Full Employment or Bust · Full Employment or Bust Global Economic Outlook Issues, 51st Annual...

Global Economic Outlook Issues, 51st Annual Economic Forecast Luncheon, Chase-W. P. Carey School of Business, Arizona State University, Phoenix, Arizona, December 3, 2014.

Full Employment or Bust




2

When will the Fed’s rates go back to normal?

Nominal federal funds rate and core inflation¹ (percent per annum and % ch. from 12 months earlier)

¹ Chain price index for personal consumption expenditures excluding food and energy.

Source: Federal Reserve Board. Updated through October 31, 2014.

0

4

8

12

16

20

0

4

8

12

16

20

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Core PCE

chain price

inflation ( % ch. from 12 months earlier)

Nominal federal funds rate



3

Where are bond yields headed?

Components of the 5-year Treasury yield five years in the future (percent per annum)


-1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Five-year forward Treasury yield (5 x 5)

Five-year forward real Treasury yield (5 x 5 TIPS)

Five-year forward inflation expectations plus inflation risk premium (5 x 5 breakeven)



High yield spread (basis points)

Sources: Federal Reserve Board, JPMorgan. Updated through November 7, 2014.

Can credit spreads narrow further?

4

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Ibbotson Associates J.P. Morgan Securities LLC high-yield index



Wilshire 5000 (Dec 31, 1970 = 830.27) After-tax GDP profits (billions of dollars)

Note: scales aligned to reflect the historical P/E of 11 times ex. the multiples of 1997 through 2001.

Sources: US Department of Commerce; Dow Jones. Updated through 2014 Q3 (profits) and Nov. 26, 2014.

Whither stocks? Fairly valued to current earnings ...

5

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

36,000

1990 1995 2000 2005 2010 2015 2020

Line represents the Wilshire 5000 index (left scale)

Shaded area represents after-tax GDP profits (right scale)

Note: Since 1952, the Wilshire 5000 P/E climbs to 14 times earnings near cyclical peaks, excluding the unprecedented multiples during 1997 - 2001, and that would occur when the line floats at the upper boundary of earnings.

Forecast





Sources: US Department of Commerce; Dow Jones. Updated through 2014 Q3 (profits) and Nov. 26, 2014.

... but what about tomorrow’s?

6

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

36,000

1990 1995 2000 2005 2010 2015 2020



Note: Since 1952, the Wilshire 5000 P/E climbed to 14 times earnings near cyclical peaks, excluding the unprecedented multiples during 1997 - 2001, and that would occur when the line floated at the upper boundary of earnings.

Forecast



7

Powering Up ... No Surprise

Real GDP, selected developed economies (ratio to 1997 Q4, 2005 US dollars, PPP basis)

Sources: US Dep. of Commerce; Haver Analytics; JPMorgan Chase & Co. Updated through 2014 Q3.

0.90

0.91

0.92

0.93

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

1.06

1.07

1.08

0.90

0.91

0.92

0.93

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

1.06

1.07

1.08

2007 2008 2009 2010 2011 2012 2013 2014

28-member European Union

Japan

United States

2014 Q3



8

And there’s nothing artificial about this

Labor force and selected measures of employment (thousands)

Source: US Department of Labor. Updated through October 2014.

128,000

130,000

132,000

134,000

136,000

138,000

140,000

142,000

144,000

146,000

148,000

150,000

152,000

154,000

156,000

158,000

128,000

130,000

132,000

134,000

136,000

138,000

140,000

142,000

144,000

146,000

148,000

150,000

152,000

154,000

156,000

158,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Labor force

Household employment adjusted for breaks in the population

Household employment adjusted to match the concepts and coverage of nonfarm payrolls

Nonfarm payrolls



9

Those who know, know

Real GDP (percent change from 4 quarters earlier) Jobless claims (thousands weekly, scale reversed)

Sources: US Deps. of Labor and Com. Updated through 2014 Q3 (GDP) and November 22, 2014 (claims).

50

100

150

200

250

300

350

400

450

500

550

600

650

700-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Real GDP growth (left)

Jobless claims (right, scale is reversed)

Real GDP

growth forecast



Recovery and time heals

10

0

25

50

75

100

125

150

175

200

225

0

25

50

75

100

125

150

175

200

225

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

CoreLogic measure of house prices

Scenario above assumes that

house prices rise 4%

annually in the

future.

Note: The red zone represents an estimate ($875 billion) of the aggregate amount of remaining under-water mortgages, before chargeoffs

House prices (January 2000 = 100)

Source: CoreLogic. Updated through 2014 Q2.



11

That’s why they’re moving to the front of the line ...

Nonfarm employment in selected areas (ratio to 2000 Q4 level)

Source: US Department of Labor. Updated through September 2014 (US) and September 2014 (state).

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

1.06

1.07

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

1.06

1.07

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US

California

Forecast



12

... and why you will be



0.97

0.99

1.01

1.03

1.05

1.07

1.09

1.11

1.13

1.15

1.17

1.19

0.97

0.99

1.01

1.03

1.05

1.07

1.09

1.11

1.13

1.15

1.17

1.19

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Arizona

US

Forecast



13

The economy and the motion of the ocean

The economic cycle, unemployment rate (percent of the labor force)


0

1

2

3

4

5

6

7

8

9

10

11

12

13

0

1

2

3

4

5

6

7

8

9

10

11

12

13

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Nairu (where we want to be)

Official unemployment rate (U-3)Official unemployment plus part-timers plus job-force exits under 49 years of age (U-3 ++)

Forecast



Unemployment rate (percent)

Sources: Vertical bars denote recessions and are designated by the NBER; US Department of Labor. Updated

through October 2014 (unemployment) and September 17, 2014 (FOMC forecast). 14

The unemployment rate doesn’t know everything ...

0

1

2

3

4

5

6

7

8

9

10

11

12

0

1

2

3

4

5

6

7

8

9

10

11

12

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Horizontal bars denote the Fed's view

(central tendency) about the near-term and sustainable unemployment rate (often referred to as the Nairu, or nonincreasing

inflationary rate of unemployment)¹

Note: The red boxes identify the first step in each Fed tightening sequence.

Proved to be premature and the Fed backed down



... but what it knows is getting better ...

Duration of unemployment spells (thousands)

Source: US Department of Labor. Updated through October 2014. 15

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Unemployed for less than 27 weeks (left scale)

Percent of the labor force unemployed for less than 27 weeks (right scale)



... that long-term unemployed are getting jobs too



0%

1%

2%

3%

4%

5%

6%

7%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Unemployed for more than 27 weeks (left scale)

Percent of the labor force unemployed for more than 27 weeks (right scale)



Selected elderly populations (percent of the population)

Source: US Department of Labor. Updated through July 2014.

17

Demographics are in the background but are just a footnote

0.00

0.05

0.10

0.15

0.20

0.25

0.00

0.05

0.10

0.15

0.20

0.25

1947 1957 1967 1977 1987 1997 2007 2017 2027 2037 2047

The projected five percentage point rise in the fraction of the population over the age of 65 represents an increase of about 16 million people in today's terms. That represents an average increase of one million annually when spread out over the next 15 years.

The percentage of the population over the age of 69.



Involuntary part-timers are called “employed” ... not so

Involuntary part-time (thousands) (percent of the labor force)

Source: US Department of Labor. Updated through September 2014. 18

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Percent of the labor force (right scale)

Number of people (left scale)



Dropouts are nowhere ... but they aren’t retiring

Participation rate for selected age groups (percent of the respective population)


54

55

56

57

58

59

60

61

78

79

80

81

82

83

84

85

2007 2008 2009 2010 2011 2012 2013 2014

35 to 44 year olds (left scale)

25 to 34 year olds (left scale)45 to 54 year olds (left scale)

16 to 24 year olds (right scale)



Selected unemployment rate measures (percent of the labor force)

Source: US Department of Labor. Updated through September 2014.

20

Thinking outside the unemployment box ... 5th inning

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

U-6 (official plus involuntarily part-time plus marginally attached)

Official unemployment plus part-timers plus job-force exits under 49 years of age (U-3 ++)

Official unemployment plus one half of above-normal number of part-timers (U-3 +)

Official unemployment rate (U-3)

Forecast



We don’t live in silos

Output gap in selected regions (actual less potential real GDP as a percent of potential real GDP)

Source: US Department of Commerce; JPMorgan. Updated through 2014 Q3. 21

-14

-12

-10

-8

-6

-4

-2

0

2

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Japan

EU-28

US

Australia

Canada

Sweden



The proof is in the tasting ... hourly compensation ...

Hourly wage & salary rates (percent change from four quarters earlier)

Sources: US Departments of Commerce and Labor. Updated through 2014 Q2. 22

0

1

2

3

4

5

0

1

2

3

4

5

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

ECI, private-sector compensation, excluding incentive-based pay

ECI, privae-sector compensation



Core PCE chain price index (percent change from 12 months earlier)

¹ Chain price index for personal consumption expenditures.

Sources: Vertical bars denote recessions and are designated by the NBER; US Department of Commerce.

Updated through October 2014 (inflation) and September 17, 2014 (FOMC forecast).

... inflation ... all of it looks and feels like the 5th inning

23

-2

0

2

4

6

8

10

12

-2

0

2

4

6

8

10

12

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

The range of FOMC's forecast

for PCE chain

price inflation, including its

longer-run goal

Overall PCE inflation¹

Core PCE inflation¹



After-tax GDP profits of all US businesses (percent of nominal Gross Domestic Income)


Updated through 2014 Q3.

Meanwhile there’s still a lot for equity markets to digest

24

0

1

2

3

4

5

6

7

8

9

10

11

0

1

2

3

4

5

6

7

8

9

10

11

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017



25

Doing Well, Despite All, ...



26

Powering Up

Real GDP, selected developed economies (ratio to 1997 Q4, 2005 US dollars, PPP basis)

Sources: US Dep. of Commerce; Haver Analytics; JPMorgan Chase & Co. Updated through 2014 Q3.

0.90

0.91

0.92

0.93

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

1.06

1.07

1.08

0.90

0.91

0.92

0.93

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

1.06

1.07

1.08

2007 2008 2009 2010 2011 2012 2013 2014


Japan

United States

2014 Q3



27

There’s nothing artificial about this

Labor force and selected measures of employment (thousands)


128,000

130,000

132,000

134,000

136,000

138,000

140,000

142,000

144,000

146,000

148,000

150,000

152,000

154,000

156,000

158,000

128,000

130,000

132,000

134,000

136,000

138,000

140,000

142,000

144,000

146,000

148,000

150,000

152,000

154,000

156,000

158,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Labor force

Household employment adjusted for breaks in the population

Household employment adjusted to match the concepts and coverage of nonfarm payrolls

Nonfarm payrolls



28

Those who know, know

Real GDP (percent change from 4 quarters earlier) Jobless claims (thousands weekly, scale reversed)

Sources: US Deps. of Labor and Com. Updated through 2014 Q3 (GDP) and November 22, 2014 (claims).

50

100

150

200

250

300

350

400

450

500

550

600

650

700-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Real GDP growth (left)

Jobless claims (right, scale is reversed)

Real GDP

growth forecast



29

If it’s over at Ground Zero, it’s over



0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

1.06

1.07

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

1.06

1.07

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US

California

Forecast



30

... ditto ...



0.95

1.00

1.05

1.10

1.15

0.95

1.00

1.05

1.10

1.15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Florida

US

Forecast



31

... double ditto ...



0.97

0.99

1.01

1.03

1.05

1.07

1.09

1.11

1.13

1.15

1.17

1.19

0.97

0.99

1.01

1.03

1.05

1.07

1.09

1.11

1.13

1.15

1.17

1.19

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Arizona

US

Forecast



32

... triple ditto



0.97

1.02

1.07

1.12

1.17

1.22

1.27

0.97

1.02

1.07

1.12

1.17

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Nevada

US

Forecast



33

Shale activity is big but isn’t the whole story ...

Nonfarm employment in selected areas (ratio to December 2007 level)


0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US Forecast US ND UT WY TX AK MT

NV ID AZ HI AL AR CA CO

CT DE DC FL GA IL IN IA

KS KY LA ME MD MA MI MN

MS MO NE NH NJ NM NY NC

OH OK OR PA RI SC SD TN

VT VA WA Wva WI

Forecast



34

... because just about everyone is swimming upstream



0.85

0.87

0.89

0.91

0.93

0.95

0.97

0.99

1.01

1.03

1.05

1.07

1.09

1.11

0.85

0.87

0.89

0.91

0.93

0.95

0.97

0.99

1.01

1.03

1.05

1.07

1.09

1.11

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US Forecast US

TX DC

AK UT

CO SD

OK NY

MA NE

MN MT

LA IA

W Va WA

VA MD

KS WY

CA NH

PA TN

VT IN

HI WI

AR SC

MO DE

KY NC

OR RI

ID ME

OH GA

FL IL

CT MI

NJ MS

NM AZ

AL NV



Household income and house prices (ratio to 1970)

Sources: US Dep. of Commerce; CoreLogic. Updated through 2014 Q2 (income) and 2014 Q2 (house prices).

All this, despite the real estate hangover

35

0

1

2

3

4

5

6

7

8

9

10

11

12

13

0

1

2

3

4

5

6

7

8

9

10

11

12

13

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

CoreLogic house price index (ratio to 1970)

Gross nominal income per household (ratio to 1970)Forecast

(assumes nominal income

grows 5% annually in the coming

decade's recovery)



Contribution of government spending (cont. to real GDP over 4-qtr spans, percentage points)

Sources: NBER-designated recession bars; U.S. Department of Commerce. Updated through 2014 Q3.

All this, despite the unprecedented fiscal swing

36

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Forecast



37

All this, despite severe headwinds in Europe and Japan

Real GDP in selected regions (percent change from four quarters earlier)

Sources: World Bank; US Dep. of Commerce; JPMorgan Chase & Co. Updated through 2014 Q3.

-9-8-7-6-5-4-3-2-1012345678910111213

-9-8-7-6-5-4-3-2-10123456789

10111213

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China

India

All others

US (thick line)

Japan


Global (shaded grey region)

Forecasts



38

For us, despite Sandy’s washout



0.85

0.87

0.89

0.91

0.93

0.95

0.97

0.99

1.01

1.03

1.05

1.07

1.09

1.11

0.85

0.87

0.89

0.91

0.93

0.95

0.97

0.99

1.01

1.03

1.05

1.07

1.09

1.11

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

US Forecast US

TX DC

AK UT

CO SD

OK NY

MA NE

MN MT

LA IA

W Va WA

VA MD

KS WY

CA NH

PA TN

VT IN

HI WI

AR SC

MO DE

KY NC

OR RI

ID ME

OH GA

FL IL

CT MI

NJ MS

NM AZ

AL NV



39

... And Probably Will Do Better in 2015 ...



40

In the US, done with the “slow” ...

Real GDP (annualized percent change)

Source: US Department of Commerce. Updated through 2014 Q3.

2.9

0.2

2.0

4.4

3.1 3.0

2.41.9

-2.8

-0.2

2.7

1.7 1.6

3.1

2.5

3.53.2 3.2 3.2

3.0

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

% change from the previous quarter

% change from four quarters earlier

% change over the four quarters of the year

Forecast (growth over the four

quarters of the year)



High yield spread (basis points)

Sources: Federal Reserve Board, JPMorgan. Updated through November 7, 2014.

Credit conditions are all good ...

41

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Ibbotson Associates J.P. Morgan Securities LLC high-yield index



US vehicle sales and production (millions of units at an annualized rate)

Sources: US Department of Commerce; Federal Reserve Board. Updated through October 2014.

... and vehicle sales prove it

42

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014



43

... But There’s Room to Run



Unemployment rate (percent)


through October 2014 (unemployment) and September 17, 2014 (FOMC forecast). 44

The unemployment rate doesn’t know everything ...

0

1

2

3

4

5

6

7

8

9

10

11

12

0

1

2

3

4

5

6

7

8

9

10

11

12

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Horizontal bars denote the Fed's view

(central tendency) about the near-term and sustainable unemployment rate (often referred to as the Nairu, or nonincreasing

inflationary rate of unemployment)¹

Note: The red boxes identify the first step in each Fed tightening sequence.

Proved to be premature and the Fed backed down



... but what it knows is getting better ...



0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Unemployed for less than 27 weeks (left scale)

Percent of the labor force unemployed for less than 27 weeks (right scale)



... that long-term unemployed are getting jobs too



0%

1%

2%

3%

4%

5%

6%

7%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Unemployed for more than 27 weeks (left scale)

Percent of the labor force unemployed for more than 27 weeks (right scale)



Selected elderly populations (percent of the population)

Source: US Department of Labor. Updated through July 2014.

47

Demographics are in the background but are just a footnote

0.00

0.05

0.10

0.15

0.20

0.25

0.00

0.05

0.10

0.15

0.20

0.25

1947 1957 1967 1977 1987 1997 2007 2017 2027 2037 2047

The projected five percentage point rise in the fraction of the population over the age of 65 represents an increase of about 16 million people in today's terms. That represents an average increase of one million annually when spread out over the next 15 years.

The percentage of the population over the age of 69.



December 3, 2014

Commercial Banking

What it doesn’t know (hidden unemployment) is improving

48

Change

2009 since Steady-state

peak the peak assumptions Excess vs steady state Sep 2014 Oct 2014

Unemployment (thousands) 15,352 -6,357 8,595 8,126 7,033 400 869 1,962 9,262 8,995

% of the labor force 10.0% (5.5%) (5.2%) (4.5%) (at 5.5%) (at 5.2%) (at 4.5%) 5.9% 5.8%

Unemployed fewer than 27 weeks 9,781 -3,579 5.860 342 6,307 6,202

% of the labor force 6.4% (3.7%) 4.0% 4.0%

Unemployed 27 weeks or more 5,643 -2,727 1,172 1,744 2,954 2,916

% of the Labor force 3.7% (0.75%) 1.9% 1.9%

Part-time for economic reasons (‘000) 8,979 -1,952 4,676 3,516 2,351 3,511 7,103 7,027

% of the labor force 5.9% (3.0%) (2.25%) (at 3.0%) (at 2.25%) 4.6% 4.5%

‘Work is slow’ (thousands) 6,681 -2,467 2,186 2,028 4,162 4,214

4.4% (1.4%) 2.7% 2.7%

‘Full-time work not available’ (thousands) 2,018 429 991 1,456 2,562 2,447

1.3% (0.6%) 1.6% 1.6%

20- to 49-yr old dropouts (thousands) 2,797 -140 0 2,657 2,704 2,657

20-year olds 1,205 -42 0 1,163 1,193 1,163

30-year olds 521 -58 0 464 467 464

40-year olds 1,070 -40 0 1,031 1,044 1,031

Memo: 16- to 19-year olds 971 -59 0 913 935 913

Note: Blue-shaded area marks the components of hidden unemployment.



Involuntary part-timers are called “employed” ... not so

Involuntary part-time (thousands) (percent of the labor force)

Source: US Department of Labor. Updated through September 2014. 49

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Percent of the labor force (right scale)

Number of people (left scale)



Dropouts are nowhere ... but they aren’t retiring

Participation rate for selected age groups (percent of the respective population)


54

55

56

57

58

59

60

61

78

79

80

81

82

83

84

85

2007 2008 2009 2010 2011 2012 2013 2014

35 to 44 year olds (left scale)

25 to 34 year olds (left scale)45 to 54 year olds (left scale)

16 to 24 year olds (right scale)



Selected unemployment rate measures (percent of the labor force)

Source: US Department of Labor. Updated through September 2014.

51

Thinking outside the unemployment box ... 5th inning

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

U-6 (official plus involuntarily part-time plus marginally attached)

Official unemployment plus part-timers plus job-force exits under 49 years of age (U-3 ++)

Official unemployment plus one half of above-normal number of part-timers (U-3 +)

Official unemployment rate (U-3)

Forecast



It’s no surprise that Europe is disinflating

Output gap in selected regions (actual less potential real GDP as a percent of potential real GDP)

Source: US Department of Commerce; JPMorgan. Updated through 2014 Q2. 52

-14

-12

-10

-8

-6

-4

-2

0

2

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Japan

EU-28

US

Australia

Canada

Sweden



Hourly pay trends don’t feel like the 9th inning ...

Hourly labor compensation (percent change from four quarters earlier)

Sources: US Departments of Commerce and Labor; Updated through 2014 Q2. 53

-2

0

2

4

6

8

10

-2

0

2

4

6

8

10

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

ECEC (unweighted

version of the Employment Cost Index)

Employment Cost Index (fixed-weighted by industry and occupation)

Nonfarm business sector (unweighted), from the Productivity & Costs report



... incentive-based pay is behind the latest comp wiggle



0

1

2

3

4

5

0

1

2

3

4

5

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014





... incentive-based pay is behind the latest wage wiggle

Hourly wage & salary rates (percent change from four quarters earlier)


0

1

2

3

4

5

0

1

2

3

4

5

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014





... ditto for hourly wage rates


Source: US Department Labor; Updated through 2014 Q3 (ECI) and Oct. 2014 (average hourly earnings). 56

0.00.30.50.81.01.31.51.82.02.32.52.83.03.33.53.84.04.34.54.85.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

0.00.30.50.81.01.31.51.82.02.32.52.83.03.33.53.84.04.34.54.85.0

Average hourly earnings, production and nonsupervisory workers (thin black line)¹Average hourly earnings, total private industries (thick black line)¹ECI for private wages (orange line)

¹ Average hourly earnings for produduction workers are shown only up until March 2006 in order to provide historical context for the newer measure of average hourly earnings for all workers. The measure for all private -sector workers is available only since March 2006.



Not all wage shifts are about wages

Hourly average wages (percent change from four quarters earlier)

Source: US Dep. of Labor; Updated through 2014 Q3 (ECI) and October 2014 (wages). 57

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

AHE, production and non-supervisory workers

AHE, all private-sector workers¹

ECI, hourly private sector wage rates



Core PCE chain price index (percent change from 12 months earlier)


Updated through August 2014 (inflation) and June 18, 2014 (FOMC forecast).

Inflation doesn’t look like the 9th inning, and it rules

58

-2

0

2

4

6

8

10

12

-2

0

2

4

6

8

10

12

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

The range of FOMC's forecast

for PCE chain

price inflation, including its

longer-run goal

Overall PCE inflation¹

Core PCE inflation¹



59

It’s Not News (Nor Interesting) that the Fed will Tighten and Rates Will Go Up



60

It would be news if it delayed

Forecasts of the federal funds rate (percent)

Source: Federal Reserve Board; Bloomberg. Updated through November 7, 2014.

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Dashes & Columns:Range of FOMC forecasts (lighter

columns)

Central tendency of FOMC

forecasts (darker columns)

Median FOMC forecast (horizontal line)

Lines:Current market forecast (solid blue line)¹

Glassman, midpoint of range rounded to the next 1/4 point

(dotted line)



61

The outlook for long-term interest rates

Decomposition of 10-year Treasury yield (percent per annum)


0

1

2

3

4

5

6

7

8

0

1

2

3

4

5

6

7

819

99

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Estimated term premium embedded in a 10-year Treasury zero-coupon yield

Estimated average level of zero-coupon short-term interest rates anticipated over the subsequent 10 years

Average level of expected short-term interest rates plus an assumed term premium of 50 basis points

Average level of zero-coupon short-term interest rates anticipated over the subsequent 10 years (based on the assumed fed funds path, the dashed line)

Federal funds rate path (actual to date and assumed after that)



62

Conclusion ... Implications of 5th Versus 8th Inning



Actual and potential real GDP (2009 chained dollars)

Source: JPMorgan Chase & Co. Updated through 2014 Q2.

Why it matters

63

14,000

15,000

16,000

17,000

18,000

19,000

20,000

21,000

14,000

15,000

16,000

17,000

18,000

19,000

20,000

21,000

2007 2009 2011 2013 2015 2017 2019 2021

Potential real GDP = 2.1%

Actual real GDP

Potential real GDP = 2.5%





Sources: US Dep. of Commerce; Dow Jones. Updated through 2014 Q3 (profits) and Nov. 26, 2014 (stocks).

5th inning means there’s more of everything ahead

64

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

36,000

1990 1995 2000 2005 2010 2015 2020



Note: Since 1952, the Wilshire 5000 P/E climbed to 14 times earnings near cyclical peaks, excluding the unprecedented multiples during 1997 - 2001, and that would occur when the line floated at the upper boundary of earnings.

Forecast



After-tax GDP profits of all US businesses (percent of nominal Gross Domestic Income)



Meanwhile there’s still a lot for equity markets to digest

65

0

1

2

3

4

5

6

7

8

9

10

11

0

1

2

3

4

5

6

7

8

9

10

11

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017



66

Post Scripts



67

How Speculative Excesses Were Addressed



New housing starts (thousands at an annual rate) Unsold homes (months’ worth of sales)

Source: US Department of Commerce. Updated through August 2014

.

Builders had to under build ...

68

0

2

4

6

8

10

12

14

16

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Total housing starts (left)

Unsold single family houses (right)

Forecast



Housing sales and starts (ratio to June 2005)

Source: US Department of Commerce. Updated through August 2014

.

... new and existing

69

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Sales of existing houses

Housing startsSales of new houses



Household income and house prices (ratio to 1970)

Sources: US Dep. of Commerce; CoreLogic. Updated through 2014 Q2 (income) and 2014 Q2 (house prices).

Economic recovery and time

70

0

1

2

3

4

5

6

7

8

9

10

11

12

13

0

1

2

3

4

5

6

7

8

9

10

11

12

13

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

CoreLogic house price index (ratio to 1970)

Gross nominal income per household (ratio to 1970)Forecast

(assumes nominal income

grows 5% annually in the coming

decade's recovery)



Rising prices are draining underwater mortgages

71

0

25

50

75

100

125

150

175

200

225

0

25

50

75

100

125

150

175

200

225

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

CoreLogic measure of house prices

Scenario above assumes that

house prices rise 4% annually in

the future.

Note: The red zone represents an estimate of the aggregate amount of under-water mortgages (see the note below)

House prices (January 2000 = 100)

Source: CoreLogic. Updated through 2014 Q2.



Loan charge-offs (billions of dollars quarterly) Cumulative charge-offs since 2006 (billions of dollars)

Source: Federal Deposit Insurance Corporation. Updated through 2014 Q2.

Mark-to-market discipline

72

0

100

200

300

400

500

600

700

0

10

20

30

40

50

60

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Net chargeoffs by all FDIC institutions (left scale)

Cumulative "excess" net chargeoffs of all FDIC institutions since 2007 (right scale)



That’s how leverage got reduced

Debt service (percent of monthly income) Household debt (ratio to income)

Source: Federal Reserve Board. Updated through 2013 Q3. 73

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

0

5

10

15

20

25

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Financial obligations (left)

Debt service (left)

Household debt (right)



... and household net worth is back in record territory

Personal saving (percent of disposable income) Household net worth (ratio to income)

‘Sources: US Dep. of Com.; FRB. Updated through August 2013 (saving) and 2013 Q4 (net worth). 74

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

5.8

6.0

6.2

6.4

6.6

6.81

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Ratio of household net worth to income (right scale, reversed).

Household saving rate (left)

Forecast



Which left little market on the consumer industry

Nominal consumer spending (percentage of nominal GDP)

Source: US Department of Commerce. Updated through 2014 Q2. 75

0.57

0.58

0.59

0.60

0.61

0.62

0.63

0.64

0.65

0.66

0.67

0.68

0.69

0.70

0.57

0.58

0.59

0.60

0.61

0.62

0.63

0.64

0.65

0.66

0.67

0.68

0.69

0.70

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012



REITs stepping in as GSEs exit

Credit provided by selected (percent of all credit provided)

‘Source: Federal Reserve Board. Updated through 2013 Q3. 76

0

10

20

30

40

50

60

70

80

90

100

1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

Federal Reserve System

Life Insurance and Property Casualty Companies

Private and Public Pension Funds

Securities Brokers and Dealers, Finance Companies, Funding Corporations, and Holding Companies

Money Market Mutual Funds

Mutual Funds, Closed-End Funds, Exchange-Traded Funds, and REITs

GSEs, Mortgage Pools, and Issuers of Asset-Backed Securities

Private Depository Institutions



77

The stagnant “secular stagnation” theory



78

Why the “secular stagnation” idea isn’t interesting

The economic cycle, unemployment rate (percent of the labor force)


0

1

2

3

4

5

6

7

8

9

10

11

12

13

0

1

2

3

4

5

6

7

8

9

10

11

12

13

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Nairu (where we want to be)

Official unemployment rate (U-3)Official unemployment plus part-timers plus job-force exits under 49 years of age (U-3 ++)

Forecast



79

The US Structural Fiscal Challenge Is About Healthcare



What we see isn’t what matters

Federal deficit over the most recent 12 months (percent of nominal GDP)

Note: Black boxes denote the fiscal year end.

Sources: Vertical bars denote NBER-designated recessions; US Treasury. Updated through July 2014. 80

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Forecast



It’s what is in our (the CBO’s) mind’s eye that’s key

Long-term revenue and spending projections (percent of GDP)

Source: Congressional Budget Office. Updated through October 2012. 81

0

5

10

15

20

25

30

0

5

10

15

20

25

30

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Debt service

Other

Medicare and Medicaid

Social Security

Revenues (shown holding at the historical average of 18.1% of nominal GDP)



The fiscal issue is a healthcare issue, not a fiscal issue

Federal healthcare spending (percentage of GDP)

Source: Congressional Budget Office. Updated through 2012. 82

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.00

0.01

0.02

0.03

0.04

0.05

0.06

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010



83

The Industrial Sector



Selected trade weighted US dollar indexes (March 1973 = 100)

Source: Federal Reserve Board. Updated through July 2014.

The industrial sector has the wind at its back ...

84

75

85

95

105

115

125

135

75

85

95

105

115

125

135

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2008 2013

Nominal trade-weighted dollar

index versus G10 countries (1972-76

= 100)

Broad real trade-

weighted dollar index



Real GDP and industrial output (percent change from 12 months earlier)

Sources: FRB; Macroeconomic Advisers. Updated through June 2014 (IP) and May 2014 (GDP).

Industrial activity is plodding along

85

-6

-4

-2

0

2

4

6

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Manufacturing output, line (left)Industrial Output, line (left)

Real GDP, grey shaded area (right)



ISM indexes (50+ = increasing) Real GDP (percent change from 12 months earlier)

Source: Federal Reserve Board. Updated through July 2014 (ISM) and May 2014 (GDP).

ISM sentiment surveys and the economy

86

-6

-4

-2

0

2

4

6

15

20

25

30

35

40

45

50

55

60

65

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Manufacturing ISM, line (left)Nonmanufacturing ISM, line (left)

Real GDP, grey shaded area (right)



ISM indexes (50+ = inc) Manufacturing output (annualized percent change from 3 months earlier)

Sources: Federal Reserve Board; ISM. Updated through June 2014 (IP) and July 2014 (ISM).

ISM sentiment surveys and factory output

87

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Manufacturing ISM, line (left)Nonmanufacturing ISM, line (left)

Manufacturing output, grey shaded area (right)



Selected sectors (2007 =100)

Source: Federal Reserve Board. Updated through January 2014.

The business equipment sector

88

-20

-15

-10

-5

0

5

10

15

20

25

30

-20

-15

-10

-5

0

5

10

15

20

25

30

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Energy

High-tech equipment

Nonenergy, non-tech output Manufacturing output (shaded area)




Source: Federal Reserve Board. Updated through June 2014.

The energy sector is driving much now

89

40

50

60

70

80

90

100

110

120

130

140

150

160

170

180

40

50

60

70

80

90

100

110

120

130

140

150

160

170

180

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Crude oil extraction

Natural gas liquid extraction

Natural gas extraction

Oil and gas well drillingMetal ore mining

Petroleum and coal products

Chemicals

Coal miningNonmetalic mineral mining




Source: Federal Reserve Board. Updated through August 2014 (output) and August 2014 (sales).

So is the motor vehicle sector

90

4

6

8

10

12

14

16

18

20

22

4

6

8

10

12

14

16

18

20

22

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Vehicle sales

Domestic vehicle output



Capital goods orders and shipments (billions of dollars)

Source: US Department of Commerce. Updated through August 2014.

Capital goods activity

91

45

50

55

60

65

70

75

80

45

50

55

60

65

70

75

80

2007 2008 2009 2010 2011 2012 2013 2014

Orders of nondefense capital equipment excluding nondefense aircraft (line)

Shipments of nondefense aircraft

Shipments of nondefense capital equipment excluding aircraft



Backlogs of unfilled orders (billions of dollars)


Backlogs of unfilled orders for capital goods

92

0

50

100

150

200

250

300

350

400

450

500

550

600

650

0

50

100

150

200

250

300

350

400

450

500

550

600

650

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Backlogs of (military and nondefense) aircraft orders

Backlogs of nondefense capital goods other than aircraft



Backlogs of unfilled orders (months’ supply)


Backlogs of unfilled orders for capital goods

93

10

20

30

40

50

60

70

80

2

3

4

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Backlogs of (military and nondefense) aircraft orders

Backlogs of nondefense capital goods other than aircraft



Selected sectors (2007 =100) Factory utilization rate (percent)

Source: Federal Reserve Board. Updated through June 2014.

The industrial sector still has unused capacity

94

60

65

70

75

80

85

90

95

100

20

30

40

50

60

70

80

90

100

110

1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014

Manufacturing output (left scale)

Manufacturing capacity utilization (right scale)



Factory payrolls (millions)


through July 2014.

... but it will look different

95

10

11

12

13

14

15

16

17

18

19

20

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

10

11

12

13

14

15

16

17

18

19

20



Prices of oil and natural gas, thermally-equivalent comparison (dollars per barrel)

Source: Oil & Gas Journal. Updated through May 2, 2014.

The energy revolution has more up its sleeve ...

96

0

25

50

75

100

125

150

0

25

50

75

100

125

150

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Petroleum price (WTI, $/barrel)

Natural gas price converted to thermal equivalent price of oil in terms of price per barrel (6 times the $/mmBTU)



US current account deficit (percent of GDP)

Source: US Department of Commerce. Updated through 2013 Q4.

... beyond the current account balance

97

-6

-5

-4

-3

-2

-1

0

1

2

-6

-5

-4

-3

-2

-1

0

1

2

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Petroleum balance

Current account balance



98

Consumer Outlook



Consumer trends now are powered by the cyclical recovery

Real consumer spending and real disposable income (percent change from 12 months earlier)

Source: US Department of Commerce. Updated through July 2014. 99

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Real consumer spendingReal disposable personal income



Income growth is the key

Real disposable income, real wages, and real consumption (percent change from 12 months earlier)

Source: US Department of Commerce. Updated through July 2014. 100

-6

-5

-4

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1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Real consumer spending (shaded area)Real disposable personal incomeReal wages and salaries



FIGURE 3. THE HOUSEHOLD BALANCE SHEET LOOKS IMPRESSIVE

Seleceted assets and liabilities (billions of dollars, unless noted otherwise)

Source: Federal Reserve Board. Updated through 2013 Q3.

December 3, 2014

Weekly Insights on Markets and the Economy

Commercial Banking 101

1960 1965 1970 1975 1980 1985 1990 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 3/31 6/30 9/30 12/31 3/31¹ 6/30¹ 9/30¹ 12/31¹

Net Worth 2,066 2,788 3,849 5,792 10,318 15,285 22,009 26,793 29,233 30,975 34,472 38,313 43,189 43,885 44,336 44,026 49,426 56,515 62,538 67,331 67,753 57,180 58,920 63,354 64,763 70,863 80,664 74,088 75,434 77,710 80,664 81,206 83,100 85,068 87,063

Consisting of Real Estate 406 477 739 1,225 2,487 3,890 5,114 5,375 5,520 5,686 6,077 6,738 7,374 8,708 9,568 10,263 11,074 12,958 15,216 15,049 12,766 9,269 8,269 8,419 8,431 10,273 12,625 11,057 11,655 12,158 12,625 12,852 13,082 13,314 13,548

Consisting of Financial Assets 1,660 2,311 3,110 4,567 7,831 11,395 16,895 21,418 23,713 25,288 28,395 31,575 35,816 35,177 34,767 33,763 38,353 43,557 47,322 52,282 54,986 47,911 50,651 54,935 56,332 60,590 68,039 63,031 63,779 65,552 68,039 68,354 70,018 71,754 73,516

Memo:

Net Worth 5.5 5.4 5.1 4.8 5.1 4.9 5.1 5.1 5.3 5.3 5.6 5.8 6.3 5.9 5.7 5.4 5.8 6.3 6.7 6.7 6.4 5.2 5.4 5.6 5.5 5.8 6.5 6.0 6.1 6.2 6.4 6.4 6.5 6.6 6.7

Real Estate Net Worth 1.1 0.9 1.0 1.0 1.2 1.3 1.2 1.0 1.0 1.0 1.0 1.0 1.1 1.2 1.2 1.3 1.3 1.4 1.6 1.5 1.2 0.8 0.8 0.7 0.7 0.8 1.0 0.9 0.9 1.0 1.0 1.0 1.0 1.0 1.0

Financial Net Worth 4.4 4.5 4.1 3.7 3.9 3.7 3.9 4.1 4.3 4.3 4.6 4.8 5.2 4.8 4.5 4.2 4.5 4.8 5.0 5.2 5.2 4.4 4.6 4.9 4.8 4.9 5.5 5.1 5.1 5.2 5.4 5.4 5.5 5.5 5.6

Equity Net Worth 0.8 1.0 0.7 0.3 0.3 0.2 0.3 0.6 0.8 0.9 1.2 1.4 1.8 1.4 1.1 0.7 1.0 1.1 1.1 1.3 1.3 0.6 0.9 1.0 1.0 1.1 1.5 1.2 1.2 1.3 1.5 1.5 1.5 1.5 1.6

Household Saving Rate (% of Disposable Personal Income) 10.0 11.4 12.6 13.0 10.6 8.6 7.8 6.3 6.4 5.9 5.7 6.2 4.3 4.0 4.3 5.0 4.8 4.6 2.6 3.4 3.0 5.0 6.1 5.6 5.7 5.6 4.5 4.1 4.7 4.9 4.3 4.4 4.8 5.0 5.1

Assets 2,291 3,142 4,328 6,560 11,766 17,653 25,702 31,505 34,276 36,380 40,229 44,513 49,946 51,238 52,312 52,787 59,251 67,511 74,701 80,793 82,147 71,457 72,972 77,130 78,332 84,461 94,419 87,631 88,995 91,399 94,419 95,029 96,991 99,027 101,091

Tangible Assets 738 931 1,391 2,288 4,455 6,789 9,752 11,101 11,510 11,997 12,700 13,793 14,978 16,924 18,470 20,053 21,918 24,994 28,534 29,581 28,200 24,798 23,664 23,319 23,264 25,004 27,471 25,794 26,408 26,974 27,471 27,587 27,845 28,106 28,370

Real Estate 548 696 1,025 1,684 3,414 5,340 7,602 8,540 8,839 9,223 9,829 10,793 11,805 13,521 14,890 16,291 17,983 20,817 24,128 24,958 23,377 19,846 18,687 18,326 18,109 19,708 21,996 20,444 21,015 21,541 21,996 22,213 22,432 22,653 22,876

Equipment & Software 4 5 8 19 36 51 75 88 91 92 95 105 116 129 142 157 173 191 207 226 246 268 279 291 305 315 324 317 319 321 324 326 328 330 332

Consumer Durable Goods 185 228 354 578 991 1,377 2,039 2,424 2,529 2,628 2,718 2,834 2,991 3,202 3,364 3,527 3,679 3,899 4,108 4,301 4,476 4,579 4,588 4,587 4,726 4,848 5,011 4,898 4,937 4,974 5,011 5,048 5,086 5,123 5,161

Financial Assets 1,553 2,210 2,936 4,272 7,311 10,864 15,951 20,404 22,767 24,383 27,528 30,721 34,967 34,314 33,842 32,734 37,333 42,517 46,166 51,212 53,947 46,659 49,308 53,811 55,068 59,457 66,949 61,837 62,587 64,425 66,949 67,442 69,146 70,921 72,721

Cash (Deposits) 242 380 542 925 1,550 2,655 3,538 3,256 3,438 3,577 3,745 3,953 4,133 4,468 4,990 5,250 5,489 5,848 6,263 6,905 7,564 8,173 8,095 8,061 8,738 9,201 9,448 9,205 9,133 9,252 9,448 9,647 9,851 10,058 10,271

Bonds (Credit Market Instruments) 151 170 242 321 521 967 1,741 2,377 2,383 2,540 2,499 2,552 2,668 2,562 2,471 2,628 2,859 3,915 4,203 4,414 5,037 5,158 5,604 5,874 5,490 5,641 5,652 5,599 5,670 5,656 5,652 5,652 5,652 5,652 5,652

Marketable Treasury Securities 27 25 31 44 101 202 378 691 652 701 611 546 623 394 244 77 214 270 222 126 10 -6 668 944 534 779 765 804 868 826 765 765 765 765 765

Municipal Securities 31 37 47 67 130 395 648 594 533 493 498 498 527 532 588 671 687 1,523 1,601 1,636 1,674 1,721 1,828 1,872 1,807 1,655 1,617 1,670 1,672 1,647 1,617 1,617 1,617 1,617 1,617

Corporate Bonds 11 9 30 64 59 95 237 535 612 644 638 705 602 661 861 1,234 1,167 1,263 1,345 1,511 1,961 1,949 2,312 2,294 2,427 2,641 2,793 2,600 2,606 2,665 2,793 2,793 2,793 2,793 2,793

Stocks 378 655 709 654 1,133 1,544 2,494 4,594 6,192 6,987 9,163 11,251 14,536 12,674 10,899 8,402 11,248 12,773 13,968 16,890 17,285 10,191 13,084 15,454 15,098 17,224 22,844 19,211 19,582 20,915 22,844 22,974 23,635 24,325 25,025

Direct Holdings 360 616 650 585 1,010 1,229 1,961 3,294 4,434 4,712 6,144 7,507 9,763 8,140 6,826 5,163 6,777 7,498 8,152 10,293 10,118 5,927 7,492 8,997 9,050 10,338 13,865 11,632 11,780 12,547 13,865 13,944 14,345 14,764 15,188

Indirect Holdings 18 39 59 70 123 314 533 1,300 1,757 2,275 3,019 3,745 4,773 4,534 4,073 3,239 4,471 5,274 5,816 6,597 7,167 4,264 5,592 6,457 6,048 6,886 8,980 7,579 7,803 8,368 8,980 9,031 9,290 9,562 9,837

Life Insurance Companies #N/A 0 4 9 18 33 58 200 275 373 510 665 904 883 807 692 887 1,029 1,140 1,335 1,467 957 1,220 1,421 1,396 1,556 1,855 1,671 1,696 1,761 1,855 1,866 1,919 1,975 2,032

Private Pension Funds 3 8 17 30 70 182 278 568 778 903 1,162 1,405 1,658 1,623 1,423 1,164 1,596 1,834 2,061 2,179 2,276 1,371 1,795 2,117 2,015 2,290 2,964 2,538 2,616 2,790 2,964 2,981 3,066 3,156 3,247

Federal Government Retirement Funds #N/A #N/A #N/A #N/A #N/A #N/A 0 6 11 19 30 43 57 57 49 46 79 98 111 136 146 84 117 141 134 148 208 168 174 185 208 209 215 221 227

Mutual Funds 15 30 38 30 36 99 196 527 693 980 1,316 1,632 2,154 1,971 1,794 1,337 1,908 2,314 2,504 2,948 3,279 1,852 2,460 2,779 2,503 2,892 3,953 3,201 3,316 3,633 3,953 3,976 4,090 4,209 4,331

Other 782 1,005 1,443 2,372 4,106 5,698 8,178 10,176 10,754 11,279 12,121 12,965 13,631 14,609 15,482 16,453 17,737 19,982 21,733 23,003 24,061 23,138 22,525 24,422 25,742 27,391 29,004 27,822 28,202 28,602 29,004 29,169 30,008 30,885 31,773

Liabilities 225 353 479 768 1,447 2,368 3,694 4,712 5,043 5,406 5,757 6,200 6,756 7,352 7,977 8,761 9,824 10,996 12,162 13,461 14,394 14,277 14,052 13,775 13,569 13,598 13,756 13,543 13,562 13,688 13,756 13,823 13,891 13,959 14,027

Mortgage Loans 141 219 286 459 926 1,450 2,489 3,165 3,319 3,537 3,753 4,054 4,431 4,813 5,322 6,028 6,909 7,859 8,912 9,909 10,610 10,577 10,417 9,907 9,678 9,435 9,372 9,388 9,361 9,382 9,372 9,361 9,350 9,339 9,329

Ratio to income 0.38 0.43 0.38 0.38 0.46 0.47 0.58 0.60 0.60 0.61 0.61 0.62 0.64 0.65 0.69 0.74 0.81 0.87 0.95 0.99 1.01 0.96 0.95 0.88 0.82 0.77 0.75 0.76 0.75 0.75 0.74 0.74 0.73 0.72 0.71

Memo: Estimated Under Water Mortgages 3 5 7 6 -392 -1,720 -2,185 -2,548 -2,960 -1,962 #N/A -1,851 -1,232 -911 #N/A #N/A #N/A #N/A #N/A

Gross 0 0 0 -4 -411 -1,777 -2,301 -2,712 -3,162 -2,197 -1,007 -2,091 -1,477 -1,159 -1,007 -933 -859 -784 -712

Chargeoffs of Real Estate Loans at FDIC Institutions 3 5 7 10 19 57 116 165 202 235 #N/A 240 245 248 #N/A #N/A #N/A #N/A #N/A

Portfolio Allocation 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Cash 11 12 13 14 13 15 14 10 10 10 9 9 8 9 10 10 9 9 8 9 9 11 11 10 11 11 10 11 10 10 10 10 10 10 10

Bonds 7 5 6 5 4 5 7 8 7 7 6 6 5 5 5 5 5 6 6 5 6 7 8 8 7 7 6 6 6 6 6 6 6 6 6

Stocks 51 53 50 46 45 41 42 47 49 50 53 54 56 53 50 47 49 49 48 49 50 47 49 52 52 53 55 54 54 54 55 55 55 56 56

Real Estate 32 30 32 35 38 38 38 35 34 33 32 31 30 33 35 38 37 37 38 37 34 35 32 30 30 30 29 29 30 30 29 29 29 28 28

Net Worth Allocation

Cash 12 14 14 16 15 17 16 12 12 12 11 10 10 10 11 12 11 10 10 10 11 14 14 13 13 13 12 12 12 12 12 12 12 12 12

Bonds 7 5 6 5 4 5 7 8 7 7 6 6 5 5 5 5 5 6 6 5 6 7 8 8 7 7 6 6 6 6 6 6 6 6 6

Stocks 52 55 51 47 46 41 43 49 52 53 56 58 60 56 54 50 53 52 52 54 55 52 54 57 57 57 59 58 58 58 59 59 59 59 60

Real Estate 29 26 29 32 34 35 33 30 28 27 26 25 24 28 30 32 30 30 31 29 26 25 22 21 21 22 22 22 23 23 22 22 22 22 22

Memo: Disposable Personal Income 376 513 762 1,219 2,018 3,099 4,312 5,244 5,533 5,830 6,149 6,561 6,876 7,401 7,752 8,099 8,487 9,003 9,402 10,038 10,508 10,995 10,937 11,244 11,787 12,246 12,477 12,297 12,417 12,568 12,625 12,708 12,811 12,970 13,084

Wilshire 5000 #N/A #N/A #N/A #N/A 1,405 2,165 3,101 4,541 6,057 7,198 9,298 11,318 13,813 12,176 10,708 8,343 10,800 11,971 12,518 14,258 14,820 9,087 11,562 13,360 13,190 14,995 19,706 16,598 16,992 17,982 19,706 19,818 20,388 20,984 21,587

% change 8 8 7 5 4 5 4 15 13 5 6 4 1 9 -39 27 16 -1 14 31 11 2 6 10 1 3 3 3

Dow Jones Industrial Average 616 969 839 852 964 1,547 2,634 3,834 5,117 6,448 7,908 9,181 11,497 10,787 10,022 8,342 10,454 10,783 10,718 12,463 13,265 8,776 10,428 11,578 12,218 13,104 16,577 14,579 14,910 15,130 16,577 16,671 17,150 17,651 18,159

% change 5 -1 0 1 5 11 4 3 2 2 2 2 15 10 5 5 3 0 1 11 -34 19 11 6 7 26 11 2 1 10 1 3 3 3

20142013

Ratio to Disposable Personal Income

Percent of All Assets

Percent of Net Worth

The balance sheet and record net worth ...



... encourages less saving and more spending

Nominal disposable income and nominal wages and salaries (percent change from 12 months earlier)

Source: US Department of Commerce. Updated through February 2014. 102

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.00123456789

1011121314151617181920

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Ratio of household net worth to income (right scale is reversed), includes a 2013 Q4 estimate and 2014 forecasts, based on the Wilshire 5000 as of February 14, 2014




When savings go up, saving falls and spending rises

Personal saving (percent of disposable income) Household net worth (ratio to income)

Sources: US Dep. of Com.; FRB. Updated through April 2014 (saving) and 2014 Q1 (net worth). 103

3.6

3.8

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4.2

4.4

4.6

4.8

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5.4

5.6

5.8

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6.2

6.4

6.6

6.81

2

3

4

5

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7

8

9

10

11

12

13

14

15

16

17

18

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Ratio of household net worth to income (right scale, reversed).


Forecast



Retail trends have lost some momentum ...

Retail sales (percent change from 12 months earlier)

Source: US Department of Commerce. Updated through August 2014. 104

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Year-over-year percent change

Annualized change from three months earlier



... core sales too

Retail sales other than auto and gasoline purchases (percent change from 12 months earlier)


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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Year-over-year percent change

Annualized change from three months earlier



But FedEx and UPS are happy

Non-store retail sales (percentage of nonauto retail sales)

Sources: US Dep. of Com.; ICSC. Updated by Feb. 2013 (electronic shopping) and Feb. 2013 (eCommerce). 106

0.00

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1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

E-commerce sales

Electronic shopping and mail order purchases



Cars have fully recovered

Sales of motor vehicles (millions at an annual rate)


8

10

12

14

16

18

20

22

8

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12

14

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1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013



108

Business Capital Spending



Business fixed investment, structures and equipment (percent change from four quarters earlier)



... and invest in the future ...

109

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Forecast



Business investment on structures, equipment, and intellectual products (% ch from 4 quarters earlier)



... capital investment ...

110

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60 65 70 75 80 85 90 95 00 05 10

Shaded area denotes overall business fixed investment

Nonresidential structures

Intellectual property products

Equipment and software

Forecast



Economic Forecast

OUTPUT AND EMPLOYMENT WHAT THE TABLE SHOWS:

Arizona’s GDP forecast is derived from the

national forecast by allocating output to each

of the 50 states based on employment

shares. So, forecast misses reflect surprises

in the aggregate forecast as well as

unexpected shifts in a state’s GDP share.

Arizona’s recovery is gaining traction. The

state’s recovery paced the national recovery

in 2012.

KEY MESSAGES:

The state’s economy is forecast to fare

better still in 2014 and 2015.

Note: GDP figures are based on quarterly values that are

interpolated from annual GDP estimates using quarterly

employment changes. Unbolded figures are reported

actual values and bold figures represent forecasts.

Sources: US Department of Commerce;

US Department of Labor.

December 3, 2014

Regional Perspectives: Arizona Economic Outlook


2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

United States

Real GDP

$ billions (fourth quarter) $14,992 $14,577 $14,542 $14,939 $15,190 $15,434 $15,916 $16,314 $16,885 $17,433 $18,000

% change over the four quarters 1.9% -2.8% -0.2% 2.7% 1.7% 1.6% 3.1% 2.5% 3.5% 3.2% 3.2%

Nonfarm employment

Job count (fourth quarter) 138,246,000 135,493,667 129,877,667 130,652,000 132,642,667 134,853,667 137,247,667 139,880,000 141,861,482 143,689,481 145,541,036


Average monthly change 101,667 -229,361 -468,000 64,528 165,889 184,250 184,250 184,250 184,250 184,250 184,250

Arizona

Real GDP

$ billions (fourth quarter) $270 $257 $244 $247 $254 $260 $264 $272 $282 $292 $302


Nonfarm employment

Job count (fourth quarter) 2,684,100 2,562,600 2,387,833 2,389,967 2,429,800 2,486,200 2,534,267 2,587,738 2,627,747 2,664,657 2,702,043


Average monthly change 1,922 -10,125 -14,564 178 3,319 4,700 4,006 4,456 3,334 3,076 3,115



The Economy’s Structure

PERCENT OF TOTAL GDP DERIVED FROM SELECTED INDUSTRIES WHAT THE CHART SHOWS:

The figure compares the relative importance

of selected industries to the state’s economy

with the national footprint of each industry

(state and national figures reflect the value

added of each industry as a percent of

aggregate state or US nominal GDP,

respectively).

Construction, durable manufacturing, retail

trade, and real estate account for a bigger

share of Arizona’s economy, compared with

the industry composition of the national

economy.

KEY MESSAGES:

The housing bust took a toll on the state’s

economy, given its outsized presence of the

real estate sector in the economy.

Source: US Department of Commerce. Updated through

2011.

December 3, 2014



0

2

4

6

8

10

12

14

16

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US industry mix Arizona's industry mix



Bankruptcies

RATIO OF BANKRUPTCY FILINGS TO THE 2007 Q4 NUMBER WHAT THE CHART SHOWS:

The figure illustrates trends in bankruptcy

filings by businesses and persons relative to

the number of filings in 2007 Q4, prior to the

recession.

Bankruptcy filings climbed sharply as the

homebuilding industry shut down but the

number of business bankruptcies is coming

down quickly.

KEY MESSAGES:

Indicators of financial stress are a useful

coincident indicator of economic distress.

Financial stresses are receding in Arizona’s

business community, a sign that recession’s

grip is easing.

Source: Administrative Office of the U.S. Courts; Updated

through September 2014.

December 3, 2014



0

1

2

3

4

5

0

1

2

3

4

5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Business bankruptcy filingsNonbusiness bankruptcy filings

All US bankruptcy filings (shaded area)



Oil & Gas Activity

NUMBER OF DRILLING RIGS ON LAND, INLAND WATERS, AND OFFSHORE WHAT THE CHART SHOWS:

The figure illustrates recent trends in the rig

count for petroleum drilling operations.

Oil and gas drilling activity in Arizona is

relatively modest.

KEY MESSAGES:

Arizona’s economy doesn’t draw as much

support from its small energy activity,

compared with some of its Rocky Mountain

neighbors.

Source: Baker Hughes rig count. Updated through 2014

Q3.

December 3, 2014

Regional Perspectives: Alabama Economic Outlook


0

1

2

0

500

1,000

1,500

2,000

2,500

3,000

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

United States (left scale)Arizona (right scale)



Initial Jobless Claims

RATIO OF INITIAL CLAIMS FOR UNEMPLOYMENT INSURANCE TO THE 2007 Q4 LEVEL WHAT THE CHART SHOWS:

The figure tracks layoffs in Arizona and the

national level of claims.

Weekly layoffs, both the state and national

tallies, are illustrated in the figure as a ratio

to the level of layoffs in the fourth quarter of

2007, prior to the recession.

Layoffs have retreated since early 2009, in

line with the national economy, but are

tracking at a higher level than the national

level.

KEY MESSAGES:

Modest declines in Arizona’s jobless claims

trend points to a gradual strengthening of the

job market.

Source: US Department of Labor. Updated through

November 8, 2014 (state) and November 15, 2014 (US).

December 3, 2014



0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2007 2008 2009 2010 2011 2012 2013 2014 2015

ArizonaUS (solid area)



Economic Growth

REAL GDP GROWTH (PERCENT CHANGE FROM FOUR QUARTERS EARLIER) WHAT THE CHART SHOWS:

Real GDP growth in Arizona (the line in the

figure) is superimposed on top of US real

GDP growth (bars in the figure).

Arizona’s economy downshifted more rapidly

than the national economy’s but now is

tracking the national economy’s recovery.

KEY MESSAGES:

Real estate drags are fading.

Arizona’s economy is forecast to continue to

speed up.


2013 (state) and 2014 Q3 (US). Quarterly estimates for

states after 2012 are interpolated from employment

figures (through Octoer 2014), based on the historical

correlation of state and national employment changes.

December 3, 2014



-8

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7

8

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Arizona

US

Forecast



Economic Output

REAL GDP LEVEL (RATIO TO 2000 Q4) WHAT THE CHART SHOWS:

The figure illustrates the evolution of real

GDP of the state and the overall US

economy since the fourth quarter of 2000,

the peak of the previous business cycle—

that is, at any point in time the lines trace the

ratio of real GDP to its level in 2000 Q4.

Despite Arizona’s real estate recession, the

state’s real GDP has expanded faster than

the nation’s over the past decade.

The state’s real GDP has recovered to the

pre-recession level.

KEY MESSAGES:

Arizona’s economy is progressing quite well.


2013 (state) and 2014 Q3 (US). Quarterly estimates for

states after 2012 are interpolated from employment

figures (through Octoer 2014), based on the historical

correlation of state and national employment changes.

December 3, 2014



0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Arizona

US

Forecast



Employment Growth

NONFARM PAYROLL EMPLOYMENT (PERCENT CHANGE FROM 12 MONTHS EARLIER) WHAT THE CHART SHOWS:

A comparison of job growth in Arizona

versus the nation.

Arizona’s wide swings in employment are

amplified by the volatility of the real estate

sector.

Employment is expanding in line with the

national trends.

KEY MESSAGES:

Arizona’s economy is forecast to match

national economy’s pace.


October 2014.

December 3, 2014



-10

-8

-6

-4

-2

0

2

4

6

8

-10

-8

-6

-4

-2

0

2

4

6

8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

ArizonaUS

Forecast



Employment in Relative

Terms

NONFARM PAYROLL EMPLOYMENT (RATIO TO THE 2000 Q4 LEVEL) WHAT THE CHART SHOWS:

The figure illustrates the evolution of

employment in the state compared with the

nation since 2000 Q4, the peak of the

previous business cycle. The lines trace out

the ratio of employment at the time to

employment in 2000 Q4.

Employment grew almost 20% over the

2000s, but lost almost half the decade’s

gains as the housing industry contracted.

Businesses now have recreated or replaced

almost 60 percent of the recession’s job

losses.

KEY MESSAGES:

The job market is forecast to continue to

expand at a steady pace.


October 2014.

December 3, 2014



0.97

0.99

1.01

1.03

1.05

1.07

1.09

1.11

1.13

1.15

1.17

1.19

1.21

0.97

0.99

1.01

1.03

1.05

1.07

1.09

1.11

1.13

1.15

1.17

1.19

1.21

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Arizona

US

Forecast



Employment in Absolute

Terms

NONFARM PAYROLL EMPLOYMENT (THOUSANDS) WHAT THE CHART SHOWS:

The figure illustrates the evolution of

employment in the state compared with the

nation since 2000 Q4, the peak of the

previous business cycle. The lines trace out

the ratio of employment at the time to

employment in 2000 Q4.

KEY MESSAGES:

The steady upward trajectory of the job

count points to continued economic strength

in the near future.


October 2014.

December 3, 2014



122,500

125,000

127,500

130,000

132,500

135,000

137,500

140,000

142,500

145,000

147,500

150,000

2,350

2,400

2,450

2,500

2,550

2,600

2,650

2,700

2,750

2,800

2,850

2,900

2,950

3,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

US (right scale)Arizona (left scale)

Forecast



Intrastate Employment

NONFARM PAYROLL EMPLOYMENT IN SELECTED COMMUNITIES (RATIO TO 2000 Q4 LEVEL) WHAT THE CHART SHOWS:

Job trends in communities across the state.

Local economic conditions vary widely

across the state and conditions in many

communities are still challenging.

Arizona’s recovery is spreading across the

state.

KEY MESSAGES:

Most communities are on the mend, judging

by trends in employment.


October 2014.

December 3, 2014



0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

US forecast

US

Yuma

Lake Havasu City

Prescott

Phoenix

Tucson

Anniston

Arizona forecast

Arizona

Forecast



Unemployment

UNEMPLOYMENT (PERCENT OF THE LABOR FORCE) WHAT THE CHART SHOWS:

Unemployment in Arizona, compared with

the national trend.

Arizona’s unemployment rate crested around

11 percent, but has fallen back to 7 percent

most recently.

KEY MESSAGES:

The unemployment rate is the single best

indicator of the relative economic

performance of a region.

Despite the drags associated with real estate

excesses in the state, the state’s

unemployment trends have largely paralleled

the national unemployment trends.


October 2014.

December 3, 2014



0

1

2

3

4

5

6

7

8

9

10

11

12

0

1

2

3

4

5

6

7

8

9

10

11

12

1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Arizona

US (shaded)

Forecast



Relative House Prices

RATIO OF THE STATE’S HOUSE PRICES TO THE NATIONAL AVERAGE (1995 Q2 = 1.0) WHAT THE CHART SHOWS:

The figure tracks the relative price of houses

versus the nation in the state—that is, it

reflects the ratio of the state price index to

the national house price index, with that ratio

set to unity in the summer of 1995. A drop in

the line means that house prices in the state

lag the national trend. States that did not

suffer from speculative conditions saw a

decline in the relative price of houses in this

last decade.

Arizona’s house prices rose 35 percent more

than the national average in the mid-2000s,

but corrected and then some. Arizona’s

house prices have recovered some in the

recent year and are back in normal

alignment with the rest of the nation.

KEY MESSAGES:

Inflated real estate conditions have been

corrected.

Source: FHFA. Updated through 2014 Q3.

December 3, 2014



0.8

0.9

1.0

1.1

1.2

1.3

1.4

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014



Relative House Prices

RATIO OF THE STATE’S HOUSE PRICES TO THE NATIONAL AVERAGE (1995 Q2 = 1.0) WHAT THE CHART SHOWS:

Arizona’s house price trends relative to the

national average and versus the Midwest,

the recent origin of many of the state’s new

residents.

Arizona’s markets became much more

expensive relative to Midwest markets but

those inflated conditions now have been

corrected.

KEY MESSAGES:

Arizona’s housing market is inflated no more.

Source: FHFA. Updated through 2014 Q3.

December 3, 2014



0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Versus the Midwest

Versus the national average



Real Estate Markets

HOUSE PRICES IN SELECTED COMMUNITIES (RATIO TO THE 1995 Q2 LEVEL) WHAT THE CHART SHOWS:

The figure tracks the cumulative percentage

deviation in house prices since 1995 in

selected local markets and compares those

with the national average.

House prices are beginning to rise.

KEY MESSAGE:

Markets that saw the biggest price increases

have corrected the most and prices now are

beginning to rise.

Sources: FHFA; Standard & Poor’s. Updated through

2014 Q3.

December 3, 2014



0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

US

Flagstaff

Tucson

Phoenix

Yuma

Phoenix (Case-Shiller)



New Home Building

HOUSING STARTS (RATIO TO THE JULY 1990 LEVEL) WHAT THE CHART SHOWS:

The figure illustrates homebuilding in Arizona

versus the rest of the nation.

Home building activity is beginning to

rebound.

KEY MESSAGES:

Given the huge footprint of the real estate

industry in the state, trends in home building

will offer important clues to the outlook.

The modest recovery in housing construction

implies the real estate sector is beginning to

normalize.

Source: Census Department. Updated through

September 2014 (state) and October 2014 (US).

December 3, 2014



0

1

2

3

4

5

0

1

2

3

4

5

2000 2003 2006 2009 2012 2015

USArizona

Forecast



Office Markets

PERCENT OF OFFICE SPACE THAT IS VACANT WHAT THE CHART SHOWS:

Office vacancy rates in Arizona, compared

with the national office vacancy rate.

Commercial real estate conditions seem to

be stabilizing in Tucson and are improving in

Phoenix.

KEY MESSAGES:

Office markets are a barometer of the state’s

economic health and at least conditions

appear to be stabilizing.

Source: CB Richard Ellis (formerly CB Commercial

Property Information Systems), Office Vacancy Index of

the United States. Updated through 2014 Q3.

December 3, 2014



0

5

10

15

20

25

30

0

5

10

15

20

25

30

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

PhoenixTucson

All metropolitan areas (shaded area)



CONTACT:

James E. Glassman

Telephone: (212) 270-0778

[email protected]

© 2014 JPMorgan Chase & Co. All rights reserved. Chase, JPMorgan and JPMorgan Chase are marketing names for certain businesses of JPMorgan Chase & Co. and its subsidiaries worldwide

(collectively, “JPMC”). The material contained herein is intended as a general market commentary. To the extent indices have been used in this commentary, please note that it is not possible to invest directly in an index. Opinions expressed

herein are those of James Glassman and may differ from those of other J.P. Morgan employees and affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein

may differ from that contained in J.P. Morgan research reports. The above summary/prices/quotes/statistics have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.

Full Employment or Bust · Full Employment or Bust Global Economic Outlook Issues, 51st Annual...

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