Arizona Outlook GFOAz Conference February 19, 2009

Economic Outlook US Recession Watch Arizona Jobs Arizona People Arizona Housing Outlook Summary

US RECESSION WATCH How long in duration? How severe in depth?

Is This a Repeat of the GREAT DEPRESSION? Feb Andrew Mellon Secretary of the Treasury for Herbert Hoover "There is nothing in the situation to be disturbed about."

%-6.4%-13.0%-1.3%+10.8% In the Great Depression real GDP declined for 4 years & 27% Another Great Depression?

2008 Q32008 Q42009 Q12009 Q22009 Q3 -0.5%-3.8%-4.9%-1.5%+0.8% In the current downturn real GDP is expected to fall for 4 quarters & 2-3% Blue Chip Consensus Another Great Depression?

GDP Recovery in 2nd Half? Percent Change in Real GDP at Annual Rate Blue Chip Consensus

Survey of Leading Economists 90% say recession will end by Q % say unemployment will peak in 2010 Blue Chip Economic Indicators, February 2009 Blue Chip Consensus _ _ _ 50 Top Economists

Longest Since The Depression Post-War Recessions Months Average: 10 Previous Post-War Recessions10 mos. Longest ( & )16 mos. Current Recession (Duration since 12/07)14 mos. Current Recession Forecast (12/07 – 12/09)24 mos. The Great Depression ( )43 mos. Historical data: National Bureau of Economic Research

GDP Growth in Q ComponentsQ3 08Q4 08 Consumption -3.8% -3.5% Exports 3.0% -19.7% Residential Building -16.0%-23.6% Non-Residential Building 9.7% -1.8% Change in Real GDP -0.5% -3.8% U.S. Bureau of Economic Analysis, January Report

Percent Growth In Consumer Spending at Annual Rate U. S. Consumer Spending Negative Again in Q First negative quarter since 1991

Consumer confidence sinks

Auto sales worst in 26 years

Neighborhood Banks Doomed to Fail? 1930: 744 Bank Failures1930: Failures 2008: 25 Bank Failures2008: Failures

8,500 Banks 171 on “Watch List” Problem banks: What you need to know The FDIC is keeping close tabs on 171 banks

Job Growth/Loss, Thousands 12 Months of U.S. Job Loss 2 million jobs lost

Monthly Percent Change vs Year Ago Arizona Job Losses in 2008 Worst since -4.6% June 1975

12 Months Into Recession Arizona Weaker Than US Non-Farm Job Loss After 12 Months% Loss Average 10 Post-War Recessions-2.0% U.S. in Current Recession-2.0% Arizona (Dec./Dec.)-4.3% Wyoming (Dec./Dec.)+2.2%

Arizona & US Move Together (Employment Year/Year Percent Change ) Arizona USA You are here

Five Recessions Since 1970 Arizona Follows U.S. Energy Stagflation Fed Policy S & Ls Energy Leverage Tech Bubble Energy Housing Leverage

Real GDP Growth1.3%-2.0% 2.0% Employment Growth-0.2%-2.5%0.0% Inflation (CPI)3.8%-1.0%1.8% Housing Starts (000) US Economic Forecast W. P. Carey School of Business, ASU

(Percent Change Dec vs Dec. 2007) U. S. Bureau of Labor Statistics Red: 42 States Losing Jobs Arizona Ranks Near Last in Rate of Job Creation 8 20 Green = Growth 7

116,500 Arizona Jobs Lost Sector Dec 08 vs Dec 07 Overall -116,500 Health Care +9,400 Arts, Entertainment +1,200 Government (Fed/Local) +3,600 Employment Services -10,800 Retail Trade -25,200 Food Service -11,200 Construction -43,800

Less Harmed by Recession Food, guns, alcohol Online commerce Repair & maintenance “Down market” retail Health care & related

Hit Hardest by Recession Discretionary & postponable Temporary worker agencies Retail outlets, restaurants Auto dealers, appliances Finance & insurance Construction, home stores

Thousands of Jobs 80,000 Arizona Construction Jobs Lost Since Summer of

Arizona Unemployment Rates in Recession % % % % (Dec) Unemployment at 7%?

US Census Bureau Arizona 2 nd in Population Arizona 2 nd in Population Growth Among All States Percent Change 2008 vs

14 th Largest State 2 nd Fastest Growth Rate 5 th in New Resident Count 3 rd in Domestic Migration Count 9 th in International Migration Count Arizona Population Rank 2008

Population in 2030 Population 10.7 Million 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

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.

AZ Housing Slump Continues Single Family Q3 ‘07 Permits - 30% Resales - 31% Prices (Phx) - 4.1% Source: National Assoc Realtors; US Census Single Family 2008 Permits - 53% Resales +10% Resale Price -26% Source: US Census, National Assoc. Realtors

10 Months Supply of Housing for Sale in US Market Months Supply

(Percent Change Dec vs Dec. 2007) U. S. Bureau of Labor Statistics Red: Loss of 10% or More 3 States Add Construction Jobs Green = Growth

Population growth Population growth Employment growth Employment growth Mortgage rates Mortgage rates Mortgage standards Mortgage standards Move-up buyers Move-up buyers Investors Investors Housing Market Drivers

Affordability Rebounds Share of Phoenix home sales affordable at median income Phoenix Affordability National Association of Home Builders, 2008 Q3

Metro Phoenix Construction Single family Permits Greater Phoenix Blue Chip Forecast, 2008 Q4

Economic Outlook, University of Arizona, December 2008 Metro Tucson Construction Single Family Permits

Arizona Public Service ASU AZ Dept. Commerce Davidson Fixed Income Econ-LincEconLit Elliott Pollack Co. JLBC Maguire Co. Northern Arizona Univ. Salt River Project Stellar Capital S’west Growth Partners Univ. of Arizona VisionEcon Wells Fargo Blue Chip Forecast Panel Blue Chip Forecast Panel

Annual Percent Change Personal Income Employment Single Family Units Retail Sales Population ARIZONA BLUE CHIP ECONOMIC FORECAST

Arizona Employment: No Job Growth Until 2010 Annual Numeric Change In Arizona Employment

Annual Percent Change In Arizona Employment Arizona Employment: No Job Growth Until 2010

Annual CY Percent Change Source: Arizona Blue Chip Forecast Forecast Arizona Retail Sales: Recession Level Growth

Source: US Bureau of Labor Statistics and AZ Dept of Commerce CategoryCY2006CY2008 Building Supplies Apparel Furniture Restaurant/Bar Motor Vehicles Arizona Retail Sales Decline Percent Change Vs Previous Year Source: Arizona Department of Revenue, collections

Stagnant economy 2009 Stagnant economy 2009 No job growth until 2010 No job growth until 2010 Unemployment goes up Unemployment goes up Population growth is critical Population growth is critical Wait for US economic recovery Wait for US economic recovery Arizona Outlook Summary

Resale prices fall next 9 mos. Resale prices fall next 9 mos. New starts, resales up end 2009 New starts, resales up end 2009 Tighter lending standards Tighter lending standards Non residential building stops Non residential building stops Watch population growth Watch population growth Construction Outlook Summary

Anatomy of Recovery National economy rebounds Population growth improves Home prices stabilize Housing inventory falls Job creation increases Unemployment declines General confidence restored

Worse economic news ahead Worse economic news ahead Housing must bottom out Housing must bottom out Recovery late 2009? Recovery late 2009? Unemployment at 8%? 10%? Unemployment at 8%? 10%? Stimulus plan to boost growth Stimulus plan to boost growth National Outlook Summary National Outlook Summary

Economic Policy Options 1. Monetary policy (credit & interest rates) Lenders must lend, borrowers must borrow Works with a lag, no direct job impacts 2. Tax Cuts (give rebates & reduce rates) Smaller impact but rate cuts keep on working Rebates saved or pay off debt, one time impact 3. Spending on Infrastructure, state aid Takes time to implement, larger multiplier Job impacts end when projects end But infrastructure may support growth

Stimulus Plan: A HybridComponent To 2019 Total Tax Cuts/Aid$116$245 $28$389 Infrastructure $29 $83$142$254 State/Local Gov $40 $72 $32$144 Total$185$400$202$787 $787 Billion Program