Sun Corridor Projections 1 Sun Corridor Projections Base and Alternative Scenarios Prepared for Central Arizona Association of Governments January 8, 2009

Sun Corridor Projections 2 Study Outline Joint effort –ASU’s WP Carey School of Business –UA’s Eller College of Management Review economic & demographic research Development of Sun Corridor (3-county) model Base forecast highlights –Population and demographic outlook –Employment outlook –Earnings, income and sales outlook High & low scenario results

Sun Corridor Projections 3 Economic & Demographic Research

Sun Corridor Projections 4 Introduction The Economic and Demographic Research portion examines/identifies long-term economic and demographic forces that could affect economic development in 3- county “megapolitan” area (Pinal, Maricopa and Pima counties combined)

Sun Corridor Projections 5 Economic & Demographic Topics Population, demographics and net migration analysis Industry mix and basic industries in the region Target industry recommendations Interviews with “experts” Case study: Riverside vs. Pinal County

Sun Corridor Projections 6 Population, Demographics and Net Migration Analysis Historical population growth –Natural increase –Domestic migration –Immigration Comparison of long-term forecasts Expert interview summary

Sun Corridor Projections 7 Population, Demographics and Net Migration Analysis Use Census Bureau estimates of population –By age, sex, ethnicity Domestic migration to AZ is much larger than immigration –Undocumented immigration surged in mid-90s, peaked in 2000, and has declined since Largest migration flows from Los Angeles –And other So. California metros (55% of total) –Chicago (during the 1980s, 6% in 2006)

Sun Corridor Projections 8 Industry Mix and Basic Industries, 2004 Manufacturing is a key driver of the megapolitan economy (33,000 excess jobs) –Electronic components (11,000) –Instruments (4,300) –Aerospace (17,700) –2 Wholesale trade industries tied to high tech mfg. (6,000) Tourism (30,000 excess jobs) – low wage Administrative support and finance (16,000 excess jobs) Copper mining and smelting (2,000 excess jobs)

Sun Corridor Projections 9 TARGET INDUSTRY SECTORS Aerospace/Avionics/Defense/Homeland Security Healthcare and Health Industries Bioscience/Bioindustries/Biotechnology/Biomedical Transportation and Logistics Agriculture/Food Processing/Agricultural Technology Sustainability/Environmental Technology/Renewable Energy – Solar Energy – Environmental Technologies – Water Management – Waste Treatment – Other Renewable Energy (Wind, Biofuels) General Manufacturing – Industrial Machinery Business and Professional Services – Communication Services – Engineering Services Research and Testing – Financial Services – Information Tech./Computer Software & Systems High Tech Industry – High-tech Instruments – Medical Devices – Electronics/Semiconductor – Nanotechnologies – Analytical Instruments

Sun Corridor Projections 10 Economic Interview Summary Global competitiveness Issues –Workforce and education –Infrastructure –Labor costs –Geographic location Constraints to economic development –K-12 education quality –Transportation system –Water and waste water systems –Availability of high skilled workforce –Access to local employment opportunities –Funding is the key to avoiding constraints Water issues –With proper management there will be enough water in Arizona in the long-run –AZ will have to develop incremental water supplies to extend life of resources –There could be temporary localized water shortages –Water will become more expensive

Sun Corridor Projections 11 Case Study: Riverside vs. Pinal County Population Growth –Population growth in Riverside County has remained rapid over extended period of time, indicating Pinal County population growth could remain rapid for many years Employment Growth –The strong economies in Phoenix and Tucson are providing jobs for Pinal County residents and are likely retarding the job creation in Pinal County –Pinal County’s ability to create high wage jobs is limited by its relatively low skilled workforce, and lack of arterial transportation infrastructure within the County Payroll per employee (PPE) –If the example of Riverside County is any indication, the PPE in Pinal County will stay below the U.S. average and below Maricopa and Pima Counties average PPE Employment to Population Ratio (E/P) –Pinal County needs to increase the number of jobs. Over time the E/P will improve, but not to Pima or Maricopa County levels

Sun Corridor Projections 12 Sun Corridor Model

Sun Corridor Projections 13 The Sun Corridor Model The Sun Corridor model was developed using data for the 3-county megapolitan area that includes Pinal, Maricopa and Pima Counties The model consists of an econometric general equilibrium structural model with an embedded cohort survival model

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Sun Corridor Projections 15 Assumptions Economic drivers for model are from Global Insight, “U.S. Economic Outlook” (ST), and “U.S. Economy” (LT), Oct Short-term –Real GDP will decline for three quarters in a row, starting 3Q ’08 Growth will be just 0.2% in –Inflation has peaked and will fall close to zero in mid Long-term –CPI rises at modest 2.0% rate –Real oil prices fall, but remain high by historical standards (no oil embargos in forecast) –Federal budget deficit average 4.4% of GDP –Real consumption grows at 2.1% annual rate –Productivity grows at 2.0% annual rate

Sun Corridor Projections 16 Assumptions The Sun Corridor Forecasting Model used the following demographic assumptions –Birth rates are held constant –Survivorship rates are constant –The distribution of net migrants by age/sex/ethnicity reflects the recent proportions –Total net migration is driven by relative housing prices and economic activity

Sun Corridor Projections 17 Assumptions Gasoline prices in the Phoenix area remain high and drift upward from current levels to near $4.00 per gallon in 2015 Housing prices in the Sun Corridor have fallen significantly –Relative to prices in Los Angeles, the Sun Corridor remains “cheap” –Prices in LA will remain nearly twice those in the Sun Corridor

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Sun Corridor Projections 20 Determinants of Growth In the long term, supply factors matter –Labor force –Capital stock (infrastructure AND human) –Technological progress For the 3-county area, population growth is the most important –Migration flows –Natural increase

Sun Corridor Projections 21 Base Scenario Results

Sun Corridor Projections 22 Highlights: Year million people will live in the Sun Corridor The Sun Corridor will grow into one of the nation’s 10 “megapolitan” areas Growth rates for both population and jobs moderate to near 2% annually

Sun Corridor Projections 23 Forecasts to 2040, Sun Corridor Population (000s) 4,1225,3236,7408,37010,100 Nonfarm Jobs (000s) 1,9252,1803,0203,8304,760 Personal Income ($bil) ,150 Retail Sales ($ bil)

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Sun Corridor Projections 26 Population Dynamics Natural increase (births – deaths) –Birth rates remain relatively constant –Death rates trend upward as population ages –Calculated relative to total population Migration (net) –On average, provides twice the number of natural increase –As a percent of population, continues on downward trend

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Sun Corridor Projections 30 Population Dynamics Retirement-related migration will double as boomers retire –but the numbers are small compared 0-64 age group Work-related migration returns to “average” ( thousand per year) by 2015

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Sun Corridor Projections 32 Population Dynamics Once the economy recovers from current downturn, annual population growth returns to roughly 160,000 per year in 2015 –Then drifts slowly upward

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Sun Corridor Projections 34 Highlights: Year 2040 The proportion of the population age 65+ –will increase significantly, but remain less than nationwide –AZ will remain one of the youngest states School age population remains flat at 21% Hispanics share of the total population rises from 33% to 48% –Hispanic share of school age population increases from 42% to 58%

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Sun Corridor Projections 42 Highlights: Year mil new nonfarm jobs will be created during the next 32 years –4.75 mil total –Most will be in services sectors

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Sun Corridor Projections 44 Changes in Employment, 3-Co.

Sun Corridor Projections 45 Employment Sector Growth Growth Leaders Professional & Business Services Leisure & Hospitality Financial Activities Information Other services Health Care & Social Assistance Growth Laggards Government Construction Manufacturing Mining

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Sun Corridor Projections 48 Highlights: Year 2040 Employment to population ratio recovers after the recession and drifts slowly upward –Nationwide, the ratio remains flat at 0.46 An alternative measure using BEA employment relative to working-age population (15-64) is significantly higher and moves upward more quickly over the forecast period

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Sun Corridor Projections 50 Highlights: Year 2040 PCPI relative to US stabilizes at 88% after ratcheting down during the current recession

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Sun Corridor Projections 52 Long Term Outlook - BASE 10.1 million people in the Valley by 2040 –Population growth rate moderates from 3.7% annually in decade of 1990s to 1.9% in 2030s Hispanic population’s share grows from 31.5% today to 46.4% in 2040 Net migration flows stabilize at 100,000 per year rather than trending ever upward –An increasing share is age 65 and over Proportion of 65+ rises from 12% to 18%

Sun Corridor Projections 53 Long Term Outlook 2.3 mil new jobs will be created by 2040 –Service-related industries play larger role Employment:population steadies at 46% Per capita personal income relative to US stabilizes near 88% A larger portion of our income will come from transfer payments –Less from “property” income

Sun Corridor Projections 54 Alternative Scenarios

Sun Corridor Projections 55 Scenario Forecast Development Forecast scenarios were developed on the basis of the work done on the Demographic & Economic White Papers, and expert interviews National economic forecasts from Global Insight (GI) were used to incorporate alternative economic assumptions of business conditions Future investments in education, workforce development and infrastructure are necessary for Arizona to attract high tech industry, raise income levels, and improve the overall quality of life The level of investment in education and infrastructure, along with national economic conditions were key factors in developing the three forecast scenarios

Sun Corridor Projections 56 Base Scenario Assumes that the national economy will grow according to the GI base (trend) economic forecast Investment in education and infrastructure remains on a business-as-usual basis

Sun Corridor Projections 57 High Scenario Assumptions The GI high economic scenario boosts regional economic growth Relatively higher housing prices in other regions sustains a high rate of in-migration The state makes a commitment to increase expenditures for education and infrastructure on a sustained basis That investment results, with a lag, in better education, improved workforce skills, increased attraction of higher waged industries, higher average wage levels and a better quality of life Increased economic opportunities result in lower birth rates for working aged Hispanic females, but their birth rates remain above those for non-Hispanic females

Sun Corridor Projections 58 High Scenario (Cont.) Increased spending for education and infrastructure raise wages for educators, improves the quality of the workforce and results in greater success attracting, retaining and expanding higher wage industries, including high tech industries Construction employment benefits from increased expenditures for infrastructure development Employment increases in utilities as solar power generation capacity is added Employment also rises in other manufacturing industries due to increased activity in high tech industries such as biotechnology, pharmaceuticals, etc Healthcare industry employment expands due to increased research and development activity and higher incomes Transportation and warehousing employment expand to take advantage of better rail, highway and airport infrastructure

Sun Corridor Projections 59 Low Scenario Assumptions The national economy grows at the GI low scenario Homes in other parts of the country become relatively less expensive than those in the megapolitan region, resulting in slower in-migration rates Expenditures for education and infrastructure are inadequate to support population growth, resulting in deteriorating workforce quality, slower income growth, and a lower overall quality of life in the region The poor quality workforce and weaker infrastructure cause employment to suffer in manufacturing, information technology industries, and those with higher wages and higher workforce skill requirements Transportation and warehousing employment drops due to poorer transportation infrastructure Finally, the diminished quality of life in the region discourages employment in the leisure and hospitality industry as tourism activity declines

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Sun Corridor Projections 67 Population Forecasts to 2040, Sun Corridor (000s) Base 4,1225,3236,7408,37010,100 High 5,3367,0509,15011,490 Low 5,2886,3707,5908,870 Range ,5602,620

Sun Corridor Projections 68 Report Available At: