Research

Podcast: Lee McPheters on the economy — is this the bottom or are we still falling?

Unemployment went up in August, and in the floundering real estate sector, qualified borrowers with prime loans who are having trouble making payments are beginning to slip into foreclosure. Consumer confidence improved a bit, but is still weak. Is this the bottom or are we still falling? W. P. Carey economist Lee McPheters comments.

2008-09-10

Unemployment went up in August, and in the floundering real estate sector, qualified borrowers with prime loans who are having trouble making payments are beginning to slip into foreclosure. Consumer confidence improved a bit, but is still weak. Is this the bottom or are we still falling? W. P. Carey economist Lee McPheters comments.

Transcript:

Knowledge@W. P. Carey: Distress in the economy continued to create pain this summer leaving consumers wondering when a recovery might begin. Economist Lee McPheters of the W. P. Carey School of Business talked with Knowledge@W. P. Carey recently about conditions nationally and in the Western region. Lee, non-farm employment fell by 84, 000 jobs in August according to the Labor Department and unemployment rose to 6.1 percent. It was under five in February. Is this a sign that the economy nationally has bottomed out?

Lee McPheters: Well, these are indicators that the typical consumer would really be paying attention to. In addition, they would be looking at gas prices and they would have some knowledge of oil prices just from what they read in the newspaper. In terms of the price level, actually things seem to be easing up a bit, but one of the key factors that influence consumer confidence of course is the labor market, the prospect that you might be unemployed.

And I think a reasonable forecast would be that unemployment rates are going to continue to drift upward. I think that we are just starting out to have some labor market problems in the economy and six months from now we are probably going to be well over 6 percent in terms of unemployment rates. But if you look at the indicators, indicators [just recently released] on the health of the economy, the number one thing you would look at would be the growth of gross domestic product.

Inflation adjusted growth was up over 3 percent, and this comes after I think a number of pundits were very negative about the health of the economy. So that indicator, just in and of itself, seems to suggest that we are not in a serious downturn. We are certainly in a slump, but I don't think it is severe as 2001 or 1991.

And in fact if you look at the job losses that we just heard about — 84, 000 jobs lost — [and] look back at the last five, six, seven, eight months of job losses, that is very disturbing, but during a recession you would expect to see job losses double those figures, something in the range of 150, 000 jobs per month. So while there is a downturn, while there is a slump, it is simply not as serious as we had been led to expect, however we may not have seen the bottom yet either.

Knowledge: How long do you think it is going to be before we start to see things really begin to climb back out?

McPheters: The way I would look at this is in terms of the cause and effect — that is, how did we get into this situation to start with. And it all began with the housing bubble and then the contraction in the housing market, the housing industry, construction, employment.

And I would say that what we really need to watch for is a flattening out of housing prices, how home values if they stop deteriorating then I would say we are at the bottom. They don't necessarily have to be ratcheting up at six, eight, 10 percent a year, they just simply have to stop declining. And when that happens, then you will see that housing market revive and I think that will be the first thing, then the first step in recovery.

Knowledge: What part do foreclosures play in this scenario, what do you expect in that area?

McPheters: Well, the most recent foreclosure numbers from the Mortgage Bankers Association showed that foreclosures are up again. They were looking at second quarter data for 2008. And what was alarming in those figures was that not only do the subprime problems persist, however they are not getting much worse, but what seems to happen now more often, we are seeing prime mortgages also having difficulty with payments.

We are seeing new mortgage problems developing the type of problem that comes about when someone who does have a job and does have reasonable credit, all of a sudden is unemployed and then they are missing payments and they are in the first phases of foreclosures. Those are the numbers that are going up. Still when you look at the states where the biggest problems are, there is no surprises there. It is California, it is Nevada, it is Florida and unfortunately, for those of us here in the Grand Canyon State, it is Arizona as well.

Knowledge: Well, what do you make of conditions in the Phoenix market right now?

McPheters: Well, again if you just go back to the received data, what we know about the market [is] housing permits in the greater Phoenix area this year are going to be down again. They are probably going to be down by more than 50 percent over what they were a year ago. Home resales, they are going to be down again, they are probably going to be down about 25 percent over what they were a year ago and home prices are down again.

My view, as I mentioned, is that this is just going to be a continuing problem until home prices stop going down and hit some sort of bottom. My own view on it is that [the] bottom is roughly equivalent to the prices that we saw in 2004. So we are 15 percent away from that. And if you just kind of pencil it out, if we see home prices decline maybe two to 2.5 percent a month, how long does it take to get something in the range of 15 to 20 percent, something like that, it is probably six, eight, nine months that we are going to continue to see home prices decline.

Knowledge: So it could early to mid 2009 before we see some real improvement?

McPheters: That would be my call and I am certainly I think not an outlier on this. I think most of the analysts certainly don't expect to see anything improving in the second half of 2008. And the question is, when in 2009 will there be any kind of upturn at all? I think most people would say it is going to be very late in 2009; 2010 I think would be much more favorable.

Knowledge: Wow … how has the western region fared? Are there any bright spots out here?

McPheters: Well, the darkest spot in the west actually turns out to be Arizona. If you want to look at job creation, which is one of the indicators that we follow pretty closely, every month we look at job growth state by state across the country and compare that with employment from one year before. So that it takes out the seasonal factor and you are just looking at absolute raw growth from one year to the next.

Then if you compute the percentage increase from that, you find out that Arizona is not the worst state in the country, but we are second to worst. Rhode Island has the weakest labor market in the country right now. Arizona is 49th in the country. There are about 20 states losing jobs, our neighbor Nevada is one of them, Colorado is one of them, Idaho is one of them. And in the west, the states that are doing best are the states that have natural resources.

And here I am talking about coal, oil, natural gas; if you have got all three of those, you are really sitting pretty, and that would be Wyoming: [the] number one job growth state in the country for the past two years, simply because of their energy markets. Texas is doing well, Colorado is doing reasonably well. Again those are energy states.

Knowledge: What about consumer confidence nationally?

McPheters: Consumer confidence appears to be a little bit stronger than it was in the past couple of months, however, that is like saying that instead of drowning in 15 feet of water, we are only drowning in 10 feet of water. Consumer confidence is very very low. What we thought that would lead to is consumer spending actually turning negative. So far that has not happened. The consumer spending continues to grow, [although it is] very weak growth in the range of 1 percent.

But really, the two things that are driving the economy right now are the consumer, which accounts for about 70 percent of spending, then the other element is exports. Because of the weak dollar, at least U.S. products are looking very very favorable in world markets and that really is driving the economy as well, with some pretty significant growth rates. The consumer is still hanging in there and I think the question is, how long will that hold on?

Economics Faculty