Plow horse economy will continue to recover slowly

The general consensus on Arizona’s economic outlook for the second half of 2013 is this: Arizona, like the nation, is likely to continue growing, but slowly. In some areas of the economy -- like jobs -- we’ll have to get used to a new normal. In other areas -- like GDP -- full recovery is still years away. Economists from the W. P. Carey School of Business delivered this analysis that the Annual Economic Outlook Luncheon on May 16.

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By some measures (the Dow) the economy seems to be going gangbusters. But by other measures (jobs) recovery remains elusive.

That is the case in Arizona, where the rate of job growth in 2012 was strong enough to rank the state eighth in the nation, but is still only running at half speed. Speaking at the annual Economic Outlook Luncheon sponsored by the Economic Club of Phoenix, Research Professor Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School explained that the long-term average job growth rate in Arizona is 3.9 percent. But in 2012, Arizona jobs grew just 2 percent. McPheters' slides

And not only is Arizona’s rate of job growth about half of its long-term rate, but job growth in Arizona also lags behind the nation. “The U.S. has regained about 67 percent of jobs lost during the recession,” McPheters explained. “Arizona has regained just 39 percent -- 124,000 of the 314,000 jobs lost. “Arizona is not adding jobs back as fast as the nation as a whole.”

Yet in every year since 2010 job growth in Arizona has been better than the year before. “We’re slowly clawing our way back,” McPheters said. Arizona added 49,800 new jobs in 2012, and according to the Blue Chip Economic Forecast, Arizona should add 61,000 jobs in 2013.

Though improving, job growth in Arizona continues to lag behind the state’s own long-term trend rate as well as the nation’s rate because of lackluster population growth, McPheters said. Population growth was 1.3 percent in 2012, and is forecast to be 1.3 percent in 2013 as well. “But we need 2.0 to 2.5 percent population growth to drive a robust jobs recovery.”

Dennis Hoffman, economics professor and director of the L. William Seidman Research Institute at the W. P. Carey School, said that the nation has experienced jobless recoveries after the last three recessions because among lower-skill workers, jobs that are lost during the recession never come back.

“Since the early 1990s, we have seen post-recession job recovery among knowledge workers and specialists whose jobs cannot be replaced by robots,” Hoffman said. “But for everyone else, employment continues to decline. Those jobs are never coming back.”

Housing market: good for sellers, increasingly tough for buyers

Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School, said that the Arizona housing market is great for sellers, but increasingly tough for buyers. That’s in part due to constrained supply. “Right now we have a housing supply shortage,” he said. The count of homes that are actively on the market is about half of what he would expect in a normal market, Orr said. Orr's slides

In addition to supply constraints, the “quality” of the homes on the market has changed. “In 2011, more than half the homes on the market were ‘distressed’ -- short sales or foreclosed homes,” Orr said. “Right now only about 15 percent of homes listed are distressed, and that percentage continues to decline.”

Together, the housing supply shortage and increasing “quality” of homes on the market have pushed prices up. The monthly median home price has risen 58 percent from the bottom of the market in May 2011 to March 2013. Price per square foot has risen 45 percent from the bottom of the market. “The recovery in home prices has been fast and sharp,” Orr said.

“But home prices aren’t back to the long-term trend -- where they would be if the market hadn’t crashed,” Orr said. He predicts the average price per square foot will hit $120 before the summer, but long-term trend is $130-135. “We still have a way to go. But my guess is that we’ll overshoot the trend line. Arizona is a very volatile market, and the chronic supply shortage will continue to drive prices up.”

Orr added, “But even with price increases, Arizona is still very affordable compared to California and the rest of the world.”

“Plow horse economy” likely to continue plodding along

So what is in store for Arizona’s economy in coming years? “I think the probability is about 50 percent that the economy will continue to be what Brian Westbury termed a plow horse economy -- GDP growth in the 2-3 percent range and continuing moderate job growth,” said Hoffman. Hoffman's slides

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Or, the economy could boom. Hoffman gives a probability of about 35 percent that the current plow horse economy will take flight. If that were to happen, it would likely be driven by resurgence in the real estate market, rally on Wall Street, declining fuel costs, and innovation.

So together, there’s an 85 percent chance that the economy will continue to improve. But Hoffman said the chances that the economic recovery stalls is not zero -- he calls it about 15 percent. “The economic plow horse could get mired,” Hoffman said, “by political squabbling in Washington D.C., by rising debt levels, by economic stagnation in Europe and/or China, and by the impending retirement of a generation of Baby Boomers.”

At the national level, Hoffman said that he is far less concerned about the level of debt (currently at about 112 percent of GDP) than he is about the dramatic increases in debt as a percentage of GDP between 1980 and 2007. “Debt as a percentage of GDP always surges in times of economic crisis,” Hoffman said. “My worry is that debt has surged since 1980, and we have no plan to bring it down.”

Debt as a percentage of GDP will continue to rise without a plan to deal with unfunded Medicare liabilities. Hoffman explained, “At all income levels, current retirees will have paid about $1 for every $3 they will receive in Medicare benefits.”

Hoffman said that the solution to rising debt as a percentage of GDP and unfunded liabilities is straightforward: “Figure out how much government people want, then ask them to pay for it, at all income levels according to their means.” Instead, we get one of two fairytales, Hoffman said: the “Bury your head in the sand and all will be well” or the “Let’s just cut tax rates and all will be well.”

At the state level, Hoffman said that a loss of the federal dollars that flow into the state due to fiscal woes at the national level could significantly impact Arizona. “About $64 billion in federal dollars are spent in Arizona each year,” Hoffman said. Considering the size of the state’s economy -- $260-270 billion -- sequester could have a big impact.

Between McPheters, Orr, and Hoffman, the general consensus on Arizona’s economic outlook for the second half of 2013 is this: Arizona, like the nation, is likely to continue growing, but slowly. In some areas of the economy -- like jobs -- we’ll have to get used to a new normal. In other areas -- like GDP -- full recovery is still years away.

Bottom line

• The long-term average job growth rate in Arizona is 3.9 percent. But in 2012, Arizona jobs grew just 2 percent. Arizona should add 61,000 jobs in 2013.
• Knowledge workers and specialists have recovered their jobs, but jobs that can be automated “are never coming back,” according to Dennis Hoffman.
• The count of homes that are actively on the market in Arizona is about half of what one would expect in a normal market. The monthly median home price has risen 58 percent from the bottom of the market; price per square foot has risen 45 percent.
• Still, homes in Arizona are still very affordable compared to California and the rest of the world.
• While tailwinds and headwinds could speed up or slow down the growth trajectory for Arizona and the nation, it’s most likely that the economy will continue to plod along -- growing, but slowly.