The Economic and Revenue Outlook Presented by Mark McMullen, Economy.com FTA Annual Outlook Conference Slide 1 The Economy is Performing Well 5 Real GDP 3 Core CPI 1 % change year ago Sources: BEA, BLS ' '1 ' '3 ' '5 Slide 1
Businesses Are Flush... 1, 9 Internally generated cashflow Nonfinancial corporate business $ bil 8 7 5 Source: Federal Reserve Board '9 '97 '98 '99 ' '1 ' '3 ' '5 Slide 3...And Balance Sheets Are Strong 1 1 Yield spread between junk corporate bonds and 1-yr Treasury yields 8 Sources: Lehman, FRB 9 97 98 99 1 3 '5 Slide
Improved Business Psyches... 5 35 3 5 15 1 5 Business confidence % positive - % negative -week MA Iraq war Election Source: Economy.com Jan-3 May-3 Sep-3 Jan- May- Sep- Jan-5 May-5 Slide 5...Have Prompted Them to Expand 1,3 1,5 1, 1,15 Fixed investment $ bil (L) Employment mil (R) 133.5 13.5 131.5 1,1 1,5 1, Sources: BEA, BLS ' '1 ' '3 ' '5 13.5 19.5 Slide 3
Conditions are Stronger Across Industries... 8 7 % of industries adding to payrolls over 3 month period 5 3 Source: BLS ' '1 ' '3 ' '5 Slide 7...Throughout the Country... Job growth All States Improving 7.. UT Expanding NV (.5,.3) Annualized 3-mo. % change on 3-mo. MA ID OR 5. ND. WY SD 3. WA NE DE MS KS CO OK IN FL AZ DC RI LA IL NM KY MD AR GA MO CA TN TX 1. NJ MA ME PA NC IA WI CT NH NY MN OH VA. WV US AK AL HI. -1. -.5 SC..5 1. MT VT1.5..5 3. 3.5..5 MI Contracting Slipping -1. % change year ago, April 5, 3-mo. MA Slide 8
... And Across the Globe Real GDP growth Recovery 1 Argentina China Expansion Netherlands Hong Kong Brazil Japan Israel Russia Mexico India Chile Indonesia Norway Germany Sweden United States Spain U.K. Denmark Finland Australia Korea Euro New Area Canada Zealand France Belgium % change year ago - Italy Portugal 8 1 - Recession - annualized %change Struggling Slide 9 Still Some Room to Grow Strongly.5 95. 5.5 5. Jobless Rate Capacity 9 85 8.5 75. 3.5 Sources: BLS, FRB Manufacturing Utilization '95 '9 '97 '98 '99 ' '1 ' '3 ' '5 7 5 Slide 1 5
Sturdy Economic Outlook 5 % change year ago Real GDP 3 1 Core CPI ' '1 ' '3 ' '5 ' '7 Slide 11 Western States Look Particularly Strong Annualized job growth through 7 < 1.3% U.S. = 1.% 1.3% to 1.8% > 1.8% Slide 1
Weaker $ Eventually Improving Trade Improved Terms of Trade Will Help 1.3-1. 1.1 1..9 Real $ lagged yrs Index: 9=1. (L) Net trade deficit as a share of GDP (R) 79 81 83 85 87 89 91 93 95 97 99 1 3 5 Sources: BEA, FRB -5 - -3 - -1 Slide 13 Real Dollar Depreciation Rates Change in dollar value weighted by state export trade patterns -3% to -33% % change from peak value through end of -19% to -3% -7% to -19% Slide 1 7
Interest Rates are Expected to Rise With a Better Job Market... 7 3 Average annual growth job growth over past 3 yrs (R) 5 1-year T-bond yield (L) 1 3 Sources: FRB, BLS, Economy.com '99 ' '1 ' '3 ' '5 ' -1 Slide 15...and a Resumption of Business Borrowing 5 Corporate bonds and commercial paper outstanding % change year ago 15 1 5 Source: Federal Reserve Board 59 9 7 79 8 89 9 99 ' Slide 1 8
Rising Rates Will Put More Financial Pressure... ARM share of non-conforming mortgage debt outstanding 7 5 Source: Fitch Subprime 3 Alt-A 1 95 97 99 1 3 95 97 99 1 3 Slide 17...On Already Pressed Households 1 1 1 Financial obligation ratio (R) 19 18 8 Saving rate (L) 17 1 Sources: BEA, FRB 15 8 85 9 95 5 Slide 18 9
Vehicle Sales Are Especially Vulnerable to Higher Rates 5 Vehicle discounts as a share of vehicle price Sources: CNW, BEA, Economy.com 15 1 5 9 9 9 9 98 Slide 19 Higher Rates Will Short-Circuit the Housing Cash Machine 7 5 Cash Raised from Mortgage Borrowing $ bil Source: Economy.com HE Loans Refis Sales 3 1 ' '1 ' '3 ' Slide 1
Refinancing Across States Mortgage originations for refinancing & home improvement, % of personal income, 3 California Colorado Massachusetts Utah Maryland Hawaii Washington Virginia Arizona Rhode Island Michigan Nevada Minnesota Illinois US Source: HMDA 35 5 55 5 75 Slide 1 Depending on House Price Appreciation Value of subprime and non-conforming mortgages, % of total originations, 3 Source: HMDA More than % 18% to % Less than 18% Slide 11
Housing Market Watch List Difference between actual and expected median existing house price is more than SD from historic average, Q Seattle Tacoma New York Oakland San Francisco San Jose Los Angeles Orange County San Diego Sacramento Reno Las Vegas Riverside Denver Minneapolis Milwaukee Madison Chicago Charleston Portland Boston Providence Nassau Bergen-Passaic Newark Middlesex Monmouth Baltimore Washington DC Tampa Orlando Sarasota West Palm Beach Fort Myers Ft. Lauderdale Naples Miami Slide 3 Oil Prices Are Expected to Fall... 55 West Texas Intermediate $ per barrel 5 35 5 15 Sources: WSJ, Economy.com ' '1 ' '3 ' '5 ' '7 Slide 1
...as the Supply Side of the Energy Market Responds... 5 35 3 Active Rotary Rigs Source: Baker Hughes Worldwide U.S. 5 15 1 5 '98 '99 ' '1 ' '3 ' '5 Slide 5...as Does Energy Demand Real Gas Consumption % chg yr ago (L) Gas Price $ per galloon (R). 1.8 1. 1. - 1-mo MA Sources: Energy, BEA '9 '97 '98 '99 ' '1 ' '3 ' '5 1. 1. Slide 13
But Higher Prices Pose a Threat West Texas Intermediate Price, % change year ago 15 1 5-5 -1 5 5 55 5 7 75 8 85 9 95 5 Slide 7 High Oil Prices Hurt Agricultural States Oil and natural gas, net exports, % of gross state product Sources: EIA, BEA, Economy.com <-5-5 to -3-3 to > Slide 8 1
Top Ten Winners and Losers Under BRACS Proposed employment changes Source: DOD Number % Numbe r % Clovis, NM Norwich-New London, CT -,779-15,813 -.5-9. St. Marys, GA Lawton, OK 5,3 5,731 1.9 9. Fairbanks, AK Rapid City, SD -,71 -,77-8. -8.5 Columbus, GA-AL Enterprise-Ozark, AL 13,88 3,559 8.5 7. Grand Forks, ND-MN -,99-7. Manhattan, KS,73.5 Texarkana, TX-AR Mountain Home, ID Wichita Falls, TX -,5-898 -,38 -.5 -. -.7 El Paso, TX Fort Walton Beach, FL Anniston-Oxford, AL,19 3,95 1,8.1 3.3 3. Elizabethtown, KY Portland, ME -,93-13,3 -.5 -. Sumter, SC Colorado Springs, CO 1,1 8,58..5 Slide 9 States Have Yet to Fully Rebuild Reserves 1 8 Real GDP, % change year ago - - Source: BEA State & local government net savings, % of GDP 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3 5 Slide 3 15
State Personal Income Tax Collections Are Highly Cyclical Growth in personal income vs. tax receipts, yr MA Sources: Census, BLS Employment, % change year ago - - - -8-1 Annual growth in real tax collections relative to underlying income, percentage point difference 79 81 83 85 87 89 91 93 95 97 99 1 3 5 Slide 31 The Return of Taxable Capital Gains U.S. realized capital gains, $ bil Source: IRS, Economy.com 5 3 1 9 9 9 9 98 8 1 Slide 3 1
Even Withholdings Are Relatively Volatile Wages and salaries vs. personal income tax withholdings 1 1 % change year ago 8 Personal income tax withholdings Wages & salaries - - - Sources: BEA, Rockefeller Inst. 98 99 1 3 Slide 33 Determinants of State & Local Government Revenues % change year ago, qtr ma 15 1 9 Corporate profits (R) Housing prices (R) Retail sales (L) Wages & salaries (L) 5 15 1 3 5-3 3 5 7-5 Slide 3 17