Transcript Slide 1

Some Perspectives on
Forecasting in an Uncertain
Economy
GFOAz
October 17th, 2014
Presented By:
Jim Rounds
Sr. VP, Elliott D. Pollack & Company
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Some Basic Considerations
• Understanding the background economy.
• Policy versus economics.
• Risk assessment.
• Math and timing.
• Example: OSPB and JLBC.
• Example: Maricopa County
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Understanding the
background economy…
…Tell the story.
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Example:
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United States Real Gross Domestic Product*
Annual Growth 1970 - 2015**
Source: U.S. Bureau of Economic Analysis & Blue Chip Economic Indicators
8%
Underlying = 2.2%
7.3%
Act: -2.0, 4.6, 2.8, 3.3%
5.4% 5.6%
5.6%
5.2%
6%
4.6%
4.6%
4%
3.2%
2.6%
3.3%
4.8%
4.5%
4.5%
4.1%
3.6% 4.0%3.8%
4.2%
4.2%
3.5%
3.5%
3.7%
2.8%
2.7% 2.7%
1.9%
2%
3.8%
3.4%
2.7%
1.8%
1.8%
0.9%
3.0%
2.5% 2.3%
2.2%
2.1%
1.6%
0.2%
0%
-0.5%
-0.2%
-0.1%
-0.2%
-2%
-0.3%
But, next year hit “average.”
-1.9%
-2.8%
0
2
4
6
8
0
2
4
199
199
199
199
199
200
200
200
4
8
198
201
6
198
2
4
198
201
2
198
0
0
198
201
8
197
8
6
197
200
4
197
** 2014 and 2015 are a forecast from the Blue Chip Economic Indicators, September 2014.
6
2
197
* Based on chained 2009 dollars.
200
0
197
-4%
3.8% = 40-year avg during expansion
3.2% = 20-year avg during expansion
Recession Periods
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S&P 500
1980-2014*
Source: Standard & Poor's (S&P); Moody's Analytics (ECCA) Converted
Recession Periods
Risk? Bubble?
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*Data through July 31,2014
140
130
30
Jan- 7
8
Jan- 7
9
Jan- 8
0
Jan- 8
1
Jan- 8
2
Jan- 8
3
Jan- 8
4
Jan- 8
5
Jan- 8
6
Jan- 8
7
Jan- 8
8
Jan- 8
9
Jan- 9
0
Jan- 9
1
Jan- 9
2
Jan- 9
3
Jan- 9
4
Jan- 9
5
Jan- 9
6
Jan- 9
7
Jan- 9
8
Jan- 9
9
Jan- 0
0
Jan- 0
1
Jan- 0
2
Jan- 0
3
Jan- 0
4
Jan- 0
5
Jan- 0
6
Jan- 0
7
Jan- 0
8
Jan- 0
9
Jan- 1
0
Jan- 1
1
Jan- 1
2
Jan- 1
3
Jan- 1
4
Consumer Confidence
1978 – 2014*
Source: The Conference Board
Recession Periods
150
So people will be spending
more…
120
110
100
90
80
70
60
Worried
50
40
Disenfranchised
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Weary
P.O.’d
20
*Data through August 2014.
Job Growth 2014
YTD June 2014 vs YTD June 2013
Source: US BLS
Alaska
47
11
30
7
35
1
33
2
9
27
Hawaii
5
6
15
50
Jobs growing
Top 10
Jobs declining
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8
10
3
4
Job Growth 2014
YTD June 2014 vs June 2013
Source: U.S. Bureau of Labor Statistics
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
State
North Dakota
Nevada
Texas
Florida
Utah
Colorado
Oregon
Delaware
California
South Carolina
Washington
Tennessee
Georgia
North Carolina
Arizona
Indiana
Minnesota
Oklahoma
Wisconsin
Iowa
Massachusetts
Missouri
Rhode Island
New Hampshire
Maine
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% chg.
4.34%
3.78%
3.07%
3.03%
2.87%
2.85%
2.84%
2.42%
2.34%
2.08%
2.07%
1.88%
1.84%
1.81%
1.77%
1.66%
1.65%
1.65%
1.58%
1.56%
1.49%
1.47%
1.35%
1.27%
1.23%
Rank
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
State
New York
Hawaii
Arkansas
Kansas
Montana
Nebraska
West Virginia
Wyoming
Ohio
Idaho
Mississippi
Louisiana
South Dakota
Alabama
Michigan
Maryland
Connecticut
Pennsylvania
Vermont
Illinois
Kentucky
Alaska
Virginia
New Jersey
New Mexico
% chg.
1.23%
1.15%
1.11%
1.06%
1.06%
1.04%
1.01%
0.98%
0.96%
0.93%
0.93%
0.92%
0.79%
0.75%
0.64%
0.64%
0.63%
0.61%
0.55%
0.55%
0.54%
0.31%
0.18%
0.07%
-0.20%
Net Percentage of Large U.S. Banks
Reporting Eased Standards versus Tougher Standards
on Residential Mortgage Prime Loans
2007 Q1 – 2014 Q2
Recession Periods
Source: Federal Reserve
Still Flat…
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U.S. Foreclosure Lag
2002–2021
Source: CoreLogic
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Recession Periods
Tell the story…
• The economy is growing but some recent statistics are skewed a
bit and need to be adjusted.
• Businesses are spending a little more as are consumers. This
should continue but only moderately.
• Population flows to AZ still weak another year or so, but good
long term opportunity. Expect steady improvement. No
boom.
• Downturn not most likely scenario but plan for continued
weakness.
THIS FRAMES THE FORECAST!
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Policy versus economics…
…Get the “buy in.”
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Public Policy




Forecasting is about more than modeling
and math.
Risk must be set by policymakers and
staff working together.
Use of outside opinion?
Optimistic, Baseline, Pessimistic.
 When
to move from one to the other?
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Public Policy

What is your plan?
 If
a downturn comes, do you want to have
fewer cuts?

If so, then a more conservative forecast is needed
to constrain spending (or a reserve fund in some
cases).
 Did
this policy get set by public officials?
 Set policy, then match with forecast
approach. = “buy in.”
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Risk assessment…
…Some will be dictated,
some you will dictate.
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Risk
Forecasting & Budgeting
Recession
Now
• Policy sets risk, economy sets revenues.
• A policy change can affect the forecast as much as the
economic analysis.
Normal
Expansion
Most Likely
Pessimistic
a
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b
c
Revenues
Risk
Forecasting & Budgeting
Highest
Risk
?
Pessimistic
Most Likely
Revenues
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Forecasting & Budgeting



Forecast policy can sometimes change the
revenue forecast as much as a new economic
assessment.
The last dollar that is projected is the most
risky.
What to do now?
 True
“most likely” or use “pessimistic”?
 Capital vs ongoing?
 Reserves?
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Math and timing…
…It’s not just the rate of
growth, it is when in a fiscal
year it picks up.
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The basics make it more difficult
this time…

Timing: Slightly missing a forecast’s
timing can have severe implications.

Math: A 50% decrease requires a 100%
increase for full recovery.
 Thus,
we are dealing with a larger percentage
range this time around. No 7% default.
 Some taxes are harder to forecast just from
volatility.
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This is why it helps to know the
story.
When is full recovery?
What will growth rates need to be to get
there?
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Example: OSPB and
JLBC…
…Some math, some
consensus, some policy.
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Example: Maricopa
County…
…Strategic planning
meets long term
forecasting.
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Again…
• Understanding the background economy.
• Policy versus economics.
• Risk assessment.
• Math and timing.
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Your specific
questions?
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