arizona update & outlook long road to recovery acma conference sedona, arizona february 4, 2010

Arizona Update & OutlookLong Road To Recovery

ACMA ConferenceSedona, ArizonaFebruary 4, 2010

Update & Outlook• Is the Recession Over?

• Why Consumers Worry

• Arizona Budget Basics

• Arizona Outlook

Is Recession Over?

Yes - it’s over (19%) No - not over (64%) Don’t know (17%)

• Recession is a contraction

• Ends when indicators turn up

• At the bottom of the cycle

• When conditions are worst!

Is Recession Over?

But…Current Recession Longest in Post-War10 Previous Post-War Recessions Months

Average Post-War Recession 10 mos.

Longest (1973-1975 & 1981-1982) 16 mos.

Current Recession (Dec 07 – Sept 09?) 21 mos.

The Great Depression (1929-1933) 43 mos.

National Bureau of Economic Research

End in Sight? Return to PreviousEmployment Peak Takes Longer

(Months required for U.S. employment to recover from recessionand return to previous peak before recession began)

Recession Jobs Recovery

8 from 1947 - 1982 11 months

1990 - 1991 24 months

2001 36 months

2007 - 2009 48 months (?)

ISM Index Is Back Above 50

(Manufacturing)

20

25

30

35

40

45

50

55

60

2005 2006 2007 2008 2009 2010

Institute for Supply Management, Report on Business

American Trucking Association

2005 2006 2007 2008 2009

Truck Tonnage Up Since Summer

Retail Sales Up After Dec. 2008 Bottom

2004 2005 2006 2007 2008 2009

$ billions of U. S. Retail Sales

2009 sales 7% below 2008

U. S. Census Bureau

Arizona Retail Sales Fall Since 2007(Monthly Percent Change Yr/Yr)

Arizona Department of Revenue

-8

-6

-4

-2

0

2

4

6

8

Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09

Pe

rce

nt

Gro

wth

Re

al G

DP

GDP Rebounds in Fourth Quarter:Expect Smaller Gains In Q1

1.5%

U. S. Bureau of Economic Analysis

-6.4%

5.7%

2.2%

GDP: How Strong in Q4?

2008 2009

Percent Change in Real GDP at Annual Rate

2010

1979 1980 1981 1982 1983 1984

1980-82“W”

Recovery

GDP

Beware the double dip

End of stimulus may bringdouble dip recession

Stiglitz Says U.S. RecoveryMay Not Be ‘Sustainable’

Buy & Hold? How’s That Been For You?

1999 & 2009

S & P 500

-2

0

2

4

6

8

10

12

14

1970 1976 1983 1989 1996 2002 2009

5.9%

1% rise in saving cuts

spending by $100 bil.

Consumers Stopped Buying & Borrowing – Savings Rate Up

• Accounts for 70% of GDP• But 2010 spending will be weak• New borrowing is down• Saving rate up as debt reduced• Will this be the “new normal?”

Why Consumer is Key

How Long Will Deleveraging Last?

Why Consumers Worry

Worry Meter

• Job Losses Continue• Unemployment Up • Home Values Down• No End in Sight?

Arizona consumers &businesses are in thestate’s worst downturn(by far) in modern times.

Why Consumers Worry

7.3 Mil. U. S. Jobs Lost in Past Two Years

Time Period Job LossDec. 2007 – Dec. 2008 3.1 Mil

Dec. 2008 – Dec. 2009 4.2 Mil

Two Year Total 7.3 Mil

115,000

125,000

135,000

1996 1997 1999 2001 2003 2005 2007 2009

Jo

bs

(th

ou

sa

nd

s)

Fewer U. S. Jobs Now than 9 Years Ago

Dec. 2000132.5 mil

Jobs

Dec. 2009 131.8 mil

Jobs

U. S. Bureau of Labor Statistics, seasonally adjusted data

-380

-597

-681-741

-681 -652

-519

-303

-463

-304

-154 -139 -127

4

-85

Oct.

Nov.Dec

.Ja

n.Feb

.M

ar.

AprilM

ayJu

neJu

lyAug

Sept

OctNov

Dec Jan

US Bureau of Labor Statistics, thousands of U. S. nonfarm jobs

U.S. Job Losses Slowing

4,000 jobs added in November

(Percent Change Dec. 2009 vs Dec. 2008)

30

47

841

18

1

U. S. Bureau of Labor Statistics

50

28

44

493938

Western Job Growth Is Weak

25

Alaska #2

22

26

123,800 Arizona Jobs Lost Sector Jobs: 12 Mos.Overall Nonfarm -123,800Construction -31,100Government -20,500Prof/Biz Services -19,100Retail Trade -15,000Manufacturing -11,200Health Care +6,400

Arizona Dept. of Commerce, Dec. 2009 vs. Dec. 2008

Source: Arizona Department of Commerce, not seasonally adjusted

% Change Yr/Yr

Two Years of Arizona Job Loss

(305,000 Jobs Lost Since Dec. 2007)

Metro Area Percent Job LossDetroit -6.2% -114,500

Phoenix -5.0% -92,100

Atlanta -4.4% -105,300

Riverside -4.3% -51,100

Tampa -4.2% -51,000

Worst Big Metro EconomiesJob Loss – Dec. 2009 vs Dec. 2008 – Labor Force > 1 Million

W. P. Carey School of Business & U. S. Bureau Labor Statistics

“Bermuda Triangle” of Economic Troubles

(Phoenix – Riverside – Las Vegas)

Phoenix Riverside Las Vegas

Job Loss (yr/yr) -5.0% (2nd) -4.3%(4th) -7.4% (1st)*

Home Value Decline 36% (9th) 39% (4th) 40% (2nd)

Foreclosure Rate 2.4% (12th) 3.3% (6th) 5.0% (1st)

Under Water Homes 54% (2nd) 54% (2nd) 70% (1st)

Triangle of Economic Troubles

Job loss, U. S. Bureau Labor Statistics, Dec. 2009Home values from National Association Realtors, third quarter 2009Foreclosure rate from RealtyTrac, third quarter 2009Negative equity from First American CoreLogic, third quarter 2009

*Las Vegas labor force < 1 million

AZ Unemployment Rate Below U.S.

US Bureau of Labor Statistics and AZ Dept of Commerce

Region Unemployment Rate

USA 10.0% (Dec.)

Arizona 9.1%

Phoenix Metro 8.4%

Tucson Metro 8.1%

Flagstaff Metro 8.2%

• Discouraged workers

• Fewer hours per job

• Out migration

What Factors Keep Arizona’sUnemployment Rate Lower?

Arizona 7th Greatest in LaborUnderutilization at 17.2% (US BLS)

Component 2009 2010 2011 2012

Personal Tax Cuts/Aid $105 $136 $67 $5

Corporate Tax Cuts $58 $31 $-4 $-14

Infrastructure/Other $27 $55 $44 $34

State/Local Govt. $62 $88 $22 $2

Total $252 $309 $129 $27

Percentage 32% 39% 16% 3%

Stimulus Impact Peaks in 2010

Recovery.gov website

How Many Jobs Has Stimulus Created?

• 305,000 Arizona jobs lost since December, 2007 employment peak

• 6,810 Arizona jobs funded by U.S. Recovery Act (Q4 2009)

• $1.1 billion received in contracts, grants & loans

Helped Economy 30%

Hurt Economy 38%

No Impact 28%

Don’t Know 5%

Has The Stimulus Helped or Hurt?

Rasmussen Poll, December 2009

Evaluating the Stimulus

Evaluating the Stimulus

•Only 599,000 jobs created? The Stimulus program failed!

• Only 599,000 jobs created? The funding was too small!

Too Small? Not Exactly!

Some States Over/UnderFunded by Stimulus Act

StateShare of Stimulus

Funds

Share of U.S. Unemployed

Arizona 1.7% 1.9%

California 11.0% 14.9%

Florida 4.6% 7.2%

Washington 4.0% 2.2%

District Columbia 1.6% 0.3%

Average 2.0% 2.0%

Stimulus jobs from Recovery.gov website

Arizona Fiscal Woes Second to California

Arizona Budget Basics

• Sales taxes (-31%)

• Individual income taxes (-36%)

• Corporate income taxes (-46%)

• These are 90% of General Fund

Budget Basics: 3 Major

Revenue Sources Decline

Office of Strategic Planning & Budgeting, FY 2007 – FY 2010 data

Annual Percent Change

Arizona Dept. of Revenue & W. P. Carey School Forecast

Arizona Retail Sales Outlook:2009 Will be 10 – 15% Below 2008

Annual Percent Change

U.S. Dept. Commerce & W. P. Carey School Forecast

Arizona Personal Income: FirstDecline Since Records Kept

• K-12 Education

• Corrections

• AHCCCS & Health Care

• These are 2/3 of General Fund

Budget Basics: Much of Spending is Formula

Based

Office of Strategic Planning & Budgeting

Arizona Taxable Retail Sales and Personal Income

(YR/YR Growth 1985:1-2009:2)

Taxable Sales

47

Arizona’s Future Fiscal Crisis

The cumulative gap between expenditures and revenue from FY10 to FY14 is $15.4

Billion 4,114

3,783

3,4792,2361,781

1,0811,323

7,000

9,000

11,000

13,000

15,000

FY05 FY06 FY07 FY08 FY09Est.

FY10Est.

FY11Est.

FY12Est.

FY13Est.

FY14Est.

Expenditures Revenue Federal

2008 2009 2010

Real GDP Growth 0.4% -2.5% 2.5%

Employment Growth -0.4% -3.8% -0.5%

Inflation (CPI) 3.8% -0.5% 1.5%

Housing Starts (000) 900 600 750

United States Economic Forecast

W. P. Carey School of Business, ASU

• Recession is over, pain remains

• “U” shaped recovery begins

• Unemployment stays near 10%

• Stimulus/bailouts unpopular but support recovery

U.S. Outlook Summary

2008 2009 2010Job Gain (Loss) -57,400 -183,000 -24,000

Percent Change -2.1% -7.0% -1.0%

Single Family Units 19,153 11,500 17,250

Percent Change -49% -40% +50%

Population Growth 2.3% 1.5% 1.8%

W. P. Carey School of Business, ASU; based on data available as of Feb. 1, 2010

ARIZONA Economic Forecast

Arizona Employment: 3rd Year of Job Losses

Annual Percent Change In Non-Farm Employment

Forecast

Arizona Department of Commerce and W. P. Carey School of Business, ASU

031,200

85,000127,500 125,700

39,200

-57,500

-183,000

-24,000

2002 2003 2004 2005 2006 2007 2008 2009 2010

No AZ Job Growth Until 2011Annual Numeric Change In Arizona Employment

Properties in the Foreclosure Process Maricopa County 2002 – 2009

Source: The Information Market

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

*Data through October 2009.

Option ARM Resets: Next Shoe To Drop

Single-Family Vacant UnitsGreater Phoenix 1993–2009q2

Source: PMHS

13,68115,42514,975

13,72513,75014,72517,525

19,80017,525

23,825 24,450 17,125 19,325

29,775

51,650

58,050

102,275

0

20,000

40,000

60,000

80,000

100,000

120,000

80,778 80,804

55,633

37,666

19,15311,500

17,250

29,000

40,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

Arizona Single Family Permits

U. S. Census Bureau and W. P. Carey School of Business

Home Building Hits Bottom in 2009

Balance between supply and demand will not be fully achieved until about 2014.

But home building will get progressively better

between now and then.

Elliott D. Pollack & Company

Arizona Housing Affordable Again

Percent Families That Can Afford Median Priced Home

National Association of Home Builders, Phoenix MSA

Hurdles On Road To Recovery

Economy.com

Commercial Real Estate Poses A Major Risk to Recovery

“If future defaults follow current delinquencypatterns, we should expect an accelerationof bank failures.”

Office Space Vacancy RatesU.S. versus Greater Phoenix

Source: CB Richard Ellis and Marcus & Millichap

18.3%16.9%

16.4% 16.1%

12.6%14.0%

11.1%

12.8%13.9%

13.0%

19.1%

14.7%

23.7%

16.0%

0%

5%

10%

15%

20%

25%

30%

2003 2004 2005 2006 2007 2008 2009q2

Greater Phoenix National

Tight Credit Hurts Small Business Job Creation

• Small business provides 25% of all jobs in U.S.

• But…small business has accounted for 40% of jobs lost in current recession

Hurdles On Road To Recovery

Why Arizona Recovers: Population

Growth is “Ace in the Sleeve” Decade

Growth Rank

1970 - 1980 2nd

1980 - 1990 3rd

1990 - 2000 2nd

2000 - 2008 2nd

Year 2008 2nd

1

8

2

4

5

3US Census Bureau

6 Alaska

9 7

10

Arizona 2nd Fastest GrowthState for 25 Years

Percent Change: 1980 - 2005

-10

-5

0

5

10

15

1974 1978 1982 1987 1991 1996 2000 2004 2009

Arizona Comes Back From Recession(Employment Growth Rate & Ranking)

#2

#18

#1

#20

#2

#12

#2

#47

Percent

U. S. Bureau of Labor Statistics

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

The Long Road to Recovery:Arizona Jobs Return in 2013

2.7 million

2.4 million

2.7 million

Arizona Department of Commerce and W. P. Carey School of Business, ASU

Arizona Employment

-10

-5

0

5

10

15

1970 1974 1978 1983 1987 1991 1996 2000 2004 2009

Arizona Job Growth

US Job Growth

You are here

U. S. Bureau of Labor Statistics

U.S. Rebound Will Lift Arizona

(Employment Year/Year Percent Change 1970-2009)

• 2009 - ugly

• 2010 - homely

• Weak job gains

• Unemployment high

• Population growth is critical

• Wait for US economic recovery

Arizona Outlook Summary

Arizona Update & OutlookLong Road To Recovery

Lee McPhetersW. P. Carey School of Business

Arizona State University