Economic Outlook
Where we are and where we are going”
• US Economy in the Global Economy
• Arizona Economy in the US Economy
• Drivers of Economic Growth
Economic Outlook
Where we are and where we are going”
• US Economy in the Global Economy
• Arizona Economy in the US Economy
• Drivers of Economic Growth
Economic Outlook
US Economy in the Global Economy
How We Got Here
The Current Context
The Outlook
Long-Term Trends
Lessons from the Past
How We Got Here
“Those who don't know history are destined to repeat it.”
-- Edmund Burke
• End of the “Great Moderation”
• Federal Policies Led to Housing Bubble
• Easy Money Led to Recession Postponed
Economic Outlook
What Happened?
• The “House of Cards” Collapsed
End of the Housing Run, led to
Destabilization of Mortgage Debt, led to
Financial Market Contagion
• PLUS Cyclical Recession – On Top!
Economic Outlook
What Happened?
• Counterparty Risk and Inter-dependence
Credit Enhancement“Insurance” against Payment Shortfall or Default
Unquestioned Faith: Diversification Mitigates Risk
• Widening Investor Pool
• Liquidity Crisis Sound Familiar?• Failure of Confidence “Trust you? -- I don’t trust Me!”
Economic Outlook
What Happened?
• Arizona Among Worst - Why?
Historical Growth Pattern
Existing Housing Industry
Projected Housing Demand
Everyone Counting the Same Buyers
• Others Affected – Nevada, Florida,…
See a pattern?
Economic Outlook
Economic OutlookThe Current Context
“Slow and Steady Wins the Race”-- Aesop
• Current Conditions
• Gross Domestic Product Trends
• Employment Trends
• Current Challenges
Economic OutlookThe Current Context
• Cyclical Recession Is Over
Relatively Short Recession in GDP Terms
• US Financial Crisis Has Been Largely Contained
Some Major Issues to Clean-up – Fannie, Freddie, Privates
• So, ………….
Economic Outlook
The Current Context
• Very Sluggish Growth for “recovery” period
• Historical Recovery Drivers Missing
• Remnants of Double Whammy Still With Us
Overhanging Mortgage Debt / Other DebtOverhanging Housing SupplyBattered Consumer ConfidenceInternational Issues
Economic OutlookUS GDP Quarterly Change 1970 - 2011
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Recessions
*
Economic OutlookUS GDP Quarterly Change 1970 - 2011
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
RecessionsReliable Data??
Economic OutlookUS GDP Quarterly Change 1970 - 2011
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Recoveries
*
Economic OutlookUS GDP Quarterly Change 1970 - 2011
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Recoveries
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Economic OutlookUS Employment Change from Prior Year 1970 - 2011
Recoveries
*
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Economic OutlookUS Employment Change from Prior Year 1970 - 2011
Recoveries
*
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Economic OutlookUS Employment Change from Prior Year 1970 - 2011
Recoveries
*
Economic OutlookUS Employment Change from Prior Year 1990 - 2010
To
tal Em
plo
ymen
tE
mp
loym
ent
Gro
wth
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
50
60
70
80
90
100
110
120
*
Economic OutlookUS Employment Change from Prior Year 1990 - 2010
To
tal Em
plo
ymen
tE
mp
loym
ent
Gro
wth
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
50
60
70
80
90
100
110
120
*
Economic OutlookUS Employment Change from Prior Year 1990 - 2010
To
tal Em
plo
ymen
tE
mp
loym
ent
Gro
wth
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
50
60
70
80
90
100
110
120
Economic Outlook
The Outlook – Near Term
• Substantial Drags on Growth
International Issues – Especially Europe
Potential EU Banking Crisis
Weak Demand – Scared Consumers & CEOs
Continuing Uncertainty• Expectations of Rising Taxes
• Structural Workforce Issues
*
Economic Outlook
The Outlook – Near Term
• Substantial Drags on Growth
International Issues – Especially Europe
Potential EU Banking Crisis
Weak Demand – Scared Consumers & CEOs
Continuing Uncertainty• Expectations of Rising Taxes
• Structural Workforce Issues
Yikes!
Economic Outlook
The Outlook – Near Term
• European Situation
Unsustainable Deficits AND Debt
Government Debt Burdens
Use of Debt for “Operating Expenses”• Expectations of Resolution
Based on Hope not Analysis
• Public vs. Private Sector Ratio
Yikes!!!
Economic Outlook
The Outlook – Near Term
• European Debt and Deficits
Bond Write-downs = Controlled DefaultBroad based Bank Losses
• European Bank / Financial Crisis
Repeat of US 2007 -2008Liquidity Crisis due to Loss of ConfidenceGovernment Liquidity Intervention
• Risk of Contagion
EU’s QE 1 & 2
Economic Outlook
The Outlook – Near Term
• Europe’s Impact on Global Economy
One-Quarter of Global Economy
Linked to US and China• Risk of European Recession
Repeat of US - 2009 to 2011? – Too Likely
Governmental Response ??• Benefit of Advanced Warning!
Economic Outlook
Long Term Trends
• Risks to US Competitiveness
Labor Force Skills
Massive Federal Deficits - Europe-itis
Demographic Shifts• Worldwide Demand Issues
Future of Europe
Asian Cultural / Governmental Challenges
America Alone? -- Again?
Europe’s Folly –
Still Failing
Economic Outlook
Lessons From The Past
In this present crisis, government is not the solution to our problem; government is the problem.
-- Ronald Reagan, First Inaugural
• Decades in the Making – Decades in the Fixing
Improve Labor Force Skills
Reduce Costs and Barriers
Reinvigorate Responsibility• Will America Learn from Europe’s Failure?
*
Economic Outlook
Lessons From The Past
In this present crisis, government is not the solution to our problem; government is the problem.
-- Ronald Reagan, First Inaugural
• Decades in the Making – Decades in the Fixing
Improve Labor Force Skills
Reduce Costs and Barriers
Reinvigorate Responsibility• Will America Learn from Europe’s Failure?
Regulation!
Economic Outlook
Where we are and where we are going”
• US Economy in the Global Economy
• Arizona Economy in the US Economy
• Drivers of Economic Growth
Economic Outlook
AZ Economy in the US Economy
The Current Context
Long-Term Trends
The Outlook
Lessons from the Past
Economic OutlookThe Current Context
• AZ Employment Trends
• AZ Gross Domestic Product Trends
• Current Challenges
Economic OutlookAZ Employment 2001 – 2010
(000’s)
2,000
2,500
3,000
100
150
200
250
300
All Industries
Manufacturing
Construction
*
Economic OutlookAZ Employment 2001 – 2010
(000’s)
2,000
2,500
3,000
100
150
200
250
300
All Industries
Manufacturing
Construction
*
100,000
150,000
200,000
250,000
300,000
0
5,000
10,000
15,000
20,000
25,000
Economic OutlookAZ GDP 1997 - 2010
($ Millions)
Manufacturing
All Industries
Construction
*
100,000
150,000
200,000
250,000
300,000
0
5,000
10,000
15,000
20,000
25,000
Economic OutlookAZ GDP 1997 - 2010
($ Millions)
Manufacturing
All Industries
Construction
*
100,000
150,000
200,000
250,000
300,000
0
5,000
10,000
15,000
20,000
25,000
Economic OutlookAZ GDP 1997 - 2010
($ Millions)
Manufacturing
All Industries
Construction
Economic OutlookThe Current AZ Context
• Still Challenging Conditions
• Positive Trends
• Gradual Return to Government Fiscal Balance
• Continuing Uncertainty
• Benefit of A “Low Base” to Build From
• Beware of the “Illusion of Recovery”
Economic OutlookThe AZ Outlook
• Substantial Drags and Risks Still Exist
• Historic Drivers Are Weak
Housing Starts
Business Investment
Consumer Spending• Not Like Historical Patterns
• Government Sector Challenges – Improving!
Economic OutlookThe AZ Outlook
• Expect Very Slow, but Positive Growth
Available Capacity for Growth
-- Without Capital Spending
-- With Limited New Hiring• Still Strong Fundamentals in Arizona
Positive Business and Social Climates
Not California!
Economic OutlookThe Good News
• Employment Growth – Slow, but increasing
• Consumer Confidence Back to 2010 levels
• New Jobless Claims Slowing
• US GDP Improving (But still weak)
• Arizona Regaining Momentum
Economic OutlookThe Good AZ News
• 22nd in Job Growth – From 49th!
40,000 + jobs added in 2011
• Retail Spending Rising (Autos, Durables)
Az Retail Sales up about 6%
Outlook Hopeful
• Arizona Recovery Underway (Overhanging Risk)
Economic OutlookThe Good AZ News
• Economic Estimates Commission Forecast
PERSONAL INCOME
FY10 FY11 FY12 FY13
-1.7% 5.0% 5.0% 5.8%
POPULATION
FY10 FY11 FY12 FY13
0.4% 0.4% 0.5% 0.9%
Economic OutlookAZ 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
Economic Outlook
Where we are and where we are going”
• US Economy in the Global Economy
• Arizona Economy in the US Economy
• Drivers of Economic Growth
Economic Outlook
Drivers of Economic Growth
Population Growth
Business Investment and Productivity
Disposable Incomes and Consumer Spending
Economic OutlookPopulation Growth
• Growing Employment Drives Population
• Population Drives Further Expansion
• Population Means Consumption and Production
• Potential Changing Population Patterns
Aging Population and Declining Birth Rates
Medium Term Effects of Mortgage Debacle
Consequent Slower In-Migration
Economic OutlookProductivity and Business Investment
• 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
• Substantial Opportunities Still Exist
Economic OutlookRising Disposable Income
• Rising Incomes and Standards of Living
Relative Declines in Cost of Essentials
Widespread Access to Better Living• Available Income after “Necessities”
Higher “Disposable” Incomes
Increasing Discretionary Spending• Challenge of Expanding “Wishes vs. Needs”
Economic OutlookProductivity 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
Arizona’s Historic Development Drivers
Open Markets
Easy Access to Key Factors of Production
Constructive Self-Selection
Important Comparisons to Current Situation
Economic OutlookOpen Markets
• Culturally, Socially, and Economically Open
In-Migrants Readily Assimilated
No Rigid Hierarchies • Positive Transportation Patterns
Historically Good Roads
Beneficial Geographic Location
Economic OutlookEasy Access to Key Factors of Production
• Strong, Trained, Willing Labor Force
Growing PopulationGood Educational Institutions
• Readily Available Land, Water, Other Commodities
• Reliable Affordable Energy
Economic OutlookConstructive Self-Selection
• American Exceptionalism Squared
Self-Selection from Self-Selected
• Employment Driven Migration
• Absence of Antiquated Infrastructure
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