The Economic Minute: Help is here — so when will we feel better?

The Economic Minute is a new feature of Knowledge@W. P. Carey. These brief recaps by W. P. Carey economists, first presented at Economic Club of Phoenix luncheons, are designed to bring you up to date on current conditions nationally and in the West. In this edition, research economist Lee McPheters, editor of Economy@W. P. Carey, details how much help is coming to hard-hit Arizona via the economic stimulus package.

The Economic Minute is a new feature of Knowledge@W. P. Carey. These brief recaps by W. P. Carey economists, first presented at Economic Club of Phoenix luncheons, are designed to bring you up to date on current conditions nationally and in the West.

In this edition, research economist Lee McPheters, editor of Economy@W. P. Carey, details how much help is coming to hard-hit Arizona via the economic stimulus package.

Transcript:

Lee McPheters: Let me talk a little bit about why we think that the stimulus program is not going to bring a quick fix to the economy. This is not to say that it's not going to work. What we are saying is that you really should not expect any immediate, profound impact. When you look at the way that the stimulus plan is laid out, you can see that in the first year, the year we're in, you get less than 25 percent of the overall impact. It is not until 2010 that you get the main impact out of the stimulus plan.

As a result of that, while we will see some impacts, it's really going to be 2010 before we really see the major infrastructure outlays, before you have larger impact from the various tax provisions, state aid, and so forth. If you have tried to track down exactly where we are with the stimulus plan right now, the best place to do it eventually is going to be a website put out by the White House called recovery.gov.

But, you go there right now and you don't find a whole lot of information. So, we've tried to piece some of that together for you and give you a little bit of insight on what's going on with the stimulus plan. I've set up a collection of very brief bullet points here to give you my perspective. No quick fix because the major impact is actually felt after 2009. You get about 50 percent of your impact in 2010, not 2009. $185 billion in the current year.

Now, if you use the multiplier that the Council of Economic Advisors is working with, that's 1.5. So, what that gives you then is an impact on gross domestic product of your $185 billion goes to $280 billion. $280 billion is 2 percent of GDP. If you've been following this stimulus plan for a while you know that it started out with a target of a 1 percent magnitude compared to GDP. It has since grown to much greater than that.

The current year impact then of 2 percent compared to what we always thought a stimulus plan would look like is pretty significant. There's a rule of thumb used by the council Council of Economic Advisors that says every 1 percent increase in GDP gives you a million new jobs. So, $280 billion increase in GDP, that's 2 percent of GDP, that gives you two million more jobs.

The problem is that from December '07 when the recession started, to where we are now December 2008, the most recent 12 month period, we lost three million jobs. So, we hope to then kind of address the situation, but it's only going to be kind of a two-thirds impact. We'll probably continue to lose jobs through 2009. So, kind of remember that. OK.

Three million jobs lost, if the stimulus plan does what it's supposed to do in 2009, two million jobs either saved or created. So, hold that thought. Now, look at Arizona. Here's my projection as to what Arizona is going to get out of this stimulus plan. It goes like this. Arizona's share of GDP is traditionally about 1.8 percent, 1.7, 1.9. Something like that. Arizona's share of U.S. jobs is about 1.8 percent, 1.9 percent of all U.S. jobs.

Arizona's share of U.S. population is a little bit higher, 2.1 percent of U.S. population. From that, you can kind of deduce that the Arizona labor force participation rate is a little below the national average. Now, if the Council of Economic Advisors tells us that there's going to be two million jobs created in 2009, then my simple back-of-the-envelope model tells me that 2 percent — which is Arizona's share of everything economic — 2 percent of two million is 40,000 Arizona jobs in 2009.

Now, here's the problem. From December '07 through December '08, Arizona lost 116,000 jobs. The numbers just out today from the Arizona Department of Commerce tell us the state in the last 12 months has lost over 150,000 jobs. So when you look at 40,000 let's just say versus 150,000, obviously you're in the realm of somewhere around 30 percent, 40 percent offset. At the national level, OK, they're giving us two million jobs to offset the loss of three million.

So, you've got a two-thirds offset. In Arizona, the offset is going to be less than half. Now, why is that? Because nationally, the economy has lost 2 percent of its jobs since the recession began. In Arizona, we've lost about 4.5 percent since the recession began. So, things are twice as bad here as in the nation. If we're just getting our straight 2 percent, we're not getting any kind of proportionate offset.

OK? Kind of the bottom line conclusion is that the stimulus plan is not expected to help areas that have weaker economies. It is in fact based on a different kind of model. OK? Now, I have made the point that I did this on the back of an envelope and you might say well, what's the official forecast? What's the official forecast? Forget about your envelope.

Obviously you're kind of a time-pressed sort of guy and you said look, take 2 percent of two million, 40,000, that's Arizona's share. What's the official forecast? I put that up on the board. This is from White House recovery.gov. 74,300 jobs over the next two years. OK? So, this is your Council of Economic Advisors. You've got the leading tier of economists in the country cranking out these numbers.

So, what's the official forecast? OK. Turns out that it works out like this. The official forecast from the council of economic advisors, 3.6 million U.S. jobs in two years. What is 2 percent of 3.6 million? It's exactly 74,300. Ergo, 74,300 Arizona jobs in two years. My point is this, I made my projection for Arizona job impact by saying Arizona gets 2 percent of everything, so 2 percent of two million is 40,000. How did the council Council of Economic Advisors do their forecast? The same way.

They did it the same way. They took the total over two years and took 2 percent of that. So, what do you conclude from all of this? What you conclude from all this is that we don't know a whole lot about what the impact is going to be. It is obvious that they have simply said Arizona's got 2 percent of the population, therefore, you're going to get 2 percent of the impact. Now we may get more, we may get less. Nobody knows at this point.

But, it seems to me that, kind of going back to the original point, you're not going to get a heck of an impact in 2009 anyway. Final point that I'm going to make up here is that this whole contraction is really a problem of confidence and trust. A lack of confidence, a lack of trust. Banks don't trust their partners, consumers don't have the confidence to borrow, business doesn't have the confidence to invest.

And again, the best thing we could hope for, I guess, is that the stimulus plan would take us on a first step to restoring confidence. That's the best we could hope for. Again, I don't expect that's going to happen very quickly. Because if you look at the serious problems that consumers relate to when they assess their own consumer confidence, probably number one up there is the unemployment rate, which is going to get higher and higher.

Arizona's unemployment rate is now 7 percent and going higher. We're probably going to see 9 percent to 10 percent at the national level. The other thing is their home prices are falling. So, those two things are affecting consumers and that's going to be a problem all through 2009. The other issue has to do with their concerns about trust. In particular, Wall Street seems to have obviously taken a turn for the worse.

But not only that, they continue to shoot themselves in the foot there. Just to kind of summarize the kind of thing that is undermining consumer confidence, I just kind of present this for you to look at. Madoff, you know, this is just the kind of thing that goes on and on. Madoff arrested at Wall Street office, Thursday, December 11th. The headline, "Biggest Wall Street Scam Since Wednesday, December 10th."

OK? So if you're dozing there, see. He was arrested December 11th. Are you getting this? Wall Street keeps shooting itself in the foot. We have to kind of get past that as well. So, the bottom line to that then is that what we really need is a return to confidence in this economy. We need consumers to start spending.

We need business to start investing. We need banks to start lending. As I have done before though, let me just close out with one positive statement. That would be — the data are completely irrefutable — statistically in every recession, the Arizona rebound is approximately twice as strong as the national rebound.

If you want to look at job growth, you want to look at personal income, whatever indicators you look at, you're going to find that Arizona rebounds stronger. Unfortunately, this isn't going to happen until the national economy rebounds and that's going to be something that I think is certainly going to be measured in quarters, if not in months.