California in the 21st century: State of the State

in the 21st century: State of the State Briefing Book

CONFERENCE PARTNERS The Milken Institute gratefully acknowledges the support of the following companies, whose generous support helped make the in the 21st Century: State of the State Conference.

ACKNOWLEDGMENTS The Milken Institute thanks the following organization for their assistance in promoting the conference. Asia Society Association for Corporate Growth Berkeley Roundtable on the International Economy Big Sky Capital City of Beverly Hills, Economic Development Council City of Hermosa Beach Institute for Strategic Thinking and Technology Development Japan External Trade Organization (JETRO) Los Angeles Chamber of Commerce Los Angeles County Community Development Commission Los Angeles Financial Analysts Society Los Angeles Regional Technology Association (LARTA) National Association of Business Economists (NABE) Pacific Basin Institute Public Policy Institute of Real Estate Media, Inc. TEC Worldwide Inc. Technolink UCLA, School of Public Policy World Affairs Council - Los Angeles World Affairs Council - Sacramento World Affairs Council - Southern Zone Communications Copyright 1999 by the Milken Institute. Milken Institute 12 Fourth Street Santa Monica, 941-133 For complete ordering information for this and all Milken Institute publications, please see our Web site at or contact us by e-mail (publications@milken-inst.org), telephone (31.998.26), or in writing. The Milken Institute s mission is to explore and explain the dynamics of world economic growth. Our goal is to provide understanding of and insights into the effects of economic, political, technological, and regulatory changes on the world economy and its societies as a basis for better public policy.

PREFACE The Milken Institute is pleased to present this briefing book on the economy. It is, we believe, one of the most detailed, yet concise documents ever compiled on the state s economy. As one of the largest and most dynamic economies in the world today, has been on the leading edge of many of today s most important industries, including two of the fastestgrowing technology and entertainment. Understanding this complex and vital economy has led the Milken Institute to expand our growing research agenda to include a major analytical capability on. The in the 21st Century: State of the State Conference, held on, at the Milken Institute, and for which this briefing book was prepared, is the inaugural event of that research effort. This briefing book is the result of months of analysis by the Milken Institute s Regional and Demographic Studies staff using data from a wide variety of sources. It lays out in extensive charts and bullet points the salient underpinnings of the state s economy, from banking and finance to global trade, entertainment, technology, and real estate. In addition to data on s key business, economic, financial and demographic factors, this comprehensive guide also includes comparisons to other states (particularly Texas and Florida) and national statistics. We believe it will serve as an important reference document that can be used year-round, giving those who live, work, do business in, or have an interest in a better understanding of the state s economy and its vital role in the economic health of the United States and the global community. DONALD STRASZHEIM PRESIDENT MILKEN INSTITUTE ROSS DEVOL DIRECTOR REGIONAL AND DEMOGRAPHIC STUDIES

TABLE OF CONTENTS Executive Summary........................... 1 SECTION 1: Industry................................... 11 SECTION 2: Banking and Finance......................... 27 SECTION 3: Technology................................. 39 SECTION 4: International Trade and Globalization............ SECTION : Entertainment............................... 73 SECTION 6: Demographics.................................. 81 SECTION 7: Real Estate................................. 97 ABOUT THE AUTHORS........................ 113 MILKEN INSTITUTE STAFF.................... 114

Executive Summary Change, Year Ago 4 United States 3 2 1-1 -2-3 199 1991 1992 1993 1994 19 1997 Source: Bureau of Labor Statistics is Coming Back Employment Growth 1999 continues to see its economic prospects soar. The state s employment comeback is beginning to make its severe early 199s recession seem like a distant memory. is creating a new paradigm for economic growth by utilizing its long-held strengths in cuttingedge research and development. The state has been transformed from a defensedependent and population-based economy into a global incubator of information technology and knowledge-based industries. s job growth has exceeded the national average in all but one month out of the last four years. 11 1 9 8 7 6 4 3 8 Underperformed U.S. Unemployment Rate: vs. United States 82 84 86 Source: Bureau of Labor Statistics 88 9 92 94 United States 96 98 s unemployment rate closely followed national changes in the 198s. The relationship broke down in 1991 with the severe aerospace-induced recession. s economy is roughly two years out of phase with the rest of the country. The unemployment gap with the nation has narrowed from 2. percentage points in 1994 to 1. percentage point. The gap remains despite higher job growth in, attributable to stronger labor force growth stemming from high immigration rates and reduced out-migration. Index Jan. 199 = 1 12 Northern Southern 11 Total 11 1 1 9 High-Tech Driven Recovery in Northern CA Employment Relative to Pre-Recession 199 1991 1992 1993 1994 19 1997 1999 Source: WEFA Defense downsizing, collapsing aerospace, banking consolidation, and the real estate bust devastated Southern s economy. Northern was less dependent on defense and its high-tech sectors helped moderate the downturn. The birth of a new industry in the Bay Area based upon the Internet brought its economy back faster. s recovery is now firmly established throughout the state. Southern recovered its previous employment peak in May 1997. 1 EXECUTIVE SUMMARY

Executive Summary Thousands 22 2 18 16 14 12 1 8 Motion Pictures Dwarfs Aerospace Employment Aerospace Motion Pictures 6 1988 1989 199 1991 1992 1993 199419 1997 1999 Source: WEFA Change, Year Ago 12 1 United States 8 6 4 2-2 -4 High-Tech Business Services is Key Job Growth - Business Services 199 1991 1992 1993 1994 19 1997 1999 Source: Bureau of Labor Statistics The accompanying chart probably depicts the most pervasive structural change in s economy, or at least Southern s. Ten years ago, the aerospace industry employed twice as many ns as the motion picture industry. After losing 12, jobs between 1988 and 19, the two industries fortunes have been reversed: motion pictures now employ twice as many as aerospace. is the epicenter of film, video, and audio production. Its entertainment industry is producing films, television programs, and music recordings at a historic pace in an attempt to satisfy worldwide demand. The expansion of high-tech services is fueling the state s economy, especially software, wireless telecom, biotech, multimedia, and the Internet-related sectors. is the leading producer of computer software in the country. Software employs nearly 1, in the state, almost doubling since 1993. Business services where many of these jobs are classified provide almost 1.2 million jobs in the state. Much of this growth has been at small start-up firms. New Media firms are racing to develop a wave of Web-based entertainment delivering music, video, and interactive content around the globe with new broadband technologies. Change, Year Ago 1 Communications Engineering & Management Services 1 Other High-Tech Services Employment As a result of the structural change over the past decade, s economic base is more diversified. As the demand for wireless and Internet services providers has grown, communication services employment has increased at a rapid pace. Engineering services is seeing a surge in job growth stemming from the outsourcing of many activities due to new business practices. Combined, these two industries employ 72, in the state. - 1991 1992 Source: WEFA 1993 1994 19 1997 1999 2 EXECUTIVE SUMMARY

Executive Summary Change, Year Ago 1 8 6 4 2-2 -4-6 Hotels & Other Lodgings Amusement & Recreation Services 199 1991 1992 1993 1994 19 1997 1999 Source: WEFA 's Leisure Services Employment Travel and tourism is another important engine of growth for the state s economy. Travel and tourism is a $6 billion industry in the state, employing roughly 7,. This industry has added jobs at twice the rate of the overall state average in the last decade. After El Niño and Asian-related weakness, hotels and other lodging, and amusement and recreation services are creating jobs at a rapid pace in 1999. Rising discretionary income in the rest of the country is causing a jump in domestic visitation. The industry helps employ many less-skilled workers. Change, Year Ago 6 United States 4 2-2 -4-6 Manufacturing Outpaced U.S. Manufacturing Employment - vs. U.S. 199 1991 1992 1993 1994 19 1997 1999 Source: Bureau of Labor Statistics Change, Year Ago 1 8 6 4 2-2 -4-6 Mining Source: WEFA Mfg. Wholesle Trade TPU Construction FIRE Government Services Spurred by high technology, manufacturing has been growing faster than the national average. Low-tech industries are bolstering s economy, too. Furniture production is expanding again after a severe downturn. Even primary metals is adding jobs in the state again. has become a center for women s apparel by becoming more efficient. Other areas of the country have witnessed a hemorrhaging of apparel jobs. Asian demand for exports fell 2 percent in, harming manufacturing output. The gap between s and the United States performance has narrowed and both are declining. Employment By Industry Employment, August 1999 Mining and manufacturing are the only two major employment categories to post a decline over the last 12 months. Asia is responsible. The security industry and holding and investment firms are adding jobs at a robust rate, offsetting declines at banks. Wholesale trade is boosted by rising imports and hiring by retail is restrained by labor shortages. Communication services is creating jobs at a rapid pace reflecting wireless and Internet activity. The broad service sector is the backbone of job additions in the state. Construction is leading in job growth in the state, with both residential and nonresidential markets strong. 3 EXECUTIVE SUMMARY

Executive Summary Permit Valuations (Smoothed) Change, Year Ago 6 Residential Nonresidential 4 2-2 -4-6 Construction Rebounds 199 1991 1992 1993 1994 19 1997 Source: Construction Industry Research Board Thousands 3 2 2 1 1 7 Home Building Recovering Housing Starts 8 8 Sources: U.S. Bureau of the Census; WEFA 9 1999 Construction markets are recovering after a deep and prolonged contraction. Nonresidential construction is providing a strong underpinning for the state s economy. High absorption of office, other commercial, and industrial space has caused vacancy rates to fall, prompting new building activity. Mushrooming high-tech service firms are promoting a boom in campus-style buildings. Strong income gains, high consumer confidence, and relatively low mortgage rates are propelling s homebuilding market. Housing affordability in is still problematic, especially in the San Francisco Bay Area. New home construction has been rising strongly on a percentage basis. Housing starts are on track for a 1999 pace of 1,, the highest since 199. This represents half of the previous peak in 1986. For housing construction to keep pace with household growth, 22, new units are needed each year. Environmental restrictions, inadequate financing for minorities, and builder fears of over-extension seem to be factors affecting this imbalance. Recent immigrants use housing more intensively due to lower income and larger household size. Immigrants home-ownership rates rise as they become more economically established boosting long-term demand. Change, Year Ago 1 United States 1 - -1 Construction Employment Beats U.S. Residential and Nonresidential Construction s construction markets are witnessing strong job growth. Construction has added 42, jobs over the past 12 months. Construction workers who moved to other Western states are returning to. Special building trade workers are seeing the greatest increase in demand for their services. Construction pays an above-industry average wage, bolstering income growth in the state. -1 199 1991 1992 1993 1994 Source: Bureau of Labor Statistics 19 1997 1999 4 EXECUTIVE SUMMARY

Executive Summary Change, Year Ago 4 3 2 1 Regional Growth Change in Employment for Year-Earlier Period San Diego Los Angeles San Francisco Sacramento Orange Co. San Jose Oakland Source: Bureau of Labor Statistics 7 August '98 August '99 6 4 3 August '98 August '99 's Labor Markets Tighten Change in Unemployment for Year-Earlier Period 2 San Diego Los Angeles San Francisco Sacramento Orange Co. San Jose Oakland Sources: Bureau of Labor Statistics; WEFA Regional growth patterns have altered over the past several years. Two years ago, the San Francisco Bay Area was recording the highest job growth in the state. Los Angeles is creating jobs at double the pace of San Jose and San Francisco in 1999. San Diego has experienced a slowdown in job growth in 1999, while Orange County is adding jobs at a 3.2 percent rate. Oakland is the fastest growing metro in the state as small tech start-ups take advantage of lower office costs and the availability of space. Sacramento is benefiting from lower costs than the Bay Area and is nearly matching Oakland s rate of job creation. Major metros rank among the national leaders in low unemployment rates. San Diego, Orange County, San Jose, San Francisco, and Oakland all have unemployment rates below 3. percent. Tight labor markets have led high-tech employers to receive a temporary increase in H1B visas for foreign technology workers. Reflecting the higher mix of low-skilled workers, Los Angeles unemployment rate remains substantially above other major metros. Providing increased training services for poorly equipped welfare-to-work personnel is critical to maintain sufficient labor force growth to meet demand. Construction Strong Change in Construction Employment for Year-Earlier Period Change, Year Ago 16 14 12 1 8 6 4 2 San Diego Los Angeles San Francisco Sacramento Orange Co. San Jose Oakland Sources: Bureau of Labor Statistics; WEFA August '98 August '99 Construction employment growth remains strong throughout the state. San Diego s job growth has slowed due to several major projects being completed. Despite median home prices at $4,, San Jose construction market is still strong. Los Angeles is recording construction employment growth of 7.2 percent. Orange Country and Sacramento are the only metros to witness acceleration in job creation from a year ago. EXECUTIVE SUMMARY

US$ Trillion 1 8 6 4 2 Japan France U.S. Germany UK Source: WEFA Italy Executive Summary 7th Largest Economy Current Dollars () is the envy of most advanced economies. China Korea CA Canada Mexico If were a nation, it would be the world s seventh-largest economy. may surpass Italy in the next two years for sixth place. s information technology and knowledgebased industries have made it an international powerhouse. is a Pacific Basin economy. s fate is more closely aligned with Asia than any state east of the Mississippi. Billions, US$ 12 1 8 6 4 2 Top State for FDI Foreign Direct Investment (Book Value), is the leading state for attracting foreign Texas New York Source: Trade & Commerce Agency Illinois Ohio direct investment and this is an important component of the state s economy. Much of this foreign investment is in hightechnology industries. Foreign firms desire to gain access to the newly emerging technologies of tomorrow. In, almost 4, foreign firms with over $1 billion in assets were located in. Asian foreign direct investment represents a disproportionate share of the total in, nearly 4 percent. 7 6 4 3 2 1 Japan Foreign Held Bank Assets Top Countries, June Foreign bank investments account for 2 percent of total assets in banks versus approximately 1 percent for the United States banking system. France Other Source: Trade & Commerce Agency Taiwan Korea Canada There are over 1 foreign banks operating in with assets over $117 billion. The only state with greater foreign-owned bank assets was New York, with 71 percent of total U.S. foreign bank assets. Foreign banks operating in are vitally important to the state s economic well-being. Roughly 42 percent of all business loans came from foreign bank offices at the end of 1997. 6 EXECUTIVE SUMMARY

Executive Summary is arguably the most globalized state by many measures. This is reflected in the rise in merchandise trade, cross-border service transactions, and capital flows between and other nations. This has fostered closer economic integration. Globalization is also reflected in s high level of foreign immigration and the changing ethnic demographics of the state s residents. trade with the outside world supports thousands of manufacturing, transportation, and wholesale jobs. Our research shows that foreign trade accounts for nearly one-quarter of s output, with exports directly accounting for 1 percent of gross state product. is America s gateway to the vast Asian markets. As U.S. trade with Asia expanded over the past decade, s ports disproportionately benefited. Asian expenditures on travel and tourism are major segments of the total industry. Asian receipts on Hollywood-produced films account for 1 percent of total box-office receipts. Asian purchases of business services, from engineering to advertising, comprise major segments of these industries. 7 EXECUTIVE SUMMARY

Executive Summary Change, Year Ago 4 Total Exports Asian 1 3 Other 2 1-1 -2-3 1993 Source: MISER 's Exports Stabilize Exports 1994 19 1997 1999 The Asian crisis caused a dramatic reduction in exports in. exports to the Asian 1 fell by 2 percent in. Large declines in exports of industrial machinery, computers, and electronic components were witnessed in. In the first five years of NAFTA, exports to Mexico increased by $.6 billion, or 72 percent. Reflecting weakness in European economies, s exports are falling. The worst of the impact from Asia appears to be over, as exports stabilized in the second quarter of 1999. Change, Year Ago 1 Electronics Computers 1 Instruments - -1 Asia Slows High-Tech Manufacturing Employment by Sector, High-tech manufacturing still is an important component of the state s economy. Manufacturers of computers, electronic and other special machinery equipment, and electronic components account for 22 percent of all manufacturing jobs in and an even larger share of output. There was a notable slowdown in these sectors in mid- as Asian demand collapsed. As Asian exports recover, high-tech manufacturing should resume an upward course. -1 199 1991 Source: WEFA 1992 1993 1994 19 1997 1999 Change, Year Ago 7 6 4 3 2 1-1 Source: WEFA Silicon Valley Cools Off Nonagricultural Employment 1997 San Jose Los Angeles 1999 The loss of export demand from Asia impacted regions of the state disproportionately. Prior to the Asian crisis, San Jose was recording job growth near 6. percent. By May of 1999, San Jose s job growth was. percent relative to the same period a year earlier. San Jose exports to Asia represented approximately 2 percent of gross metro product. High-tech manufacturers cut San Jose s employment by 11, jobs since the Asian crisis hit. Los Angeles benefits from higher Asian imports and did not witness a slowdown in job growth. 8 EXECUTIVE SUMMARY

Executive Summary Thousands 3 2 1-1 -2-3 -4 - Net Migration Domestic and Foreign Migration Foreign Migration Domestic Migration 1991 1992 1993 Source: U.S. Bureau of the Census 1994 19 1997 A dichotomy developed in migration patterns in the 199s. Between 199 and, over 8, more domestic migrants left the state than entered it, although this was more than offset by the influx of more than 1.1 million immigrants during the same period. Due to the severe recession in, many highskilled engineers and other workers exited the state for better economic opportunities in the Mountain states and Pacific Northwest. Net domestic migration patterns have reversed since with more people entering the state than exiting. 's Changing Population 197 Hispanic 17% Black 7% Asian 3% Source: U.S. Bureau of the Census White 73% 's Changing Population Hispanic 31% Asian 11% Black 7% Source: U.S. Bureau of the Census White 1% is undergoing a dramatic demographic change. The minority population in is quickly becoming the majority. The non-white population rose from 27 percent of the total in 197 to 49 percent in. The Hispanic and Asian shares now represent 31 percent and 11 percent of the state s total population, respectively. Hispanics are concentrated in Southern due to its close proximity to the Mexican border. The Asian population is concentrated in the San Francisco Bay Area, a major gateway for Asian immigrants. Looking at live births in the state in gives a good indication of the future demographic mix of the state. White births comprised 34.4 percent of total births in and Asian and black proportions of births were similar to their shares of the general population; Hispanic live births, however, comprised fully 47 percent of the total number of live births. Within two years, the minority population will exceed the white share. Over the next two decades, the state s Hispanic population will double and the Asian population will grow by two-thirds. During the same period, s white (non-hispanic) population will increase by 13 percent. 9 EXECUTIVE SUMMARY

1 EXECUTIVE SUMMARY

Industry From the time of the 1849 Gold Rush, a variety of diverse industrial sectors have fostered economic growth and created wealth in the state of. Agriculture became the state s primary instrument of economic growth as the gold mines closed and railroads opened s economy to markets in the east. In the 2 th century, oil, entertainment, construction, defense/aerospace, and most recently technology have been some of the more important industries shaping the state s economy. After World War II, grew at a pace that was the envy of the world. In the 2 years from 1963 to 1988 alone, real gross state product (GSP) increased nearly 2 percent. also displayed an uncanny ability to resist economic downturns as severe as the national economy in the postwar era. s near recession-proof economy was particularly evident in the early 198s. As recession crippled other regions of the country, rapid population growth, a booming technology industry, and a less cyclical industrial structure kept growing. boomed in the 198s. From 1983 to 1989, real GSP increased.1 percent annually, compared to 3.6 percent nationwide. Growth was led by defense-related manufacturing (the result of the Reagan buildup), construction, and real estate (driven by declining interest rates, a housing and office-space shortage, and Japanese investment), consumer manufacturing, and commercial aviation. Gross Product Billions of 1992 Dollars Share Change Of U.S. 1978 1978-98 Agriculture 7.1 22.2 212.7 16.1 Mining.2 4.9 -.8 4.3 Construction 26. 3.8 16.2 1.9 Manufacturing 67.7 176.1 16.1 11.7 Transportation & Public Utilities 37.3 7.6 89.3 1.6 Wholesale Trade 2.2 72. 187.7 12.7 Retail Trade.3 98..8 13.1 Finance, Insurance, Real Estate 113.3 214.9 89.7 1.6 Services 19. 214.7 97. 14.6 Government 76. 91.6 2. 11.3 Total 24.4 983.4 87. 13. Sources: BEA; BLS; U.S. Bureau of the Census; RFA Employment Thousands of Employees Share Change Of U.S. 1978 1978-98 Agriculture 228.1 278.3 22. 19. Mining 37.3 2. -31.6 4.4 Construction 42.3 61.8 49.6 1.1 Manufacturing 1,888.9 1,96.9 3.8 1. Transportation & Public Utilities 4.1 694.6 37.8 1.6 Wholesale Trade 34. 81. 49.9 11.7 Retail Trade 1,93. 2,321 4.7 1.3 Finance, Insurance, Real Estate 3.8 798. 44.1 1.9 Services 1,938.2 4,218. 117.7 11.2 Government 1,71.9 2,164. 23.6 1.9 Total 9,24.6 13,8.8 47.6 1.8 Sources: BEA; BLS; U.S. Bureau of the Census; RFA vs. U.S. - Real GDP Growth 197- vs. U.S. - Employment Growth Total Nonfarm Payroll Employment, 197- Change, Year Ago 1 United States 8 6 4 2-2 Change, Year Ago 8 6 4 2-2 United States -4 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA -4 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 11 INDUSTRY

Industry Output of Industry Billions of 1992 Dollars Manufacturing Sector Share Change Of U.S. 1978 1978-98 Durable Goods 39.3 129. 228.2 13.3 Stone, Clay, and Glass 2.3 2.4 4.3 8. Primary Metals 2.3 2.2-4.3 4. Fabricated Metal Products. 7.7 4. 8. Industrial Machinery 4.2 38.9 826.2 16. Electronic Equipment 7. 2.9 6.7 17.3 Transportation Equipment.8 9.2 8.6 6.8 Instruments 6. 8.2 36.7 24.4 Miscellaneous 1.6 3.2 1. 14.2 Nondurable Goods 28.4 47.1 6.8 8.7 Food Processing 8. 12.3 44.7 11.2 Tobacco.3. -1.. Textiles.4.9 12. 3.6 Apparel 2.1.2 147.6 18.7 Lumber and Wood Products 3.3 2.3-3.3 7.1 Furniture and Fixtures 1.7 2.1 23. 1.3 Paper Products 2.2 2.4 9.1 4.8 Printing and Publishing 6.9 8.3 2.3 1.9 Chemicals 3.9 7.7 97.4.4 Petroleum Products 2.6 6.2 138. 2.2 Rubber and Plastic Products 1. 4. 166.7 7. Leather Products.3.2-33.3.1 Total Manufacturing 67.7 176.1 16.1 11.7 Service Sector Share Change Of U.S. 1978 1978-98 Hotels and Lodging Places..9 18. 1.3 Personal Services 4.7 6. 27.7 13.6 Business Services 14.9 7 282.6 16.6 Auto Repair and Parking.9 9.3 7.6 14. Misc. Repair Services 2.6 2.3-11. 1.9 Motion Pictures 6.8 13.9 14.4 1.2 Amusement & Recreation 3.7 1.2 17.7 16.9 Health Services 33.8 4.8 2.7 1.8 Legal Services 7.9 12.6 9. 14.1 Educational Services 3.7.6 1.4 11. Social Services 1.6.2 22. 1.9 Museums and Zoos.9.4 344.4 14.8 Membership Organizations 3.3 4.7 42.4 1.6 Engineering & Management 12.7 31.9 11.2 1.3 Total Services 19 214.7 97. 14.6 Sources: BEA; BLS; U.S. Bureau of the Census; RFA Employment in Industry Thousands of Employees Manufacturing Sector Share Change Of U.S. 1978 1978-98 Durable Goods 127. 1231.9-2. 11.1 Stone, Clay, and Glass 7. 48. -16. 8. Primary Metals 7.7 3.2-39.. Fabricated Metal Products 149.3 128.1-14.2 8.6 Industrial Machinery 2.4 233.1 16.3 1.6 Electronic Equipment 194.3 269. 38.4 1.8 Transportation Equipment 23.8 169.3-33.3 9. Instruments 17.2 184.3.2 21.4 Miscellaneous 43.8 47.9 9.4 12.4 Nondurable Goods 631.9 729.1 1.4 9.6 Food Processing 184.1 182.3-1. 1.7 Tobacco 4.1. -1.. Textiles 1.8 24.9 7.6 4.2 Apparel 19.6 13.8 4.3 19.9 Lumber and Wood Products 69.6 8.1-16. 7.2 Furniture and Fixtures.4 8.7 6. 11.2 Paper Products 37. 4.4 7.7.9 Printing and Publishing 113. 11.6 34.2 9.7 Chemicals 64.2 72.3 12.6 7. Petroleum Products 27.3 21.4-21.6 1.8 Rubber and Plastic Products 64.1 7.6 17.9 7. Leather Products 12.2 6.8-44.3 8.3 Total Manufacturing 924.6 138.8 47.6 1. Service Sector Share Change Of U.S. 1978 1978-98 Hotels and Lodging Places 17.1 189.3 76.8 1.7 Personal Services 94.7 117.8 24.4 1. Business Services 313.1 1134.4 262.3 13.3 Auto Repair and Parking 82.2 13.6 86.9 13.3 Misc. Repair Services 4. 4. 12.3 11.8 Motion Pictures 73.6 186.2 13. 33. Amusement & Recreation 88.6 197. 122.9 11.7 Health Services. 91. 8. 9.1 Legal Services 1.3 118. 131. 12.1 Educational Services 121.3 24.8 68.8 9.3 Social Services 97.4 27.9 164.8 9.8 Museums and Zoos 2.8 1.4 271.4 11.3 Membership Organizations 123.2 16.2 3. 7.1 Engineering & Management 21.9 438.7 117.3 13.6 Total Service 1938.2 4218. 117.7 11.2 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 12 INDUSTRY

Industry By 1989 the economy was beginning to slow down. Declines in national defense spending with the end of the Cold War were already well under way, and the real estate market was showing signs of weakness. When the national economy slipped into recession in 199, the reduced demand for s goods and services pushed the state into its worst economic crisis since the Great Depression. The national recession of 199-91 proved that was not immune to large-scale economic disruption. Indeed, the downturn hit harder and lasted longer than it did nationally. Nationally, GDP actually increased 1.8 percent, in real terms, from 199 to 1992, while s GSP decreased nearly 1.1 percent from 199 to 1994. Despite its dramatic impact, the recession was felt unevenly within the state. functions like three states, each with its own distinct geography and economic composition that exposed it to, or shielded it from, the recession. s Central Valley, for example, with its large agricultural and food processing industries, was only moderately affected by the crisis. The economic effect on the San Francisco Bay area was greater, but was held in check by the region s diverse industrial structure and a high-tech sector that continued to grow. Southern was most seriously affected. Hardest hit was the manufacturing sector, particularly defense manufacturing, and the overbuilt and overvalued real estate market, which was due for a price correction after being destabilized by the loss of investment dollars from a Japanese economy now also in recession. 's Three Regions - Gross Product Real GSP Growth, 198- 's Three Regions - Employment Employment Growth, 198- Change, Year Ago 1 Change, Year Ago 6 8 6 4 4 2 2-2 -4-6 8 Southern Central Valley Northern 82 84 86 88 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 92 94 96 98-2 -4-6 8 Southern Central Valley Northern 82 84 86 88 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 92 94 96 98 Change, Year Ago 2 Durable Goods Nondurable Goods 1 1 - Manufacturing - Gross Product Durable and Nondurable Goods, 197- Change, Year Ago 1 Durable Goods Nondurable Goods 1 - Manufacturing - Employment Durable and Nondurable Goods, 197- -1 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA -1 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 13 INDUSTRY

Industry Despite s economic woes in the early 199s, the state s diverse economy and geography helped to localize a severe recessionary downturn. The recession also led to a fundamental shift in the structure of s economy, albeit a painful one, that would serve the state well in recent years. s recession of the 199-94 period is similar in scope to Texas and its economic downturn during the mid-198s. Each state suffered a comparable decline in employment growth, but the impact on state output in Texas was more severe than. Although the effects of recession on and Texas were similar, the triggers that pushed each state into recession were different, and highlight s diversity and resilience. Whereas slipped into recession as the result of a number of losses including defense manufacturing, real estate investment, and a general economic downturn nationwide, the bust in Texas came with the decline in price of a single commodity oil. Despite these downturns, each state came out of recession with structural changes, particularly growth in hightech manufacturing and in high-tech business, and financial services, that have enabled and Texas to perform well above the national average in recent years. With general declines in manufacturing in the early 199s, now has one of the largest service economies of any state in the Union, rivaling Florida in terms of percentage of output and employment. vs. Texas - Gross Product Growth in Real Gross State Product, 197- vs. Texas - Employment Growth Total Nonfarm Payroll Employment, 197- Change, Year Ago 1 Texas 8 United States 6 4 2 Change, Year Ago 8 6 4 2 Texas United States -2-4 -2-6 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA -4 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 8 vs. Florida - Service Industry Output Non-Manufacturing Services as of GSP vs. Florida - Service Industry Employment Non-Manufacturing Services as of GSP 9 8 8 7 8 7 7 6 6 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA Florida United States 7 6 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA Florida United States 14 INDUSTRY

Industry s banking industry has undergone a dramatic contraction over the course of nearly two decades. In 197, banking was the largest industry in in terms of output, and ranked 8 th in employment. By, however, the contribution commercial banking made to s GSP had slipped to 14 th place, and employment had fallen to 19 th. The changes experienced by are by no means limited to the state, but are symptomatic of larger trends in the U.S. commercial banking industry. These changes have been driven by crisis and recession, structural economic change, new technology, industry consolidation, and a changing regulatory environment. Like the state as a whole, s banks entered the 198s relatively unhurt by the economic turmoil of the time. Yet despite the state s economic success during much of the 8s, s banking industry performed rather poorly during the decade. This performance can be attributed to intense competition from the newly deregulated thrift industry, and a host of newly charted banks that entered the market in the early 8s. When the economy contracted in 199, banks experienced relatively few failures and low losses despite experiencing the worst recession in the state since the Great Depression. This has been attributed to the low interest rates of the time, a localization of the most serious failures to the Southern region, a failure rate highest among small community banks or newer banks chartered during the 198s, and the geographic diversity of the four statewide institutions that offset local losses by gains in other regions. Commercial Banks - Gross Product Industry Output as of Total GSP Commercial Banks - Employment Industry Employment as of Total Employment 3. 3. United States 2. 1.8 United States 2. 2. 1.6 1.4 1.2 1. 1. 1. 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA.8 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA Yearly Medians Weighted Medians* 198 1981 1982 1983 1984 198 1986 1987 1988 1989 199 1991 1992 1993 1994 198-89 199-94 U.S. Banking Industry 1.12 1.9 1.4.98.9.9.8.81.87.92.86.89 1.7 1.14 1.9.94 1. Banking Industry.79.83.37.24.44.49.1.73.87 1.4.93.6.48.46.73.63.63 Established..94.47.38.9.64.73.8.98 1.16 1.2.74.67.49.76.76.7 Community Banks** Banks Chartered -.3.4.1.6.23.27.3.64.82 1..92..38.32.62.44.7 in the 198s "Big Four" Banks.6.49.3.41.48.3. -. 1.14 1.28 1.11 -.1.6 1.14 1.1.1.78 Bank of America.4.36.34.3.34 -.41 -.48 -.96.91 1.21.91.98 1. 1.14 1.1.22 1.4 First Interstate.6.61.36.2.62.67.77-1.69 1.33 1.28 1.32 -.24.7.96.97.1.62 Security Pacific***.7.69.68.67.6.6.63 -.1 1.12 1.31.8-1.4.69 -.12 Wells Fargo..29.2 -.7-1.9.13.47.16 1.17 1.27 1.41.4.6 1.36 1.63.26 1.1 Notes: * Medians are weighted by number of banking organizations Banks in Crisis, 198-1994 Median Return on Assets for U.S. and Banking Industries, ** community banks are defined as institutions with less than $3 million in total assets. ***Acquired by Bank of America in 1992 Source: FDIC, History of the Eighties - Lessons for the Future, http://www.fdic.gov/bank/historical/history/index.html 1 INDUSTRY

Industry s relatively mild banking crisis of the early 199s is in stark contrast to the large-scale demise of Texas institutions during the mid-198s. This crisis was precipitated by the decline in oil prices, a sector that is heavily supported by banks. Loans were issued based on the speculative assumption that oil prices would continue to rise, and when oil prices began to weaken, many banks invested in real estate in an attempt to offset their losses, but soon this market collapsed as well. 689 Texas banks failed between 1987 and 199. s banking woes also continued into the 199s. Although the industry had generally recovered from recession by mid-decade, the industry continued to shrink in terms of total contribution to state output and employment. This is primarily the result of larger forces of consolidation that have swept the industry nationwide. Several factors are driving the banking industry toward consolidation. Information technology is allowing banks to increase in size while offering the same level of service, but is affordable only if its costs are spread over a large number of customers. This has encouraged consolidation as a means to reduce costs and keep prices down. The relaxation of interstate banking laws has also led to a rise in merger activity, as banks attempt to control risk by diversifying across different geographic regions, types of customers, and services offered. Despite industry contraction and consolidation, s commercial banks, like most U.S. banks, remain productive in terms of output per employee. Yet, today there are only two large statewide banks in, and only one is headquartered in the state. Commercial Banks - Gross Product Industry Output as of Total GSP Insured Commerical Banks in Number of Banks, Branches, and Offices, 197-98 3. 3. Texas United States Hunderds 4 Banks (L) Branches (R) Offices (R) Thousands 2. 2. 1. 4 3 3 4 4 1. 2 3. 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 2 7 Source: FDIC 8 8 9 3 Bank Closings and Assistance Transactions Insured Institutions, 198- Commercial Bank Mergers Insured Institutions, 198- U.S. Texas U.S. Texas Share Share Share Share Year Number Number of U.S. Number of U.S. Year Number Number of U.S. Number of U.S. 198 22.. 198 133 7.3. 1981 4. 1 2. 1981 21 11.1 2.9 1982 119 4.2 16 13.4 1982 281 4 1.4 6 2.1 1983 99 7 7.1 4 4. 1983 347 1 4.3 2.6 1984 16 7 6.6 8 7. 1984 392 1.3 7 1.8 198 18 18 1. 17 9.4 198 423 9 2.1 16 3.8 1986 24 24 11.8 31 1.2 1986 442 9 2. 29 6.6 1987 262 14.3 68 26. 1987 679 16 2.4 29 3.8 1988 47 8 1.7 26 4. 1988 771 21 2.7 266 34. 1989 34 28.2 224 41.9 1989 86 8 1.4 174 29.7 199 382 21. 141 36.9 199 34 1 2.8 129 24.2 1991 271 21 7.7 41 1.1 1991 32 13 2.4 62 11.7 1992 241 18 7. 31 12.9 1992 1 1 3. 6 11.2 1993 24 48. 1 2. 1993 16 2 3.9 62 12. 1994 1 1 66.7. 1994 9 21 3.8 31. 19 8 62.. 19 61 24 3.9 48 7.8 6 2 33.3 2 33.3 9 2 4. 61 1.9 1997 1.. 1997 62 33. 8.3 3.. 67 19 3.4 49 8.6 Source: FDIC, http://www2.fdic.gov/hsob/ Source: FDIC, http://www2.fdic.gov/hsob/ 16 INDUSTRY

Industry High-tech industries have been a primary driving force behind s economic success this decade. In, four of the ten largest industries in the state were in the high-tech field, including the first- and secondranked industries, electronic components and accessories, and computer and data processing services. High-tech industries account for over $1 billion of output, or about 1 percent of total GSP, and nearly 1 percent of state employment. From mainframes, to personal computers, to the Internet, Silicon Valley has led the world in high-tech development for over years, much the result of primary research conducted at universities in the region. The San Jose metro has the largest concentration of high-tech industries in the United States, according to the Milken Institute report, America s High-Tech Economy, and is over three times larger in size than the study s secondranked metro, Dallas. San Jose placed in the top ten for concentration in no less than six separate high-tech industries. s high-tech success story is by no means limited to Silicon Valley. In all, six metros (San Jose, Los Angeles, Orange County, Oakland, San Diego, and San Francisco) ranked in the top 2 largest technology metros, according to the Milken Institute study, with Los Angeles placing third. High-tech success in Los Angeles has come from growth in the computer equipment/components and telecommunications industries, and the technology services sector, including software, motion pictures, and multimedia. High Tech in Real Gross Product and Employment, 197- High Tech in the United States Real Gross Product and Employment, 197- Billions of 1992 Dollars 16 Gross Product (L) Employment (R) 14 Millions 1.3 1.2 Billions of 1992 Dollars 8 Gross Product (L) Employment (R) 7 Millions 7. 7. 12 1 8 6 1.1 1..9.8 6 4 3 6. 6... 4. 4.7 2 4. 2 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA.6 1 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 3. Regional High Tech - Gross Product High-Tech Output in 's Three Regions, 197-98 Regional High Tech - Employment Tech Employment in 's Three Regions, 197-98 Billions 8 6 4 Southern Northern Central Valley Thousands 6 4 3 2 2 1 Southern Northern Central Valley 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 17 INDUSTRY

Industry Computer Equip. & Components - Gross Product Industry Output as of Total GSP Computer Equip. & Components - Employment Industry Employment as of Total Emp. 3. 3. 2. 2. Computers and Office Equipment Electronic Components and Accessories 1.6 1.4 1.2 1. 1. 1... 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA.8.6 7 Computers and Office Equipment Electronic Components and Accessories 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA Electronic components and accessories, and computers and office equipment were ranked first and fifth, respectively, in terms of their contribution to GSP in. Combined, accounts for nearly 3 percent of nationwide employment in these two industries, yet these figures are down from a mid-8s peak. The desire of firms to seek cost savings by relocating facilities to less expensive regions around the U.S. and the world, and the development of less labor-intensive computer and semiconductor production techniques are responsible for the decline. While employment in the production of computer hardware has fallen, in relative terms, over the past decade and a half, has witnessed steady growth in the computer and data processing services industry. In, this industry ranked second in terms of contribution to gross state product, with accounting for 21 percent of nationwide industry employment. The largest segment of the computer and data processing services industry is the software segment, which was valued at over $12 billion in and provides over 6, jobs nationwide. On a value-added basis, software is the third-largest manufacturing business in the U.S. (exceeded only by automobiles and electronics) and is soon expected to surpass the auto industry as the largest contributor to the economy. Industry output has surged in recent years with the growth of the Internet. Between 1994 and, for example, industry output in has nearly doubled, while employment has increased 7 percent. Computer & Data Processing Serv. - Gross Product Industry Output as of Total GSP Computer & Data Processing Serv. - Employment Industry Employment as of Total Employment 3. 2. 2. United States 2. 1. United States 1. 1. 1.... 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA. 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 18 INDUSTRY

Industry Aerospace - Gross Product Industry Output as of Total GSP Aerospace - Employment Industry Employment as of Total Employment 1.6 1.4 1.2 United States 2. 2. United States 1..8.6 1. 1..4.2.. 7 8 8 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 9. 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA One of the few high-tech industries to suffer significant losses over the past two decades in has been the aerospace industry. With the end of the Cold War, defense cutbacks in the early 199s hit the state hard, resulting in mass industry unemployment. The impact was hardest felt in Southern. Between 199 and 1994, defense-related employment fell from 191, to 114, a 4 percent decline. In an attempt to cut their losses and diversify, many aerospace firms converted to civilian production, including multimedia, digital technology, and, most successfully, the telecommunications service (telephone communications) and hardware (communications equipment) industries. The boom in telecommunications in the early to mid- 9s came on the heels of innovation that was reducing the cost of technologies such as wireless communications, and driving demand for long distance and Internet service. Between 199 and, the telephone communications and communications equipment industries grew over 1 percent in, and today are ranked 6 th and 11 th, respectively, in terms of their contribution to GSP. Like, Texas has also sought to boost its stake in the telecommunications and high-tech industries in an attempt to diversify its economy in the wake of economic turmoil. Attracting companies with low costs, a skilled workforce, and business-friendly environment, Texas now boasts an electronic components and accessories industry that is the second largest contributor to gross state product. Telephone communications is ranked third, computer and data processing services sixth, and communications equipment eighth. Communications Equipment - Gross Product Industry Output as of Total GSP Telephone Communications - Gross Product Industry Output as of Total GSP 2. 1. Texas United States 3. 2. Texas United States 1. 2.. 1.. 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 1. 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 19 INDUSTRY

Industry s commercial and residential real estate markets were overbuilt and overpriced as they entered the 199s. Developers, investors, and lenders were relying upon continued growth to fuel market demand, but declines in manufacturing (particularly in Southern ), the loss of overseas investment, and the effects of a nationwide recession destabilized the industry. In Los Angeles County, the commercial real estate bust was exacerbated by a wave of corporate restructuring that reduced demand, and the addition of 16.2 million square feet of office space in 199-1991 from the completion of existing projects. Rents and purchase prices fell, and vacancy rates rose. In residential markets, the median price of a single-family home in the state fell nearly 12 percent between 1991 and, from a 1991 high of $2,66. Home prices fell 21 percent in Los Angeles during the same period. It was not until that the construction market began to recover, and it has remained strong since that time. Employment in the construction industry was up 7.8 percent in 1997 and 8.3 percent in. Stable interest rates, pent-up demand, and available capital has contributed to the industry s recovery. The median home price in in July 1999 was $222,1. In the San Francisco Bay area the median price was $34,, as demand for housing has reached unprecedented levels with the boom in Silicon Valley. Concerns of an affordability crisis in the area have been raised, particularly if interest rates continue their upward trend. Single-Family Homes - Price Median Existing Single-Family Home Price Metropolitan Office Vacancy Rates Selected Cities, 198-1999 US$ Thousands 3 Los Angeles 3 San Francisco United States 2 2 2 2 1 1 1 1 8 82 84 86 88 9 92 94 96 98 Sources: US Bureau of the Census; State of ; Calif. Association of Realtors Los Angeles San Diego San Francisco United States 86 88 Sources: CB Commercial; RFA 9 92 94 96 98 General Building Construction - Gross Product Industry Output of Total GSP General Building Construction - Employment Industry Employment as of Total Employment 1.4 1.3 United States 1. 1.4 United States 1.2 1.3 1.1 1.2 1. 1.1.9 1..8.9.7 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA.8 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 2 INDUSTRY

Industry has led the nation in agricultural production for over years. Producing 2 crop and livestock commodities (and leading the nation in the production of 7), the state has one of the most diverse agricultural economies in the world. produces over half of the nation s fruits, nuts, and vegetables on only 3 percent of America s farmland. s farms contributed $14.1 billion to GSP in a figure that has increased 14 percent since 197, even though employment declined 28 percent during the same period. Gains in output per employee, which averaged $8, in, are responsible, despite being nearly half the national average. s diverse, and often labor-intensive agricultural economy is likely to blame for this small increase. Agriculture is particularly critical to the economy of the Central Valley region, where farm-related industries create nearly a third of all jobs and generate one of every three dollars of personal income. In addition to agricultural production, is also a leader in food processing (food and kindred products), which was valued at $12.3 billion in, and has increased 72 percent since 197. Unlike agricultural production, s food processors have increased their employee base a modest 4 percent since 197. Output per employee was $67,3 in, which is down 1 percent from a 19 peak of $79,3. s agricultural exports were valued at $8.4 billion in and make up about 1 percent of the U.S. total. Asia and the Pacific Rim account for about percent of exports, followed by Canada and Mexico. Agricultural Production - Output Annual Output Per Employee Agricultural Production - Emplyment Industry Employment as of Total Employment US$ Thousands 16 United States 14 12 1 8 3. 3. 2. 2. United States 6 4 2 1. 1. 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA. 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA Food & Kindred Products - Output Annual Output Per Employee Food & Kindred Products - Employment Industry Employment as of Total Employment US$ Thousands 8 United States 7 6 4 2.4 2.2 2. 1.8 1.6 1.4 United States 3 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 1.2 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 21 INDUSTRY

Industry Government accounts for nearly 2.2 million jobs in, or about 16 percent of state employment. Total government employment in has increased 4 percent since 1993, despite a 2 percent decline in federal employment in the same period. Reduction in federal employment has been due primarily to a decline in defense expenditures and the closure of military bases around the state. About one million jobs, or over half of state and local employment, are in education. This figure has risen in recent years with increased student enrollment and mandated reductions in statewide classroom size. is on the verge of a demographic transition that will have a significant impact on public services and employment. This transition comes from two distinct demographic events that will affect the state in the coming years. The first of these is the retirement of the leading edge of the Baby Boom generation, as the statewide population of citizens over 6 increases from 1.4 percent in 2 to 13 percent in 22. Second, is the influx of mostly young immigrants into the state combined with the demands of the children of boomers ( echo boomers ) as they become young adults. Between 2 and 22, s population is expected to increase by almost 17 million. Each of these cohorts will place different demands on government services. Retirees will require health care and medical services, while immigrants and young adults will require educational services in addition to a general expansion in infrastructure and municipal services associated with a population increase. Government - Employment 197-98 Government - Employment Industry Employment as of Total Employment Thousands 4 Federal (L) State (L) 4 Local (R) 3 3 2 2 Millions 1. 1.4 1.3 1.2 4. 4. 3. 3. 2. 2. 1 Federal (L) State (L) Local (R) 14 13 12 11 1 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 1.1 1. 7 8 8 9 Sources: BEA; BLS; U.S. Bureau of the Census; RFA 1 Population Projections 2-22 2 2 21 22 Age Thousands Thousands Thousands Thousands -4 2,678 8.2 2,782 8.1 3,622 8.8 4,318 8.8-17 6,672 2. 7,164 2.8 8,184 19.8 1,191 2.7 18-24 3,131 9.6 3,638 1.6 4,718 11.4,12 1. 2-64 16,63 1.2 17,43. 2,384 49.3 23,2 47.1 6+ 3,387 1.4 3,44 1. 4,46 1.8 6,424 13. Total 32,21. 1. 34,441. 1. 41,373. 1. 49,28. 1. Source: US Bureau of the Census, http://www.census.gov/population/projections/state/stpjage.txt 22 INDUSTRY