Research

Mid-year economic outlook: Slow growth

While the nation's economy showed some significant signs of life in the first half of 2011, the state's economy continues to bounce along the bottom. But forecasters at the Economic Club of Phoenix's Annual Economic Outlook 2011 luncheon on May 5, said they are looking at a comparably stronger finish to the year, with growth continuing at a gradually healthier pace leading up to 2015.

2011-05-05

While the nation's economy showed some significant signs of life in the first half of 2011, the state's economy continues to bounce along the bottom. But forecasters at the Economic Club of Phoenix's Annual Economic Outlook 2011 luncheon on May 5, said they are looking at a comparably stronger finish to the year, with growth continuing at a gradually healthier pace leading up to 2015.

Robert Mittelstaedt, dean of the W. P. Carey School of Business, Lee McPheters, research economist and director of the school's JPMorgan Chase Economic Outlook Center and Dennis Hoffman, director of the L. William Seidman Research Institute presented on aspects of the state and national economies.

While the nation's economy showed some significant signs of life in the first quarter of 2011, the state's economy continues to bump along the bottom. But forecasters at the Economic Club of Phoenix's Annual Economic Outlook 2011 luncheon on May 5, said they are looking at a comparably stronger finish to the year, with growth continuing at a healthier, but not pre-crash, pace leading up to 2015.

"Arizona job growth is still very weak. For the first quarter, the Arizona economy has added only 4,100 jobs over the first quarter of last year, so growth is well below one half of one percent," said Lee McPheters (see photo), director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business in an interview before the luncheon.

"The summer is not usually a strong period for job growth in Arizona. In fact the economy basically goes nearly flat. We are currently forecasting 1 percent job growth, or an increase of about 24,000 new jobs for the year."

Long term: Steady, not spectacular

In March, Arizona ranked 47th in the nation in year-over-year job creation, well below another state also hard hit by the housing market collapse. "The California economy is starting to add jobs again, up by almost 200,000 in the past year, and the state ranks 13th overall based on percentage change over last year at this time," McPheters said.

"Florida employment is growing less than 1 percent. But Arizona's growth is barely above 0 percent, and the state ranks among the bottom five of all states. Housing is hard hit in (Arizona, California and Florida), but California is starting to add construction jobs, while construction employment in Arizona and Florida is still in decline."

The nation's GDP has been growing since the third quarter of 2009. However, that growth has proven sub par. According to the U.S. Bureau of Economic Analysis, the nation's GDP rose by 5 percent in the fourth quarter of 2009, only to stall at 1.7 percent growth in the second quarter of 2010.

The final quarter of 2010 saw the GDP rise by 3.1 percent, only to grow by an anemic 1.8 percent in the first quarter of this year. Even more telling, in the last seven quarters, the nation's GDP grew at a rate of 2.8 percent. Between 1957 and 2007 the average rate of quarterly growth was 3.3 percent.

McPheters said that if Arizona has any hope of generating 1 percent job growth, the state and nation's economies needed to get moving in the second half of the year. "Current national forecasts are calling for improved job growth this year, but it will also tend to be weighted to the second half," he said. "So, economy watchers have their fingers crossed that things will improve after summer."

According McPheters forecast, in 2011 the nation will record 650,00 housing starts, an inflation rate of 2.6 percent, 2 million jobs created and GDP growth of 3.1 percent. And in the years leading up to 2015, other forecasts also showsteady if not spectacular growth. The Congressional Budget Office sees real GDP growth climbing steadily from 2012 and peaking at 3.8 percent in 2015.

The Obama Administration forecasts a peak in GDP growth of 4.4 percent in 2013, before slipping to 3.8 percent in 2015. Less sanguine is the Blue Chip Economic Indicators, which calls for peak GDP growth of 3.2 percent in 2012 and 2013, before dropping to 2.9 percent in 2015.

The U.S. government's massive budget deficit will no doubt continue to play a role in the nation's recovery. In April, Standard & Poor's downgraded its outlook for U.S. Treasuries from stable to negative. Many economists hope the downgrade will push the government to control the mammoth deficit.

While the deficit is stimulating the economy now, the continuing debt, combined with interest payments, could stifle future growth by forcing the government to raise taxes or issue more debt that would then be competing with private borrowing sources.

The Congressional Budget Office in January forecasted that — if spending and revenue remain as specified under current law — the nation's deficit would drop from more than $1.5 trillion this year to $1.1 billion in 2012, eventually hitting $551 billion in 2015. However, the debt-to-GDP ratio is expected to hover at around 75 percent over the next four years. The interest-to-GDP ratio is expected to rise from 1.7 percent in 2012 to 2.5 percent in 2015.

The global perspective

In sharp contrast, the International Monetary Fund expects the U.S.' debt-to-GDP ratio to hit about 85 percent in 2016. That compares to Great Britain and France, which will see their debt ratios fall below 80 percent in 2016. Germany will remain steady at just more than 50 percent.

As Robert Mittelstaedt, the dean of the W. P. Carey School of Business pointed out at the luncheon, other nations, particularly in the developing world, are far outpacing U.S. GDP growth. China is seeing 10.3 percent growth, with India at 8.3 percent and Brazil at 7.5 percent.

Growth in developing nations is so dynamic that, Mittelstaedt said, 17 companies on the Dow 30 are making most of their revenue outside of the U.S. Industries that were once the purview of the U.S. — heavy equipment, automobiles, electronics and aircraft — are slowly shifting to Europe, Asia and Latin America.

The "wild card," as Mittelstaedt said, is whether China will continue moves to make the yuan an alternate reserve currency. If that happens, Mittelstaedt said some Asian nations may look to the yuan as their reserve currency, which will obviously have repercussions on the U.S. bond market and economy.

Here in Arizona, where the state once led national economic recoveries, it is now relying on growth in other parts of the country to rev up its financial engine. "Arizona population growth depends as much on events outside Arizona as within the state," McPheters said.

"If Arizona job growth improves (and it has a long way to go), this would act as a 'draw.' But people have trouble moving if they cannot sell their house or if they cannot get the price they need. That is why we expect to see more young people move to the state, they will rent instead of buy and are less locked into a particular career path."

This year, McPheters forecasts that Arizona job growth will only be 1 percent, with personal income rising 4 percent. Meanwhile, single-family home permits are expected to rise by just 10 percent and the population will increase by 1.5 percent. The forecast is only slightly better in 2012, with employment expected to be up 2 percent, a 30 percent increase in single-family home permits and a 1.8 percent rise in the number of people moving into the state.

However, McPheters said, the state's economy will continue an upward trajectory through 2015, with personal income rising 6.5 percent, the rate of job growth hitting 3.5 percent and a population increase of 2.5 percent. Single-family housing permits are expected to increase by 50 percent in 2013 (reflecting the current stasis in the residential home industry) before leveling off to a 20 percent growth rate in 2015.

In raw numbers, McPheters forecasts that between 2011 and 2015 the state will create 300,00 jobs, issue 112,500 single-family home permits, and see 665,000 new residents. The state's ongoing budget crisis has been one of the major factors in Arizona's slow economic recovery.

"The effect of budget cut backs has been felt sharply by local governments," McPheters said. "Their employment is down by 5,000 workers and is expected to decline more in the months ahead. Typically, we look to state and local government as a source of stability, not necessarily a growth sector. But current budget problems have changed all that."

State's revenue conundrum

Not too long ago, Arizona enjoyed a substantial budget surplus. So, where did all the money go? Dennis Hoffman, director of the L. William Seidman Research Institute, succinctly illustrated the devastating effect the economic crash had on Arizona residents and, in turn, the state's revenue.

• The number of millionaires in Arizona dropped from 6,000 in 2006 to about 2,500 in 2009.
• Taxes paid by millionaires dropped from more than $800 million in 2006 to under $300 million in 2009.
• In 2006, the state's 70,000 tax filers with incomes of $200,000 and above paid half of all taxes or $1.6 billion.
• In 2009, that same group of taxpayers shrank to under 50,000, paying about $550 million — less than 25 percent of the total taxes paid.
• In addition, the state reduced tax rates by 10 percent after 2006.

When adjusted for inflation, the average amount of income tax collected from an Arizona resident dropped from about $1,650 in 2005 to about $1,050 in 2009. But even as fewer dollars come in, the state's expenditures have remained relatively constant. "Right now, the state's expenditures represent about $425 per $10,000 of personal income in Arizona," Hoff man said at the luncheon.

"However, the state is only collecting about $300 per $10,000 of personal income. Obviously, that's not sustainable." Hoffman did sound one bright note. "The last couple of months have seen considerably robust retail sales, especially in the area of durable goods," he said, adding that improved consumer confidence is fueling the recent growth.

That will certainly help the state government as it grapples with its budget crisis, but Hoffman also pointed out that the temporary sales tax increase will expire just as the economy is expanding and putting more pressure on public sector services.

He added that state policymakers will face a "balancing act" during much of the next five years — especially in 2014. Part of the solution, Hoffman said, will involve streamlining the state's expenses and raising taxes. "Government just simply has to be more efficient in its expenditures," he said. "And we have to ask everyone to contribute according to their means."

Economics Faculty