Post on 04-Jan-2016
Elliott D. Pollack & Company
Some Perspectives on Forecasting in an Uncertain
Economy
GFOAz
October 17th, 2014
Presented By:Jim Rounds
Sr. VP, Elliott D. Pollack & Company
Elliott D. Pollack & Company
Some Basic Considerations
• Understanding the background economy.• Policy versus economics.• Risk assessment.• Math and timing.• Example: OSPB and JLBC.• Example: Maricopa County
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Understanding the background economy…
…Tell the story.
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Example:
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United States Real Gross Domestic Product* Annual Growth 1970 - 2015**
Source: U.S. Bureau of Economic Analysis & Blue Chip Economic Indicators
0.2%
3.3%
5.2%
5.6%
-0.5%-0.2%
5.4%
4.6%
5.6%
3.2%
-0.2%
2.6%
-1.9%
4.6%
7.3%
4.2%
3.5%3.5%4.2%
3.7%
1.9%
-0.1%
3.6%
2.7%
4.0%
2.7%
3.8%
4.5%4.5%4.8%
4.1%
0.9%
1.8%
2.8%
3.8%3.4%
2.7%
1.8%
-0.3%
-2.8%
2.5%
1.6%
2.3%2.2%2.1%
3.0%
-4%
-2%
0%
2%
4%
6%
8%
* Based on chained 2009 dollars.
** 2014 and 2015 are a forecast from the Blue Chip Economic Indicators, September 2014.
Recession Periods
3.8% = 40-year avg during expansion
3.2% = 20-year avg during expansion
Underlying = 2.2%
Act: -2.0, 4.6, 2.8, 3.3%
But, next year hit “average.”
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S&P 5001980-2014*
Source: Standard & Poor's (S&P); Moody's Analytics (ECCA) Converted
*Data through July 31,2014
Recession Periods
Risk? Bubble?
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Consumer Confidence1978 – 2014*
Source: The Conference Board
20
30
40
50
60
70
80
90
100
110
120
130
140
150
*Data through August 2014.
Recession Periods
Disenfranchised Weary
Worried
P.O.’d
So people will be spending more…
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15
33
9 6
3
50
7
2
35
1
5
Alaska 47
Jobs growing
Jobs decliningTop 10
Hawaii
27
1130
Job Growth 2014YTD June 2014 vs YTD June 2013
Source: US BLS
10
4
8
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Job Growth 2014YTD June 2014 vs June 2013
Source: U.S. Bureau of Labor Statistics
Rank State % chg.1 North Dakota 4.34%2 Nevada 3.78%3 Texas 3.07%4 Florida 3.03%5 Utah 2.87%6 Colorado 2.85%7 Oregon 2.84%8 Delaware 2.42%9 California 2.34%
10 South Carolina 2.08%11 Washington 2.07%12 Tennessee 1.88%13 Georgia 1.84%14 North Carolina 1.81%15 Arizona 1.77%16 Indiana 1.66%17 Minnesota 1.65%18 Oklahoma 1.65%19 Wisconsin 1.58%20 Iowa 1.56%21 Massachusetts 1.49%22 Missouri 1.47%23 Rhode Island 1.35%24 New Hampshire 1.27%25 Maine 1.23%
Rank State % chg.26 New York 1.23%27 Hawaii 1.15%28 Arkansas 1.11%29 Kansas 1.06%30 Montana 1.06%31 Nebraska 1.04%32 West Virginia 1.01%33 Wyoming 0.98%34 Ohio 0.96%35 Idaho 0.93%36 Mississippi 0.93%37 Louisiana 0.92%38 South Dakota 0.79%39 Alabama 0.75%40 Michigan 0.64%41 Maryland 0.64%42 Connecticut 0.63%43 Pennsylvania 0.61%44 Vermont 0.55%45 Illinois 0.55%46 Kentucky 0.54%47 Alaska 0.31%48 Virginia 0.18%49 New Jersey 0.07%50 New Mexico -0.20%
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Net Percentage of Large U.S. BanksReporting Eased Standards versus Tougher Standards
on Residential Mortgage Prime Loans2007 Q1 – 2014 Q2
Source: Federal ReserveRecession Periods
Still Flat…
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U.S. Foreclosure Lag2002–2021
Source: CoreLogicRecession Periods
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Tell the story…
• The economy is growing but some recent statistics are skewed a bit and need to be adjusted.
• Businesses are spending a little more as are consumers. This should continue but only moderately.
• Population flows to AZ still weak another year or so, but good long term opportunity. Expect steady improvement. No boom.
• Downturn not most likely scenario but plan for continued weakness.
THIS FRAMES THE FORECAST!
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Policy versus economics…
…Get the “buy in.”
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Forecasting is about more than modeling and math.
Risk must be set by policymakers and staff working together.
Use of outside opinion? Optimistic, Baseline, Pessimistic.
When to move from one to the other?
Public Policy
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What is your plan? If a downturn comes, do you want to have
fewer cuts? If so, then a more conservative forecast is needed
to constrain spending (or a reserve fund in some cases).
Did this policy get set by public officials? Set policy, then match with forecast
approach. = “buy in.”
Public Policy
!
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Risk assessment…
…Some will be dictated, some you will dictate.
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Forecasting & Budgeting R
isk
Revenues
Most Likely
Pessimistic
Recession
Normal Expansion
Now
• Policy sets risk, economy sets revenues.
• A policy change can affect the forecast as much as the economic analysis.
a b c
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Forecasting & Budgeting R
isk
RevenuesMost LikelyPessimistic
Highest
Risk
?
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Forecast policy can sometimes change the revenue forecast as much as a new economic assessment.
The last dollar that is projected is the most risky. What to do now?
True “most likely” or use “pessimistic”? Capital vs ongoing? Reserves?
Forecasting & Budgeting
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Math and timing…
…It’s not just the rate of growth, it is when in a fiscal
year it picks up.
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Timing: Slightly missing a forecast’s timing can have severe implications.
Math: A 50% decrease requires a 100% increase for full recovery. Thus, we are dealing with a larger percentage
range this time around. No 7% default. Some taxes are harder to forecast just from
volatility.
The basics make it more difficult
this time…
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This is why it helps to know the story.
When is full recovery?
What will growth rates need to be to get there?
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Example: OSPB and JLBC…
…Some math, some consensus, some policy.
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Example: Maricopa County…
…Strategic planning meets long term
forecasting.
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Again…
• Understanding the background economy.• Policy versus economics.• Risk assessment.• Math and timing.
Elliott D. Pollack & Company
Your specific questions?