Research

Phoenix economic outlook: The good, the bad and the ugly

The Phoenix economy "could be worse," says Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business. And that's the good news. Members attending a recent luncheon meeting of the Economic Club of Phoenix listened intently as economic experts described three different scenarios for the current economy in terms of "the good, the bad and the ugly."

2008-05-21

Growth is to Phoenix what the automobile industry is to Detroit, according to Peter Ewen, chief economist at Arizona Public Service, the state's largest utility. And growth — especially the rapid population growth Phoenix is famous for — fuels construction, which boosts income and sales statewide.

But this winter's influx of seasonal residents, often called "snowbirds," and the in-migration from more expensive states like California did not stop the slide that began with a construction slowdown around mid-2006, Ewen told more than 300 business leaders gathered for the Economic Club of Phoenix.

Members attending the group's May 13 luncheon meeting listened intently as three experts, Ewen among them, took turns explaining the current economy in terms of "the good, the bad and the ugly." Ewen's presentation focused on "the ugly."

The ugly: slowest growth in 35 years

"This is the slowest growth in at least 35 years," Ewen said. During that 35-year period, he added, there were four recessions in Arizona. Data culled by APS showed that Phoenix residential growth, measured by new residential customers, dipped most dramatically around 1977, 1983, 1992 and 2004 — until now, that is. Hardest hit currently are the once explosively expanding West Valley communities of Surprise and Avondale.

APS tracks the number of unoccupied houses in metropolitan Phoenix by counting the number of new residential permits and the number of new meters installed. Since 2002, APS has logged 145,000 permits and 138,000 new meter installs. Think of this as "supply." In contrast, APS has added 123,000 more customers since 2002, but evidently 3,000 of those homes aren't occupied, since their utility usage is so low. That means the "demand" is actually around 120,000.

Translation: In APS's metropolitan Phoenix territory, the housing supply outstrips demand. In fact, at the current growth rate, Phoenix has a 30-month supply of housing. "This is a huge amount, and it's due to the lowered population growth," Ewen said. "And the gap widened a lot faster in the last 12 months."

Typically, sluggish population growth is tied to higher unemployment. But that's not the case in Arizona, where the current unemployment rate is 4.0 percent. Metro Phoenix is 3.5 percent (the national unemployment rate is 5.0 percent). That compares favorably to the unemployment rate during the last recession, which topped out at 5.8 percent. So what's going on?

"Look to the impact of undocumented workers, who made up around 8 percent of the state's population — approximately 50,000 people — in 2006," Ewen said. Note: it's impossible to be precise about the number of undocumented workers, but this estimate is consistent with U.S. Census and Department of Homeland Security figures.

The number of undocumented workers in Arizona is dropping, thanks to stronger enforcement of existing immigration laws, along with the new "employer sanctions" law penalizing companies that hire undocumented workers. At the same time, the declining growth rate means we need fewer jobs here. Ewen laid out four possible scenarios based on the undocumented worker equation.

1) If 50 percent of undocumented workers move away in one year, the population will decline by about 110,000 people; 2) If the same number leave over a two-year period, the population stays flat; 3) If 100 percent of undocumented workers leave in a year, the state population will drop 375,000; and 4) If the same number leave over a two-year period, the population declines by about 110,000 people.

Obviously, any of the four scenarios would have far-reaching impact locally, but as Ewen pointed out, "We don't know, and can't tell, if this is actually happening." The unknown impact of undocumented worker out-migration, coupled with the fact that several large, non-residential construction projects are winding down, makes him reluctant to say when the economy will bounce back.

"When will it be fixed? The most optimistic guess is the second half of 2008; that s what some forecasts say. But it's more probable that 2008 will stay flat, 2009 will be close to flat and in 2010 there will be recovery of some construction jobs," Ewen concluded.

The bad: prices and debt on the rise

Next up was Robert Mittelstaedt, dean of the W. P. Carey School of Business, bearer of "the bad" news. His analysis of employment statistics indicated that while jobs grew since about 1990, then leveled off this year, specific sectors are doing worse than others.

Bright spots include job growth in education and health services. Mining is up, too, but this sector is relatively small, so it can't fuel enough new jobs to actually turn Arizona's economy around, Mittelstaedt said. The number of government jobs is expanding locally, but unlike the more desirable health-sector employment, "these are not the kind of jobs that will increase our economy," he explained.

Job-market sectors holding steady include trade, transportation, utilities and leisure/hospitality. Of course, the professional business services sector is stable, as people who are laid off during corporate downsizing become consultants. But the number of jobs in the financial services, construction and manufacturing sectors is down significantly, Mittelstaedt added.

There's more grim news in housing foreclosure data. According to RealtyTrac figures, there are currently 27,404 foreclosure filings, or one in 95 homes, making Arizona the third-worst state for foreclosure rates nationwide, coming in behind Nevada and California. As Mittelstaedt said, "This is pretty significant."

This has economists looking for a peak in the foreclosure rate, as the stirrings of recovery will follow. "Usually mortgage foreclosures will climb for three or four years when the economy slows. You've got to get the bad [loans] out of the system before you can have growth again," he noted.

Consumer perception about how the economy is faring — whether accurate or not — can worsen or help remedy a slowdown, so economists keep an eye on how much we spend, on what, using which resources. There's been tons of media coverage lately regarding high food and gas prices. The first notable impact is that Arizonans are buying fewer retail goods, which means the state collects less sales tax.

We're using our charge cards more often, so consumer debt climbed 7 percent in March, to $2.6 trillion. "I think the ugly scenario is that people keep spending, and they're spending beyond their means," Mittelstaedt continued. Drill down a bit further and it's possible to see more specifically where consumers lack confidence. For instance, we're buying fewer automobiles; auto sales tax collection is down 18 percent.

Bicycle and motor scooter sales are up, though, as more commuters look for a cheaper way to get to work. Consumers are not alone in their anxiety. GE Capital recently announced it is getting out of the business of lending money for boats and recreational vehicles. The number of people with outstanding hardship loans from their 401(k) savings grew from 11 percent to 18 percent in a year, according to a Transamerica survey.

At the same time that consumers are borrowing against their retirement and running up their charge cards, "people dropped $500 million in a week on Grand Theft Auto," a popular video game, Mittelstaedt said. Inflation is creeping into our economy in myriad ways, he continued. Example: Mittelstaedt noticed his favorite brand of peanut butter has a new shape. Although it sells for the same price, there's a half-ounce less of peanut butter in the redesigned jar.

"It's becoming blatant, and is being blamed on gas prices," he said. Given these factors, and the upcoming tax increases predicted by two of the three candidates running for president, Mittelstaedt said it's hard to be optimistic.

"What will stimulate the economy? I don't think there's much out there. I have trouble thinking consumers can do it quickly," he concluded.

The good: it could be worse

Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business began his discussion of the good scenario by saying "We need to redefine good as 'it could be worse'." It's true that consumer confidence is collapsing, he said, but Arizona's incredible economic growth was not sustainable year over year.

In general, Arizona's current economic woes parallel the weak U.S. economy. If he's right, then some of the local fiscal fallout can be considered right-sizing. An example is the housing industry, he said. "The construction frenzy was not sustainable. Housing value increases couldn't continue to rise at 60 percent."

According to a recent Gallup poll, 80 percent of the population thinks we are experiencing a recession, partly due to the frightening increase in gas prices. But it's unwise to pay much attention to "the pundits and the bloggers" who say we're heading for a crisis similar to the Great Depression, McPheters said. From a long-term perspective, things may not look good, but as he noted, "they could be worse."

Are we in a recession? Indicators to watch include employment (down) and income (up), industrial production (up), retail sales (down); we haven t seen any negative quarters of gross domestic product (not yet). As McPheters noted, "Recession signals are mixed." But even the mixed signals are, well, mixed.

For instance, retail sales are down in the U.S. because of the dip in auto sales. "If you take out auto, we are still up in retail sales," he said. GDP growth will get a shot in the arm when a federal fiscal stimulus package takes effect in the third quarter. And the weak dollar means Arizona is exporting more high tech and attracting more international tourists.

Bottom Line:

• Arizonans consume 2.6 billion gallons of gasoline in a typical year. When gas prices go up by one dollar, that pulls $2.6 billion out of the consumer spending stream for other things.
• There were 9,199 foreclosures filed in Arizona in March, 2008.
• Back in May, 2005, single-family homes in the metro Phoenix averaged 33 days on the market; today, it takes an average 102 days to sell a house.
• Ewen, Mittelstaedt and McPheters all agreed that while the current economic outlook is not the best, Arizona is likely to do better than the rest of the U.S. into the foreseeable future.

---

Test your knowledge of the Arizona economy: see link to Second Annual Arizona Economic Confidence Quiz.

Economics