1. The Economic Outlook for the U.S. and Arizona For Presentation at the: Arizona City/County Management Association Meetings July 26, 2012 Presented by Ronald J. Gunderson Professor of Economics Northern Arizona University

2. An economic forecaster is like a cross-eyed javelin thrower; he doesn’t win many accuracy contests, but he keeps the crowd’s attention. -- Anonymous

3. Manufacturing Drops for 1 st time in 3 years – July 3, 2012 Headline Institute for Supply Management Report Production & exports of manufactured goods declined along with the number of new orders The decline comes as: U.S. employers have cut back on hiring Consumers have become more cautious Europe is entering a recession Manufacturing in China is also slowing 3 Source: Institute for Supply Management, In: The Arizona Republic July 3, 2012

4. Manufacturing Decline – cont’d “This is not good” --Dan Greenhaus, Chief Economic Strategist at BTIG Brokerage 4

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6. Our Current Dilemma Technically, we have been out of recession since June 2009, but most people don’t believe it and many are worse off today than 3 years ago 6

7. So, why do we feel so badly? Unemployment is still much higher than usual for this portion of the recovery in the business cycle The political scene has led to gridlock in government Workers’ share of income has fallen to historic lows Uncertainty in global markets (Europe & China) is causing some investors to postpone decisions Demand and Supply in the housing sector have not found a stable equilibrium in many locations 7

8. Analysis of Recession What is different about this cycle? Although recession technically ended three years ago, we didn’t bounce back in terms of: Rapid increase in GDP Large decline in unemployment Increase in personal income and spending Why not? 8

9. A potential issue may be: The Decline of the Middle Class More and more attention is being paid to this topic in the past couple years “Workers’ wages and benefits make up 57.5 percent of the economy, an all-time low.” “Until the mid-2000s, that figure had been remarkably stable – about 64 percent through boom and bust alike 9 Source: Paul Wiseman, Associate Press, in The Arizona Republic. July 2, 2011

10. Increasing Income Inequality The Gini Index is a measure of income inequality that can range from 0 to 1. The latest Gini Coefficient in U.S. is.468 The coefficient has increased by 20% over the past 4 decades. The U.S. number is similar to the Philippines and Mexico! Zero indicates everyone gets the same income One indicates all the income is received by just one person Source: As Middle Class Shrinks, P&G Aims High and Low. The Wall Street Journal, September 12, 2011. 10

11. Worldwide GINI Coefficients 11

12. Why is this a problem? John Hobson – English economist (wrote in 1902) The poor didn’t have enough money to buy goods The rich couldn’t consume enough Countries looked to external markets (Imperialism) Multinationals then and now do the same thing Investment in foreign markets is profitable Imperialism leads to: High unemployment in the home country Increase in social unrest Increases in inequality of income and wealth 12

13. The Price of Inequality Joseph Stiglitz, 2012 The numbers show that the American Dream is a myth. There is less equality of opportunity in the U.S. today than there is in Europe, or in any advanced industrial country. This is one of the reasons for the high and rising level of inequality today. In the 2009-2010 recovery period, the top 1% of the income earners received 93% of the income growth. 13 Joseph E. Stiglitz, The Price of Inequality

14. The Price of Inequality Joseph Stiglitz, 2012 Inequality, which causes a lack of opportunity in education and potential jobs, leads to lower growth and less efficiency because increasing numbers of people are not being fully utilized (unemployed or underemployed) and the value of those resources is lost forever. 14 Joseph E. Stiglitz, The Price of Inequality

15. The Price of Inequality Joseph Stiglitz, 2012 At the same time the rich, who require fewer public services, are afraid that a strong government might try and redistribute wealth, so they apply pressure to the Congress or legislatures to reduce taxes or cut government spending. This, in turn, leads to even less expenditure for education, health care, physical infrastructure, etc. and in the process further reduces the potential for growth. 15 Joseph E. Stiglitz, The Price of Inequality, & commentary by Aaron Task, host of The Daily Ticker.

16. The Price of Inequality Joseph Stiglitz, 2012 “Stiglitz believes inequality of wealth and opportunity are hurting the overall economy by limiting competition, promoting cronyism and keeping those at the bottom from reaching their potential.” Stiglitz says: “Income inequality is ultimately detrimental to those at the top too…..we’ve created an economy that is not in accord with the principles of the free market.” 16 Aaron Task, host of The Daily Ticker. June 2012

17. The Price of Inequality Joseph Stiglitz, 2012 Stiglitz believes the U.S. could reverse this trend, and he recommends “improving education and nutrition for those at the bottom of society, and eliminating ‘corporate welfare’ and other policies which ‘create wealth’ but not economic growth.” Brazil has done this to reduce income inequality, but (I ask) how likely is this in the U.S. today? 17 Aaron Task, host of The Daily Ticker. June 2012

18. Coming Apart -The State of White America 1960-2010 -- Charles Murray (2012) American ‘civic culture’ is dying as the country evolves into a two-class society The few ‘elites’ live in a totally different culture than the rest of society and they don’t have any clue how most people live 18 Source: Summary by Aaron Task. Daily Ticker, May 3, 2012.

19. Coming Apart Charles Murray - 2012 The new role for “class” in our culture wouldn’t mean so much except that it is this narrow elite who control almost everything Political system Financial system Media & information streams Access to education Murray concludes …….We are coming apart 19

20. Coming Apart -The State of White America 1960-2010 -- Charles Murray (2012) Ernest Hemingway may have said that “the difference between the rich and everyone else is that the rich have more money” But today, it’s more than money – it is an entirely different culture and way of life…….. 20

21. Coming Apart Charles Murray - 2012 Differences in....... Amount and type of TV shows & movies Restaurants Books & music Views on marriage Views on diet & smoking Education of their children How children spend their time 21 Source: Summary by Aaron Task. Daily Ticker, May 3, 2012.

22. Coming Apart Charles Murray - 2012 The two classes rarely come in contact because they are also separated geographically regarding their zip-codes of residence Increased isolation Less understanding Increased indifference There is NO COMMON IDEA of what it means to be an American 22 Source: Summary by Aaron Task. Daily Ticker, May 3, 2012.

23. Coming Apart Charles Murray - 2012 Historically, class has not been a part of the American culture Today, there’s “an awful lot of people very comfortable thinking they are the upper class” They think, “why should I associate with those bozos?” A culture of separate classes is new to America 23 Source: Summary by Aaron Task. Daily Ticker, May 3, 2012.

24. The Movie: Avalon (1990) “Avalon was not just a place; it was a time.” Could the 60 years in the Post-WWII period have been a time – a period in history that was unique and one that won’t be repeated? 24

25. Is there a way out? Maybe not! We may just be ‘pushing on a string’ The potential exists for a “lost decade” or even several “lost decades” before the economy finds a new normal.......and the old normal may never return. 25

26. What about today’s tools? Traditional expansionary tools aren’t working…. Monetary Policy Interest rates are already low “Animal Spirits” have not been kindled Investment is low because uncertainty is high What can be gained by lowering interest rates if businesses don’t wish to borrow? 26

27. What about today’s tools? (continued) Fiscal Policy Another stimulus plan would increase demand by increasing the level of potential spending, but it won’t happen:  Going further into debt seems risky  Raising taxes to fund it is just too unpopular  Printing money would be inflationary Government could reduce taxes again but:  Public services and infrastructure are already lagging  Lower taxes won’t generate more spending if people pay down debt or increase savings instead of buy more goods 27

28. What Needs to Occur to End the Lingering Effects of Recession? Reduce Uncertainty…. Congress has to assume much of the blame. They need to work together in order to build confidence Housing has to return as a strong and stable sector, but without the rise in speculative pricing Credit needs to be made available to the middle class which is currently not happening Problems in Europe need to be resolved And, people need to believe all of this can happen

29. What Needs to Occur to End the Lingering Effects of Recession? Notice that I did not include: Reducing taxes Balancing the federal budget Tax rates & the annual deficits are less important factors in the overall picture Yet, these issues are politically popular & what Congress addresses

30. Consumer Confidence Index DateIndex June 201262.0 May 201264.4 April 201268.7 June 201157.6 Most Recent Low February 200925.3 Most Recent High February 201270.8 Source: The Conference Board & Associated Press. (90.0 represents healthy conditions) 30

31. My Forecast for the U.S. The U.S. will not return to a healthier state so long as there is: Anti-government sentiment that government is the enemy & doesn’t create jobs Anti-Federal Reserve sentiment Worsening distribution of wealth & income An unwillingness to work together in Congress A double-dip recession is possible – particularly if the ‘fiscal cliff’ coming on January 1st is not addressed

32. State & Local Governments Spending and investment by state and local governments is shrinking & causing a drag on the economy unless the private sector steps up. State & local government spending as a percent of GDP: 201111.9% 202010.0% (projected by Macroeconomic Advisers) This would be lowest level since the mid-60’s 32 Conor Dougherty, The Wall Street Journal, June 25, 2012

33. State Outlook Where is Arizona headed in view of the national situation? 33

34. Economic Strength Rankings Policom Corporation Source: Economic Strength Rankings – 2012 Policom Corporation. www.policom.comwww.policom.com 34 Policom.com – William (Bill) Fruth Metropolitan Areas:366 areas w/50,000+ Micropolitan Areas:576 areas w/10,000 + In Arizona: 6 Metro areas with 7 counties 5 Micro areas with 6 counties Only Apache & La Paz are in neither group

35. Economic Strength Rankings Policom Corporation Source: Economic Strength Rankings – 2012 Policom Corporation. www.policom.comwww.policom.com 35 Economic Strength has 3 components: Looks at size and quality of growth over time: Growth:Earnings, jobs, wages Behavior:Changes in small business, construction & retail trade Negative:Welfare, Medicaid

36. Metropolitan Strength Rankings County or Multi-County Ranking out of 366 Source: Economic Strength Rankings – 2012 Policom Corporation. www.policom.comwww.policom.com 36 Metropolitan Areas2012201020082006 Flagstaff (Coconino) 203187214158 Lake Havasu-Kingman (Mohave) 330217176182 Phoenix-Mesa-Glendale (Maricopa & Pinal) 36 16 6 8 Prescott (Yavapai) 333248215285 Tucson (Pima) 218158120 87 Yuma (Yuma) 260271310278

37. Micropolitan Strength Rankings County or Multi-County Ranking out of 576 Source: Economic Strength Rankings – 2012 Policom Corporation. www.policom.comwww.policom.com 37 Micropolitan Areas2012201020082006 Nogales (Santa Cruz) 181161275205 Payson (Gila) 462378418432 Safford (Graham & Greenlee) 351220310443 Show Low (Navajo) 338326317n/a Sierra Vista – Douglas (Cochise) 80 38 97 90

38. Arizona Annual Net Migration YearNet Migration from Outside Arizona 2005147,000 2006139,500 2007100,100 2008 37,400 2009(31,800) 2010(31,900) 2011 (1,700) 38 Arizona’s Economy, Economic and Business Research Center. Eller College of Management March 2012.

39. General Fund Revenues (11 mo’s) Arizona General Fund Revenues ($ in Millions) YTD FY 2012 Collections: $ 7,989.3 Difference From Budget Forecast$ 60.2 Difference From FY 2011$ 602.4 Percent Difference from FY 2011+ 6.0% 39 Joint Legislative Budget Committee, Monthly Fiscal Highlights, June 2012

40. Individual Income Tax (11 mo’s) Individual Income Tax ($ in Millions) YTD FY 2012 Collections: $ 2,757.8 Difference From Budget Forecast$ 32.8 Difference From FY 2011$ 206.7 Percent Difference from FY 2011+ 8.1% 40 Joint Legislative Budget Committee, Monthly Fiscal Highlights, June 2012

41. Sales Tax Collections (11 mo’s) Arizona Sales Tax Collections ($ in Millions) YTD FY 2012 Collections: $ 3,347.8 Percent Difference from FY 2011 Overall +5.3% Restaurant & Bars7.7% Contracting7.4% Retail5.7% Utilities1.1% 41 Joint Legislative Budget Committee, Monthly Fiscal Highlights, June 2012

42. Average Weekly Hours Worked (Statewide) 42 Arizona Department of Administration. Current Employment Statistics, Various Issues.

43. Average Hourly Earnings in $$ (Statewide) 43 Arizona Department of Administration. Current Employment Statistics, Various Issues

44. Projected 2011-2013 Job Gains by Sector (in thousands) 44 Source: Arizona Department of Administration, Employment Forecast, May 4, 2012

45. County Hotel Occupancy Rates 2012/2011 YTD 45 Smith Travel Research in Arizona Office of Tourism; May 2012

46. Projected Retail Sales for 2013 based on the month the projection was made in 2012 46 Western Blue Chip Forecasts Made in 2012. ASU W.P. Carey School of Business

47. Projected Employment Growth for 2013 based on the month the projection was made in 2012 47 Western Blue Chip Forecasts Made in 2012. ASU W.P. Carey School of Business

48. Projected Single Family Housing Permits for 2013 based on the month the projection was made in 2012 48 Western Blue Chip Forecasts Made in 2012. ASU W.P. Carey School of Business

49. Permits for Single Family Home Construction Permits have increased over the last 6 months May 2012: 1,330 for Maricopa and Pinal Counties This is an increase of 85% over May 2011 The highest monthly total since June 2008 This is still low compared with historical numbers Single family homes comprise only a small share of the market 49 Greater Phoenix Housing Market – May 2012. Center for Real Estate Theory and Practice, W.P. Carey School of Business.

50. National New Home Sales (May 2012 data reflect the annual rate that would occur) 50 Source: National Association of Homebuilders - www.nahb.org

51. National Existing Home Sales (May 2012 data reflect the annual rate that would occur) 51 Source: National Association of Homebuilders - www.nahb.org

52. Projected Change in Personal Income by State 52 Western Blue Chip Forecasts Made in July, 2012. ASU W.P. Carey School of Business

53. Projected Change in Employment by State 53 Western Blue Chip Forecasts Made in July, 2012. ASU W.P. Carey School of Business

54. Looking Ahead The national economy plays a significant role in the health of the state economy – and there is little chance of any pickup nationally until after the election. At the same time, internal forces appear to have turned around in some sectors within the state which will have the impact of pulling Arizona ahead of the national average with respect to short-term growth. 54