.8
Edu. & Health Serv.             3.8      0.6       3.0     2.2      2.5     2.8     1.4     1.2     1.2      1.6      1.7      2.0
Leisure & Hospitality           4.5      1.9       0.5     1.5      1.8     2.0     1.9     1.8     1.4      1.6      1.8      2.0
Other Services                 -0.9      0.8      -1.1     1.4      2.2     2.5     2.7     2.4     2.9      3.8      3.8      4.0
Federal Gov’t                  -5.1     -8.4       6.0     1.6      1.0     1.1     2.2     2.2     1.4      1.2      1.7      0.9
State and Local Gov’t          -1.4     -2.3       5.2    -1.2     -1.6    -1.8     0.4     1.7     1.1      0.9      1.1      1.0
                                                        Nonfarm Employment (Payroll Survey, Thous.)
Total Nonfarm               14039      14047     14109   14143    14176   14218   14276   14345   14417   14496     14582    14672
Construction                  566        566       569     570      570     569     569     568     570      572      574      576
Manufacturing                1250       1253      1255    1258     1261    1267    1273    1281    1290    1298      1306     1313
   Nondurable Goods           472        472       474     474      475     478     479     481     483      485      487      489
   Durable Goods              779        781       782     784      786     789     793     800     807      813      819      824
Trans. Warehousing & Util.    467        471       469     468      467     468     470     473     475      479      481      484
Trade                        2175       2178      2183    2185     2186    2187    2190    2199    2209    2222      2234     2248
Information                   447        453       454     460      461     465     469     474     477      481      485      489
Financial Activities          758        757       754     753      752     752     752     753     756      760      765      769
Professional Busi. Serv.     2130       2131      2141    2152     2166    2184    2205    2224    2244    2265      2291     2318
Edu. & Health Serv.        1822.9     1825.7    1839.4 1849.7 1861.3 1874.1 1880.4 1886.1 1891.5 1899.0            1907.1   1916.3
Leisure & Hospitality      1519.1     1526.2    1528.2 1533.9 1540.9 1548.6 1556.0 1562.9 1568.4 1574.7            1581.6   1589.6
Other Services              482.6      483.6     482.2   483.8    486.4   489.4   492.8   495.7   499.3   504.0     508.7    513.7
Federal Gov’t                 255        249       253     254      255     255     257     258     259      260      261      261
State and Local Gov’t        2139       2127      2154    2147     2139    2129    2131    2140    2146    2151      2156     2162
                                                                  Population and Migration
Net Inmigration(Thous)         75.1     76.8      70.0    64.6     61.3    63.5    68.4    72.9    79.2    82.5      85.7     91.7
Population (Thous)            37579    37670     37758   37845    37930   38015   38102   38190   38279   38370     38462    38556
   (% Ch)                       1.0      1.0       0.9     0.9      0.9     0.9     0.9     0.9     0.9      0.9      1.0      1.0
                                                                    Construction Activity
Residential Building
   Permits (Thous. Un.)      42.6    48.9    45.0         43.8     45.1     45.5     54.8    65.2    73.5    89.1   123.0   151.1
Nonres.Permits (Mil. ‘05$) 9891.7 10192.7 10075.4       9840.9   9860.7   9863.8   9997.5 10301.4 10631.2 11353.3 12531.3 12688.5


104–California                                                                         UCLA Anderson Forecast, December 2011
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                                                                                                   Forecast Tables - Detailed

Table 3. Personal Income, Taxable Sales, Construction and Population in California
                             2003     2004     2005     2006     2007     2008    2009      2010     2011     2012     2013
                                                                        Aggregates
 (Bil $)
Personal Income            1233.0   1312.2   1387.7   1495.5   1566.4   1610.3   1528.5   1590.3   1683.8   1747.2   1821.8
Disposable Income          1090.7   1157.6   1211.4   1298.3   1351.0   1409.4   1368.4   1417.3   1492.6   1542.0   1588.9
 (Bil 2005$)
Personal Income            1305.9   1354.2   1387.0   1445.4 1468.2 1467.7 1390.2 1426.3 1482.2             1521.1   1553.6
Disposable Income          1155.2   1194.7   1210.9   1254.7 1266.3 1284.5 1244.6 1271.2 1313.9             1342.4   1355.1
                                                         (Nominal %Ch)
Personal Income               3.8      6.4      5.7      7.8      4.7     2.8    -5.1     4.0    5.9           3.8      4.3
Disposable Income             5.1      6.1      4.6      7.2      4.1     4.3    -2.9     3.6    5.3           3.3      3.0
                                                             (Real %Ch)
Personal Income               1.7      3.7      2.4      4.2      1.6    -0.0    -5.3     2.6    3.9           2.6      2.1
Disposable Income             2.9      3.4      1.4      3.6      0.9     1.4    -3.1     2.1    3.4           2.2      0.9
                                                         Components of Personal Income (Bil $)
Personal Income            1233.0   1312.2   1387.7   1495.5 1566.4 1610.3 1528.5 1590.3 1683.8             1747.2   1821.8
  Wages & Salaries          666.2    706.2    743.5    792.9    837.4   845.3  801.5    818.6  860.8         889.2    924.9
  Other Labor Income        158.2    171.7    181.6    183.6    184.6   191.6  189.7    192.2  199.8         214.6    233.8
  Farm                        5.2      6.8      4.8      4.8      7.5     5.3     6.0     7.2    8.1           8.9     10.0
  Other Income              353.4    378.9    407.1    454.1    467.8   484.0  413.8    434.7  463.6         485.8    509.5
  Transfer Payments         152.5    160.2    167.9    181.0    191.6   208.9  238.3    260.0  268.5         278.4    287.3
  Social Insurance          102.3    111.2    117.1    120.6    122.4   124.7  120.8    122.3  116.6         128.4    141.7
                                                                                Taxable Sales
 Nominal
Level (Bil $)               459.9    499.8    536.3    559.5    561.3    532.3    456.6    471.1    488.8    505.2    525.0
    %Ch                       4.3      8.7      7.3      4.3      0.3     -5.2    -14.2      3.2      3.8      3.4      3.9
 Real
Level (Bil. 2005$)          487.1    515.8    536.0    540.8    526.2   485.2   415.2    422.5  430.3        439.8    447.8
    %Ch                       2.2      5.9      3.9      0.9     -2.7    -7.8   -14.4      1.7     1.8         2.2      1.8
                                                                   New Automobile Sales (Mil Un.)
New Registrations            1.46     1.48     1.36     1.22     1.02    0.76    0.51     0.52    0.55        0.85     1.18
U.S. Sales                  16.64    16.87    16.95    16.50    16.09   13.19   10.40    11.55  12.63        13.17    14.51
                                                                   Construction Activity
 Residential Building Permits (Thous.)
Total                       197.2   213.0   208.8   163.5   113.1    65.4    36.3    44.5    45.1    52.7   109.2
   Single-Family            140.1   151.9   154.6   107.3    68.4    32.8    25.3    25.6    20.5    24.3    50.9
   Multi-family              57.1    61.1    54.3    56.3    44.8    32.7    11.0    19.0    24.5    28.3    58.3
 Nonresidential Permit Valuation
Nominal (Mil. $)          13956.8 15651.2 18263.1 21139.8 22622.8 19187.8 10897.0 11169.8 12630.6 12818.6 15288.9
    %Ch                      -4.2    12.1    16.7    15.8     7.0   -15.2   -43.2     2.5    13.1     1.5    19.3
Real (Mil. 2005$)         16985.8 17699.3 18236.4 18728.2 18885.6 15309.0 8892.7 9222.4 10000.2 10005.9 11801.1
    %Ch                      -7.5      4.2    3.0     2.7     0.8   -18.9   -41.9     3.7     8.4     0.1    17.9
                                                               Population (Thous.)
Net Inmigration              71.3      6.7  -78.8 -129.6    -82.7    25.7    82.7    87.7    71.6    66.6    84.8
Net Natural Increase        304.0   301.0   316.0   314.0   330.0   329.0   299.0   298.0   286.6   278.1   281.0
Population                35252.3 35560.0 35797.2 35981.6 36228.9 36583.6 36965.3 37351.0 37713.0 38059.5 38416.7




UCLA Anderson Forecast, December 2011                                                                                  California–105
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                                                                                     Regional Modeling Group




                           The Los Angeles Department of Water and Power
                           (DWP), established at the beginning of the century is
                           the largest municipally-owned utility in the nation. It
                           exists under and by virtue of the Charter of the City
                           of Los Angeles enacted in 1925.

                           With a work force in excess of 9,000, the DWP
                           provides water and electricity to some 3.5 million
                           residents and businesses in a 464-square-mile area.
                           DWP’s operations are financed solely by the sale of
                           water and electric services. Capital funds are raised
                           through the sale of bonds. No tax support is received.

                           A five-member Board of Water and Power Commis-
                           sioners establishes policy for the DWP. The Board
                           members are appointed by the Mayor and confirmed
                           by the City Council for five-year terms.




UCLA Anderson Forecast, December 2011                                                Regional Modeling Group–107
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Regional Modeling Group




The Los Angeles County Metropolitan Transporta-            Metro’s Mission is to insure the continuous improve-
tion Authority (Metro) is unique among the nation’s        ment of an efficient and effective transportation
transportation agencies. It serves as transportation       system for Los Angeles County. In support of this
planner and coordinator, designer, builder and opera-      mission, our team members provide expertise and
tor for one of the country’s largest, most populous        leadership based on their distinct roles: operating
counties. More than 9 million people – one-third of        transit system elements for which the agency has de-
California’s residents – live, work, and play within its   livery responsibility, planning the countywide trans-
1,433-square-mile service area.                            portation system in cooperation with other agencies,
Besides operating over 2,000 coaches in the Metro          managing the construction and engineering of trans-
Bus fleet, Metro also designed, built and now operates     portation system components and delivering timely
over 73 miles of Metro Rail service. The Metro Rail        support services to the Metro organization.
system currently consists of 62 stations and several       Metro was created in the state legislature by As-
more are in the planning and/or design stage.              sembly Bill 152 in May 1992. This bill merged the
In addition to operating its own services Metro funds      Los Angeles County Transportation Commission
16 municipal bus operators and funds a wide array          (LACTC) and the Southern California Rapid Transit
of transportation projects including bikeways and          District (RTD) to become the Los Angeles County
pedestrian facilities, local road and highway improve-     Metropolitan Transportation Authority. The merger
ments, goods movement, and the popular Freeway             became effective on April 1, 1993.
Patrol and Call Boxes.                                     Metro is governed by a 13-member Board of Direc-
Recognizing that no one form of transit can solve          tors comprised of: the five Los Angeles County Super-
urban congestion problems, Metro’s multimodal ap-          visors, the Mayor of Los Angeles, three Los Angeles
proach uses a variety of transportation alternatives to    mayor-appointed members, four city council members
meet the needs of the highly diverse population in the     representing the other 87 cities in Los Angeles County
region.                                                    and one non-voting member is appointed by the Gov-
                                                           ernor of California.




108–Regional Modeling Group                                           UCLA Anderson Forecast, December 2011
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                                                                                            Seminar Members




The nonpartisan Legislative Analyst's Office (LAO)          The Legislature and Governor created the California
has been providing fiscal and policy advice to the          Research Bureau (CRB) within the California State
California Legislature for more than 65 years. It is        Library in the 1991 Budget Act. The bureau pro-
particularly well known for its fiscal and program-         vides objective, nonpartisan, timely, and confidential
matic expertise and nonpartisan analyses relating to        research to the Governor’s Office, members of both
the state budget, including making recommendations          houses of the Legislature, and other state constitu-
for operating programs in the most effective and            tional officers. The Bureau provides these clients with
cost-efficient manner possible. Its responsibilities also   research, policy assistance through written reports
include making economic and demographic forecasts           and other documents, consultations, seminars, and
for California, and fiscal forecasts for state govern-      other training and assistance in preparing legislative
ment revenues and expenditures. It also prepares            proposals. The Bureau has five branches: Environ-
fiscal analyses for all propositions that appear on the     mental and Natural Resources; Education and Hu-
California statewide ballot, including bond measures.       man Services; Economics; General Law and Govern-
                                                            ment; and Information Services. It maintains a small
For more information about the LAO,                         office at the State Capitol in Room 5210 to make
please visit our website at www.lao.ca.gov or call us       reference services conveniently available.
at 916-445-4656.




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Seminar Members




             City of El Segundo                                     City of Hermosa Beach




El Segundo is a small coastline community equally re-      The Los Angeles Magazine has named Hermosa an
nowned for its quaint, small town atmosphere as well       "outstanding coastal town" praising many of our
as a thriving business environment that caters to some     businesses and shops. From traditional Surf and Turf
of the region's most prestigious corporations.             to more exotic cuisines, from Comedy to Jazz, Her-
                                                           mosa Beach has many fine dining and entertainment
Conveniently located just south of Los Angeles Inter-      places from which to choose. Our hotel and lodging
national Airport, adjacent to the Pacific Ocean, and       facilities offer breath taking ocean views and all the
quickly accessible to the 105 and 405 freeways, El         comforts of home which are surrounded by a Mecca
Segundo is ideally situated between Los Angeles and        of restaurants, upscale shops and tourist delights.
the South Bay beach communities.                           Come to Hermosa Beach, relax and enjoy the warmth
                                                           of our hospitality.
El Segundo prides itself on its excellent schools,
quality recreation programs, safe neighborhoods and
unparalleled city services.

It is also a haven for business, with 13 Fortune 500
companies and a diverse mix of aerospace firms,
high-tech businesses, professional service outfits, fine
restaurants and retailers.

Whether you are looking to relocate or start up, El
Segundo offers the ultimate combination of location,
amenities, and incentives for your business.




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                                                                                          Seminar Members




The State of California’s Department of Finance is        Health Net, Inc. is among the nation’s largest publicly
responsible for submitting to the State’s fiscal year     traded managed health care companies. Its mission
budget to the Governor in January of each year. The       is to help people be healthy, secure and comfortable.
Department is part of the State’s Executive Branch        The company’s health plans and government con-
and part of the Governor’s Administration. The Di-        tracts subsidiaries provide health benefits to approxi-
rector of Finance is appointed by the Governor and is     mately 6.7 million individuals across the country
his chief fiscal advisor. The Director sits as a member   through group, individual, Medicare, Medicaid and
of the Governor’s cabinet and senior staff. Principal     TRICARE and Veterans Affairs programs. Health
functions include:                                        Net’s behavioral health subsidiary, MHN, provides
                                                          mental health benefits to approximately 7.0 million
Establish appropriate fiscal policies to carry out the    individuals in all 50 states. The company’s subsidiar-
Administration’s Programs.                                ies also offer managed health care products related
Prepare, enact and administer the State’s Annual          to prescription drugs, and offer managed health care
Financial Plan.                                           product coordination for multi-region employers and
Analyze legislation which has a fiscal impact.            administrative services for medical groups and self-
Develop and maintain the California State Account-        funded benefits programs.
ing and Reporting System (CALSTARS).
Monitor/audit expenditures by State departments to
ensure compliance with approved standards and poli-
cies.
Develop economic forecasts and revenue estimates.
Develop population and enrollment estimates and
projections.
Review expenditures on data processing activities of
departments.

In addition, the Department of Finance interacts with
the Legislature through various reporting require-
ments, by presenting and defending the Governor’s
Budget and in the legislature.

The Department interacts with other State depart-
ments on a daily basis on terms of administering
the budget, reviewing fiscal proposals, establishing
accounting systems, auditing department expenditures
and communicating the Governor’s fiscal policy to
departments.


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Seminar Members




The Employment Development Department’s La-             The energy industry is changing rapidly and dramati-
bor Market Information Division (LMID) regularly        cally. As global competition transforms the way com-
collects, analyzes, and publishes information about     panies do business, energy issues are no longer simply
California’s labor market, which has approximately      local, or even national. At the same time, its clear that
1,068,000 employers covered by Unemployment             the importance of providing reliable local service has
Insurance and a civilian labor force of approximately   never been more important.
16.6 million. In addition to employment and unem-
ployment data, LMID provides economic develop-          Our heritage at Southern California Edison is based
ment and planning information; industry and occupa-     on reliability. For more than 100 years we have
tional characteristics, trends, and wage information;   provided high-quality, reliable electric service to more
and social and demographic information. Most of         than 4.2 million business and residential customers
these data are available for the state and counties.    over a 50,000 square mile service area in coastal,
Some data are available for other geographic regions    central, and southern California.
a well.
                                                        Of course, recent changes in the California’s electric
In addition to basic labor market information, the      industry have affected us as well. In 1997, as part
LMID provides technical assistance, training seminars   of the restructuring of the electric industry in our
for data users, and standard and customized reports     state, SCE sold its 12 fossil fuel generating stations
for state and sub-state geographic areas. Labor         and overhauled nearly every aspect of its business to
market information is available electronically and in   prepare for the changing environment. While we still
print.                                                  own and operate hydro and nuclear power facilities
                                                        that serve our area, our main role is that of power
For more information, visit our website at www.         transmission and distribution. The power needed for
calmis.ca.gov or call 916-262-2162.                     our customers is largely purchased from the Cali-
                                                        fornia Power Exchange and provided by SCE to our
                                                        customers without a price markup.

                                                        At SCE we want you to know that even in times of
                                                        change, we retain our proven commitment to service,
                                                        reliability, innovation, and the community.




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                                                               Seminar Members




The Irvine Company is a nearly 150-year-old, privately
held best-of-class real estate investment company with
operations throughout California. Its management
structure is concentrated in two main operating groups:
Community Development, an affiliate responsible for the
planning and development of all for-sale residential hous-
ing communities and other land sales; and the Investment
Properties Group, which plans and guides the develop-
ment, marketing and management of the company’s large
and diverse statewide portfolio of retail, office, apartment
and resort properties.

•The Irvine Company is one of America’s most respected
and diversified private real estate companies.

•It owns and manages a high-quality investment portfolio
of nearly 95 million square feet that includes 116 apart-
ment communities, 484 office buildings, 41 retail centers,
and five yacht marinas.

•The portfolio also contains world-class resort proper-
ties including Pelican Hill®, which features 204 rooms
and suites, 128 villas and two 18-hole championship golf
courses overlooking the Pacific Ocean.

•Guided by an unwavering pursuit of excellence, the
company is highly respected for its stewardship and
master planning of The Irvine Ranch® in Orange County,
California.

•Donald Bren is Chairman of the Irvine Company. He
oversees a Board of Directors that includes some of the
nation’s most accomplished and respected business lead-
ers and former public officials.



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114-Sponsors                           UCLA Anderson Forecast, December 2011
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                                                                                   Members




Corporate 6                                Individual Member
California Energy Commission               Alston & Bird, LLP
RPA                                        American Beauty Development
The California Endowment                   Austrian Trade Commission
                                           Bank Leumi USA
Corporate 4                                BRE Properties, INC
ADP                                        Broadway Federal Bank
City of Los Angeles                        Business First Books
IBIS World, Inc.                           Cal Recycle
Irvine Company                             California Air Resources Board
Southern California Assoc of Governments   California Association of Realtors
                                           California Department of Transportation
Corporate 3                                California Housing Finance Agency
Ameron International                       California Public Utilities Commission
Center Bank                                California State Board of Equalization
City National Bank                         California State Polytechnic University, Pomona
City of Santa Monica                       California State University, Fullerton
Hanmi Bank                                 California State University, Long Beach
Kia Motors America, Inc.                   California State University, Sacramento
Kilroy Realty Corporation                  California Steel Industries, Inc
Los Angeles Police Federal Credit Union    Cathay Bank
McMaster-Carr Supply Company               CB Richard Ellis
Mitsubishi Cement Corp.                    Chartwell Capital Solutions
Nara Bank                                  Chicago Title
Pepperdine University                      Chu & Waters, LLP
Shelly Automotive Group                    City of Beverly Hills
State Compensation Insurance Fund          City of Carlsbad
State Farm Insurance Co.                   City of Garden Grove
The Newhall Land and Farming Company       City of New Orleans
Unified Western Grocers, Inc.              City Of Sacramento
WCIRB                                      City of San Diego
                                           City of San Diego - Office of the IBA
                                           City of Santa Clara
                                           City of Torrance
                                           CompWest Insurance Company
                                           Consulate General of Japan
                                           Cornerstone Real Estate Advisers LLC




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Members




County of San Diego                          Orange County Transportation Authority
Cox Communications, Inc.                     Pacific Western Bank
Crystal Cruises                              Parsons Brinckerhoff
CSU, Chico                                   Pasadena Public Library
Desmond, Marcello & Amster                   Pepperdine University - Office of Instit
DMC Investment Group, Inc.                   PG&E
Far East National Bank                       Philip Durden
FDIC                                         Preferred Employers Insurance Company
Fidelity Investments Money Management Inc.   RBC Capital Markets
First California Bank                        Rio Tinto Minerals
Gilmore Bank                                 San Diego Gas & Electric Co.
Golden Security Bank                         School Services of California Inc.
Goodwin Procter LLP                          SEIU Local 721
Granite Rock Company                         Stanford University
Harold Davidson & Associates Inc.            State of Hawaii
Heritage Bank of Commerce                    Sully-Miller Contracting Co
Howard Hsieh                                 Teichert Aggregates
HR&A Advisors, Inc.                          The Aerospace Corporation
JETRO, Los Angeles                           The Olson Company
Keefe, Bryette & Woods                       U.S. Court of Appeals
Kinecta Federal Credit Union                 United Methodist F.C.U.
KPMG                                         University of California Library, Berkeley
Lehigh Southwest Cement Company              University of California San Diego
Lloyd Management Corporation                 University of Cincinnati
Londre Marketing Consultants, LLC            University of Hawaii Library
Los Angeles Public Library                   University of Richmond
Los Angeles Times                            USS-POSCO Industries
Mack 5                                       Visterra Credit Union
Massmann International Booksellers           Vulcan Materials
Maynard Consulting Services                  Warland Investments
Merritt Santa Monica                         Wells Fargo & Co
Metals USA                                   Wells Fargo Bank - West Covina
Metropolitan Water Dist                      Winreal Operating Co.
Monterey County Administrative Office        Winzler & Kelly
Northern California Power Agency             York University Libraries
Northwood Investors
Orange County Resources & Development




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                                                                                                              Speakers




                 Edward E. Leamer                                                 David Shulman
                     Director                                                     Senior Economist

Edward E. Leamer is the Chauncey J. Medberry Professor of      David Shulman is currently managing member of his own
Management, Professor of Economics and Professor of Sta-       LLC and engages in educational and charitable activi-
tistics at UCLA. He received a B.A. degree in mathematics      ties, including being a Distinguished Visiting Professor at
from Princeton University and a Ph.D. degree in economics      Baruch College and a Visiting Professor at the Univer-
and an M.A. degree in mathematics from the University of       sity of Wisconsin. Dr. Shulman is currently a member of
Michigan. After serving as Assistant and Associate Professor   NAREIT’s Real Estate Investment Advisory Council. He
at Harvard University he joined the University of California   blogs at Shulmaven.blogspot.com. Shulman received a
at Los Angeles in 1975 as Professor of Economics and served    bachelor’s degree from Baruch College in 1965, an MBA in
as Chair from 1983 to 1987.                                    1966 from the Graduate School of Management at UCLA;
                                                               and his Ph.D. in 1975 with a specialization in Finance.
In 1990 he moved to the Anderson Graduate School of
Management and was appointed to the Chauncey J. Med-           From 1986 to 1997, Dr. Shulman was employed by Salomon
berry Chair. Professor Leamer is a Fellow of the American      Brothers Inc. in various capacities. He was their director of
Academy of Arts and Sciences, and a Fellow of the Econo-       real estate research from 1987 to 1991 and became Chief
metric Society. He is a Research Associate of the National     Equity Strategist from 1992 to 1997. As Chief Equity
Bureau of Economic Research and a visiting scholar at the      Strategist, he was responsible for developing the firms
International Monetary Fund and the Board of Governors of      overall equity market view and maintaining their list of
the Federal Reserve System. Dr. Leamer has published over      recommended stocks. Dr. Shulman was widely quoted in
100 articles and 4 books . This research has been supported    print and electronic media and he coined the terms “Gold-
by continuous grants for over 25 years from the National       ilocks Economy” and “New Paradigm Economy.” In 1991,
Science Foundation, the Sloan Foundation and the Russell       he was named a Managing Director; and in 1990, he won
Sage Foundation. His research papers in econometrics have      the First Annual Graaskamp Award for Excellence in real
been collected in Sturdy Econometrics, published in the        estate research from the Pension Real Estate Association.
Edward Elgar Series of Economists of the 20th Century.
                                                               In March 2005, Dr. Shulman retired from Lehman
His research in international economics and econometric
                                                               Brothers, where he was Managing Director and head
methodology has been discussed in a chapter written by
                                                               Real Estate Investment Trust Analyst. Before joining
Herman Leonard and Keith Maskus in New Horizons in
                                                               Lehman Brothers in 2000, he was a member and Senior
Economic Thought: Appraisals of Leading Economists.
                                                               Vice President at Ulysses Management LLC from 1998-
Recent research interests of Professor Leamer include the
                                                               1999, an Investment Manager of a private investment
North American Free Trade Agreement, the dismantling
                                                               partnership and an offshore corporation, whose invest-
of the Swedish welfare state, the economic integration of
                                                               ment capital approximated $1 billion at the end of 1999.
Eastern Europe, Taiwan and the Mainland, and the impact
of globalization on the U.S. economy.




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Speakers




                  Jerry Nickelsburg                                                  William Yu
                   Senior Economist                                                  Economist

Jerry Nickelsburg joined the UCLA Anderson Forecast in          William Yu joined the UCLA Anderson Forecast in 2011
2006 as an economist. At the Anderson Forecast he plays a       as an economist. At Forecast he focuses on the economic
key role in the economic modeling and forecasting of the Los    modeling and forecasting of Los Angeles and other re-
Angeles, Southern California and California economies. He       gional economies in California. He also conducts research
has conducted special studies into the future of manufactur-    and forecast on Asian emerging economies, especially
ing in Los Angeles, the distribution of income, the economic    China, and their impacts on the US economy. His research
impact of the writer’s strike, the aerospace industry, the      interests include a wide range of economic and financial
undocumented construction and manufacturing labor force,        issues, such as time series econometrics, stock, bond and
the ports of Los Angeles and Long Beach and the garment         commodity price dynamics, public health, human capital,
industry, focusing on the development of new data and the       higher education, and economic sustainability. He has
application of economic theory and statistical methods to       published over a dozen research articles in Journal of
sectoral issues. He is a regular presenter at the Los Angeles   Forecasting, International Journal of Forecasting, Journal
Mayor’s Economic Conference and has been cited in the           of International Money and Finance, Journal of Health
national and local media including the Financial Times, New     Care Finance, Journal of Education Finance, Economic
York Times, Los Angeles Times, Reuters, Variety, CNBC,          Affairs, and Global Economic Review, etc. He has also
NBC, PBS, and L.A. Business Journal.                            served as a reviewer for various journals, such as Jour-
                                                                nal of Money, Credit, and Banking, Journal of Banking
He received his Ph.D. in economics from the University of
                                                                and Finance, Japan and the World Economy, and Energy
Minnesota in 1980 specializing in monetary economics and
                                                                Journal, etc.
econometrics. He was formerly a professor of Economics at
the University of Southern California and has held executive    He received his bachelor’s degree in finance from Na-
positions with McDonnell Douglas, Flight Safety Interna-        tional Taiwan University in 1995 and was an analyst in
tional, and Flight Safety Boeing during a fifteen year span     Fubon Financial Holding in Taipei from 1997 to 2000. In
in the aviation business.                                       2006, he received his Ph.D. degree in economics from the
                                                                University of Washington where he was also an econom-
From 2000 to 2006, he was the Managing Principal of Deep
                                                                ics instructor and won two distinguished teaching awards.
Blue Economics, a consulting firm he founded. He held
                                                                In 2006, he worked for the Frank Russell Investment
a position with the Federal Reserve Board of Governors
                                                                Group for Treasury and corporate yields modeling and
developing forecasting tools, and has advised banks, in-
                                                                forecasting. From 2006 to 2011, he served as an assistant
vestors and financial institutions. He has been the recipient
                                                                and an associate professor of economics at Winona State
of the Korda Fellowship, USC Outstanding Teacher, India
                                                                University where he taught courses including interna-
Chamber of Commerce Jubilee Lecturer and is a Fulbright
                                                                tional economics, forecasting methods, intermediate
Scholar. He has published over 40 articles on monetary
                                                                macroeconomics, introductory macroeconomics, money
economics, econometrics, aviation economics, and industrial
                                                                and banking, and Asian economies.
organization.


118–Speakers                                                               UCLA Anderson Forecast, December 2011
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Description: The UCLA Anderson forecast for the nation and California