Sun Corridor Projections Base and Alternative Scenarios

1. Sun Corridor ProjectionsBase and Alternative Scenarios Prepared for Central Arizona Association of Governments January 8, 2009

2. Study Outline • Joint effort • ASU’s WP Carey School of Business • UA’s Eller College of Management • Review economic & demographic research • Development of Sun Corridor (3-county) model • Base forecast highlights • Population and demographic outlook • Employment outlook • Earnings, income and sales outlook • High & low scenario results

3. Economic & Demographic Research

4. Introduction • The Economic and Demographic Research portion examines/identifies long-term economic and demographic forces that could affect economic development in 3-county “megapolitan” area (Pinal, Maricopa and Pima counties combined)

5. Economic & Demographic Topics • Population, demographics and net migration analysis • Industry mix and basic industries in the region • Target industry recommendations • Interviews with “experts” • Case study: Riverside vs. Pinal County

6. Population, Demographics and Net Migration Analysis • Historical population growth • Natural increase • Domestic migration • Immigration • Comparison of long-term forecasts • Expert interview summary

7. Population, Demographics and Net Migration Analysis • Use Census Bureau estimates of population • By age, sex, ethnicity • Domestic migration to AZ is much larger than immigration • Undocumented immigration surged in mid-90s, peaked in 2000, and has declined since • Largest migration flows from Los Angeles • And other So. California metros (55% of total) • Chicago (during the 1980s, 6% in 2006)

8. Industry Mix and Basic Industries, 2004 • Manufacturing is a key driver of the megapolitan economy (33,000 excess jobs) • Electronic components (11,000) • Instruments (4,300) • Aerospace (17,700) • 2 Wholesale trade industries tied to high tech mfg. (6,000) • Tourism (30,000 excess jobs) – low wage • Administrative support and finance (16,000 excess jobs) • Copper mining and smelting (2,000 excess jobs)

9. TARGET INDUSTRY SECTORS • Aerospace/Avionics/Defense/Homeland Security • Healthcare and Health Industries • Bioscience/Bioindustries/Biotechnology/Biomedical • Transportation and Logistics • Agriculture/Food Processing/Agricultural Technology • Sustainability/Environmental Technology/Renewable Energy • Solar Energy • Environmental Technologies • Water Management • Waste Treatment • Other Renewable Energy (Wind, Biofuels) • General Manufacturing • Industrial Machinery • Business and Professional Services • Communication Services • Engineering Services Research and Testing • Financial Services • Information Tech./Computer Software & Systems • High Tech Industry • High-tech Instruments • Medical Devices • Electronics/Semiconductor • Nanotechnologies • Analytical Instruments

10. Economic Interview Summary • Global competitiveness Issues • Workforce and education • Infrastructure • Labor costs • Geographic location • Constraints to economic development • K-12 education quality • Transportation system • Water and waste water systems • Availability of high skilled workforce • Access to local employment opportunities • Funding is the key to avoiding constraints • Water issues • With proper management there will be enough water in Arizona in the long-run • AZ will have to develop incremental water supplies to extend life of resources • There could be temporary localized water shortages • Water will become more expensive

11. Case Study: Riverside vs. Pinal County • Population Growth • Population growth in Riverside County has remained rapid over extended period of time, indicating Pinal County population growth could remain rapid for many years • Employment Growth • The strong economies in Phoenix and Tucson are providing jobs for Pinal County residents and are likely retarding the job creation in Pinal County • Pinal County’s ability to create high wage jobs is limited by its relatively low skilled workforce, and lack of arterial transportation infrastructure within the County • Payroll per employee (PPE) • If the example of Riverside County is any indication, the PPE in Pinal County will stay below the U.S. average and below Maricopa and Pima Counties average PPE • Employment to Population Ratio (E/P) • Pinal County needs to increase the number of jobs. Over time the E/P will improve, but not to Pima or Maricopa County levels

12. Sun Corridor Model

13. The Sun Corridor Model • The Sun Corridor model was developed using data for the 3-county megapolitan area that includes Pinal, Maricopa and Pima Counties • The model consists of an econometric general equilibrium structural model with an embedded cohort survival model

15. Assumptions • Economic drivers for model are from Global Insight, “U.S. Economic Outlook” (ST), and “U.S. Economy” (LT), Oct. 2008. • Short-term • Real GDP will decline for three quarters in a row, starting 3Q ’08 Growth will be just 0.2% in 2009. • Inflation has peaked and will fall close to zero in mid-2009. • Long-term • CPI rises at modest 2.0% rate • Real oil prices fall, but remain high by historical standards (no oil embargos in forecast) • Federal budget deficit average 4.4% of GDP • Real consumption grows at 2.1% annual rate • Productivity grows at 2.0% annual rate

16. Assumptions • The Sun Corridor Forecasting Model used the following demographic assumptions • Birth rates are held constant • Survivorship rates are constant • The distribution of net migrants by age/sex/ethnicity reflects the recent proportions • Total net migration is driven by relative housing prices and economic activity

17. Assumptions • Gasoline prices in the Phoenix area remain high and drift upward from current levels to near $4.00 per gallon in 2015 • Housing prices in the Sun Corridor have fallen significantly • Relative to prices in Los Angeles, the Sun Corridor remains “cheap” • Prices in LA will remain nearly twice those in the Sun Corridor

20. Determinants of Growth • In the long term, supply factors matter • Labor force • Capital stock (infrastructure AND human) • Technological progress • For the 3-county area, population growth is the most important • Migration flows • Natural increase

21. Base Scenario Results

22. Highlights: Year 2040 • 10.1 million people will live in the Sun Corridor • The Sun Corridor will grow into one of the nation’s 10 “megapolitan” areas • Growth rates for both population and jobs moderate to near 2% annually

23. Forecasts to 2040, Sun Corridor

26. Population Dynamics • Natural increase (births – deaths) • Birth rates remain relatively constant • Death rates trend upward as population ages • Calculated relative to total population • Migration (net) • On average, provides twice the number of natural increase • As a percent of population, continues on downward trend

30. Population Dynamics • Retirement-related migration will double as boomers retire • but the numbers are small compared 0-64 age group • Work-related migration returns to “average” (90-100 thousand per year) by 2015

32. Population Dynamics • Once the economy recovers from current downturn, annual population growth returns to roughly 160,000 per year in 2015 • Then drifts slowly upward

34. Highlights: Year 2040 • The proportion of the population age 65+ • will increase significantly, but remain less than nationwide • AZ will remain one of the youngest states • School age population remains flat at 21% • Hispanics share of the total population rises from 33% to 48% • Hispanic share of school age population increases from 42% to 58%

42. Highlights: Year 2040 • 2.25 mil new nonfarm jobs will be created during the next 32 years • 4.75 mil total • Most will be in services sectors

44. Changes in Employment, 3-Co.

45. Growth Leaders Professional & Business Services Leisure & Hospitality Financial Activities Information Other services Health Care & Social Assistance Growth Laggards Government Construction Manufacturing Mining Employment Sector Growth

48. Highlights: Year 2040 • Employment to population ratio recovers after the recession and drifts slowly upward • Nationwide, the ratio remains flat at 0.46 • An alternative measure using BEA employment relative to working-age population (15-64) is significantly higher and moves upward more quickly over the forecast period

50. Highlights: Year 2040 • PCPI relative to US stabilizes at 88% after ratcheting down during the current recession