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Some Perspectives on Forecasting in an Uncertain Economy GFOAz October 17th, 2014 Presented By:

Some Perspectives on Forecasting in an Uncertain Economy GFOAz October 17th, 2014 Presented By: Jim Rounds Sr. VP, Elliott D. Pollack & Company. Some Basic Considerations. Understanding the background economy. Policy versus economics. Risk assessment. Math and timing.

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Some Perspectives on Forecasting in an Uncertain Economy GFOAz October 17th, 2014 Presented By:

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  1. Some Perspectives on Forecasting in an Uncertain Economy GFOAz October 17th, 2014 Presented By: Jim Rounds Sr. VP, Elliott D. Pollack & Company

  2. Some Basic Considerations • Understanding the background economy. • Policy versus economics. • Risk assessment. • Math and timing. • Example: OSPB and JLBC. • Example: Maricopa County

  3. Understanding the background economy… …Tell the story.

  4. Example:

  5. United States Real Gross Domestic Product*Annual Growth 1970 - 2015**Source: U.S. Bureau of Economic Analysis & Blue Chip Economic Indicators Recession Periods Underlying = 2.2% Act: -2.0, 4.6, 2.8, 3.3% But, next year hit “average.” 3.8% = 40-year avg during expansion * Based on chained 2009 dollars. ** 2014 and 2015 are a forecast from the Blue Chip Economic Indicators, September 2014. 3.2% = 20-year avg during expansion

  6. S&P 5001980-2014*Source: Standard & Poor's (S&P); Moody's Analytics (ECCA) Converted Recession Periods Risk? Bubble? *Data through July 31,2014

  7. Recession Periods Consumer Confidence1978 – 2014* Source: The Conference Board So people will be spending more… Worried Weary Disenfranchised P.O.’d *Data through August 2014.

  8. Hawaii Jobs growing Top 10 Jobs declining Job Growth 2014 YTD June 2014 vs YTD June 2013 Source: US BLS Alaska 47 11 30 1 7 35 33 2 5 8 9 6 27 15 50 10 3 4

  9. Job Growth 2014YTD June 2014 vs June 2013Source: U.S. Bureau of Labor Statistics

  10. Net Percentage of Large U.S. BanksReporting Eased Standards versus Tougher Standards on Residential MortgagePrime Loans2007 Q1 – 2014 Q2 Source: Federal Reserve Recession Periods Still Flat…

  11. U.S. Foreclosure Lag 2002–2021 Source: CoreLogic Recession Periods

  12. 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!

  13. Policy versus economics… …Get the “buy in.”

  14. 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? Public Policy

  15. 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.” Public Policy !

  16. Risk assessment… …Some will be dictated, some you will dictate.

  17. Forecasting & Budgeting Recession Now Risk • Policy sets risk, economy sets revenues. • A policy change can affect the forecast as much as the economic analysis. Normal Expansion Most Likely Pessimistic Revenues c a b

  18. Forecasting & Budgeting Risk Highest Risk ? Most Likely Pessimistic Revenues

  19. 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? Forecasting & Budgeting

  20. Math and timing… …It’s not just the rate of growth, it is when in a fiscal year it picks up.

  21. 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. The basics make it more difficult this time…

  22. This is why it helps to know the story. When is full recovery? What will growth rates need to be to get there?

  23. Example: OSPB and JLBC… …Some math, some consensus, some policy.

  24. Example: Maricopa County… …Strategic planning meets long term forecasting.

  25. Again… • Understanding the background economy. • Policy versus economics. • Risk assessment. • Math and timing.

  26. Your specific questions?

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