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THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2004:

THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2004: What Next For The U.S. & California Economies? A Presentation To The Annual CMTA Pre-Conference Workshop South Lake Tahoe, California April 19, 2004.

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THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2004:

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  1. THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2004: What Next For The U.S. & California Economies? A Presentation To The Annual CMTA Pre-Conference Workshop South Lake Tahoe, California April 19, 2004

  2. ANOTHER "JOBLESS RECOVERY" Cumulative % Change In Private, Non-Farm Payrolls Before And After The Cyclical Low Point 7 Recession Recovery C 6 U Avg., Past 6 Long M Economic Cycles* U 5 L A T 4 I V 3 E G 2 3/90-7/92 Cycle R O W 1 T H 0 Current Cycle, 11/00-3/04 -1 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 Months Before And After The Cyclical Low In Economic Activity * Based on six economic cycles back through 1953. Source: U.S. Commerce Department

  3. "MISERY'S"* WARNING FLAG FOR THE PRESIDENTCumulative % Chg. In The "Misery Index*" 20% Current Recovery 15% (11/01-3/04 10% 5% 0% -5% 3/91-7/93 Recovery -10% -15% 0 3 6 9 12 15 18 21 24 27 30 33 36 Months From The Start Of Recovery * Avg. of inverted index for job gains, rolling 12-mo. periods, and an index of retail gasoline prices. Sources: U.S. Dep'ts. Of Energy and Labor

  4. INVENTORIES UNUSUALLY "LEAN" VS. SALESBusiness Inventory-Sales (I/S) Ratio 1.49 Rolling 3-Year 1.47 Avg. Monthly 1.45 1.43 1.41 1.39 1.37 1.35 1.33 2/04 1.31 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Source: U.S. Department Of Commerce

  5. U.S. EXPORT ORDERS RESPOND TO A WEAKER DOLLAR % Rept'g An Increase Index: 2000=100 112 60 Export Orders, Mfd. Goods 110 (Left Scale) 58 108 56 106 54 104 102 52 3/04 100 50 98 48 "Real Trade-Weighted" $* (Right Scale) 96 46 94 92 44 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 * Based on the dollar's inflation-adjusted, trade-weighted exchange rate against 44 other currencies. Sources: Nat'l Ass'n Of Purchasing Mgrs.; J.P. Morgan & Co.

  6. A BETTER SHOWING BY CALIFORNIA DURING THE CURRENT ECONOMIC CYCLENon-Farm Job Growth; Year-Ago Percent Change 4.5% CA 3.5% 2.5% U.S. 1.5% 3/04 0.5% -0.5% Note: Bars Denote U.S. Recession Periods -1.5% -2.5% Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Source: U.S. Dep't Of Labor

  7. TRADING PLACES: NORTHERN CALIFORNIA ON THE LEADING EDGE OF THE ECONOMIC SLOWDOWNYr-Ago % Change In Non-Farm Payrolls 6.2% 5.2% 4.2% 3.2% Central Valley 2.2% 1.2% 0.2% -0.8% 2/04 -1.8% No. California -2.8% So. California -3.8% -4.8% Note: Bars Denote Recession Periods -5.8% -6.8% -7.8% Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Source: U.S. Dep't Of Labor

  8. CALIFORNIA'S ECONOMIC GROWTH DRIVEN BY "DOMESTIC," NOT “EXPORT” INDUSTRIESYear-Ago Percent Change In Employment, March 2004 6% "Export" Industries 5% "Domestic" Industries 4% F 3% I S n 2% v l c 1% s 0% M Leisure & Hosp.ity Real Estate -1% Resid. Constr. Software Pub. Educ & Health Prof & Bus Svcs o T Svcs I P t Total Nonfarm e -2% n I I c t c o h -3% e t n r Government u M -4% n r f e e g -5% t s -6% -7% Source: California Employment Development Department

  9. A MORE VULNERABLE CA HOUSING MARKET TO HIGHER INTEREST RATES? % Of Households Qualifying For The Median-Priced Home, By Selected Area 60 50 12/96 12/00 40 2/03 2/04 30 20 10 0 U.S. CA LA SF Cent. Valley Source: California Association Of Realtors

  10. ECONOMIC OUTLOOK: THE U.S. AND CALIFORNIA ECONOMIES COMPARED Year-To-Year Percent Change, Unless Otherwise Specified Forecast 1991 1992 1993 2000 2001 2002 2003 2004 2005 "Real" GDP/ GSP U.S. -0.9 2.7 2.7 3.7 0.5 2.2 3.1 4.1 3.0 California -1.9 -1.2 -0.8 6.5 -1.3 1.9 3.0 3.7 2.7 Unemployment Rate (%) U.S. 6.9 7.5 6.9 4.0 4.8 5.8 6 5.8 6.0 California 7.7 9.3 9.4 4.9 5.4 6.7 6.7 6.2 6.2 Housing Starts/Permits U.S. (Starts, MM) 1.01 1.2 1.29 1.57 1.60 1.71 1.85 1.86 1.67 California (Permits, Th) 105 98 84 149 149 168 198 196 189 Other Key California Data Tax. Retail Sales(% Chg.) -3.9 0.6 -0.1 12.0 0.0 -0.2 3.1 4.2 4.9 Population (% Chg.) 2.3 2.1 1.3 1.9 1.9 1.7 1.6 1.5 1.4 Net Inmigration (Thus) 224 225 -45 322 364 308 251 237 199 Source: The UCLA Anderson Forecast, March 2004

  11. AGGRESSIVE COST-CUTTING HELPS SUSTAIN THE RECOVERY IN MARGINS AND PROFITS Year-Ago % Change, Selling Prices Vs. Non-Farm Unit Labor Costs* 5% Margin Pressure Note: Bars Denote 4% Recession Periods 3% Selling Prices 2% 1% '03Q4 0% -1% Unit Labor Costs Margin Expansion -2% -3% -4% Mar-89 Mar-91 Mar-93 Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Source: U.S. Commerce Dep't.

  12. WEAK "PRICING POWER" DRIVES A TECH-LED INVESTMENT RECOVERYYear-Ago Percent Change, Inflation-Adjusted Spending 28 Info Processing Equipment 24 '03Q4 20 16 Low-Tech Equipment 12 8 4 0 -4 -8 Structures -12 -16 Note: Bars Denote Recession Periods -20 -24 01-Mar-91 01-Mar-94 01-Mar-97 01-Mar-00 01-Mar-03 Source: U.S. Commerce Department

  13. "APPRECIATING-CURRENCY" COUNTRIES LIFT U.S. IMPORT PRICES & “PRICING POWER” Year-Ago Percent Change, Import Prices Of Manufactured Goods 7% 5% Canada Europe 3% 3/04 1% -1% -3% "Emerging Asian" Economies -5% -7% Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Source: U.S. Department Of Labor

  14. SMALL BUSINESS "PRICING POWER" ON THE RISEPercent Of Small Businesses Reporting Price Increases 20 Mar. '04 16 12 8 4 0 Recession -4 Period -8 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Source: National Federation Of Independent Businesses (NFIB)

  15. A LOOK BACK AT THE LAST “UP CYCLE” FOR INTEREST RATES The Treasury Yield Curve, Selected Periods; Yields In Percent 7.3 Federal Funds Target Rate, 5/18/00 5/16/00=6.50% 6.3 6/29/99 5.3 Fed Funds Target Rate, 11/18/98 11/17/98=4.75% 4.3 0 5 10 15 20 25 30 35 Years To Maturity Source: Bloomberg Financial News, Inc.

  16. HOW CLOSE A CLASH BETWEEN PUBLIC & PRIVATE-SECTOR BORROWING?Year-Ago % Change In Federal & Non-Federal Borrowing 15% '03Q4 Non-Federal 10% 5% 0% -5% Federal -10% Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Source: Federal Reserve Board

  17. THE FEDERAL RESERVE KEEPING THE POLICY "PEDAL TO THE METAL"The Federal Funds Rate Less The PCE "Deflator;" Percent 5.0 4.0 3.0 Avg., 1969-2003=2.6% 2.0 1.0 Fed "Easing" During The Sluggish 1991-92 Recovery 0.0 Note: Bars Denote -1.0 3/04 Recession Periods -2.0 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Sources: Bloomberg Financial News, Inc., U.S. Commerce Dep't

  18. EIGHT SURPRISES FOR 2004 * ANOTHER TERRORIST ATTACK * THE “CARRY TRADE” UNRAVELS * “DISINFLATION” LINGERS ON * A DOLLAR TAILSPIN * SAUDI TURMOIL * A CHINESE RECESSION * A DEMOCRATIC ELECTION VICTORY * POLICY STRAINS BEGIN TO SHAKE THE EURO

  19. BOND MANAGERS STILL CAUTIOUSPortfolio Duration Vs. Target, In Percent; 4-Wk. Moving Averages 104 103 102 101 100 99 "Neutral" (100% Of Benchmark Duration) 98 97 4/13/04 Week 96 95 94 25-Dec-01 25-Jun-02 24-Dec-02 24-Jun-03 23-Dec-03 22-Jun-04 Source: Stone McCarthy Research Associates, Inc.

  20. EARNINGS GROWTH TO PROPEL STOCKS HIGHER Yr.-Ago % Chg. Qtr-To-Qtr % Chg 80% 25% S&P 500 Earnings Growth (Left Scale) 60% 19% Forecast* 13% 40% 7% 20% 1% 0% -5% S&P 500 -20% (Left Scale) -11% -40% -17% -23% -60% Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 * First Call "bottom-up" consensus estimate, including goodwill adjustments. Source: First Call, Inc.

  21. A FAIRLY TIGHT LINK BETWEEN THE S&P 500 P/E MULTIPLE AND INTEREST RATES S&P 500 Price Per $ Of Opng. Earnings Percent 16 27 10-Yr T-Note (Left Scale) 14 23 12 19 10 8 15 4/5/04 6 11 P/E Ratio 4 (Right Scale) 7 2 0 3 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Sources: Standard & Poors, Inc.; Federal Reserve Board

  22. SEEMINGLY "RICH" STOCKS "CHEAP" VS. BONDS Yield Ratio* S&P 500 P/E Multiple 27 1.8 S&P 500 P/E Multiple 1.6 (Left Scale) 23 1.4 19 1.2 15 4/16/04 1.0 11 0.8 Yield Ratio, Bonds Vs. Stocks 7 (Right Scale) 0.6 3 0.4 Jan-79 Jan-83 Jan-87 Jan-91 Jan-95 Jan-99 Jan-03 * Ratio, 10-Yr. Treasury yield vs. earnings-price yield (E/P) on S&P 500 stocks. Sources: Standard & Poors, Inc., IBES, Federal Reserve Board

  23. "DEFENSIVE" STOCKS* TURN WITH INTEREST RATESCumulative % Chg., Past 4 Bus. Cycles* 6 3 Cum. % Chg. In 10-Yr. Treas. 1 Yields (Right Scale) 3 -1 -3 0 -5 -3 -7 -9 -6 -11 -13 Cum. % Chg. In "Defensive" Vs. -9 S&P 500 Stocks -15 (Left Scale) -12 -17 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 Month's From Recession's End * Health care and consumer staples. Expansions beginning 12/70, 4/75, 1/83 and 4/91. Source: Federal Reserve Board; Citigroup, Inc.

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