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The Economy:Overview & Outlook
The Economy:Overview & Outlook
GFOAz ConferenceAugust 7, 2008
Lee McPhetersProfessor of Economics
W. P. Carey School of Business
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• U.S. EconomyU.S. Economy• Arizona EconomyArizona Economy• Housing SlumpHousing Slump• Anatomy of Recovery Anatomy of Recovery
Economic Update & Economic Update & OutlookOutlook
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-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
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Consumer Confidence Downturn Has Predicted The Last Six U. S. Recessions
Consumer Confidence Index from The Conference BoardConsumer Sentiment Index from University of Michigan
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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
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High Gas Prices Change Behavior
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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
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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
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US Average Unemployment
Rate1976 – 2005
6.2%
Unemployment at 6%?
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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
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Consumer Credit as Percent of Disposable Income
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GDP Growth Weak in 2nd Quarter… More of The Same Still to Come
2007 2008Blue Chip Consensus, July 2008
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Fiscal StimulusFiscal Stimulus
Package isPackage is
Adding AboutAdding About
1% to GDP1% to GDP
Growth inGrowth in
Quarter 2 & 3Quarter 2 & 3
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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
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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%
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(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
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Arizona Job GrowthWeaker After 2006
Peak
Source: Arizona Department of Commerce
% Change Year/Year
2006 2007 2008
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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
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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
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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
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3 Year Slowdown 2001 - 20033 Year Slowdown 2001 - 2003Annual Percent Change In Arizona EmploymentAnnual Percent Change In Arizona Employment
Source: Arizona Department of Commerce
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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?
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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)
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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
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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
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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
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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
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Metro Phoenix Construction Single family Permits
Greater Phoenix Blue Chip Forecast, 2008 Q1
42,423
31,172
17,62222,278
2006 2007 2008 2009
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Economic Outlook, University of Arizona, April 2008
Metro Tucson Construction Residential Permits
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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
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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
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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
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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
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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
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1
7
2
3
5
4
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
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1
8
2
4
5
3US Census Bureau
6 Alaska
9 7
10
Arizona 2nd Fastest GrowthState for 25 Years
Percent Change: 1980 - 2005
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1980 - 20051980 - 2005
Five States Added 3 MillionFive States Added 3 MillionOr More Residents Since 1980Or More Residents Since 1980
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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
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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
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Arizona Myths That Will Not Die
• Elderly Population
• Everybody is Retired
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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
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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.
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How Did Higher HomeHow Did Higher HomePrices AffectPrices Affect
Arizona Arizona Economic Development?Economic Development?
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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
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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
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• 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
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• 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