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Economic Outlook Government Finance Officers of Arizona August 10, 2012 Alan E. Maguire

Economic Outlook “Where are we going?” • US Economy in the Global Economy

• Arizona Economy in the US Economy

• Drivers of Economic Growth

Economic Outlook “Where are we going?”

• US Economy in the Global Economy • Arizona Economy in the US Economy

• Drivers of Economic Growth

US Economic Outlook US Economy in the Global Economy How We Got Here The Current Context

The Outlook Long-Term Trends Lessons from the Past

US Economic Outlook How We Got Here “Those who don't know history are destined to repeat it.” -- Edmund Burke

• End of the “Great Moderation” • Federally Induced Housing Bubble • Easy Money Postponed Recession

US Economic Outlook What Happened? • The “House of Cards” Collapsed Housing as Investment Vehicle End of the Housing Run Destabilization of Massive Mortgage Debt Financial Market Contagion Worldwide Consequences

• PLUS Cyclical Recession – On Top!

US Economic Outlook What Happened? • Expanded, Unsophisticated Investors • Counterparty Risk and Inter-dependence Credit Enhancement Unquestioned Faith in Contracts

• Failure of Mutual Confidence • Liquidity Crisis

US Economic Outlook What Happened? • Arizona Among Hardest Hit – Why? Existing Strong Housing Industry Historical Growth Pattern Projected Housing Demand Quadruple Counting the Same Buyers

• Others Affected – Nevada, Florida,…

US Economic Outlook The Current Context • Current Conditions • Gross Domestic Product Trends • Employment Trends • Current Challenges

US Economic Outlook The Current Context • Cyclical Recession Over Since Mid 2009 Relatively Short Recession in GDP Terms, but Deep

• US Financial Crisis Has Been Contained Some Major Issues to Clean-up – Fannie, Freddie, Privates

• So, ………….

US Economic Outlook The Current Context • Stagnant Growth for “Recovery” period • Historical Recovery Drivers Missing • Remnants of Double Whammy Remain International Issues Consumer Mortgage Debt / Other Debt Overhanging Housing Supply Battered Consumer Confidence

US Economic Outlook

*

US GDP Quarterly Change 1970 - 2012 10.0

GDP

8.0 6.0 4.0 2.0 0.0

-6.0 -8.0

Recessions

10 20

-4.0

06 20

02 20

98 19

94 19

90 19

86 19

82 19

78 19

74 19

70 19

-2.0

US Economic Outlook

*

US GDP Quarterly Change 1970 - 2012 10.0

GDP

8.0 6.0 4.0 2.0 0.0

-6.0 -8.0

Recoveries

10 20

-4.0

06 20

02 20

98 19

94 19

90 19

86 19

82 19

78 19

74 19

70 19

-2.0

US Economic Outlook

*

US GDP Quarterly Change 1970 - 2012 10.0

GDP

8.0 6.0 4.0 2.0 0.0

-6.0 -8.0

Recoveries

10 20

-4.0

06 20

02 20

98 19

94 19

90 19

86 19

82 19

78 19

74 19

70 19

-2.0

US Economic Outlook

*

US GDP Quarterly Change 1970 - 2012 10.0

GDP

8.0 6.0 4.0 2.0 0.0

10 20

06 20

02 20

98 19

94 19

90 19

86 19

82 19

-8.0

78 19

-6.0

74 19

-4.0

70 19

-2.0

US Economic Outlook

*

US GDP Quarterly Change 2009 - 2012 10.0

GDP

8.0 6.0 4.0 2.0 0.0

2012

-8.0

2011

-6.0

2010

-4.0

2009

-2.0

US Economic Outlook US GDP Quarterly Change 2009 - 2012 10.0

GDP

8.0 6.0 4.0

??

2.0 0.0

2012

-8.0

2011

-6.0

2010

-4.0

2009

-2.0

US Economic Outlook 8.0

*

US Employment % Change from Prior Year 1970 - 2011

Employment

6.0

4.0

2.0

0.0

-4.0

Recoveries -6.0

-8.0

12 20 10 20

00 20

90 19

80 19

70 19

-2.0

US Economic Outlook 8.0

*

US Employment % Change from Prior Year 1970 - 2011

Employment

6.0

4.0

2.0

0.0

-4.0

Recoveries -6.0

-8.0

12 20 10 20

00 20

90 19

80 19

70 19

-2.0

US Economic Outlook 8.0

US Employment % Change from Prior Year 1970 - 2011

Employment

6.0

4.0

2.0

0.0

-4.0

Recoveries -6.0

-8.0

12 20 10 20

00 20

90 19

80 19

70 19

-2.0

US Economic Outlook 8.0

US Employment % Change from Prior Year 1990 - 2010

6.0

120

110

100 2.0 90 0.0

12 20 10 20

00 20

90 19

80 19

-2.0

80

70 -4.0

-6.0

-8.0

60

50

Total Employment

4.0

70 19

Employment Growth

*

US Economic Outlook 8.0

US Employment % Change from Prior Year 1990 - 2010

6.0

120

110

100 2.0 90 0.0

12 20 10 20

00 20

90 19

80 19

-2.0

80

70 -4.0

-6.0

-8.0

60

50

Total Employment

4.0

70 19

Employment Growth

*

US Economic Outlook 8.0

US Employment % Change from Prior Year 1990 - 2010

110

100 2.0 90 0.0

12 20 10 20

00 20

90 19

80 19

-2.0

80

70 -4.0

-6.0

-8.0

60

50

Total Employment

4.0

70 19

Employment Growth

6.0

120

US Economic Outlook The Outlook – Near Term • Substantial Deterrents to Growth & Investment International Issues – Especially Europe Collapsing EU Fiscal / Banking Systems Weak Demand – Scared Consumers & CEOs Continuing Uncertainty! • Expectations of Rising US Taxes- “Fiscal Cliff” • Structural Workforce Issues

US Economic Outlook The Outlook – Near Term • European Situation Unsustainable Deficits AND Debt Levels Use of Debt for “Operating Expenses” Shrinking Productive Class • Expectations of Resolution

Based on Hope not Analysis • Public vs. Private Sector Ratio

US Economic Outlook The Outlook – Near Term • European Debt and Deficits

•

Bond Write-downs = Controlled Default Broad-based Bank & Investor Losses Government Fiscal Crises

European Financial Stability Facility European Financial Stability Mechanism European Stability Mechanism @ 7/13 • Risk of Contagion

US Economic Outlook The Outlook – Near Term • Europe’s Impact on Global Economy One-Quarter of Global Economy Linked to China and the to US • European Recession Now Likely From Low Growth to Negative Growth Lack of Economic Catalysts Uncertainty

US Economic Outlook Long Term Trends • Worldwide Demand Issues • Europe’s Issues

• Japan’s Issues High Debt and Pending Liquidation • Asia’s Cultural / Governmental Challenges

America Alone? -- Again?

US Economic Outlook Long Term Trends America’s Challenges and Prospects • Massive and Growing Federal Fiscal Crisis

• Demographic Trends • Labor Force Skills Gap

• Loss of Mid-skill Employment

US Economic Outlook Long Term Trends America’s Challenges and Prospects • Strong, Agile Markets

• Tradition of Productivity • Fully Developed Infrastructure

• Finest Higher Education System • Highest Caliber “Rule of Law”

US Economic Outlook Long Term Trends • Decades in the Making – Not Days in the Fixing Improve Labor Force Skills Reinvigorate Personal Responsibility Reduce Barriers to Production The power to tax is the power to destroy. -- John Marshall, First Chief Justice

The power to regulate is the power to eliminate .

Economic Outlook “Where are we going?” • US Economy in the Global Economy

• Arizona Economy in the US Economy • Drivers of Economic Growth

AZ Economic Outlook AZ Economy in the US Economy The Current Context

The Outlook Long-Term Trends Lessons from the Past

AZ Economic Outlook The Current Context

• Recent AZ Employment Trends

• Current Challenges

*

AZ Economic Outlook AZ Employment 2001 – 2012 (000’s) 2,800

2,600

All Industries 2,400

2,200

20 12

20 11

20 10

20 09

20 08

20 07

20 06

20 05

20 04

20 03

20 02

20 01

2,000

*

AZ Economic Outlook AZ Employment 2001 – 2012 (000’s) 2,800 260

2,600

Construction

220

2,400

Manufacturing

2,200

180

All Industries

140

20 12

20 11

20 10

20 09

20 08

20 07

20 06

20 05

20 04

20 03

100

20 02

20 01

2,000

*

AZ Economic Outlook AZ Employment 2001 – 2012 (000’s) 2,800 260

2,600

Construction

220

2,400

Manufacturing

2,200

180

All Industries

140

20 12

20 11

20 10

20 09

20 08

20 07

20 06

20 05

20 04

20 03

100

20 02

20 01

2,000

*

AZ Economic Outlook AZ Employment 2001 – 2012 (000’s) 2,800

2,600

All Industries

300,000 jobs

2,400

2,200

20 12

20 11

20 10

20 09

20 08

20 07

20 06

20 05

20 04

20 03

20 02

20 01

2,000

*

AZ Economic Outlook AZ Employment 2001 – 2012 (000’s) 2,800

2,600

All Industries 2,400

65,000 jobs 75,000 PRIVATE jobs 2,200

20 12

20 11

20 10

20 09

20 08

20 07

20 06

20 05

20 04

20 03

20 02

20 01

2,000

AZ Economic Outlook The Current AZ Context • Still Challenging US Conditions

• Continuing Uncertainty – Nationally / Globally

• Positive AZ Trends

AZ Economic Outlook The Current AZ Context • Returning to Government Fiscal Balance

• Above National Average Job Growth Rates

• Benefit of A “Low Base” to Build From Beware of the “Illusion of Recovery”

AZ Economic Outlook The AZ Outlook • Substantial Drags and Risks Still Exist

• Historic Drivers Are Weak • Not Like Historical Patterns

AZ Economic Outlook The AZ Outlook • Expect Very Slow, but Positive Growth Existing Capacity Available for Growth -- Without Capital Spending -- With Little New Hiring

• Still Strong Fundamentals in Arizona Positive Business and Social Climates

We’re Not California!

AZ Economic Outlook The Good AZ News • 5th in Job Growth – From 49th! 70,000 + jobs added since June 2010

• Retail Spending Rising (Autos, Durables) Az Retail Sales up about 6% Outlook Hopeful, but Concerned • Arizona Recovery Underway (Overhanging Risk)

Economic Outlook The Good AZ News • Economic Estimates Commission Forecast PERSONAL INCOME FY10

FY11

FY12

FY13

-1.7%

5.0%

5.2%

5.6%

POPULATION

FY10

FY11

FY12

FY13

0.4%

0.4%

1.0%

1.1%

Economic Outlook The Good AZ News • Blue Chip Economic Forecast Calendar 2012 over 2011 % Growth PI

Retail

Employ

5.0

6.1

1.8

Pop Housing 1.1

27

Calendar 2013 over 2012 % Growth PI

Retail

Employ

5.7

6.6

2.4

Pop Housing 1.3

38

AZ Economic Outlook AZ Long Term Trends • More Integrated Economically Not just the “Five C’s” anymore

• More Dependent on US / Global Economies • Same Core Challenges as US Labor Force Issues Global Demand Constraints

Economic Outlook “Where are we going?” • US Economy in the Global Economy

• Arizona Economy in the US Economy

• Drivers of Economic Growth

Economic Outlook Drivers of Economic Growth Business Investment and Human Productivity

 Disposable Incomes and Consumer Spending

Population Growth

Economic Outlook Business Investment and Productivity • Continuing Transition of “Mechanization” Water Wheel to Pump Hand Built to Assembly Line Typewriter to E-mail

• Massive Increases in Returns to Factors of Production – Especially Labor

• Positive Impacts on Human Productivity

Economic Outlook Rising Disposable Income • Rising Incomes and Standards of Living Declines in Relative Cost of Essentials Widespread Access to Better Living

• More Income Left after “Necessities” Higher “Disposable” Incomes Increasing Discretionary Spending

• Challenge of Expanding “Wishes vs. Needs”

Economic Outlook Population Growth • Growing Employment Drives Population

• Population Drives Further Expansion

• Population Means Consumption and Production

Economic Outlook Productivity and Income Levels • Compensation of the Factors of Production Labor

Materials Capital

• Rising Productivity means Rising Incomes Key Measure: Unit Output for Unit Input Steady Increases Since Industrial Revolution – Will it Continue?

Economic Outlook The “Wealth of Nations” “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations. “According therefore, as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniences for which it has occasion. “But this proportion must in every nation be regulated by two different circumstances; first by the skill, dexterity, and judgment with which its labour is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed.” -- Opening three sentence to The Wealth of Nations, by Adam Smith, 1776

Economic Outlook The “Wealth of Nations” • …The annual labour of every nation… supplies it with all … it annually consumes • …as this produce… bears a greater or smaller proportion to the number… who… consume it, the nation will be better or worse supplied • this proportion must … be regulated by two different circumstances; first by the skill, dexterity, and judgment with which its labour is… applied; and, secondly, by the proportion between the number of… employed in useful labour, and that… not… employed.”

AZ Economic Outlook Arizona’s Historic Development Drivers Open Markets

Easy Access to Key Factors of Production

Constructive Self-Selection

AZ Economic Outlook Open Markets • Culturally, Socially, and Economically Open In-Migrants Readily Assimilated No Rigid Hierarchies • Positive Transportation Patterns Historically Good Roads Beneficial Geographic Location

AZ Economic Outlook Easy Access to Key Factors of Production • Strong, Trained, Willing Labor Force Growing Population Good Educational Institutions • Readily Available Land, Water, Other Commodities • Reliable Affordable Energy

AZ Economic Outlook Constructive Self-Selection • American Exceptionalism Squared Self-Selection from Self-Selected • Employment Drawn Migration

• Absence of Antiquated Infrastructure

Economic Outlook Conclusion

Better in US than Elsewhere

Better in Arizona than Elsewhere!

Economic Outlook Government Finance Officers of Arizona August 10, 2012 Alan E. Maguire