Economic Review And OutlookBrian Cary

Manager of Forecasting, Archives & ResearchSalt River Project

Arizona Financial Professionals AssociationJune 11, 2014

June 2014: Economic Review

United States:• The U.S. economy slowed in early 2014 – due in part to severe

winter weather – but recent statistics reflected stronger growth in the second quarter

• The job market created jobs at a stronger pace while the unemployment rate trended downward

• The impact on the global and U.S. economies from the turmoil in Ukraine remains uncertain

Metropolitan Phoenix:• Employment gains in financial activities, education and health

services were offset somewhat by job losses in manufacturing• Phoenix area housing prices have leveled off while multi-

family construction accelerated 2

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IMF Predicts Stronger Global Economic GrowthWorld Economic Output – Spring 2014 Forecast

World U.S. Europe Japan China India Mexico-4

-2

0

2

4

6

8

10

122012 2013 2014 2015 2016

Percent Change

• U.S. economic growth is projected to improve gradually • Europe has improved but forecasted growth remains weak• China and India are expected to lead the global economy

Source: International Monetary Fund

06

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Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3-10

-8

-6

-4

-2

0

2

4

6 GDP Consumption

U.S. Economy Contracted For The First Time In Three YearsU.S. Gross Domestic Product (GDP) Growth(seasonally adjusted annual rate, 2009 dollars)

Annual Growth Rate (%)

• Q1 2014 GDP declined (1.0)% (annualized) — down from 2.6% growth in Q4 2013• Personal consumption spending increased at a 3.1% annual rate — down from 3.3% in Q4 2013• Decrease was driven primarily by reduced inventories and exports

Sources: U.S. Bureau of Economic Analysis; Moody’s Analytics

2007 2008 2009 2010 2012 2013 2014

Forecast

2011 2015

4

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06/11/2014 AFPA Meeting , B. Cary

Q1 1986

Q1 1987

Q1 1988

Q1 1989

Q1 1990

Q1 1991

Q1 1992

Q1 1993

Q1 1994

Q1 1995

Q1 1996

Q1 1997

Q1 1998

Q1 1999

Q1 2000

Q1 2001

Q1 2002

Q1 2003

Q1 2004

Q1 2005

Q1 2006

Q1 2007

Q1 2008

Q1 2009

Q1 2010

Q1 2011

Q1 2012

Q1 2013

Q1 2014

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

Nominal Dollars Constant Dollars (1985 $)

$ Billions

U.S. Household Net Worth Reaches New Record HighFirst Quarter 1986 – First Quarter 2014(non-seasonally adjusted basis)

Source: Board of Governors of the Federal Reserve System

• Household net worth increased with improved home prices, more jobs and higher stock prices• Grew 2.0% from the fourth quarter 2013 – reached $81.8 trillion 5

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U.S. Stock Prices Hit Record Levels S&P 500 Index and Dow Jones Industrial AverageLast Day Of The Month Closing Price

0

500

1,000

1,500

2,000

2,500

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Standard & Poor's 500 Index Dow Jones Industrial Average

S & P 500 DJIA

Source: Standard & Poor’s and Moody’s Analytics

• In May, the S & P 500 index closed 18.0% higher than a year ago• The closing price of the Dow Jones was 10.6% higher than last year

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20140

2

4

6

8

10

30-Yr. Fixed Mortgage Rate Federal Funds Rate 10-Yr. Treasury Note Yield

Percent

Long-Term Interest Rates May Be On The Rise AgainMonthly Averages Through May 2014

Source: Board of Governors of the Federal Reserve System

• Although interest rates began moving upward, they remain relatively low• The Fed continues to “taper” its bond purchases 7

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Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

-4%

-2%

0%

2%

4%

6% All Items Core (Excluding Food & Energy)

Percent Change

Source: U.S. Bureau of Labor Statistics

U.S. Consumer Prices: Still StableYear-Over-Year Percent Change

• CPI rose 0.3% in April — up 2.0% on a year-over-year basis • Core CPI maintained its 0.2% pace from last month — up 1.8% from a year ago• Higher food and gasoline costs led to higher consumer prices

8

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U.S. Employment Returns To Pre-Recession LevelsTotal Non-Farm Employment – Net Change From Prior Month & Unemployment Rate

-1,000

-800

-600

-400

-200

0

200

400

600

800

0%

2%

4%

6%

8%

10%

12% Total Non-Farm Employment Unemployment Rate

Source: U.S. Bureau of Labor Statistics

Thousands Unemployment Rate

• 217,000 jobs were added in May; the jobless rate was unchanged at 6.3%• Professional/business services and health care posted the largest increases • March and April data revisions showed 6,000 fewer jobs than originally reported

9

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6 7 8 9 10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

Total Nonfarm Employment: United StatesNumber of Months Needed to Surpass Previous Peak in Employment

Post-WWII Recessions

1948 1953 1957 1960 1970 1974 1980 1981 19902001 2007

Number of Months After Peak Employment

Per

cen

t Ch

ange

fro

m P

eak

Em

plo

ymen

t

10

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Employment Trends Index StrengthensThe Conference Board Employment Trends Index (ETI)

May-0

6

Sep-06

Jan-0

7

May-0

7

Sep-07

Jan-0

8

May-0

8

Sep-08

Jan-0

9

May-0

9

Sep-09

Jan-1

0

May-1

0

Sep-10

Jan-1

1

May-1

1

Sep-11

Jan-1

2

May-1

2

Sep-12

Jan-1

3

May-1

3

Sep-13

Jan-1

4

May-1

480

90

100

110

120

130

• Correlated with employment & provides a leading indication of employment’s direction• Consists of 8 labor market indicators, with 7 indicators showing positive results• Index signaling continued employment growth in the months ahead

Source: The Conference Board

1996 = 100

11

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ISM Surveys Show The Economy Is Still ExpandingInstitute for Supply Management Manufacturing Index

May-0

9

Aug-09

Nov-09

Feb-10

May-1

0

Aug-10

Nov-10

Feb-11

May-1

1

Aug-11

Nov-11

Feb-12

May-1

2

Aug-12

Nov-12

Feb-13

May-1

3

Aug-13

Nov-13

Feb-14

May-1

420

30

40

50

60

70

80 Manufacturing Non-Manufacturing

Index

Source: ISM

• Manufacturing index was 55.4 in May — up for the fifth consecutive month• New orders index rose 1.8 points from the previous month• Non-manufacturing index was 56.3 in May– up 1.1 points from April

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Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

$0

$5

$10

$15

$20

$25

$30

$0

$1

$2

$3

$4

$5

$6

$7Worldwide Americas

• Sales in the Americas dropped 1.6% from last month but climbed 13.6% from last year• Worldwide billings were up 0.7% from the previous month & increased 11.5% from last year• Demand for electronics & cloud-based computing are expected to increase semiconductor growth

$ Billions

Global Semiconductor Sales Increased Steadily Semiconductor Sales (3-month moving average)

$ Billions

Source: Semiconductor Industry Association

13

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Semiconductor Orders Dipped SlightlyU.S. Semiconductor Book-to-Bill Ratio

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Ratio

• Book-to-bill ratio = new orders divided by current shipments• Ratio was 1.03 in April — ratio above 1.0 for seventh consecutive month• Demand for mobile devices and servers for cloud computing are expected to drive steady semiconductor growth

Source: SEMI

14

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Leading Index Signals Continued Economic Growth U.S. Index Of Leading Economic Indicators — Net Change From Prior Month

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

-4%

-3%

-2%

-1%

0%

1%

2%

3%

• Index is designed to signal the economy’s performance in the next 6-12 months• LEI increased 0.4% in April – up 11 of the last 12 months• Higher interest rate spread and rising building permits led to the increase

Percent Change

Source: The Conference Board

15

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Confidence Grows With A More Favorable Employment Outlook U.S. Consumer Confidence Index

May-0

0

May-0

1

May-0

2

May-0

3

May-0

4

May-0

5

May-0

6

May-0

7

May-0

8

May-0

9

May-1

0

May-1

1

May-1

2

May-1

3

May-1

40

20

40

60

80

100

120

140

160

Index

• In May, the index rose to 83.0 — April’s index level was revised downward to 81.7• Consumers were more optimistic in May about current and future business conditions• Labor market expectations improved from April as more respondents felt jobs were plentiful

Source: The Conference Board

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Greater Phoenix Job Growth Remains SteadyMetropolitan Phoenix Non-Farm EmploymentNet Change From A Year Ago And Unemployment Rate

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

-200

-150

-100

-50

0

50

100

150

0%

2%

4%

6%

8%

10%

12% Total Non-Farm Employment Unemployment Rate

Thousands

Source: Arizona Office of Employment & Population Statistics

• Non-farm employment grew 2.2% from a year ago in April (39,100 positions)• Gains were led by the financial, education and health services sectors• Manufacturing was down by 700 jobs from a year ago

Unemployment Rate

17

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4 5 6 7 8 9 10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

Total Non-farm Employment : ArizonaNumber of Months Needed to Surpass Previous Peak in Employment

Post – WWII Recessions1948 1953 1974 1981 1991 2001 2007

Number of Months After Peak Employment (seasonally adjusted)

Per

cen

t Ch

ange

Fro

m P

eak

Em

plo

ymen

t

18

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Unemployment Insurance Claims Fell Over The YearArizona Total Unemployment Insurance Claims4-week moving average

Total Claims

Source: U.S. Department of Labor

• Total weekly UI claims were 1.1% lower than a year ago on a moving average basis

May 2006

Sep 2006

Jan 2007

May 2007

Sep 2007

Jan 2008

May 2008

Sep 2008

Jan 2009

May 2009

Sep 2009

Jan 2010

May 2010

Sep 2010

Jan 2011

May 2011

Sep 2011

Jan 2012

May 2012

Sep 2012

Jan 2013

May 2013

Sep 2013

Jan 2014

May 2014

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

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19

Unemployment Rate For Arizona CountiesUnemployment Rate, N.S.A.(April 2014)

Source: Arizona Department of Administration

20

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Coconino 6.2%Mohave 7.6%

Pima 5.5%

Maricopa 5.2%

Yavapai 5.9%

Gila 7.5%

Pinal 6.5%

Cochise 7.5%

Yuma 23.8%

La Paz 8.2%

Graham 5.6%

Apache 15.9%

Navajo 11.9%

Greenlee 5.4%

Santa Cruz 13.1%

Unemployment Rate

Low

Medium

High

Highest

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

$0

$50

$100

$150

$200

$250

$300

$350

-40%

-30%

-20%

-10%

0%

10%

20%

30% Individual Income Taxes Year-Over-Year Percent Change

State Individual Income Tax Receipts Dipped in AprilIndividual Income Tax Collections (12-month moving average)

• Individual income tax collections were 0.1% lower than a year ago on a moving average basis• April withholding tax collections were 0.2% higher than a year ago

Source: Arizona Joint Legislative Budget Committee (JLBC)

$ Millions Percent Change

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Arizonans More Confident About Future Economic ConditionsArizona Consumer Confidence Index (April 2014)

Q202Q402

Q203Q403

Q204Q404

Q205Q405

Q206Q406

Q207Q208

Q209Q210

Q410Q211

Q411Q212

Q213Q413

Q2140

20

40

60

80

100

120

1985=100

• Index increased from 68.9 to 75.1 in the latest survey – its highest level in six years• Both consumers’ current assessment and expectations for the future improved

Source: Behavior Research Center

22

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$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000Total Median Sales Price Total Sales

Price Sales Volume

Phoenix Area Home Prices: Leveling OffResale and New Home Median Sales Prices In Maricopa County6-month moving average

Sources: The Cromford Report; AMLS

• Median prices rose 14.2% from last year but were unchanged from the prior month• The number of homes sold in April fell 13.3% over the year but grew 2.9% from last month 23

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Mar-0

3Ju

l-03

Nov-03

Mar-0

4Ju

l-04

Nov-04

Mar-0

5Ju

l-05

Nov-05

Mar-0

6Ju

l-06

Nov-06

Mar-0

7Ju

l-07

Nov-07

Mar-0

8Ju

l-08

Nov-08

Mar-0

9Ju

l-09

Nov-09

Mar-1

0Ju

l-10

Nov-10

Mar-1

1Ju

l-11

Nov-11

Mar-1

2Ju

l-12

Nov-12

Mar-1

3Ju

l-13

Nov-13

Mar-1

40

50

100

150

200

250

Phoenix MSA 20-City Composite

227.4

206.5166.8

144.8

Source: Standard & Poor’s

Phoenix Area Home Prices: Leveling OffStandard & Poor’s / Case-Shiller Home Price Index

Jan 2000 = 100

• Phoenix area: up +11.1% from last year, down (36.3)% from the June 2006 peak• Phoenix area prices posted a slight monthly gain for the first time in three months• U.S. Composite: up +12.4% from a year ago, down (19.2)% from the July 2006 peak 24

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Source: Federal Housing Finance Agency

Q3 2000

Q2 2001

Q1 2002

Q4 2002

Q3 2003

Q2 2004

Q1 2005

Q4 2005

Q3 2006

Q2 2007

Q1 2008

Q4 2008

Q3 2009

Q2 2010

Q1 2011

Q4 2011

Q3 2012

Q2 2013

Q1 20140

50

100

150

200

250

300

350

400

Arizona Phoenix MSA Tucson MSA United States

U.S. and Arizona Home Prices Improved In The Last Two YearsFederal Housing Finance Agency House Price Index – Purchase OnlyQuarterly, seasonally adjusted

1991 = 100

• Arizona home prices increased 2.1% over the quarter and 14.7% from a year ago• Phoenix area home prices were up 2.0% from last quarter and 16.6% from last year• Tucson MSA home prices grew 1.0% from Q4 2013 and 8.4% from a year ago• Prices were up 1.3% from last quarter and 6.6% from last year

Distressed Home Inventories Are Down From The PeakMaricopa County Notices of Trustee Sales and Total Pending

May-0

6

Sep-06

Jan-0

7

May-0

7

Sep-07

Jan-0

8

May-0

8

Sep-08

Jan-0

9

May-0

9

Sep-09

Jan-1

0

May-1

0

Sep-10

Jan-1

1

May-1

1

Sep-11

Jan-1

2

May-1

2

Sep-12

Jan-1

3

May-1

3

Sep-13

Jan-1

4

May-1

40

2,000

4,000

6,000

8,000

10,000

12,000

0

10,000

20,000

30,000

40,000

50,000

60,000

Peak

NOTS Pending

• Inventory of properties in foreclosure peaked in December 2009 • Total active notices are 91.4% lower than December 2009 peak level• Initial notices & total foreclosures pending continue to fall – dropped 44.3% & 47.2% Y-O-Y

Source: Information Market

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Phoenix New Home Construction Still Sluggish Metropolitan Phoenix Housing Permits (6-month moving average)

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

0

1,000

2,000

3,000

4,000

5,000

6,000

Total Units Single Family Units

• Single-family permits are at the highest level since July 2013• Growth in total permits decelerated slightly after two consecutive months of strong gains

Permits

Source: U.S. Census Bureau

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Mar-1

0

Jul-1

0

Nov-10

Mar-1

1

Jul-1

1

Nov-11

Mar-1

2

Jul-1

2

Nov-12

Mar-1

3

Jul-1

3

Nov-13

Mar-1

40

500

1,000

1,500

2,000

2,500

Arizona Phoenix MSA Tucson MSA

Source: U.S. Census Bureau

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Total Permits

Arizona Housing Permits Have Improved From Last YearArizona, Phoenix MSA and Tucson MSA Total Home Permits6 — month moving average, not seasonally adjusted

• Statewide housing permits are up 21.8% from last year on a moving average basis• Phoenix permits were up 26.0% from last year & 9.4% from last month on a moving average basis• Tucson home permits were down 10.2% on a moving average basis

Commercial RE Vacancies Are Trending LowerMetro Phoenix Office, Industrial And Retail Real Estate

1Q053Q05

1Q063Q06

1Q073Q07

1Q083Q08

1Q093Q09

1Q103Q10

1Q113Q11

1Q123Q12

1Q133Q13

1Q140%

5%

10%

15%

20%

25%

30% Office Industrial Retail

Source: CBRE

• Office vacancy rate declined to 22.1% in Q1 2014 – net absorption dipped to 253,845 SF• Industrial vacancies fell to 11.3%, with net absorption of 1.6 MSF in Q1 2014• Retail vacancy rate decreased to 10.0% – net absorption was 387,226 SF

Vacancy Rate

29

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Phoenix Sky Harbor Passenger Count Reached A Record LevelPhoenix Sky Harbor Airport Statistics — Year-Over-Year Percent Change

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

-20%

-10%

0%

10%

20%

Total Air Passenger Traffic Year-Over-Year Percent Change

• Total passenger traffic climbed 28.0% and total cargo jumped 43.3% from the prior month• March marked the busiest month ever with over 4 million passengers • Passenger traffic was 3.2% higher over the year & total cargo soared 34.0% from last year

% ChangeMillions

Source: Phoenix Sky Harbor Airport

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Arizona Highway Traffic Is Gradually IncreasingTotal Vehicle Miles Driven in Arizona(12-month moving average, % change from year ago)

Mar-0

3

Mar-0

4

Mar-0

5

Mar-0

6

Mar-0

7

Mar-0

8

Mar-0

9

Mar-1

0

Mar-1

1

Mar-1

2

Mar-1

3

Mar-1

44,000

4,500

5,000

5,500

6,000

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8% Miles Driven % Change

Miles driven (Millions) % Change

• After climbing in 2010, mileage started declining again in the summer of 2011• Traffic has slowly picked up the pace since October 2012 on a moving average basis• Arizona traffic rose 1.2% on a year-over-year moving average basis in March

Source: U.S. Department of Transportation

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Exports From Arizona To Mexico Are At An All Time High

$ Millions % Change

Source: International Trade Administration, Global Patterns of a State’s Exports.

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19992000

20012002

20032004

20052006

20072008

20092010

20112012

2013$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

-30%

-20%

-10%

0%

10%

20%

30%

40%

50% Merchandise Exports To Mexico Percent Change

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Metropolitan Phoenix Employment Forecast University of Arizona Forecasting Project (May 2014)

20102011

20122013

20142015

20162017

20182019

2020-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Percent Change

• Greater Phoenix employment is expected to increase 3.2% in 2014 (57,400 jobs)• Job growth is predicted to improve in 2015 and beyond

Source: University of Arizona Forecasting Project, Arizona Office of Employment & Population Statistics

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Metropolitan Phoenix Population Forecast University of Arizona Forecasting Project (May 2014)Net Change In Population and Percent Change From A Year Ago

10,000

30,000

50,000

70,000

90,000

110,000

130,000

150,000

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0% Population Y-O-Y Percent Change

Net Change (thousands) Percent Change

Source: University of Arizona Forecasting Project

• Forecast expects steady gains in the near term with stronger growth by 2017• Greater Phoenix predicted to add nearly 68,000 people in 2014 34

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(10,000)

10,000

30,000

50,000

70,000

90,000

110,000

130,000

150,000 Arizona Phoenix MSA Tucson MSA

Net Change (thousands)

Statewide Population Forecast University of Arizona Forecasting Project (May 2014)Net Change In Population

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Source: University of Arizona Forecasting Project

• Arizona predicted to add more than 87,000 people in 2014

Arizona Personal Income Expected To Accelerate In 2014Arizona, Phoenix MSA and Tucson MSA Personal Income

19901992

19941996

19982000

20022004

20062008

20102012

20142016

20182020

2022$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000Arizona Phoenix Tucson Forecast

Source: University of Arizona Forecasting Project

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Personal Income (thousands)

• Personal income growth is expected to improve this year • Growth is expected to pick up from 2015 through 2018

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19901992

19941996

19982000

20022004

20062008

20102012

20142016

20182020

2022 -

20

40

60

80

100

120

Arizona Phoenix MSA Tucson MSA Forecast

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Source: U.S. Census Bureau, University of Arizona Forecasting Project

Arizona Home Building Predicted To Rise In The Next Three YearsArizona, Phoenix MSA and Tucson MSA Total Residential Building Permits

Total Permits (thousands)

• Home permits are expected to accelerate in 2015 across the state, especially in the Phoenix area

Summary and Outlook• U.S. economic growth is expected to accelerate this year as

household incomes and credit conditions improve

• Job creation is expected to continue at a solid pace while the unemployment rate should continue its downward trend

• Home prices in the greater Phoenix area are predicted to remain relatively flat in the months ahead

• The Arizona job market is projected to post modest gains in 2014 before trending higher in 2015

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