Over The (First) Cliff?OSIA

Wilsonville, OregonJanuary 25, 2013

John W. Mitchell

Brush with Disaster Year Four of Upturn-Modest or Moderate 12/2012 Employment 4 Million below 1/2008 but

4.78 million above 2/2010 Trough QE4 Underway Weakness in Europe and Japan Net Worth Rising Largest Increase in Domestic Oil Production in

History of Industry in 2012 Less then Year to Next Stage of the Patient

Protection and Affordable Care Act Lone Ranger Returning-Twinkies GONE!

Late January, 2013

Q1 Q2 Q3

GDP 2% 1.3% 3.1%

Consumption 2.4 1.5 1.6

Equip & Software 5.4 4.8 -2.6

Non-Res Structures 12.9 .6 0

Residential 20.5 8.5 13.5

Federal -4.2 -.2 9.5

State and Local -2.2 -1 .3

Exports 4.4 5.3 1.9

Imports 3.1 2.8 -.8

Real GDP (SAAR) Commerce Department2012

Consu

mpt

ion

Goods

Serv

ices

Inve

stm

ent

Stru

ctur

es

Equi

pmen

t& S

oft

Resid

entia

l

Inve

ntor

y Cha

nge

-.23%

Expo

rts

Impo

rts

Fede

ral

Defen

se

Non-D

efen

se

Stat

e an

d Lo

cal

-0.40%

0.00%

0.40%

0.80%

1.20%Source: BEA

Contributions to GDP GrowthQ3 2012

Janu

ary

Mar

chMay Ju

ly

Sept

embe

r

Novem

ber

Janu

ary

Mar

chMay Ju

ly

Sept

embe

r

Novem

ber

0

50

100

150

200

250

300

Source: BLS

2011-12 Nonfarm Payroll Employment Change(,000 SA) Average 153,000 Per Month in

2012 same as 2011

Mining

& Log

ging

Constru

ction

Man

ufac

turin

g

Trad

e

Tran

s, W

are

& Util

Info

rmat

ion

Finan

ce

Prof

essio

nal S

ervic

es

Ed &

Hea

lth

Leisu

re &

Hospita

lity

Other

Ser

vices

Fede

ral

Stat

eLo

cal

tota

l

-500,000

0

500,000

1,000,000

1,500,000

2,000,000

Annual Job Change December, 2011-December, 2012 (1.4%)

Janu

ary

Mar

chMay Ju

ly

Sept

embe

r

Novem

ber

Janu

ary

Mar

chMay Ju

ly

Sept

embe

r

Novem

ber

-0.40%

-0.20%

0.00%

0.20%

0.40%

0.60%

0.80%

Source:BLS

Consumer Price Index Monthly Changes 2011-121.7% in December

Core 1.9%, Annual Average 3.2% in 2011

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

Non-Farm Business Year over Year 1.8% Compensation and 1.7% Productivity-Unit Labor Costs .1% Q3

Inflation

1 m

onth

3 m

onth

s

6 m

onth

s

1 ye

ar

2 ye

ars

3 ye

ars

5 ye

ars

7 ye

ars

10 y

ears

20 y

ears

30 y

ears

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

1/18/20137/25/2012

Interest Rates Source: US Treasury

Seven Years of Zero Short Term Rates ? 30 Year Mortgage 3.4% on Week Ending

1/11/13 10 Year 1.9% on Week Ending 1/11/13 Fed will tolerate 2.5% Inflation All Treasuries Under 5 Years Yield Less than 1% Personal Interest Income Q4 2007 $1.32

Trillion by Q3 2012 $975.3 Billion Pension Obligations? Earnings on Reserves?

Rates

GDP Growth Fed Central Tendency 2012 1.7-1.8% and 2013 2.3-3%, 3-3.5% in 2014

Consensus Moving from 2% in 2013 to 2.6% in 2014

Drag from Recent Policy Actions ? Inflation Staying Near 2% Through 2014 Fed on Hold Until at Least Mid 2015

Prospects

What happens Overseas ? Dealing with the debt ceiling and

sequesters in the next few months? How will the actors behave ? Taxes,

Healthcare, Uncertainty

Known Unknowns

Jan-

05

Jul-0

51-

Jan

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09 July

Janu

ary

July

Janu

ary

July

Janu

ary

July

0

500

1,000

1,500

2,000

2,500

Residential Permits (SAAR) Census Bureau December 2012 Up 30.3% For the Year

Bend

Corva

llis

Euge

ne

Med

ford

Portl

and

Sale

m

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

I Year5 Years

FHFA House Price Index Q3 2012

2006

/1 4 3 2

2009

/1 4 3 2

2012

/1

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

12 Month Change

FHFA Purchase Only Index for Oregon

Residential Permits 2004 to 2012 Oregon (Up 48.9% to November 2012)

Source: Census

2004 2005 2006 2007 2008 2009 2010 2011 2012/110

5,000

10,000

15,000

20,000

25,000

30,000

35,000

27,309

31,024

26,623

21,101

11,676

7,039 6,868 7,93110,361

2007

/4 2 4 2 4 2 4 2 4 2

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

Source: Rockefeller Institute

Total State Tax Collections Above Previous Year for 11 Quarters

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 can’t count indefinitely on the world having

more confidence in our political system than is justified”

Policy Cauldron

Different Tools Twist to the End of December-Then Buy $45 Billion of

Treasuries with maturities from 4 Years to 30 Years Continue to Buy $40 Billion Mortgage-Backed

Securities Per Month Total $85 Billion Per Month 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)

Will it make any difference? How and When does one unwind it? Federal Debt

Costs when rates increase?

Monetary Policy

North Dakota 1 Utah 2 Hawaii 3 Texas 4 Arizona 5 Oklahoma 6 Colorado 7 Idaho 8 Indiana 9 Montana 10 Minnesota 11 Louisiana 12 Kentucky 13 Ohio 14 California 15 South Carolina 16 Washington 17 Georgia 18 Massachusetts 19

Job Growth Update November 2012 Data-Year over Year Change-44 States Up

Oregon 21 Florida 22 Nevada 23 Arkansas 30 Michigan 33 Alabama 34 New Jersey 38 Illinois 35 South Dakota 36 New Jersey 38 Maine 43 Connecticut 44 Mississippi 45 Alaska 46 New Hampshire 47 Rhode Island 48 New Mexico 49 West Virginia 50

Aug-0

7

Novem

ber

Feb

May

Aug

ust

Novem

ber

Febr

uary

May

Augus

t

Novem

ber

Febr

uary

May

Augus

t

Novem

ber

Febr

uary

May

Augus

t

Novem

ber

Febr

uary

May

Augus

t

Novem

ber

1,500

1,550

1,600

1,650

1,700

1,750

1,800

Oregon Wage and Salary Employment ( ,000-SAAR) Employment Department

Oregon Job Change Year to December, 2012 (1.3%) Employment Department

ManufacturingMine&Log

ConstructionTrade

InformationTP,W,Util

FinanceProf. Services

Ed&Health

Leisure&Hosp.

Other ServicesGovt.Total

-5,000 0 5,000 10,000 15,000 20,000 25,000

Mine&Log

Trade

TP,W,Util

Prof. Services

Leisure&Hos.

Govt.

Portland Job Change Year to November, 2012 (1.5%) Employment Department

ManufacturingMine&Log

ConstructionTrade

InformationTP,W,Util

FinanceProf. Services

Ed&HealthLeisure&Hosp.Other Services

Govt.Total

-5,000 0 5,000 10,000 15,000 20,000

Mine&Log

Trade

TP,W,Util

Prof. Services

Leisure&Hos.

Govt.

Oregon Job Growth Year to November, 2012

Source: Department of Employment

Metro Job Change Percentage

Bend 360 .6

Corvallis 130 .3

Eugene/Springfield 2,900 2.1

Medford 1,140 1.5

Portland 15,300 1.5

Salem 700 .5

Coos 90 .4

Douglas 580 1.7

Lincoln -80 -.5

Umatilla -40 -.1

Union 60 .6

Wasco 180 .9

Personal Income in Q3 Oregon up .8%, US .5% Census Population Estimates for 2010-2012 up 1.8%

versus the US up 1.7% PSU Oregon Population Up .7% in 2012 Brookings Institution- Q3 Portland 4th of the top 100

Metros-Employment, Unemployment, Output, and House Prices

Preliminary Oregon Employment Data .8-.9% Gain in Annual Average Employment

Oregon Jobs Gap in October 133,000 Brookings Hamilton Project

December Data-Total Employment in Oregon down 25,546 in Year to December?

Recent Data Points

2005 2006 2007 2008 2009 2010 2011 2012/P

-120,000

-100,000

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

Source: Employment Department

Annual Change in Oregon Wage and Salary Employment

Youth Un and Underemployment -Scarring December U-6 14.4%, Mean Unemployment

38.1 Weeks, 39.1% of Unemployed more than 27 Weeks

Labor Force Participation Rate December 63.6%-The last Time it was there was December 1981. Recession Start 66%

Real Family Median Net Worth Down 38.8% 2007-2010 Survey of Consumer Finances

Leftovers

Sustainability Popular Here- Fiscal Situation is Not- The Current Path leads to sclerosis or stagnation.

How does it end? Simpson-Bowles, Confidence Collapse –Endgame-Mauldin, Rogoff and Reinhart- Slow Growth

Is December/January the best that we can do?

Do we still have the recipe for growth?

Nagging Questions

Stella and The Fairies

Stella Fairies

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 Growth Near 2% Falling Debt Burdens, Housing, Rising

Income and Employment, Balance Sheets, Financial Institutions Strength, ISM, Energy Developments, Initial Claims

2013