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The economy: For Arizona and the nation, more of the same

Full economic recovery is still at least two years away, according to experts from the W. P. Carey School of Business who delivered their midyear forecasts at the school’s annual Economic Outlook Luncheon on May 8, 2014.

2014-05-08

At the 2014 Annual Economic Outlook Luncheon, experts from the W. P. Carey School of Business presented forecasts for the national economy, Arizona’s economy and Arizona’s real estate market. For both the nation and the state, the economic outlook for the rest of 2014 is largely more of what we’ve been seeing: growth is likely to be steady, but slow. In Arizona’s real estate market, which experts had hoped would be a bright spot; demand is at its lowest levels in more than a decade.

National economic outlook: Modest growth likely

Dennis Hoffman, economics professor and director of the L. William Seidman Research Institute at the W. P. Carey School of Business, set the stage with a reminder that the last recession was the deepest since 1973. Nevertheless, this recovery has been much slower. “76 months after the recession, the nation has just gotten back to pre-recession levels of employment,” he said. “In prior recoveries, we got back to pre-recession employment levels much more quickly — less than 44 months in every downturn since 1973.”

Some wonder why this recovery can’t be more like the 1980s or the 1990s, Hoffman said. But this was a very different downturn. “The real challenge has been a dearth of consumption,” he explained. “Debt is the new four-letter word. Consumers are ridding themselves of debt and that is a drag on the economy.”

The role of government in spurring consumption has been quite different in this recession/recovery cycle, too. “The government response in this cycle is the weakest we’ve ever seen,” Hoffman explained. “Government spending is actually below what it was prior to the recession.” State and local spending has been at the root of that decline. “In contrast, in the 1980s, state and local government spending expanded dramatically.”

What’s ahead for national economy

According to Hoffman, the baseline forecast for the national economy in 2014 is 2.4 percent GDP growth, modest inflation of 1.8 percent and an unemployment rate of 6.5 percent — still stubbornly high, though better than it has been. Hoffman puts the likelihood of that baseline scenario at about 50 percent.

Then there’s a 30 percent chance that economic growth could be faster this year, with GDP growth at 3 percent. “That’s a level of growth that we haven’t seen for the better part of the last decade, though it’s a level that is considered normal in the long run.” Factors that could lead to the faster-growth scenario include “less chatter in Washington about fiscal crises,” continued stimulus from the Fed, a resurgence in consumer confidence and spending, a resurgence in trade, rising housing prices and no more severe weather.

On the other hand, Hoffman said, there is a 20 percent chance that the scenario will be worse than the baseline. Factors that could lead to a slower-growth scenario include political dysfunction (fights over taxes and regulation, no immigration reform, no tariff or trade reform), a geopolitical shock like a showdown with Russia, a stalled housing rebound or a natural shock like severe weather.

Arizona economic outlook: Recovering but not recovered

Lee McPheters, research professor and director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business, presented the economic outlook for Arizona. “The basic question is: ‘Is Arizona out of the woods yet?’” McPheters said. “The answer is ‘No.’ The wolf is not at the door, but Arizona is not out of the woods. The economy is not back to normal; we’re recovering but not recovered.”

McPheters talked about job growth, personal income and population as the three factors that drive Arizona’s economy. “Typically Arizona’s economy is in the top 10 by any of those three measures,” McPheters explained. “But the recession hit earlier and harder in Arizona and the recovery has been slower. The long-term outlook for Arizona is positive. “We’ve seen continued but slow improvement. But we’re still saying, as we have been for two to three years, that recovery is two to three years ahead.”

Job growth in Arizona

McPheters said to expect a modest improvement in employment with job growth around 2.4 percent in 2014. But compared to the national labor market, Arizona’s recovery lags far behind. The U.S. labor market has replaced about 99 percent of the jobs lost in the recession. But Arizona has replaced only 56 percent of lost jobs. The Phoenix metropolitan area has regained 63 percent. “We have much further to go than the U.S. economy.”

In terms of the quality of jobs being regained, however, Arizona is doing comparatively well. “Nationwide, 4 percent of new jobs created in 2013 were in finance. In Arizona, 16 percent were,” McPheters explained. In fact, Phoenix was the number one metropolitan area for finance jobs both in terms of rate of growth and absolute number of jobs created. 13 percent of new jobs added in Arizona were in healthcare and another 13 percent were in construction — “good jobs at good wages.”

So what’s the problem? There are simply not enough jobs. “Arizona is an economy that should be producing at least 100,000 new jobs a year — that’s what we did in 2005,” McPheters said. “In 2014, the state will probably add 60,000 new jobs. In other words, we’re running at half speed.”

Arizona’s population

Population growth, according to McPheters, will be a bit stronger in 2014 than in 2013, but not by much. “We certainly won’t see the 2.5 or 3 percent population growth we would typically associate with a robust state economy.” Arizona ranks eighth in the nation in population growth, but at 1.2 percent in 2013 and 1.4 percent forecasted for 2014, growth is not very strong. A year ago, Arizona was ranked third among destinations for people relocating; now Arizona is sixth. “And that is slowing down economic growth.”

The Phoenix metropolitan area ranks third in the nation among all large metro areas in terms of attracting people. “We’re doing better than Austin,” McPheters said. But compared to rates of inflow in previous years, Arizona lags significantly. “In 2013, 32,000 people moved into metro Phoenix. That’s a third the number who moved here in 2006. So if you want to explain slow economic growth, that’s a number to hang your hat on.”

Overall, McPheters qualifies that Arizona’s economy is “not on any threshold of recession” but that the state remains at about half the pace of growth that would be normal at this phase of the recovery. “Are we out of the woods? No. We’re recovering, but we’re not out of the woods.”

Arizona housing outlook: Prices are flat, but sales are way down

What had been a bright spot for Arizona’s economy is not so much anymore. “I'm not going to be saying the same thing I said last year which will be disappointing because then I was quite upbeat,” said Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business. Home sales in Maricopa County are at their second-lowest levels since 1999, Orr said. That’s second only to 2008, which “was a pretty desperate year.”

A lot of the gap, Orr said, is in new home sales. “Sales of new homes are down from last year. Provisional estimates for April 2014 are down from March 2014. We see sustained low sales, which is quite different from what people — including me — were expecting this time last year.”

For existing home sales, the numbers are better, but not by much. “Resales are back up to the level of the early 2000s,” Orr explained. “But Arizona’s population has grown by 25 percent since then, so resales should be far above where they’re at now.”

Home prices, Orr said, are flat. The median price for non-distressed single-family homes in Maricopa County is $220,000 — the same as nine months ago. And Orr expects prices to stay at that point for a while, maybe even dip slightly in the summer. But, he qualified, “we’re not looking at a crash. There’s no bubble bursting. It’s just a quiet market, characterized by low demand, low supply and flat prices.”

Where are all the buyers?

Orr said one reason behind low demand for new and resale homes is the fact that many potential homeowners are — for now, at least — disqualified from owning. “We had an enormous tsunami of foreclosures and short sales,” Orr explained. “That’s now over, but the effects remain. People who went through a foreclosure or short sale will in most cases have a very hard time qualifying for a new mortgage for several years.” Given that foreclosures peaked between 2008 and 2011, Orr expects that a wave of former homeowners will be eligible to buy again beginning in 2015 and running through 2018.

Another reason for currently low demand for new and resale homes, according to Orr, is millennials. “They’ve seen the worst of what homeownership can entail, and as a result they’re not all that excited about owning a home,” Orr explained. Also, they’re starting families later, and many want to live an urban lifestyle — which typically means renting, as there often aren’t a lot of homes for purchase in urban centers.” Many millennials say that they do eventually plan to own a home. “So there is latent demand building up, but it’s not demand in 2014.”

When demand goes back to normal

Demand won’t stay low forever. For one, lenders are hurting. “Mortgage applications are at their lowest level since December 2000,” Orr said. He expects that though banks tend to move slowly, they will gradually lower the qualification criteria to allow more homebuyers to qualify for loans.

Another factor that will eventually drive demand for homes is rising rents. Already, Orr said, there is less than a month’s supply of single-family rentals available. “There’s every chance that rents are going to rise, which will drive some people to purchase a home. If a family is going to stay at least three years, there’s an overwhelming financial case to buy instead of rent.”

When demand returns to normal levels, Orr said, “we will once again realize we are very short on supply.” Homebuilders have been under-building since 2008; Arizona hasn’t had such a low period of housing unit growth since the 1930s. And while Arizona’s population growth has been modest, the state has been growing. “So when demand for homes returns to normal we’re going to see another period of significant upward pressure on housing prices.”

For the national economy, Arizona’s economy and Arizona’s housing market, the rest of 2014 holds much of the same. It won’t likely be worse, but it’s not going to be dramatically better, either.

Bottom line

• The baseline forecast for the national economy in 2014 is 2.4 percent GDP growth, modest inflation of 1.8 percent and an unemployment rate of 6.5 percent.
• The forecast for Arizona’s economy in 2014 is 2.4 percent job growth, 4 percent personal income growth and 1.4 percent population growth.
• In the central Arizona real estate market, demand for new homes and resales looks set to remain low and prices to remain flat.

ECP Economics