1. The Economy: Overview & Outlook The Economy: Overview & Outlook GFOAz Conference August 7, 2008 Lee McPheters Professor of Economics W. P. Carey School of Business

2. U.S. Economy U.S. Economy Arizona Economy Arizona Economy Housing Slump Housing Slump Anatomy of Recovery Anatomy of Recovery Economic Update & Outlook

3. Arizona & US Move Together (Nonfarm Employment Percent Change 1970 - 2008) Arizona USA

5. Consumer Confidence Downturn Has Predicted The Last Six U. S. Recessions Consumer Confidence Index from The Conference Board Consumer Sentiment Index from University of Michigan

6. 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

8. High Gas Prices Change Behavior

9. Job Growth/Loss, Thousands U.S. Economy Losing Jobs

10. Source: US Bureau of Labor Statistics and AZ Dept of Commerce RegionUnemployment Rate USA 5.7% (July) Arizona 4.8% (June) Phoenix Metro4.3% Tucson Metro4.7% Flagstaff Metro4.5% Unemployment Creeps Up

11. US Average Unemployment Rate 1976 – 2005 6.2% Unemployment at 6%?

12. Arizona Unemployment Rates Were Higher In Past Downturns 1980/82 Recession 1991 Recession 2001 Recession 4.8

14. Consumer Credit as Percent of Disposable Income

15. GDP Growth Weak in 2nd Quarter … More of The Same Still to Come 20072008 Blue Chip Consensus, July 2008

16. Fiscal Stimulus Package is Adding About 1% to GDP Growth in Quarter 2 & 3

17. GDP Growth in Q2 2008 ComponentQ1 08Q2 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

18. 2007 Real GDP1.6% 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%

19. (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 The Bottom 3 for Job Growth 46 3 5 9 13 20 States Losing Jobs

20. Arizona Job Growth Weaker After 2006 Peak Source: Arizona Department of Commerce % Change Year/Year 2006 20072008

21. Arizona Jobs:12 Mos. Sector Job Growth/Loss Overall -33,000 Health Care + 10,600 Government +9,400 Leisure/Hospitality +3,400 Trade -3,900 Prof/Biz Services -5,300 Financial -7,300 Construction -33,100

22. Arizona Health Sector Source: Arizona Dept. of Commerce Thousands of Jobs 270,000 Jobs June 08 90,000 More Jobs Than Manufacturing Up 50% since 2000

23. Thousands of Jobs Arizona Construction Jobs Peaked In Summer of 2006 2005200720062008 50,000 Jobs Lost Since Mid 2006

24. 3 Year Slowdown 2001 - 2003 Annual Percent Change In Arizona Employment Source: Arizona Department of Commerce

25. Annual Percent Change In Arizona Employment Forecast Source: Arizona Blue Chip Forecast 3 Year Slowdown 2007 – 2009?

26. AZ Housing Slump Continues 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)

27. Arizona Foreclosures: Q1 2008 CategoryNumber% of U.S. All Mortgages 1,211,7322.7% In Foreclosure Now 31,263 (2.6%) 2.8% Subprime ARM 118,5404.5% 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

29. Housing Market Drivers Low mortgage rates Low mortgage rates Population & job growth Population & job growth Creative home finance Creative home finance Move-up buyers Move-up buyers Boomer second homes Boomer second homes Investors Investors

30. Percent Families That Can Afford Median Priced Home Affordability up again from low point in 2006 Source: Phoenix Metro data from National Assoc. Home Builders Arizona Housing More Affordable

31. Metro Phoenix Construction Single family Permits Greater Phoenix Blue Chip Forecast, 2008 Q1

32. Economic Outlook, University of Arizona, April 2008 Metro Tucson Construction Residential Permits

33. Source: US Bureau of Labor Statistics and AZ Dept of Commerce Category20002008* Regional Mall13.214.7 Power Centers27.252.7 Neighborhood36.346.5 Strip10.613.6 Total87.3127.3 Metro Phoenix Retail Space Existing Inventory in Millions Sq. Ft. *8.8 million sq ft now under construction Source: Realty Studies, ASU Poly Campus

34. Annual Percent Growth Source: Arizona Blue Chip Forecast Forecast Arizona Retail Sales Outlook: Recession Level Growth

35. Source: US Bureau of Labor Statistics and AZ Dept of Commerce CategoryFY2006FY2008 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 Decline Percent Change Vs Previous Year Source: Arizona Department of Revenue

36. 200720082009 Annual Percent Change Personal Income6.34.6 4.9 Employment1.20.3 1.4 Single Family Units-29-24 1.1 Retail Sales0.50.7 3.1 Population2.82.3 2.4 ARIZONA BLUE CHIP ECONOMIC FORECAST

37. 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

38. 1 7 2 3 5 4 6 US Census Bureau 13 25 8 12 17 9 Arizona Ranks 2 nd in Arizona Ranks 2 nd in Population Growth (Percent Change 2007 vs 2006) 10 11

39. 1 8 2 4 5 3 US Census Bureau 6 Alaska 9 7 10 Arizona 2nd Fastest Growth State for 25 Years Percent Change: 1980 - 2005

40. 1980 - 2005 Five States Added 3 Million Five States Added 3 Million Or More Residents Since 1980

41. Arizona In-migration From California Still Strong in 2008 200393,194 2004111,397 2005117,000 2006113,791 2007105,402 2008 (Est)102,600 Source: Driver Licenses turned in to AZ Dept of Motor Vehicles

42. Demographics Drive Growth Arizona DemographicsRank Median age 46 Percent > 65 yrs age 22 Percent < 18 yrs age 5 Percent moved last year 4 Domestic Migrants 3

43. Arizona Myths That Will Not Die Elderly Population Everybody is Retired

44. Arizona Ranks as the 5 th “ Youngest” State in U.S. “Great place to retire” is accurate “Everybody is a retiree” is a myth Percent population < 18 yrs, Census Bureau

45. Every time the Arizona population increases by 2.5 people, a new housing unit is needed. Every time the Arizona population increases by 2.5 people, a new housing unit is needed.

46. How Did Higher Home Prices Affect Arizona Economic Development?

47. Housing Affordability Effects Outer urban fringe develops Outer urban fringe develops Retailing follows consumers Retailing follows consumers Cross commuting increases Cross commuting increases Infrastructure needs increase Infrastructure needs increase Roadway construction increases Roadway construction increases Population still growing Population still growing

48. Population in 25 Years Population Doubles (10 mil) 2 nd Largest State in West 10 th Largest State in US Median Age 39.3 Yrs More Children than Seniors U. S. Census Bureau

49. Resale prices fall through 2008 Resale prices fall through 2008 New sales, starts up in 2009 New sales, starts up in 2009 Population growth is critical Population growth is critical Tighter lending standards Tighter lending standards Non residential will slow Non residential will slow Construction Outlook Summary Construction Outlook Summary

50. Consumer in retreat Consumer in retreat Stagnant job growth Stagnant job growth Lots of housing inventory Lots of housing inventory 170,000 new residents? 170,000 new residents? Weak – but not yet bleak Weak – but not yet bleak Arizona Outlook Summary Arizona Outlook Summary

51. Thank You GFOAz! Lee.mcpheters@asu.edu W. P. Carey School of Business Arizona State University