The Economy:Overview & Outlook

The Economy:Overview & Outlook

GFOAz ConferenceAugust 7, 2008

Lee McPhetersProfessor of Economics

W. P. Carey School of Business

• U.S. EconomyU.S. Economy• Arizona EconomyArizona Economy• Housing SlumpHousing Slump• Anatomy of Recovery Anatomy of Recovery

Economic Update & Economic Update & OutlookOutlook

-6

-4

-2

0

2

4

6

8

10

12

14

1970 1974 1978 1982 1986 1990 1995 1999 2003 2007

Arizona & US Move Together

(Nonfarm Employment Percent Change 1970 - 2008)

ArizonaArizona

USAUSA

Consumer Confidence Downturn Has Predicted The Last Six U. S. Recessions

Consumer Confidence Index from The Conference BoardConsumer Sentiment Index from University of Michigan

What to Worry About: 2008

Worry Meter

• Energy/Food Prices Up• Job Growth Down• Unemployment Up• Home Values Down• Debt Levels Up• Stock Market Down

High Gas Prices Change Behavior

41

-76-88

-51 -51-47-67

-83

Dec. Jan. Feb. March April May June July

Job Growth/Loss, ThousandsJob Growth/Loss, Thousands U.S. Economy Losing Jobs U.S. Economy Losing Jobs

Source: US Bureau of Labor Statistics and AZ Dept of Commerce

Region Unemployment Rate

USA 5.7% (July)

Arizona 4.8% (June)

Phoenix Metro 4.3%

Tucson Metro 4.7%

Flagstaff Metro 4.5%

Unemployment Creeps Up

US Average Unemployment

Rate1976 – 2005

6.2%

Unemployment at 6%?

0

2

4

6

8

10

12

1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Arizona Unemployment RatesWere Higher In Past Downturns

1980/82 Recession

1991 Recession

2001 Recession

4.8

Consumer Credit as Percent of Disposable Income

GDP Growth Weak in 2nd Quarter… More of The Same Still to Come

2007 2008Blue Chip Consensus, July 2008

Fiscal StimulusFiscal Stimulus

Package isPackage is

Adding AboutAdding About

1% to GDP1% to GDP

Growth inGrowth in

Quarter 2 & 3Quarter 2 & 3

GDP Growth in Q2 2008Component Q1 08 Q2 08

Consumption 0.9% 1.5%

Residential Investment -25.1% -15.6%

Non-Residential Structures 8.6% 14.4%

Exports 5.1% 9.2%

Imports -0.8% -6.6%

Real GDP 0.9% 1.9%

U.S. Bureau of Economic Analysis, Advance Report

2007Real GDP 1.6%

Employment 0.3%

Inflation (CPI) 4.2%

30 yr Mortgage 5.5%

2009 2008

2.2%1.1%

2.9%

6.3%

Outlook for the U.S. Economy

Forecast subject to change as new information is available

1.7%

0.6%

2.9%

5.8%

(Percent Change June 2008 vs June 2007)

2

41

48

1

40 6

7

U. S. Bureau of Labor Statistics

10

11

27

Arizona Now Ranks In TheBottom 3 for Job Growth

46

3

5

9

13

20 StatesLosing Jobs

Arizona Job GrowthWeaker After 2006

Peak

Source: Arizona Department of Commerce

% Change Year/Year

2006 2007 2008

Arizona Jobs:12 Mos.Sector Job Growth/LossOverall -33,000Health Care + 10,600Government +9,400Leisure/Hospitality +3,400Trade -3,900Prof/Biz Services -5,300Financial -7,300Construction -33,100

Arizona Health Sector

Source: Arizona Dept. of Commerce

Thousands of Jobs

270,000 Jobs June 08270,000 Jobs June 08

90,000 More Jobs Than Manufacturing

Up 50% since 2000Up 50% since 2000

190

200

210

220

230

240

250

260

JAN JUL JAN JUL JAN JULY JAN JULY

Thousands of Jobs

Arizona Construction JobsPeaked In Summer of 2006

2005 20072006 2008

50,000 JobsLost SinceMid 2006

3 Year Slowdown 2001 - 20033 Year Slowdown 2001 - 2003Annual Percent Change In Arizona EmploymentAnnual Percent Change In Arizona Employment

Source: Arizona Department of Commerce

Annual Percent Change In Arizona EmploymentAnnual Percent Change In Arizona Employment

ForecastForecastSource: Arizona Blue Chip Forecast

3 Year Slowdown 2007 – 2009?3 Year Slowdown 2007 – 2009?

AZ Housing Slump AZ Housing Slump ContinuesContinues

Single Family Q3 ‘07 Permits - 30%Resales - 31%Prices (Phx) - 4.1%Source: National Assoc Realtors; US Census

Single Family Q1 08 Permits - 57%Resales - 31%Resale Price - 15%Source: US Census, NAR (vs. Q1 07)

Arizona Foreclosures: Q1 2008Category Number % of U.S.

All Mortgages 1,211,732 2.7%

In Foreclosure Now 31,263 (2.6%) 2.8%

Subprime ARM 118,540 4.5%

Sub. ARM Foreclosure 16,430 (13.9%) 3.7%

Foreclosures Started 16,116 3.5%

Foreclosure + Started 47,379 (3.9%) 3.0%

Source: Mortgage Bankers Association

0

10

20

30

40

50

60

Bill

ions

of D

olla

rs

Source: CreditSuisse

Major Mortgage "Reset" WavesStill Ahead in Future Years

2007 2008 2009 2010 2011 2012

Housing Market DriversHousing Market Drivers

• Low mortgage ratesLow mortgage rates• Population & job growthPopulation & job growth• Creative home financeCreative home finance• Move-up buyersMove-up buyers• Boomer second homesBoomer second homes• Investors Investors

Percent Families That Can Afford Median Priced Home

Affordabilityup againfrom lowpoint in2006

Source: Phoenix Metro data from National Assoc. Home Builders

Arizona Housing More Affordable

Metro Phoenix Construction Single family Permits

Greater Phoenix Blue Chip Forecast, 2008 Q1

42,423

31,172

17,62222,278

2006 2007 2008 2009

Economic Outlook, University of Arizona, April 2008

Metro Tucson Construction Residential Permits

Source: US Bureau of Labor Statistics and AZ Dept of Commerce

Category 2000 2008*

Regional Mall 13.2 14.7

Power Centers 27.2 52.7

Neighborhood 36.3 46.5

Strip 10.6 13.6

Total 87.3 127.3

Metro Phoenix Retail Space Existing Inventory in Millions Sq. Ft.

*8.8 million sq ft now under constructionSource: Realty Studies, ASU Poly Campus

1.3

5.3

9.0

13.2

7.9

0.5 0.7

3.1

2002 2003 2004 2005 2006 2007 2008 2008

Annual Percent Growth

Source: Arizona Blue Chip Forecast Forecast

Arizona Retail Sales Outlook:Recession Level Growth

Source: US Bureau of Labor Statistics and AZ Dept of Commerce

Category FY2006 FY2008

Building Supplies +18.7 -7.6

Apparel +18.1 -3.0

Furniture +12.7 -4.2

Restaurant/Bar +12.4 0.4

Motor Vehicles +9.9 -17.4

Arizona Retail Sales DeclinePercent Change Vs Previous Year

Source: Arizona Department of Revenue

2007 2008 2009Annual Percent Change

Personal Income 6.3 4.6 4.9

Employment 1.2 0.3 1.4

Single Family Units -29 -24 1.1

Retail Sales 0.5 0.7 3.1

Population 2.8 2.3 2.4

ARIZONABLUE CHIP ECONOMIC FORECAST

Anatomy of Recovery• Population growth continues

• Fewer new home starts

• Housing inventory falls

• Gas, food prices fall

• Consumer confidence restored

• National economy rebounds

• Job creation increases

1

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2

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5

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6

US Census BureauUS Census Bureau

13

25 8

1217

9

Arizona Ranks 2Arizona Ranks 2ndnd in inPopulation GrowthPopulation Growth

(Percent Change 2007 vs 2006)(Percent Change 2007 vs 2006)

10

11

1

8

2

4

5

3US Census Bureau

6 Alaska

9 7

10

Arizona 2nd Fastest GrowthState for 25 Years

Percent Change: 1980 - 2005

1980 - 20051980 - 2005

Five States Added 3 MillionFive States Added 3 MillionOr More Residents Since 1980Or More Residents Since 1980

Arizona In-migration From California Still Strong in 2008

2003 93,1942004 111,3972005 117,000 2006 113,7912007 105,402

2008 (Est) 102,600 Source: Driver Licenses turned in to AZ Dept of Motor Vehicles

Demographics Drive Growth Demographics Drive Growth

Arizona Demographics Rank

Median age 46

Percent > 65 yrs age 22

Percent < 18 yrs age 5

Percent moved last year 4

Domestic Migrants 3

Arizona Myths That Will Not Die

• Elderly Population

• Everybody is Retired

Arizona Ranks as the 5th

“Youngest” State in U.S.

• “Great place to retire” is accurate

• “Everybody is a retiree” is a myth

Percent population < 18 yrs, Census Bureau

Every time the Arizona population increasesby 2.5 people, a new housing unit is needed.

Every time the Arizona population increasesby 2.5 people, a new housing unit is needed.

How Did Higher HomeHow Did Higher HomePrices AffectPrices Affect

Arizona Arizona Economic Development?Economic Development?

Housing Affordability EffectsHousing Affordability Effects

• Outer urban fringe developsOuter urban fringe develops• Retailing follows consumersRetailing follows consumers• Cross commuting increasesCross commuting increases• Infrastructure needs increaseInfrastructure needs increase• Roadway construction increasesRoadway construction increases• Population still growingPopulation still growing

Population in 25 Years• Population Doubles (10 mil)

• 2nd Largest State in West

• 10th Largest State in US

• Median Age 39.3 Yrs

• More Children than Seniors

U. S. Census Bureau

• Resale prices fall through 2008Resale prices fall through 2008

• New sales, starts up in 2009New sales, starts up in 2009

• Population growth is criticalPopulation growth is critical

• Tighter lending standardsTighter lending standards

• Non residential will slowNon residential will slow

Construction Outlook SummaryConstruction Outlook Summary

• Consumer in retreatConsumer in retreat

• Stagnant job growthStagnant job growth

• Lots of housing inventoryLots of housing inventory

• 170,000 new residents?170,000 new residents?

• Weak – but not yet bleakWeak – but not yet bleak

Arizona Outlook SummaryArizona Outlook Summary

Thank You

GFOAz!

Lee.mcpheters@asu.edu

W. P. Carey School of Business

Arizona State University