elliott d. pollack & company some perspectives on forecasting in an uncertain economy gfoaz...

Elliott D. Pollack & Company

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.• Example: OSPB and JLBC.• Example: Maricopa County


Understanding the background economy…

…Tell the story.


Example:


United States Real Gross Domestic Product* Annual Growth 1970 - 2015**

Source: U.S. Bureau of Economic Analysis & Blue Chip Economic Indicators

0.2%

3.3%

5.2%

5.6%

-0.5%-0.2%

5.4%

4.6%

5.6%

3.2%

-0.2%

2.6%

-1.9%

4.6%

7.3%

4.2%

3.5%3.5%4.2%

3.7%

1.9%

-0.1%

3.6%

2.7%

4.0%

2.7%

3.8%

4.5%4.5%4.8%

4.1%

0.9%

1.8%

2.8%

3.8%3.4%

2.7%

1.8%

-0.3%

-2.8%

2.5%

1.6%

2.3%2.2%2.1%

3.0%

-4%

-2%

0%

2%

4%

6%

8%

* Based on chained 2009 dollars.

** 2014 and 2015 are a forecast from the Blue Chip Economic Indicators, September 2014.

Recession Periods

3.8% = 40-year avg during expansion

3.2% = 20-year avg during expansion

Underlying = 2.2%

Act: -2.0, 4.6, 2.8, 3.3%

But, next year hit “average.”


S&P 5001980-2014*

Source: Standard & Poor's (S&P); Moody's Analytics (ECCA) Converted

*Data through July 31,2014

Recession Periods

Risk? Bubble?


Consumer Confidence1978 – 2014*

Source: The Conference Board

20

30

40

50

60

70

80

90

100

110

120

130

140

150

*Data through August 2014.

Recession Periods

Disenfranchised Weary

Worried

P.O.’d

So people will be spending more…


15

33

9 6

3

50

7

2

35

1

5

Alaska 47

Jobs growing

Jobs decliningTop 10

Hawaii

27

1130

Job Growth 2014YTD June 2014 vs YTD June 2013

Source: US BLS

10

4

8


Job Growth 2014YTD June 2014 vs June 2013

Source: U.S. Bureau of Labor Statistics

Rank State % chg.1 North Dakota 4.34%2 Nevada 3.78%3 Texas 3.07%4 Florida 3.03%5 Utah 2.87%6 Colorado 2.85%7 Oregon 2.84%8 Delaware 2.42%9 California 2.34%

10 South Carolina 2.08%11 Washington 2.07%12 Tennessee 1.88%13 Georgia 1.84%14 North Carolina 1.81%15 Arizona 1.77%16 Indiana 1.66%17 Minnesota 1.65%18 Oklahoma 1.65%19 Wisconsin 1.58%20 Iowa 1.56%21 Massachusetts 1.49%22 Missouri 1.47%23 Rhode Island 1.35%24 New Hampshire 1.27%25 Maine 1.23%

Rank State % chg.26 New York 1.23%27 Hawaii 1.15%28 Arkansas 1.11%29 Kansas 1.06%30 Montana 1.06%31 Nebraska 1.04%32 West Virginia 1.01%33 Wyoming 0.98%34 Ohio 0.96%35 Idaho 0.93%36 Mississippi 0.93%37 Louisiana 0.92%38 South Dakota 0.79%39 Alabama 0.75%40 Michigan 0.64%41 Maryland 0.64%42 Connecticut 0.63%43 Pennsylvania 0.61%44 Vermont 0.55%45 Illinois 0.55%46 Kentucky 0.54%47 Alaska 0.31%48 Virginia 0.18%49 New Jersey 0.07%50 New Mexico -0.20%


Net Percentage of Large U.S. BanksReporting Eased Standards versus Tougher Standards

on Residential Mortgage Prime Loans2007 Q1 – 2014 Q2

Source: Federal ReserveRecession Periods

Still Flat…


U.S. Foreclosure Lag2002–2021

Source: CoreLogicRecession 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!


Policy versus economics…

…Get the “buy in.”


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


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

!


Risk assessment…

…Some will be dictated, some you will dictate.


Forecasting & Budgeting R

isk

Revenues

Most Likely

Pessimistic

Recession

Normal Expansion

Now

• Policy sets risk, economy sets revenues.

• A policy change can affect the forecast as much as the economic analysis.

a b c


Forecasting & Budgeting R

isk

RevenuesMost LikelyPessimistic

Highest

Risk

?


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


Math and timing…

…It’s not just the rate of growth, it is when in a fiscal

year it picks up.


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…


This is why it helps to know the story.

When is full recovery?

What will growth rates need to be to get there?


Example: OSPB and JLBC…

…Some math, some consensus, some policy.


Example: Maricopa County…

…Strategic planning meets long term

forecasting.


Again…

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


Your specific questions?

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