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

2. 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

3. 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

4. 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

5. 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

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

7. 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:

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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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*

18. 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

19. 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

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

21. 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

22. 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

23. 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

24. Health Care is A Recession-Resistant
Growth Driver For the Arizona Economy
Health Care Job Growth: Arizona vs. All States
5th nd th th 3rd nd th
18% of New Jobs
Health care accounted for
nearly one out of every five
new Arizona Jobs in 2017
Arizona Employment (000 of Jobs)
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

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

26. 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

27. 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 5
U. S. Census Bureau, Dec. 2017

28. 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)

29. 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

30. 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
California, Texas, Washington and Florida account for 24.8% of in-migrants to Pima County

31. 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 , metro to metro movement.

32. 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

33. 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

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

35. 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

36. 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

37. 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

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

39. 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

40. 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

41. 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

42. Thank You Tucson Area Realtors! Thank You Sponsors! Lee McPheters