Regional Economic Outlook
Dr. Ronald Gunderson
Professor of Economics
The W. A. Franke College of Business

Dr. Ronald Gunderson, emeritus professor of economics at the NAU-The W. A. Franke College of Business, provided the regional economic forecast, reminding the audience of the unknowns at last year’s EOC immediately after the election. A year later, it looks much like it did in the past, and he is still not so sure where we’re headed. He did point out that through 2016, there was an upward trend in the Real GDP (Real Gross Domestic Product) toward 2-1/2%, creeping up towards 3%, but this modest improvement is “not such good news.”

Gunderson felt the CCI (Consumer Confidence Index) was looking good, numbers in the 90s being good and that with optimism that tax reform will bring positive impacts, the CGI may pass 125 this year.

On regional trends, Gunderson felt that job forecasts and job growth percent changes are very modest but that at least these numbers are positive. The housing numbers looked good, but these numbers are being challenged since it is harder to find a younger labor force to get into the trades; capital gains tax may become an issue if tax reform reduces or removes that deduction; and population projections stay relatively low. Some slowdown in tourism may occur if the U.S. National Park fees go from $30 to $70.

All in all, he concluded that Flagstaff is in for a reasonably good year – not a boom year but not a depressed year either.

Analysis of Interest Rates & Inflation
Dr. Dennis Foster
Senior Lecturer of Economics
The W. A. Franke College of Business

Dr. Dennis Foster, senior lecturer of economics at the NAU-The W. A. Franke College of Business, provided the forecast for interest rates and inflation. Inflation as measured by the Consumer Price Index has been low for the last 11 years and Q3 2017 stands at 1.96%. While that is good news for us, for the Feds, it seems their mandate is to maintain stable prices, not to maintain slowly growing prices, and Foster feels that is an area of concern.

In terms of Real GDP, current recovery average growth is not very good (2.14%). “If this is the New Normal, it is troubling,” said Foster.

On interest rates, Foster also expressed concern that we have been as far as we can go (almost 0%) for seven years and this is unprecedented. “I think we’re going to have to pay the price for that,” he said.

State & National Economic Issues
Elliott Pollack
CEO
Elliot D. Pollack & Company

Elliott Pollack, CEO of Elliott D. Pollack and Company, provided insight on economic issues for the State of Arizona and overall, he was optimistic.

“Leading indicators are going through the roof; Consumer confidence is high; my number 1 indicator is the spread between short- and long-term treasuries – we aren’t anywhere near a recession at this point. 6 million unfilled Job openings in this country – that’s a record… There are some headwinds… Really in policy that things are getting dicey.

“What keeps me up at night? Lots of things. Lack of political capital. Lack of consistency on immigration policy. We need workers; nothing is being done. Trump has been able to reduce the regulation, but only been able to slow the rate of growth of regulation, not to stop it.

“Recovery is in its 100th month of expansion. We are within two months of being the longest recovery in U.S. history, and we’re probably going to get there. This is also the slowest expansion in U.S. history not by a little, but by a lot. And I personally think it is regulatory more than anything.

“It is really the lack of population growth that has affected our recovery. The slowdown in population growth nationally and Arizona’s share in that – 1.3% instead of 3.2%… Where are the people?…The percentage hit the skids after 2005 and hasn’t recovered at all.

“Millennials not getting into the system is having a huge impact. There are more Millennials than Baby Boomers, the largest generation ever – and they have managed to delay adulthood well into their 30s. House owning is delayed. Tremendous pent-up demand. Outlook for housing is really quite positive. [There is also a] pent-up demand for “stuff” since they are marrying and buying houses later.

“No housing bubble, compared to 2005. FICO scores way up. It’s a completely different buyer. Demographics for apartments are great. In retail, vacancy rates are still high – one overriding reason – e-commerce wiping out retail sales. Retail has a completely different model now – more virtual; less inventory, except grocery stores – but guess what just happened? Amazon bought a grocery line. Only line going up is the Internet [sales].

“Expansion will continue. How rapid is up in the air. Depends on feds – that is always scary,” he concluded.

In the panel discussion that followed with these “three amigos,” there was consensus that:

The 100+ months of LONG recovery is worrisome; that the phasing in of corporate tax cuts would be a problem. “Businessmen need certainty. Phased cuts = uncertainty (Pollack).”

Gunderson explained that with the unprecedented recession, “there are a lot of possibilities when we look at the underlying theories, based on assumptions – [but] the assumptions, fundamentals, have changed.”

In regards to Trump’s changes and potential for fallout for U.S. and for Arizona North American Free Trade Agreement, the panelists agreed that we should not be “messing” with this. Perhaps downsizing the language, but if anything, “make it easier for people with skills to come into this country” [Pollack].

On the continuing impact of the educational system, Pollack said, “More than funding, it is structure. [While not this university, we are…] delivering students not qualified for the jobs out there. Statistical relationship between students spending and test scores nationally – actually negative. This is a demographic issue.”

Senior Strategic Advisor for the Global Public Sector Practice at PricewaterhouseCoopers (PwC)

David Walker started with his positioning statement:

Government has grown too big, promised too much, and needs to restructure.

His history lesson and call to action for the future is worth review.

“In the last 100 years, the Federal government has gone from 2% of the U.S. economy to 21%.

“100 years ago, the Congress of the United States controlled 97% of annual federal spending. Stated differently, only 3% of spending was on auto-pilot. Today, 70% is on auto-pilot and growing faster than the rest of the budget…

“George Washington and William Jefferson Clinton, we accumulated 5.7 trillion dollars in debt. And then with George Walker Busch (Busch #2) and Barack Obama and now beginning of President Trump, we’ve gone from 5.7 trillion to 20 trillion dollars and counting… we are out of control. Doesn’t truly reflect where we are because it doesn’t include [many items]…

“So what’s happened is government has grown bigger, it’s taken on more responsibility, and it’s lost control of the budget. And what about State’s rights? They have been eviscerated…

“…But to me, what matters is not deficits, per se, ’cause you’re going to run deficits from time to time. …what matters is debt as a percentage of the economy.

“…when you end up taking on debt in circumstances that have nothing to do with investments for the future, that is fundamentally imprudent, irresponsible, unethical in certain circumstances, and I would argue for our children, grandchildren, and future generations – immoral.

“Up until WWII, we were at 35% – 40% of debt to GDP… cared about stewardship – to leave things better positioned for the future. We are not discharging that responsibility…

“Then we had WWII. At the end, 105% of Public debt to GDP. We were betting the ranch… After WWII, we became fiscally responsible again… The debt to GDP from 104% in 1946 to about 30% in 1980 and we didn’t pay off a dollar of debt because we grew the economy faster than the debt and debt to GDP declined. Now, we are at 80%…

“At the end of WWII, the United States was over 50% of global GDP and we had 16 people working for every person who was on Social Security. And the dollar was as good as gold. Today, we are about 22% of global GDP. We have about 3.1 persons working for every person retired and it’s going to go down to 2.1 by 2035. And let’s just say that the dollar is not as good as gold, and I’m not talking about the Gold Standard. And 70% of our budget is on auto-budget…

“…new four-letter word in fiscal policy – M-A-T-H

“With the issue of healthcare being paramount these days, his outlook on the treatment in Washington was also of note:

“We’re having the wrong debate about health care right now in Washington. We spend two and a half times per person on health care than other industrialized nations do and we get below average results and costs are still growing much faster than the economy and much faster than inflation. It’s not a money problem. That system, the healthcare system and the K-12 education system which is the same – we spend two and a half times as much and we get below average outcomes – those two systems – it’s not money. We don’t have the right incentives, transparency, and accountability mechanisms…

On tax reform, for corporations, he focused on a reduction of preferences with one notable exception: provide for a deduction for dividends distributed to shareholders. “Why? They are already taxed at the individual level and that would put Boards of Directors in the position to be able to invest for growth in jobs or distribute for growth in jobs… Bloated bureaucracy needs to be taken head-on,” he said.

His conclusions were compelling.

“The biggest deficit this country has, is not a budget deficit. It’s a leadership deficit and the fact of the matter is, it’s time to recognize reality, to state the facts, speak the truth, provide some hope, talk about the tough choices and provide a way forward in all levels of government. And that’s got to be done by the President, that’s got to be done by the Governor, and that’s got to be done by the Mayor and respective ones because you can’t run a country by committee and legislative bodies are committees. And nobody’s in charge of the committee. People are in charge of factions within the committee, called political parties, but not the body of the whole.

“Good news is, we’re the greatest country on the face of the earth, I’ve been to a hundred of them. There’s no place else I would rather live. We can solve this problem. And all of you have a stake in it. And your kids and grandkids, to the extent that you have them, have a bigger stake in it. I’ll do my part. All I ask is that you do yours,” he concluded.

In the Q&A wrap up, Walker fielded questions on whether current corporate tax rates are really too high, on the efficacy of the government buying back shares, and on public sector pensions becoming a greater drain on the economy “…Most Americans don’t want to leave America. But people will leave a state and a locality, no problem. And there are already too many cases voting with their feet. Yes, it’s a real problem,” he said.

When asked if tax reform, even with the cost of implantation, will make a difference, he returned to his stance on debt to GDP. … Here is the key to me. What does it do to debt to GDP? On the Missouri Test – Trust but verify – or the Reagan test… that’s what really matters. The problem is we need accountability mechanisms to make sure we’re not just going on a pipedream. That we hold people accountable. And secondly, … We’ve written a blank check for 70% of the budget and we’ve got to get control of that.

The last question provided the opportunity to summarize his overall stance.

In regards to whether or not corporate tax reductions will actually outweigh the low labor and production costs abroad and allow us to bring home large corporations to the U.S., he said, “The United States can’t compete based on costs. We’re going to get beat every day of the week if we try to compete on cost. We have to compete on innovation, on productivity, on quality, on value-added. That’s how we have to compete. And that means that our tax structures, our regulatory structures, our immigration policies, our education systems, our training systems, all have to be re-engineered accordingly.

“We are living based upon the past rather than preparing for a better future.”

Walker’s bio

David M. Walker currently serves as the first senior strategic advisor for the Global Public Sector Practice at PricewaterhouseCoopers (PwC). A former practicing CPA with over 40 years of leadership experience in all three major sectors of the U.S. economy, Walker is a well-recognized fiscal responsibility and accountability, government transformation, and retirement security expert. With over 20 years of private sector and 15 years of public sector experience, he has also garnered significant strategic planning, risk management, financial, human capital, change management, government relations, citizen education and engagement, and other functional experience.

Walker has received Presidential appointments with unanimous Senate confirmation from Presidents Reagan, Bush (41), and Clinton, including serving as Comptroller General of the United States and head of the U.S. Government Accountability Office (GAO) for almost 10 years. He previously served as a partner and global managing director with Arthur Andersen LLP. Walker also served as the first chairman of the United Nations Independent Audit Advisory Committee for four years and currently serves on a number of non-profit boards and advisory committees. He is currently one of 400 global members of the Trilateral Commission.

Walker is also a former assistant secretary of Labor for Employee Benefits Security, a former head of the Pension Benefit Guaranty Corporation (PBGC), and a former public trustee of Social Security and Medicare. He has authored three books, with the latest one entitled Comeback America: Turning the Country Around and Restoring Fiscal Responsibility (2010) achieving national best seller status. He is a frequent writer and commentator, is a subject of the critically acclaimed documentary I.O.U.S.A., and has appeared in several other documentaries.

He lives in Bridgeport, Connecticut and Alexandria, Virginia with his wife Mary. They have two grown children and three grandchildren.