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The Economic Outlook for the U.S. and Arizona For Presentation at the:

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.

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The Economic Outlook for the U.S. and Arizona For Presentation at the:

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  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 1st 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 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

  5. 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. 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. 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. 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 Source: Paul Wiseman, Associate Press, in The Arizona Republic. July 2, 2011

  9. 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. Worldwide GINI Coefficients

  11. 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. The Price of InequalityJoseph Stiglitz , 2012 • The numbers show that the American Dream is a myth. • There is less equality of opportunityin 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. Joseph E. Stiglitz, The Price of Inequality

  13. The Price of InequalityJoseph 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. Joseph E. Stiglitz, The Price of Inequality

  14. The Price of InequalityJoseph 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. Joseph E. Stiglitz, The Price of Inequality, & commentary by Aaron Task, host of The Daily Ticker.

  15. The Price of InequalityJoseph 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.” Aaron Task, host of The Daily Ticker. June 2012

  16. The Price of InequalityJoseph 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? Aaron Task, host of The Daily Ticker. June 2012

  17. 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 Source: Summary by Aaron Task. Daily Ticker, May 3, 2012.

  18. 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. 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. 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 Source: Summary by Aaron Task. Daily Ticker, May 3, 2012.

  21. 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 Source: Summary by Aaron Task. Daily Ticker, May 3, 2012.

  22. 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 Source: Summary by Aaron Task. Daily Ticker, May 3, 2012.

  23. 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. 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. 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. 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. 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

  28. 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

  29. Consumer Confidence Index Source: The Conference Board & Associated Press. (90.0 represents healthy conditions)

  30. 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’ comingon January 1st is not addressed

  31. 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: • 2011 11.9% • 2020 10.0% (projected by Macroeconomic Advisers) • This would be lowest level since the mid-60’s Conor Dougherty, The Wall Street Journal, June 25, 2012

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

  33. Economic Strength Rankings Policom Corporation • 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 Source: Economic Strength Rankings – 2012 Policom Corporation. www.policom.com

  34. Economic Strength Rankings Policom Corporation 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 Source: Economic Strength Rankings – 2012 Policom Corporation. www.policom.com

  35. MetropolitanStrength Rankings County or Multi-County Ranking out of 366 Source: Economic Strength Rankings – 2012 Policom Corporation. www.policom.com

  36. Micropolitan Strength Rankings County or Multi-County Ranking out of 576 Source: Economic Strength Rankings – 2012 Policom Corporation. www.policom.com

  37. Arizona Annual Net Migration Arizona’s Economy, Economic and Business Research Center. Eller College of Management March 2012.

  38. 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% Joint Legislative Budget Committee, Monthly Fiscal Highlights, June 2012

  39. 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% Joint Legislative Budget Committee, Monthly Fiscal Highlights, June 2012

  40. 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 & Bars 7.7% • Contracting 7.4% • Retail 5.7% • Utilities 1.1% Joint Legislative Budget Committee, Monthly Fiscal Highlights, June 2012

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

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

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

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

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

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

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

  48. 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 Greater Phoenix Housing Market – May 2012. Center for Real Estate Theory and Practice, W.P. Carey School of Business.

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

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