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Economic Outlook
Government Finance Officers
of Arizona
August 10, 2012
Alan E. Maguire
Economic Outlook
“Where are we going?”
• US Economy in the Global Economy
• Arizona Economy in the US Economy
• Drivers of Economic Growth
Economic Outlook
“Where are we going?”
• US Economy in the Global Economy
• Arizona Economy in the US Economy
• Drivers of Economic Growth
US Economic Outlook
US Economy in the Global Economy
How We Got Here
The Current Context
The Outlook
Long-Term Trends
Lessons from the Past
US Economic Outlook
How We Got Here
“Those who don't know history
are destined to repeat it.”
-- Edmund Burke
• End of the “Great Moderation”
• Federally Induced Housing Bubble
• Easy Money Postponed Recession
US Economic Outlook
What Happened?
• The “House of Cards” Collapsed
Housing as Investment Vehicle
End of the Housing Run
Destabilization of Massive Mortgage Debt
Financial Market Contagion
Worldwide Consequences
• PLUS Cyclical Recession – On Top!
US Economic Outlook
What Happened?
• Expanded, Unsophisticated Investors
• Counterparty Risk and Inter-dependence
Credit Enhancement
Unquestioned Faith in Contracts
• Failure of Mutual Confidence
• Liquidity Crisis
US Economic Outlook
What Happened?
• Arizona Among Hardest Hit – Why?
Existing Strong Housing Industry
Historical Growth Pattern
Projected Housing Demand
Quadruple Counting the Same Buyers
• Others Affected – Nevada, Florida,…
US Economic Outlook
The Current Context
• Current Conditions
• Gross Domestic Product Trends
• Employment Trends
• Current Challenges
US Economic Outlook
The Current Context
• Cyclical Recession Over Since Mid 2009
Relatively Short Recession in GDP Terms, but Deep
• US Financial Crisis Has Been Contained
Some Major Issues to Clean-up – Fannie, Freddie, Privates
• So, ………….
US Economic Outlook
The Current Context
• Stagnant Growth for “Recovery” period
• Historical Recovery Drivers Missing
• Remnants of Double Whammy Remain
International Issues
Consumer Mortgage Debt / Other Debt
Overhanging Housing Supply
Battered Consumer Confidence
US Economic Outlook
*
US GDP Quarterly Change 1970 - 2012
10.0
GDP
8.0
6.0
4.0
2.0
0.0
-6.0
-8.0
Recessions
10
20
-4.0
06
20
02
20
98
19
94
19
90
19
86
19
82
19
78
19
74
19
70
19
-2.0
US Economic Outlook
*
US GDP Quarterly Change 1970 - 2012
10.0
GDP
8.0
6.0
4.0
2.0
0.0
-6.0
-8.0
Recoveries
10
20
-4.0
06
20
02
20
98
19
94
19
90
19
86
19
82
19
78
19
74
19
70
19
-2.0
US Economic Outlook
*
US GDP Quarterly Change 1970 - 2012
10.0
GDP
8.0
6.0
4.0
2.0
0.0
-6.0
-8.0
Recoveries
10
20
-4.0
06
20
02
20
98
19
94
19
90
19
86
19
82
19
78
19
74
19
70
19
-2.0
US Economic Outlook
*
US GDP Quarterly Change 1970 - 2012
10.0
GDP
8.0
6.0
4.0
2.0
0.0
10
20
06
20
02
20
98
19
94
19
90
19
86
19
82
19
-8.0
78
19
-6.0
74
19
-4.0
70
19
-2.0
US Economic Outlook
*
US GDP Quarterly Change 2009 - 2012
10.0
GDP
8.0
6.0
4.0
2.0
0.0
2012
-8.0
2011
-6.0
2010
-4.0
2009
-2.0
US Economic Outlook
US GDP Quarterly Change 2009 - 2012
10.0
GDP
8.0
6.0
4.0
??
2.0
0.0
2012
-8.0
2011
-6.0
2010
-4.0
2009
-2.0
US Economic Outlook
8.0
*
US Employment % Change from Prior Year 1970 - 2011
Employment
6.0
4.0
2.0
0.0
-4.0
Recoveries
-6.0
-8.0
12
20 0
1
20
00
20
90
19
80
19
70
19
-2.0
US Economic Outlook
8.0
*
US Employment % Change from Prior Year 1970 - 2011
Employment
6.0
4.0
2.0
0.0
-4.0
Recoveries
-6.0
-8.0
12
20 0
1
20
00
20
90
19
80
19
70
19
-2.0
US Economic Outlook
8.0
US Employment % Change from Prior Year 1970 - 2011
Employment
6.0
4.0
2.0
0.0
-4.0
Recoveries
-6.0
-8.0
12
20 0
1
20
00
20
90
19
80
19
70
19
-2.0
US Economic Outlook
8.0
US Employment % Change from Prior Year 1990 - 2010
6.0
120
110
100
2.0
90
0.0
12
20 0
1
20
00
20
90
19
80
19
-2.0
80
70
-4.0
-6.0
-8.0
60
50
Total Employment
4.0
70
19
Employment Growth
*
US Economic Outlook
8.0
US Employment % Change from Prior Year 1990 - 2010
6.0
120
110
100
2.0
90
0.0
12
20 0
1
20
00
20
90
19
80
19
-2.0
80
70
-4.0
-6.0
-8.0
60
50
Total Employment
4.0
70
19
Employment Growth
*
US Economic Outlook
8.0
US Employment % Change from Prior Year 1990 - 2010
110
100
2.0
90
0.0
12
20 0
1
20
00
20
90
19
80
19
-2.0
80
70
-4.0
-6.0
-8.0
60
50
Total Employment
4.0
70
19
Employment Growth
6.0
120
US Economic Outlook
The Outlook – Near Term
• Substantial Deterrents to Growth & Investment
International Issues – Especially Europe
Collapsing EU Fiscal / Banking Systems
Weak Demand – Scared Consumers & CEOs
Continuing Uncertainty!
• Expectations of Rising US Taxes- “Fiscal Cliff”
• Structural Workforce Issues
US Economic Outlook
The Outlook – Near Term
• European Situation
Unsustainable Deficits AND Debt Levels
Use of Debt for “Operating Expenses”
Shrinking Productive Class
• Expectations of Resolution
Based on Hope not Analysis
• Public vs. Private Sector Ratio
US Economic Outlook
The Outlook – Near Term
• European Debt and Deficits
•
Bond Write-downs = Controlled Default
Broad-based Bank & Investor Losses
Government Fiscal Crises
European Financial Stability Facility
European Financial Stability Mechanism
European Stability Mechanism @ 7/13
• Risk of Contagion
US Economic Outlook
The Outlook – Near Term
• Europe’s Impact on Global Economy
One-Quarter of Global Economy
Linked to China and the to US
• European Recession Now Likely
From Low Growth to Negative Growth
Lack of Economic Catalysts
Uncertainty
US Economic Outlook
Long Term Trends
• Worldwide Demand Issues
• Europe’s Issues
• Japan’s Issues
High Debt and Pending Liquidation
• Asia’s Cultural / Governmental Challenges
America Alone? -- Again?
US Economic Outlook
Long Term Trends
America’s Challenges and Prospects
• Massive and Growing Federal Fiscal Crisis
• Demographic Trends
• Labor Force Skills Gap
• Loss of Mid-skill Employment
US Economic Outlook
Long Term Trends
America’s Challenges and Prospects
• Strong, Agile Markets
• Tradition of Productivity
• Fully Developed Infrastructure
• Finest Higher Education System
• Highest Caliber “Rule of Law”
US Economic Outlook
Long Term Trends
• Decades in the Making – Not Days in the Fixing
Improve Labor Force Skills
Reinvigorate Personal Responsibility
Reduce Barriers to Production
The power to tax is the power to destroy.
-- John Marshall, First Chief Justice
The power to regulate is the power to eliminate .
Economic Outlook
“Where are we going?”
• US Economy in the Global Economy
• Arizona Economy in the US Economy
• Drivers of Economic Growth
AZ Economic Outlook
AZ Economy in the US Economy
The Current Context
The Outlook
Long-Term Trends
Lessons from the Past
AZ Economic Outlook
The Current Context
• Recent AZ Employment Trends
• Current Challenges
*
AZ Economic Outlook
AZ Employment 2001 – 2012
(000’s)
2,800
2,600
All Industries
2,400
2,200
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
2,000
*
AZ Economic Outlook
AZ Employment 2001 – 2012
(000’s)
2,800
260
2,600
Construction
220
2,400
Manufacturing
2,200
180
All Industries
140
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
100
20
02
20
01
2,000
*
AZ Economic Outlook
AZ Employment 2001 – 2012
(000’s)
2,800
260
2,600
Construction
220
2,400
Manufacturing
2,200
180
All Industries
140
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
100
20
02
20
01
2,000
*
AZ Economic Outlook
AZ Employment 2001 – 2012
(000’s)
2,800
2,600
All Industries
300,000 jobs
2,400
2,200
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
2,000
*
AZ Economic Outlook
AZ Employment 2001 – 2012
(000’s)
2,800
2,600
All Industries
2,400
65,000 jobs
75,000 PRIVATE jobs
2,200
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
2,000
AZ Economic Outlook
The Current AZ Context
• Still Challenging US Conditions
• Continuing Uncertainty – Nationally / Globally
• Positive AZ Trends
AZ Economic Outlook
The Current AZ Context
• Returning to Government Fiscal Balance
• Above National Average Job Growth Rates
• Benefit of A “Low Base” to Build From
Beware of the “Illusion of Recovery”
AZ Economic Outlook
The AZ Outlook
• Substantial Drags and Risks Still Exist
• Historic Drivers Are Weak
• Not Like Historical Patterns
AZ Economic Outlook
The AZ Outlook
• Expect Very Slow, but Positive Growth
Existing Capacity Available for Growth
-- Without Capital Spending
-- With Little New Hiring
• Still Strong Fundamentals in Arizona
Positive Business and Social Climates
We’re Not California!
AZ Economic Outlook
The Good AZ News
• 5th in Job Growth – From 49th!
70,000 + jobs added since June 2010
• Retail Spending Rising (Autos, Durables)
Az Retail Sales up about 6%
Outlook Hopeful, but Concerned
• Arizona Recovery Underway (Overhanging Risk)
Economic Outlook
The Good AZ News
• Economic Estimates Commission Forecast
PERSONAL INCOME
FY10
FY11
FY12
FY13
-1.7%
5.0%
5.2%
5.6%
POPULATION
FY10
FY11
FY12
FY13
0.4%
0.4%
1.0%
1.1%
Economic Outlook
The Good AZ News
• Blue Chip Economic Forecast
Calendar 2012 over 2011 % Growth
PI
Retail
Employ
5.0
6.1
1.8
Pop Housing
1.1
27
Calendar 2013 over 2012 % Growth
PI
Retail
Employ
5.7
6.6
2.4
Pop Housing
1.3
38
AZ Economic Outlook
AZ 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 Constraints
Economic Outlook
“Where are we going?”
• US Economy in the Global Economy
• Arizona Economy in the US Economy
• Drivers of Economic Growth
Economic Outlook
Drivers of Economic Growth
Business Investment and Human Productivity
 Disposable Incomes and Consumer Spending
Population Growth
Economic Outlook
Business Investment and Productivity
• 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
Economic Outlook
Rising Disposable Income
• Rising Incomes and Standards of Living
Declines in Relative Cost of Essentials
Widespread Access to Better Living
• More Income Left after “Necessities”
Higher “Disposable” Incomes
Increasing Discretionary Spending
• Challenge of Expanding “Wishes vs. Needs”
Economic Outlook
Population Growth
• Growing Employment Drives Population
• Population Drives Further Expansion
• Population Means Consumption and Production
Economic Outlook
Productivity 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
The “Wealth of Nations”
“The annual labour of every nation is the fund which originally supplies it with
all the necessaries and conveniences of life which it annually consumes,
and which consist always either in the immediate produce of that labour, or
in what is purchased with that produce from other nations.
“According therefore, as this produce, or what is purchased with it, bears a
greater or smaller proportion to the number of those who are to consume
it, the nation will be better or worse supplied with all the necessaries and
conveniences for which it has occasion.
“But this proportion must in every nation be regulated by two different
circumstances; first by the skill, dexterity, and judgment with which its
labour is generally applied; and, secondly, by the proportion between the
number of those who are employed in useful labour, and that of those who
are not so employed.”
-- Opening three sentence to The Wealth of Nations, by Adam Smith, 1776
Economic Outlook
The “Wealth of Nations”
• …The annual labour of every nation… supplies it with all … it annually
consumes
• …as this produce… bears a greater or smaller proportion to the number…
who… consume it, the nation will be better or worse supplied
• this proportion must … be regulated by two different circumstances;
first by the skill, dexterity, and judgment with which its labour is… applied;
and, secondly, by the proportion between the number of… employed in
useful labour, and that… not… employed.”
AZ Economic Outlook
Arizona’s Historic Development Drivers
Open Markets
Easy Access to Key Factors of Production
Constructive Self-Selection
AZ Economic Outlook
Open Markets
• Culturally, Socially, and Economically Open
In-Migrants Readily Assimilated
No Rigid Hierarchies
• Positive Transportation Patterns
Historically Good Roads
Beneficial Geographic Location
AZ Economic Outlook
Easy Access to Key Factors of Production
• Strong, Trained, Willing Labor Force
Growing Population
Good Educational Institutions
• Readily Available Land, Water, Other
Commodities
• Reliable Affordable Energy
AZ Economic Outlook
Constructive Self-Selection
• American Exceptionalism Squared
Self-Selection from Self-Selected
• Employment Drawn Migration
• Absence of Antiquated Infrastructure
Economic Outlook
Conclusion
Better in US than Elsewhere
Better in Arizona than Elsewhere!
Economic Outlook
Government Finance Officers
of Arizona
August 10, 2012
Alan E. Maguire