Is Arizona's recession over? How will we know?

Arizona employment bottomed out at the end of 2009, after a loss of nearly 300,000 jobs from the peak during 2007. But have we seen the end of the recession? Maybe not, if we are going to evaluate this current cycle in a longer term context, based on annual data. Even if employment in 2010 grows in every month, it may not increase enough to yield an annual average level greater than last year. If so, 2010 will be the third consecxutive year of job losses for the state, and analysts looking back at Arizona's economic performance will categorize 2010 as a recession year, when the economy contracted compared to the year before.

After three consecutive quarters of solid growth in Gross Domestic Product (GDP), economy watchers and politicians are increasingly comfortable with declaring that the national recession is over. Further, many observers postulate the most likely end point was as long ago as nine or ten months, in mid-year of 2009.

At the national level, the official timing of business cycle peaks and troughs is the province of the National Bureau of Economic Research (NBER). The NBER emphasizes that the timing of recession is based on "various measures of broad activity" including GDP, income, employment, sales and industrial production.

To date, the NBER has reaffirmed the national start date of the recession as December 2007, but believes identification of a trough in activity would be "premature" (as of April 12, 2010 http://www.nber.org/cycles/april2010.html).

One issue likely affecting the NBER decision is that labor markets have still not returned to consistent growth. In March, 162,000 nonfarm jobs were added. However, U.S. employment in the whole first quarter was up only by a meager 7,000 jobs over the last quarter of 2009.

Meanwhile, some 15 million workers are unemployed and the national unemployment rate has been stuck at 9.7 percent for the first three months of the year. Here in Arizona, non-farm payroll jobs were down by 3,300 again in March after rising month-to- month in three of the previous five months (based on seasonally adjusted data).

However, unlike national employment, first quarter Arizona jobs were down by 2,300 compared to the final quarter of 2009 (seasonally adjusted data). What patterns do we need to see in job growth and overall employment data to say that "the recession is over in Arizona?"

Arizona employment bottoms out

To start, we must recognize that a recession is a contraction in economic activity. If we are to focus on employment as the primary indicator of Arizona recession, then the end of the recession is synonymous with an end to job losses. There must be what is often referred to as a "bottoming out" of employment.

Chart 1shows monthly Arizona employment levels from 2005 through March of this year. The chart uses seasonally adjusted data from the U.S. Bureau of Labor Statistics, to allow for month-to-month comparisons. The employment peak of the current cycle was in August of 2007, at an all-time high record of 2,680,300 jobs.

The low point of the cycle was reached in September of 2009, at employment of 2,384,300, a peak-to-trough loss of 296,000 Arizona jobs (seasonally adjusted) or a decrease of 11 percent. For the six months following the September low point, employment has "bumped along the bottom" of the cycle, as shown in the chart.

March 2010 (seasonally adjusted) employment was 2,386,600, down by 3,300 jobs from February, but February was up by 3,500 jobs from January. Based on observation of the seasonally adjusted monthly employment data, there is support for the view that Arizona employment bottomed out at the end of 2009.

Third year of job losses in 2010?

But have we seen the end of the recession? Maybe not, if we are going to evaluate this current cycle in a longer term context, based on annual data. It is quite possible that, for all of 2010, Arizona employment may actually be lower than average annual employment in 2009. Even if employment in 2010 grows in every month, it may not increase enough to yield an annual average level greater than last year.

If so, 2010 will be the third consecutive year of job losses for the state, and analysts looking back at Arizona's economic performance will categorize 2010 as a recession year, a year when the economy contracted compared to the year before. The current year-over-year comparison is shown in Chart 2. Arizona employment in March was down by 3.2 percent compared to March of last year.

While this is an improvement over the January figure (when employment was down by 4.9 percent compared to the prior January), the evidence is clear that, so far this year, the economy is weaker now than at this time in 2009. By that measure, the recession continues. In order to grow even 1 percent over 2009, Arizona must add 24,000 jobs overall in 2010. But so far this year, Arizona average employment is down by 98,000 jobs from the same period last year.

As of this month, the consensus Arizona Blue Chip forecast is that employment will be down by 0.1 percent in 2010, basically a "no growth" outlook (http://wpcarey.asu.edu/bluechip/western/arizona.cfm). But there are three panelists who project that Arizona employment will be down by 2.0 percent or more in 2010. If these forecasters are correct, Arizona labor markets in 2010 will lose another 48,500 jobs.

The somewhat counterintuitive conclusion from review of charts 1 and 2 is that it is likely that Arizona employment stopped contracting at the end of 2009, but will still register job losses for the year as a whole. That is, it is very possible that Arizona economic historians will record the current recession as extending for three consecutive years of jobs losses (2008, 2009, and 2010), an unprecedented downturn for a state known for strong employment gains.

Full recovery will take time

Finally, while monthly job losses have bottomed out and year-over-year losses have slowed, full recovery for Arizona lies sometime in the future. As of March, employment is at 89 percent of the August 2007 peak. As recently as 2005 and 2006, Arizona has added as many as 125,000 jobs per year.

But in each of those years, construction accounted for about one out of every five new jobs created. Construction is expected to lose jobs yet again in 2010. Further, it is unlikely that the economy can move forward without the key driver of renewed population growth.

The current Arizona Blue Chip forecast calls for 1.2 percent population growth in 2010 and 1.5 percent in 2011. The consensus forecast for employment growth in 2011 is 1.8 percent. Stronger job growth and full recovery won't be seen until 2012, 2013, or beyond.