1. Economic Outlook Arizona Government Finance Officers February 17, 2012 Alan E. Maguire

2. Economic Outlook Where we are and where we are going” US Economy in the Global Economy Arizona Economy in the US Economy Drivers of Economic Growth

3. Economic Outlook Where we are and where we are going” US Economy in the Global Economy Arizona Economy in the US Economy Drivers of Economic Growth

4. Economic Outlook US Economy in the Global Economy How We Got Here The Current Context The Outlook Long-Term Trends Lessons from the Past

5. How We Got Here “Those who don't know history are destined to repeat it.” -- Edmund Burke End of the “Great Moderation” Federal Policies Led to Housing Bubble Easy Money Led to Recession Postponed Economic Outlook

6. What Happened? The “House of Cards” Collapsed End of the Housing Run, led to Destabilization of Mortgage Debt, led to Financial Market Contagion PLUS Cyclical Recession – On Top! Economic Outlook

7. What Happened? Counterparty Risk and Inter-dependence Credit Enhancement “Insurance” against Payment Shortfall or Default Unquestioned Faith: Diversification Mitigates Risk Widening Investor Pool Liquidity CrisisSound Familiar? Failure of Confidence “Trust you? -- I don’t trust Me!” Economic Outlook

8. What Happened? Arizona Among Worst - Why? Historical Growth Pattern Existing Housing Industry Projected Housing Demand Everyone Counting the Same Buyers Others Affected – Nevada, Florida,… See a pattern? Economic Outlook

9. The Current Context “Slow and Steady Wins the Race” -- Aesop Current Conditions Gross Domestic Product Trends Employment Trends Current Challenges

10. Economic Outlook The Current Context Cyclical Recession Is Over Relatively Short Recession in GDP Terms US Financial Crisis Has Been Largely Contained Some Major Issues to Clean-up – Fannie, Freddie, Privates So, ………….

11. Economic Outlook The Current Context Very Sluggish Growth for “recovery” period Historical Recovery Drivers Missing Remnants of Double Whammy Still With Us Overhanging Mortgage Debt / Other Debt Overhanging Housing Supply Battered Consumer Confidence International Issues

12. Economic Outlook US GDP Quarterly Change 1970 - 2011 Recessions *

13. Economic Outlook US GDP Quarterly Change 1970 - 2011 Recessions Reliable Data??

14. Economic Outlook US GDP Quarterly Change 1970 - 2011 Recoveries *

15. Economic Outlook US GDP Quarterly Change 1970 - 2011 Recoveries

16. Economic Outlook US Employment Change from Prior Year 1970 - 2011 Recoveries *

17. Economic Outlook US Employment Change from Prior Year 1970 - 2011 Recoveries *

18. Economic Outlook US Employment Change from Prior Year 1970 - 2011 Recoveries *

19. Economic Outlook US Employment Change from Prior Year 1990 - 2010 Total Employment Employment Growth *

20. Economic Outlook US Employment Change from Prior Year 1990 - 2010 Total Employment Employment Growth *

21. Economic Outlook US Employment Change from Prior Year 1990 - 2010 Total Employment Employment Growth

22. Economic Outlook The Outlook – Near Term Substantial Drags on Growth International Issues – Especially Europe Potential EU Banking Crisis Weak Demand – Scared Consumers & CEOs Continuing Uncertainty Expectations of Rising Taxes Structural Workforce Issues *

23. Economic Outlook The Outlook – Near Term Substantial Drags on Growth International Issues – Especially Europe Potential EU Banking Crisis Weak Demand – Scared Consumers & CEOs Continuing Uncertainty Expectations of Rising Taxes Structural Workforce Issues Yikes!

24. Economic Outlook The Outlook – Near Term European Situation Unsustainable Deficits AND Debt Government Debt Burdens Use of Debt for “Operating Expenses” Expectations of Resolution Based on Hope not Analysis Public vs. Private Sector Ratio Yikes!!!

25. Economic Outlook The Outlook – Near Term European Debt and Deficits Bond Write-downs = Controlled Default Broad based Bank Losses European Bank / Financial Crisis Repeat of US 2007 -2008 Liquidity Crisis due to Loss of Confidence Government Liquidity Intervention Risk of Contagion EU’s QE 1 & 2

26. Economic Outlook The Outlook – Near Term Europe’s Impact on Global Economy One-Quarter of Global Economy Linked to US and China Risk of European Recession Repeat of US - 2009 to 2011? – Too Likely Governmental Response ?? Benefit of Advanced Warning!

27. Economic Outlook Long Term Trends Risks to US Competitiveness Labor Force Skills Massive Federal Deficits - Europe-itis Demographic Shifts Worldwide Demand Issues Future of Europe Asian Cultural / Governmental Challenges America Alone? -- Again? Europe’s Folly – Still Failing

28. Economic Outlook Lessons From The Past In this present crisis, government is not the solution to our problem; government is the problem. -- Ronald Reagan, First Inaugural Decades in the Making – Decades in the Fixing Improve Labor Force Skills Reduce Costs and Barriers Reinvigorate Responsibility Will America Learn from Europe’s Failure? *

29. Economic Outlook Lessons From The Past In this present crisis, government is not the solution to our problem; government is the problem. -- Ronald Reagan, First Inaugural Decades in the Making – Decades in the Fixing Improve Labor Force Skills Reduce Costs and Barriers Reinvigorate Responsibility Will America Learn from Europe’s Failure? Regulation!

30. Economic Outlook Where we are and where we are going” US Economy in the Global Economy Arizona Economy in the US Economy Drivers of Economic Growth

31. Economic Outlook AZ Economy in the US Economy The Current Context Long-Term Trends The Outlook Lessons from the Past

32. Economic Outlook The Current Context AZ Employment Trends AZ Gross Domestic Product Trends Current Challenges

33. Economic Outlook AZ Employment 2001 – 2010 (000’s) All Industries Manufacturing Construction *

34. Economic Outlook AZ Employment 2001 – 2010 (000’s) All Industries Manufacturing Construction *

35. Economic Outlook AZ GDP 1997 - 2010 ($ Millions) Manufacturing All Industries Construction *

36. Economic Outlook AZ GDP 1997 - 2010 ($ Millions) Manufacturing All Industries Construction *

37. Economic Outlook AZ GDP 1997 - 2010 ($ Millions) Manufacturing All Industries Construction

38. Economic Outlook The Current AZ Context Still Challenging Conditions Positive Trends Gradual Return to Government Fiscal Balance Continuing Uncertainty Benefit of A “Low Base” to Build From Beware of the “Illusion of Recovery”

39. Economic Outlook The AZ Outlook Substantial Drags and Risks Still Exist Historic Drivers Are Weak Housing Starts Business Investment Consumer Spending Not Like Historical Patterns Government Sector Challenges – Improving!

40. Economic Outlook The AZ Outlook Expect Very Slow, but Positive Growth Available Capacity for Growth -- Without Capital Spending -- With Limited New Hiring Still Strong Fundamentals in Arizona Positive Business and Social Climates Not California!

41. Economic Outlook The Good News Employment Growth – Slow, but increasing Consumer Confidence Back to 2010 levels New Jobless Claims Slowing US GDP Improving (But still weak) Arizona Regaining Momentum

42. Economic Outlook The Good AZ News 22 nd in Job Growth – From 49 th ! 40,000 + jobs added in 2011 Retail Spending Rising (Autos, Durables) Az Retail Sales up about 6% Outlook Hopeful Arizona Recovery Underway (Overhanging Risk)

43. Economic Outlook The Good AZ News Economic Estimates Commission Forecast PERSONAL INCOME FY10FY11FY12FY13 -1.7%5.0%5.0%5.8% POPULATION FY10FY11FY12FY13 0.4%0.4%0.5%0.9%

44. Economic Outlook AZ Long Term Trends More Integrated Economically Not just the “Five C’s” anymore More Dependent on US / Global Economies Same Core Challenges as US Labor Force Issues Global Demand

45. Economic Outlook Where we are and where we are going” US Economy in the Global Economy Arizona Economy in the US Economy Drivers of Economic Growth

46. Economic Outlook Drivers of Economic Growth Population Growth Business Investment and Productivity Disposable Incomes and Consumer Spending

47. Economic Outlook Population Growth Growing Employment Drives Population Population Drives Further Expansion Population Means Consumption and Production Potential Changing Population Patterns Aging Population and Declining Birth Rates Medium Term Effects of Mortgage Debacle Consequent Slower In-Migration

48. Economic Outlook Productivity and Business Investment Continuing Transition of “Mechanization” Water Wheel to Pump Hand Built to Assembly Line Typewriter to E-mail Massive Increases in Returns to Factors of Production – Especially Labor Positive Impacts on Human Productivity Substantial Opportunities Still Exist

49. Economic Outlook Rising Disposable Income Rising Incomes and Standards of Living Relative Declines in Cost of Essentials Widespread Access to Better Living Available Income after “Necessities” Higher “Disposable” Incomes Increasing Discretionary Spending Challenge of Expanding “Wishes vs. Needs”

50. Economic Outlook Productivity and Income Levels Compensation of the Factors of Production Labor Materials Capital Rising Productivity means Rising Incomes Key Measure: Unit Output for Unit Input Steady Increases Since Industrial Revolution – Will it Continue?

51. Economic Outlook Arizona’s Historic Development Drivers Open Markets Easy Access to Key Factors of Production Constructive Self-Selection Important Comparisons to Current Situation

52. Economic Outlook Open Markets Culturally, Socially, and Economically Open In-Migrants Readily Assimilated No Rigid Hierarchies Positive Transportation Patterns Historically Good Roads Beneficial Geographic Location

53. Economic Outlook Easy Access to Key Factors of Production Strong, Trained, Willing Labor Force Growing Population Good Educational Institutions Readily Available Land, Water, Other Commodities Reliable Affordable Energy

54. Economic Outlook Constructive Self-Selection American Exceptionalism Squared Self-Selection from Self-Selected Employment Driven Migration Absence of Antiquated Infrastructure

55. Economic Outlook Conclusion Better Arizona than Elsewhere!

56. Economic Outlook Arizona Government Finance Officers February 17, 2012 Alan E. Maguire