Bank of Agriculture and Commerce Stockton, California February 6, 2013 John W. Mitchell 24 th

Disasters Avoided-Cliff One, Euro Survived March1st and March 27 th Deadlines Year Four of Upturn-Modest or Moderate 1/2013 Employment 3.23 Million below 1/2008 but 5.51 million above 2/2010 Trough House Prices Rising Case Shiller up 5.5% to November California with Clean Budget? Fourth Quarter Output Decline Global Economy Weak But Stabilizing? S &P 500 up 6.1% to 2/1/13 Personal Income in December up 2.6% (SAAR) Largest Increase in Domestic Oil Production in History of Industry in 2012 Inflation Moderated Lone Ranger Back, but Twinkies GONE!

Q1Q2Q3Q4 GDP Consumption Equip & Software Non-Res Structures Residential Federal State and Local Exports Imports

Beige Book January 16, 2013 Stable Price Pressures Energy Commodities 8.6% in Aug, 6.7% in Sept. -.5% in October and -6.9% in November and -2.2 in December Compensation 12 Months to December 1.9%, Wages1.7%, Benefits 2.5%

Seven Years of Zero Short Term Rates ? 30 Year Mortgage 3.42% Week Ending 1/25/13 10 Year 1.9% on Week Ending 1/25/13 Fed will tolerate 2.5% Inflation All Treasuries Under 5 Years Yield Less than 1% Personal Interest Income Q $1.32 Trillion in December 2012 $1.012 Trillion Pension Obligations?

GDP Growth Fed Central Tendency for % and 3-3.5% in 2014 ( % First Est.) Consensus Moving from 2% in 2013 to 2.6% in 2014 Inflation Staying Near 2% Through 2014 Fed on Hold Until at Least Mid 2015

What happens Overseas ? Dealing with the debt ceiling and sequesters in the next few months? How will the actors behave ?

Stockton Permits Building Forces Affordability Price Declines Mortgage Rates Employment Household Formation Different Credit World More Renters San Joaquin County Median Sales Price in December up 15.7% to $184,320 (CAR)

After Proposition 30 Governor Proposed Budget with a Spending Increase of 5% Expecting Gains in Personal Income Tax of 1.8% ($1.1B), Sales Tax Receipts 12.3% ($2.55B), Corporate Taxes 20.4% ($1.55B) What will Actually Appear-Getting Beyond the Cliff Impact

The First Cliff Payroll Tax Holiday Ends Bush Tax Cuts Expire for Over $450,000 Sequester Process Delayed 2 Months New Medicare Taxes Start Phase Outs and Deduction Limitations Back Estate Tax Rate Bumped AMT Fix, Doc Fix Long Term Spending Issues-Not Addressed Debt Ceiling Unresolved Short Term Problem-Long Term Problem Geithner-And you cant count indefinitely on the world having more confidence in our political system than is justified

Twist Ended in December-Now Buying $45 Billion of Treasuries Per Month with Maturities from 4 Years to 30 Years Continue to Buy $40 Billion Mortgage-Backed Securities per month Total $85 Billion Per Month in New Acquisitions as well as Reinvesting Principal Payments Exceptionally low rates as long as unemployment remains above 6.5% and inflation is no more than.5 point above 2% longer run goal (12/12/12) and (1/30/2013) When does the buying program end? When the labor market improves! How does the unwinding take place? Balanced approach 1/30/13

North Dakota 1 Utah 2 Arizona 3 Texas 4 Colorado 5 Oklahoma 6 Idaho 7 Montana 8 Indiana 9 Hawaii 10 Washington 11 Minnesota 12 Ohio 13 Georgia 14 South Carolina 15 North Carolina 16 California 17 Massachusetts 18 Nevada 19 Job Growth Update December 2012 Data-Year over Year Change-45 States Up, 1 Unchanged Kentucky 20 Missouri 21 New York 22 Tennessee 23 Oregon 24 New Jersey 25 Florida 28 Virginia 32 Pennsylvania 34 Alabama 38 Alaska 39 Connecticut 44 Mississippi 45 Wyoming 46 Connecticut 47 Maine 48 New Mexico 49 West Virginia 50

California$8,462,343$10,949,761$16,304,937 Oregon $494,534 $510,793 $1,029,169 Washington$1,065,891 $1,903,302 $2,985,398 Source: USDA

California Job Change Year to December, 2012 (1.7%) Source: EDD

Job ChangePercentage Chico Fresno 4, Los Angeles 69, Modesto 1,000.7 Napa Oakland 21, Redding 1, Sacramento 10, San Diego 20, San Francisco 33, San Jose 27, Stockton 5,5002.9

Stockton Job Change Year to December, 2012 (2.9%) Source: EDD

Youth Un and Underemployment –Scarring January U %, Mean Duration 35.3 Weeks Labor Force Participation Rate January 63.6%-The last Time it was there was December Recession Start 66% Real Family Median Net Worth Down 38.8% Survey of Consumer Finances California Jobs Gap 1,791,000 In October Brookings CoreLogic Underwater in CA 28.3% in Q3 City Finances

How Does the Fiscal Situation End? Simpson-Bowles, Confidence Collapse as in John Mauldins–Endgame, Rogoff and Reinharts This Time is Different- Slow Growth Do we still have the recipe for growth? (Lots of Gloom, but Remember the Late 1970s!)

StellaFairies The Tooth Fairy Free Medical Services Fairy The No New Taxes Fairy The Rich Will Pay Fairy The Entitlement Fairy

Uncertainty Reduced, But Remains Most likely GDP Growth 2-2.5% California Employment 1.5-2% Falling Debt Burdens, Housing, Rising Income and Employment, Balance Sheets, Financial Institutions Strength, ISM both Manufacturing and Non-Manufacturing, Energy Developments, Initial Claims, Global Glimmers

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