Elliott D. Pollack & Company To: GFOAZ By: Jim Rounds Senior Vice President Elliott D. Pollack & Company February 21, 2014 Economic Outlook 2014-2015

Elliott D. Pollack & Company

To:GFOAZ

By:Jim Rounds

Senior Vice PresidentElliott D. Pollack & Company

February 21, 2014

Economic Outlook2014-2015


Economic Crisis Du Jour

• European Debt;• U.S. Debt Ceiling;• Rating Downgrade;• ObamaCare;• Fiscal Cliff;• Sequestration;• Govt. Shutdown;• Debt Ceiling…Again;• And Again… No growth for

you!


What is

real?


United States Real Gross Domestic Product* Annual Growth 1970 - 2015**

Source: U.S. Bureau of Economic Analysis & Blue Chip Economic Indicators

0.2%

3.3%

5.2%

5.6%

-0.5%-0.2%

5.4%

4.6%

5.6%

3.2%

-0.2%

2.6%

-1.9%

4.6%

7.3%

4.2%

3.5%3.5%4.2%

3.7%

1.9%

-0.1%

3.6%

2.7%

4.0%

2.7%

3.8%

4.5%4.5%4.8%

4.1%

0.9%

1.8%

2.8%

3.8%3.4%

2.7%

1.8%

-0.3%

-2.8%

2.5%1.8%

2.8%

1.9%

2.8%3.0%

-4%

-2%

0%

2%

4%

6%

8%

* Based on chained 2009 dollars.

** 2014 and 2015 are a forecast from the Blue Chip Economic Indicators, January 2014.

Recession Periods

3.8% = 40-year avg during expansion

3.2% = 20-year avg during expansion


US Non-Farm EmploymentChange from Prior Month (S/A)

June 2010 – January 2014Source: Bureau Labor of Statistics

-122

-61-42

-57

241

137

7170

168

212

322

102

217

106122

221

183164196

360

226243

9611088

160150161

225203214

197

280

142

199199201

149

202

164

237

274

75

113

(250)

(200)

(150)

(100)

(50)

0

50

100

150

200

250

300

350

400

Feel Better When >200k


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

U.S. Unemployment Rate 1970 – 2014*

Source: Bureau of Labor StatisticsRecession Periods

*Seasonally adjusted data through January 2014

Underemployment = 12.7%


U.S. Leading Indicators1971 – 2013*

Source: The Conference Board

30

40

50

60

70

80

90

100

110

120

Recession Periods

*Data through December 2013


10 Components of U.S. Leading Indicators – December 2013

• Interest rate spread• Manuf. new orders index• Leading Credit Index (inverted)• Stock prices• Manuf. new orders – consumer goods• Manuf. hours• Consumer expectations• Manuf. new orders – capital goods• Building permits• Claims for unemployment (inverted)

+

-


Consumer Confidence1978 – 2013*

Source: The Dismal Scientist

20

30

40

50

60

70

80

90

100

110

120

130

140

150

*Data through December 2013.

Recession Periods

Weary

Worried

Disenfranchised P.O.’d


WEALTH EFFECT

Housing prices are up.

Stock market is up.


Financial Obligation Ratio**1980 – 2013*

Source: Federal Reserve

15.0%

16.0%

17.0%

18.0%

19.0%

*Data through third quarter 2013**Ratio of mortgage and consumer debt (including auto, rent and tax payments) to disposable income.

Recession Periods


Household Debt CompositionPercent Change Year Ago

2004 – 2013* Source: The Federal Reserve Bank of New York Recession Periods

* Data through third quarter 2013.


Interest Rate Monthly Payment

3.0% $449.22

4.0% $460.00

5.0% $471.78

6.0% $483.32

7.0% $495.03

8.0% $506.91

9.0% $518.96

10.0% $531.18

How Rate Sensitive?$25,000 Car Loan Payments

5-Year Term


Interest Rate

$150,000Loan

$200,000Loan

$250,000Loan

3.0% $632.41 $843.21 $1,054.01

4.0% $716.12 $954.83 $1,193.54

5.0% $805.23 $1,073.64 $1,342.05

6.0% $899.33 $1,199.10 $1,498.88

7.0% $997.95 $1,330.60 $1,663.26

8.0% $1,100.65 $1,467.53 $1,834.41

For Comparison:Mortgage Payments

30-Year Term

Interest Rate

$150,000Loan

$200,000Loan

$250,000Loan

3.0% $632.41 $843.21 $1,054.01

4.0% $716.12 $954.83 $1,193.54

5.0% $805.23 $1,073.64 $1,342.05

6.0% $899.33 $1,199.10 $1,498.88

7.0% $997.95 $1,330.60 $1,663.26

8.0% $1,100.65 $1,467.53 $1,834.41


Business


Business Spending on EquipmentPercent Change from Prior Quarter

2005 – 2013* Source: Bureau of Economic Analysis

Recession Periods

*Data through third quarter 2013


Business Spending on Plant Percent Change from Prior Quarter

2005 – 2013* Source: Bureau of Economic Analysis

Recession Periods

*Data through third quarter 2013Note: Data smoothed in Q1 of 2011


Hours WorkedPercent Change from Year Ago

1976 – 2013* Source: Bureau of Labor Statistics

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Recession Periods

*Data through third quarter 2013


US Non-Farm EmploymentPercent of Persons Working Full Time (S/A)

1970 – 2013*Source: Bureau Labor of Statistics Recession Periods


LT Average


Top Sources of New JobsU.S.

Source: Bureau of Labor Statistics

Job Growth Wage

Total 2,238,000 $49,200

1 Administrative Services 435,900 $34,870

2 Food Services 347,900 $16,242

3 Retail Trade 316,700 $27,729

4 Health Care 277,900 $45,407

5 Professional services 220,200 $83,357

6 Construction 180,000 $52,294

7 Wholesale Trade 98,500 $68,226

*Job growth January 2014/ January 2013


Jobs are being created at a slow rate.

Those that have jobs are spending a little more but will remain cautious.

Unemployment should trend lower.

Wealth levels are improving.

Consumer Summary:


Businesses are in better shape.

Spending on equipment to continue to grow.

Spending on plant will lag until capacity utilization goes higher…getting close.

Employment to continue to grow.

Business Summary:


Federal Government


Arizona At Risk For Spending CutsFederal Spending as Percent of State GDP

Pew Center for the States

National Average = 5.3%


What will they bring us this spring? Impact of the shutdown was overstated. We don’t want to go through this again though.

Federal Government Summary:


Arizona Jobs?


2

1

323 15

11

9

4

5

Alaska 24

710

Job Growth 2006Source: US BLSSource: US BLS

Jobs growing

Jobs declining

Top 10

Hawaii

6

8

50

14


49

46

2341 40

3

43

27

50

Hawaii

39

1

Alaska 2

1848

4

10

5

Jobs growing

Jobs declining

Top 10

8

6

9

7

Job Growth 2010Source: US BLSSource: US BLS

32


9

49

14 5

3

43

17

11

4

1

2

Alaska 50

Jobs growing

Jobs decliningTop 10

Hawaii

26

821

Job Growth 2013*Source: US BLS

6

7

10

*Pre-revisions


Arizona RankEmployment Growth

1990-2013Source: Bureau of Labor Statistics

*Pre-revisions


Arizona Employment* Source: ADOA

Sectors in Decline

Net

Change%

Change

Government -4,400 -1.0%

Manufacturing -2,500 -1.6%

Other Services -100 -0.1%

*December 2013/ December 2012

Sectors Improving

Net

Change%

Change

Trade, Transp. & Utilities 15,100 3.1%

Education & Health Services 12,800 3.4%

Financial Activities 10,400 5.8%

Professional & Bus. Services 6,600 1.8%

Leisure & Hospitality 6,400 2.4%

Construction 4,900 4.2%

Information 300 0.8%

Natural Resources & Mining 100 0.8%


Top Sources of New JobsArizona

Source: Bureau of Labor Statistics, ADOA

*Job growth December 2013/ December 2012

Job Growth Wage

Total 49,600 $45,237

1 Financial Activities 10,400 $59,564

2 Health Care 9,500 $47,847

3 Retail Trade 8,200 $29,843

4 Professional Services 6,600 $49,866


6 Food Services 5,000 $16,452



Top Sources of New JobsU.S.

Source: Bureau of Labor Statistics

Job Growth Wage

Total 2,193,000 $49,200

1 Administrative Services 411,300 $34,870

2 Retail Trade 406,900 $27,729

3 Food services 294,000 $16,242

4 Health Care 281,400 $45,407

5 Professional services 175,800 $83,357



*Job growth December 2013/ December 2012


Arizona Job Losses Exceeded U.S.Source: Bureau of Labor Statistics, Seasonally Adjusted Data

Slide stolen from Lee McPheters…


Arizona Jobs Regained Since Bottom of CycleMost Industries Yet To Regain Lost Jobs

Source: U.S. Bureau of Labor Statistics, Thousands of Jobs, Seasonally Adjusted, As of December 2013


Greater Phoenix Employment* Source: ADOA

Sectors in Decline

Net

Change%

Change

Manufacturing -2,100 -1.8%

Government -2,100 -0.9%

Natural Resources and Mining

-300 -7.7%


Sectors Improving

Net

Change%

Change


Education & Health Services 10,900 4.2%

Financial Activities 8,300 5.5%

Professional & Bus. Services 6,300 2.2%

Leisure and Hospitality 5,200 2.8%

Construction 5,000 5.6%

Other Services 1,000 1.6%

Information 400 1.3%


Employment Levels: Greater Phoenix back to Peak in 2016?

Source: ADOA

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2,000.0

2,200.0

2,400.0

Recession Periods

Peak

*Based on seasonally unadjusted monthly data


Tucson


Tucson Total Nonfarm Employment NSA

1990 – 2013*Source: Bureau of Labor Statistics

Recession Periods

200,000

250,000

300,000

350,000

400,000

450,000



Tucson Employment* Source: ADOA

Sectors in Decline

Net

Change%

Change

Construction -1,000 -6.7%

Government -800 -1.0%

Professional & Business Services

-400 -0.8%

Information -300 -7.0%

Other Services -200 -1.6%

Manufacturing -100 -0.4%


Sectors Improving

Net

Change%

Change


Financial Activities 800 4.2%

Leisure & Hospitality 400 1.0%

Education & Health Services 200 0.3%

Natural Resources & Mining 100 4.8%


Remainder of State


Balance of State Employment* Source: ADOA

Sectors in Decline

Net

Change

Government -1,500

Other Services -900

Manufacturing -300


Sectors Improving

Net

Change

Education & Health Services 1,700

Financial Activities 1,300

Construction 900

Leisure & Hospitality 800

Professional & Business Services 700

Trade, Transp. & Utilities 600

Natural Resources & Mining 300

Information 200


Population?


Why did population flows slow?

Slow job growth, High un(der)employment, Delayed retirement, Difficulty in selling home, Difficulty in qualifying for a loan, Etc.


2

4

8

1

10

Arizona Population Growth Was

Slow But Still Top 10 in 2012

Percent Change 2012

7

U. S. Census Bureau

65

39


Arizona Rank - Population Growth1991-2012

Source: Census Bureau


1

9

4

2

7

10

6

5

8

31 States in Red Lost Domestic Population to 19 States in Green

Texas, Florida, Arizona Attracted Most Domestic Migrants in 2012

3AlaskaHawaii

U.S. Census Bureau

Slide stolen from Lee McPheters…


Arizona Domestic Migration Ranking

Source: U.S. Census Bureau

Year Rank

2005 2

2006 3

2007 4

2008 3

2009 11

2011 12

2012 3

*No data available for 2010


Arizona International Migration Ranking

Source: U.S. Census Bureau

Year Rank

2005 8

2006 9

2007 8

2008 9

2009 8

2011 8

2012 18

*No data available for 2010


Housing?


Greater Phoenix Single Family Permits

Source: RL Brown

Year Permits % chg

2004 60,872 27.6%

2005 63,570 4.4%

2006 42,423 -33.3%

2007 31,172 -26.5%

2008 12,582 -59.6%

2009 8,027 -36.2%

2010 6,822 -15.0%

2011 6,794 -0.4%

2012 11,615 71.0%

2013 12,785 10.1%


Single Family Permits Greater Phoenix 1975–2016*

Source: RL Brown & Elliott D. Pollack & company

8.711.1

22.3

28.9

18.8

11.510.6

11.6

19.4 18.1

22.623.2

17.915.1

12.010.6

13.7

18.4

22.7

27.428.5

29.631.7

36.035.3

34.736.2

38.9

47.7

60.9

63.6

42.4

31.2

12.6

8.06.86.8

11.612.8

15.819.0

24.0

0

10

20

30

40

50

60

70

# Permits(000)

*2014 – 2016 forecast is from Elliott D. Pollack & Company


Home Prices IndicesGreater Phoenix

1989 – 2013* Source: Macro Markets, LLC; AMLS

60

80

100

120

140

160

180

200

220

240

MLS Index Case-Shiller Index Trendline (4.0%)

Recession Periods

*Data through November 2013.


2,1012,555

4,096

5,2815,795

4,8825,2745,363

6,547

7,2417,172

6,8677,493

8,511

9,570

11,783

9,607

5,044

3,018

2,0881,865

1,4372,038

2,245

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

Greater Tucson - Single Family Permits1990–2013

Source: Bright Future Real Estate ResearchRecession Periods


Tucson New Median Home Price2000-2013*

Source: Bright Future Real Estate Research


Recession Periods

$267,725

$172,250

$250,403

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

$220,000

$240,000

$260,000

$280,000


Tucson Resale Median Home Price2000-2013*

Source: Bright Future Real Estate Research


Recession Periods

$220,000

$135,000

$154,700

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

$220,000

$240,000


What Else Will/ Can Happen?


5

910

Benefits of the “SUNBELT”

Alaska

Hawaii

Industrial Northwest


Leads to…

• Retirement freedom,• Ability to move,• Comfort with additional spending,• Etc.

Elliott D. Pollack & Company Source: CBRE

Competitiveness Map – 2011, 2012Source : CBRE


Competitiveness Map – 2013Source : CBRE

Too far or just right?


Perception/Marketing Issues - AZ Example:

- Rankings (1-50 example, state and local).

- Branding (state and local).

- Consistent theme (“smart state/city”).

- Strategic research of self and competitors (state and local).

State: Any Areas of Need?


Long term infrastructure support?

How to fund? Limited resources.



Education:

- Studies have become political statements rather than solid, fundamental analyses.

- Remedy? What was done on economic development?



Others?



Forecasting and Budgeting


Things to keep in mind:

Avg. expansion is just under 5 years,The current expansion will hit 5 years this

summer,But, its not the age, it’s the mileage,How many more years of growth?

Forecasting & Budgeting


Things to keep in mind:

Less time to plan for next downturn,Less time to build infrastructure,Etc.

What are you doing now in terms of longer term planning?



Forecasting & Budgeting R

isk

Revenues

Most Likely

Pessimistic



isk

Revenues

Most Likely

Pessimistic

Recession

Normal Expansion

Now



isk

RevenuesMost LikelyPessimistic

Highest

Risk

?


The last dollar that is projected is the most risky.

Marginal analysis. What to do?

True “most likely”? Capital? Reserves?




isk

RevenuesMost LikelyPessimistic

Highest

Risk

?


Questions?


ELLIOTT D. POLLACK & Company

7505 East Sixth Avenue, Suite 100 Scottsdale, Arizona 85251

480-423-9200 P / 480-423-5942 F / www.arizonaeconomy.com / [email protected]

• Economic and Fiscal Impact Analysis/Modeling

• Real Estate Market and Feasibility Studies

• Litigation Support

• Revenue Forecasting

• Keynote Speaking

• Public Finance and Policy Development

• Land Use Economics

• Economic Development

Documents

Elliott D. Pollack & Company To: GFOAZ By: Jim Rounds Senior Vice President Elliott D. Pollack & Company February 21, 2014 Economic Outlook 2014-2015