Tucson Association of Realtors Scanning the Economic Horizon US/Arizona/Tucson Update & Outlook Tucson Association of Realtors April 5, 2018

Economic Update & Outlook Current expansion on track to be longest on record (120 months) if it continues to mid 2019 Confidence is strong, wages are rising, inflation is moderate, unemployment is at 17 year low Arizona has recovered and is now among the leading states for job gains and population growth Indicators show no recession on the horizon - but policy mistakes or external events are threats

Two Cheers For 2017 GDP GDP Components 2016 Growth 2017 U. S. (Real) GDP 1.5% 2.3% Consumer Spending 2.7 2.8 Gross Investment -1.6 3.3 Residential Construction 5.5 1.8 Exports -0.3 3.4 Imports 1.3 4.0 Government Spending 0.8 0.1 U. S. Bureau of Economic Analysis, GDP Accounts, March 28, 2018

12 Years of Below Normal GDP Growth (Average 1965 – 2005 = 3.3% Real GDP Growth) Annual Percent Change U. S. Bureau of Economic Analysis, March 28, 2018

From The Demand Side: the U. S. Consumer is Key to GDP Growth Accounts for 70% of GDP…but.. Consumers reluctant to spend Growth 1956 – 2006 = 3.6% year Growth since 2010 = 2.4% year 2017 growth was 2.8% Low real income main headwind

Middle Class Family Income Up Less Than 2% in 10 Years U.S. Arizona

Greatest Income Gains to Top .01% Source: http://wid.world/ $6.7 mil avg 1980 $1.6 mil Top 1% $1.4 mil avg 1980 $.5 mil 1980 $34,062 Bottom 90% $34,074 avg Source: http://wid.world/

Most Americans Are Not Benefitting From Greater Productivity Productivity is up But Real Hourly Worker Pay Little Changed Since 1978 Productivity Real Hourly Pay

Who Are the Top One Percent of Earners? (Household Income = $500,000 or More)* Occupation Percent Executives/Managers 31.0 Medical 15.7 Financial 13.9 Lawyers 8.4 Technical/Engineering 4.6 Skilled Sales 4.3 Real estate 3.2 Own Business 3.0 Professors/Scientists 1.8 Arts/Media/Sports 1.6 Top 5 Occupations Account for 74% Of Top One Percent Managers, Financial, Technical Account For 49.5% *Average Income $1.4 mil http://web.williams.edu/Economics/wp/BakijaColeHeimJobsIncomeGrowthTopEarners.pdf

In 1930, how did Babe Ruth explain why his salary of $80,000 was higher than that of U.S. President Herbert Hoover…? That’s because I Had a better year than Hoover…! Babe Ruth, Baseball Player Herbert Hoover, President

From the Supply Side: How to Increase U.S. GDP Growth to 3% a Year Again Economic Theory Tells Us O = f(L, K) (Output depends on labor & capital) Increase labor (immigration, participation rate) Increase capital (investment in R&D, equipment) Improve labor (training, education) Improve capital (technology, innovation) Increase efficiency (total productivity) Theorist

Productivity Slowed in “App Era” (Productivity Up When Innovation Replaces Human Labor) Computers Internet Boom Browser Wars ecommerce Robotics Great Inventions Electricity Automobile Oil & Gas Machinery App Era Smart Phones Google Facebook Twitter Sharing Refinements Jet Airplanes Microwave Air Conditioning Next? Internet of things Drones DNA/Medical Annual Average Increase in Worker Output/Hour Source: Robert Gordon, National Bureau of Economic Research

What Optimists are Saying Tax cuts will boost growth New infrastructure plan will stimulate economy Wage gains will increase consumer spending (70% of GDP) Weaker dollar will raise export sales and jobs Confidence remains strong

What Pessimists are Saying Slow grow of productivity and labor force are critical problems Wage increases bring inflation, high interest rates, recession risk Tax cuts and Federal spending will increase deficit, cost of debt service Mistakes by Fed, Congress or the Executive branch can cause collapse in business, consumer confidence

14th Year of GDP Growth Under 3.0% U.S. Economic Outlook 14th Year of GDP Growth Under 3.0% Indicator 2017 2018 2019 Real GDP Growth 2.3% 2.8% 2.4% Inflation (CPI) 2.1% 2.2% Employment Growth 2.3 mil 2.4 mil Unemployment Rate 4.4% 3.9% 3.7% 10 Year Treasury Note 2.9% 3.3% W. P. Carey School of Business, based on data available April 2018

ARIZONA Economic Outlook Indicators 2017 2018 2019 63.9 69.3 85.2 2.4 New Jobs (thousands) 63.9 69.3 85.2 Nonfarm Employment (% change) 2.4 2.5 3.0 Personal Income (% change) 4.3 5.2 6.3 Population (% change) 1.6 1.7 Single Family Permits (% change) 11.0 20.0 15.0 W. P. Carey School of Business, based on data available April 2018

Tucson MSA Economic Outlook Indicators* 2017 2018 2019 3.0 4.4 5.2 1.1 New Jobs (thousands) 3.0 4.4 5.2 Nonfarm Employment (% change) 1.1 1.3 1.4 Personal Income (% change) 3.2 4.8 Population (% change) 0.8 0.6 Residential Permits 2,862 2,940 3,032 Economic and Business Research Center, The University of Arizona, December 2017*

Arizona 5th in Job Creation Among States in 2017 Ranked by % Change: (2017 over 2016) 6 10 40 1 3 5 Top 10 Job Growth 4 7 8 9 2 Lost Jobs U. S. Bureau of Labor Statistics & W. P. Cary School of Business 18

Tucson Area Has Not Yet Regained All Jobs Lost in “Great Recession” March 2007 Peak (387,200) February 2018 (381,200) July 2011 Bottom (350,300) U.S. Bureau of Labor Statistics

Tucson Unemployment Rate Has Remained Below Arizona Rate Throughout This Cycle Arizona Unemployment Rate Tucson Unemployment Rate U.S. Bureau of Labor Statistics

Fastest Growing Arizona Industries Percent Change & U.S. Rank: 2017 Arizona Industry % Change U.S. Rank Nonfarm Employment 2.4 5 Private Employment 2.7 4 Construction 7.4 3 Finance & Insurance 5.0 1 Transport/Warehousing 4.0 10 Health Care 3.3 6 Food Services 3.2 U. S. Bureau of Labor Statistics

Tucson Area Job Growth 2017 Industry New Jobs % Growth Overall Job Growth 5,400 1.4 Private Job Growth 4,600 1.6 Manufacturing 910 3.9 Construction 850 5.7 Government 810 1.1 Business Services 600 Food Services 590 1.9 Financial Activities 330 W. P. Carey School of Business & U. S. Bureau of Labor Statistics http://research.wpcarey.asu.edu/economic-outlook/job-growth/

Arizona New Jobs Created: 2017 Number of Arizona Jobs Added by Industry: 2017 Job Growth Notes Arizona added 63,890 new jobs in 2017 The health care industry was the source of the most new jobs (11,700) Construction added 10,000 new jobs, the most since the boom period of 2006 There were 9,100 new financial jobs, with an annualized growth rate of 4.5 %, first in the nation for the second straight year U. S. Bureau of Labor Statistics

Health Care is A Recession-Resistant Growth Driver For the Arizona Economy Health Care Job Growth: Arizona vs. All States 2011 2012 2013 2014 2015 2016 2017 5th 2nd 10th 11th 3rd 2nd 6th 18% of New Jobs Health care accounted for nearly one out of every five new Arizona Jobs in 2017 Arizona Employment (000 of Jobs) 2000 2002 2004 2006 2008 2010 2012 2014 2016 Health Care Jobs (right axis) All Arizona Jobs (left axis) 25% of Residents One out of every four Arizona residents receives Medicaid health funding U.S. Bureau of Labor Statistics, Kaiser Foundation, AHCCCS

Defense Spending Benefits Pima County U. S. Department of Defense, U.S. Bureau of Economic Analysis, U. S. Census Bureau

Arizona Population: 2017 3rd Largest in West (behind Calif., Wash.) 14th Largest State (7.0 mil) 3rd Largest in West (behind Calif., Wash.) 6th Fastest Growth Rate (1.6%) 7th In New Residents (107.6K) 5th in Domestic Migration (63,111) 18th in International Migration (16,205) U. S. Census Bureau, December 2017

Arizona Ranked 6th Fastest in Population Growth in 2017 Top 10 Growth States Lost Population 4 12 9 1 2 3 8 20 6 39 10 7 U. S. States Ranked by Percent Change 2016-2017 5 U. S. Census Bureau, Dec. 2017

Arizona Population Growth Stabilizes After Slow Recovery From Recession 107,628 New AZ Residents in 2017 Annual Percent Growth Forecast W. P. Carey School of Business and U.S. Census Bureau (Dec. 2017)

Arizona Ranks 5th Among All States for Domestic In-Migration Gained In-Migrants Lost Out-Migrants 4 14 10 12 9 13 11 3 Alaska Hawaii 8 5 6 7 2 28 States in Red Lost Domestic Population to 22 States in Green 1

Pima County In-Migrants Originate Mostly In Other Arizona Counties or California Origination of In-Migrants Percent of Total Arizona 34.6% California 13.4 Texas 5.1 Washington 3.3 Florida 3.0 Colorado 2.5 Michigan 2.4 Illinois 2.3 New Mexico 2.1 Subtotal 34.2% Arizona and California account for nearly one half (48%) of in-migrants to Pima County in the years 2011-2015 California, Texas, Washington and Florida account for 24.8% of in-migrants to Pima County https://www.census.gov/data/tables/2015/demo/geographic-mobility/county-to-county-migration-2011-2015.html

Tucson Out-Migrants Tend to Have Higher Incomes and Education Levels Characteristics Phoenix Tucson Prescott Los Angeles Lafayette Income in ($000) $49.4 $41.2 $45.0 $55.0 $39.0 Income Out ($000) $45.5 $45.9 $38.1 $46.8 $42.0 College BA In (%) 39.9 40.4 31.5 51.7 43.3 College BA Out (%) 36.1 43.4 30.8 45.2 Home Owner In (%) 33 28 41 17 21 Home Owner Out (%) 25 29 26 24 Notes: The analysis compares domestic in-migrant and out-migrant characteristics by metropolitan areas. For example, in-migrants to Phoenix and Prescott have higher incomes than out-migrants, while those moving in to Tucson have lower incomes than those moving out. Data from U.S. Census 2005-2016, metro to metro movement. https://www.buildzoom.com/blog/characteristics-of-domestic-cross-metropolitan-migrants

Annual International Migration to Arizona is Down By Half Since 2001 Domestic Migration International Migration Thousands of Persons 63,111 16,205 141,000 62,000 34,000 U.S. Census Bureau

4th Year of Home Building Gains 20% Arizona Rise Expected in 2018 Arizona Single Family Permits Forecast U.S. Census Bureau & W. P. Carey School of Business

Arizona Home Ownership Rate Has Declined from Pre-Recession Peak U.S. U.S. Census Bureau

What Is Holding Back Home Building? Some Want A House But Cannot Buy One Low credit score Prior foreclosure Student loan debt Prices too high

What Is Holding Back Home Building? Some (Millennials) Don’t Want A House At All! Live with parents Live with a group Marry much later Want urban lifestyle Prefer to rent Housing seen as bad investment

Arizona Economic Outlook Summary-2018 Arizona unemployment rate is at 10 year low. Key industries are strong and growing: Finance, Manufacturing, Construction, and services such as Health Care and Food Services But Tucson area economy has lagged, with slower population gains and modest job growth Population, start ups, and cost structure will drive growth in 2018 – U.S. business cycle is greatest risk

“The function of economic forecasting is to make astrology look respectable.” John Kenneth Galbraith

Can Anybody See What’s Coming? Really? Statement: December 2007 "To sum up the story on the outlook for real GDP growth, my own view is that, under appropriate monetary policy, the economy is still likely to achieve a relatively smooth adjustment path, with real GDP growth gradually returning to its roughly 2½ percent trend over the next year or so, and the unemployment rate rising only very gradually to just above its 4¾ percent sustainable level." GDP fell in five of the next six quarters and unemployment rose to 10 percent within two years Janet Yellen Dec. 2007

Can Anybody See What’s Coming? Really? Statement: December 2007 “The recession debate is over. It’s not going to happen.” National Review Kudlow’s Money Politics GDP fell in five of the next six quarters and unemployment rose to 10 percent within two years Larry Kudlow Dec. 2007

But 3% Growth Stays Elusive 2018: U. S. GDP Improves - But 3% Growth Stays Elusive Venti Grande Tall W. P. Carey School of Business, based on data available April 2018

Thank You Tucson Area Realtors! Thank You Sponsors! Lee McPheters lee.mcpheters@asu.edu