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The 2015 Arizona economy: Driven by demographics

At the 51st Annual ASU/JPMorgan Chase Economic Forecast Luncheon, two experts shared their progress reports on the economic recovery in Arizona. Both Lee McPheters and Elliott Pollack said that construction jobs lie at the heart of the job growth problem.

2014-12-03

At the 51st Annual ASU/JPMorgan Chase Economic Forecast Luncheon, two experts shared their progress reports on the economic recovery in Arizona. The bottom line message: still recovering; not recovered.

Lee McPheters, research professor of economics and director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business, and Elliott Pollack, CEO at Elliott D. Pollack & Company talked about population growth and housing permits, personal income and retail sales. But underlying it all? Jobs.

“Growth is an industry in Arizona,” explained Pollack. “In past recoveries, Arizona had a higher rate of employment growth than the nation, and people moved here to fill those jobs. That created demand for houses, goods and services, which created more jobs, which pulled in more people. That hasn’t happened in this recovery.”

McPheters explained that Arizona labor markets remain far from fully recovered. “In May of 2014, the national economy finally replaced all jobs lost during the contraction. The Arizona economy lost a greater percentage of jobs (12 percent versus 6 percent at the national level) and as of October had replaced just over two-thirds (69 percent) of those jobs lost.”

Both Pollack and McPheters said that construction jobs lie at the heart of the job growth problem. “Arizona still has to regain 96,400 jobs that have been lost since the peak in 2007,” said McPheters. “The construction industry in Arizona is down about 100,000 jobs since its peak. So if we had to point a finger, the construction industry alone has accounted for a high proportion of jobs not yet regained.” (See slides below)

Population growth — it’s about jobs

The problem is iterative, said Pollack. “Job creation has been modest because construction activity has been modest. Construction activity has been modest because housing starts have been modest. Housing starts have been modest because population growth has been modest.

Population growth has been modest because job creation has been modest.” [see note below] McPheters further explained the population/job growth link: “While we think of Arizona as a destination for retirees, by far the largest group of people moving to the state are aged 20-40.

They relocate to pursue better economic opportunities. So it is job growth that stimulates population growth.” Yet job growth remains below previous recovery averages. The rate of job growth in Arizona was 2.1 percent in 2014 and is forecasted to be 2.5 percent in 2015.

That is half the five-decade annual average. Population growth is forecasted to be 1.5 percent in 2015 — less than half the 3.6 percent long-term average. When Arizona’s rate of job growth is high relative to other states — as it has been in past recoveries — people are relatively more likely to move to Arizona than to other states.

The problem with this recovery, explained McPheters, is that other states are gaining jobs faster. The forecasted 2015 job growth rate is lower for Arizona than four other Western states — Utah (3.1 percent), Colorado and Nevada (2.8 percent) and Texas (2.6 percent).

“So people have more options for economic opportunity in the West than just Arizona. In past recoveries, Arizona was people’s first choice among Western states. Not so anymore.” In addition to lower-than-average job growth, Arizona also has a brand problem, said McPheters.

“We don’t have a measurement for how much of an impact that brand problem — driven by policies like SB 1070 and insufficient support of education — has, but certainly it is likely that some of the businesses and people considering Arizona look at those factors.”

On the impact of SB 1070, Pollack added, “While the framers of 1070 wanted to say ‘If you are an illegal immigrant, we don’t want you here’ what came across to the world was, ‘If you are an immigrant, we don’t want you here.’ Not a good message, however this will clear up in time.”

Housing — it’s about jobs, and population growth

There are positives in the Arizona housing market, explained Pollack. “Mortgage rates are low and lending is loosening (though it’s still far too tight). Affordability is still good and price gains have slowed. Foreclosures and delinquency rates are low and distressed sales are less than 10 percent of the market.

Investors are less prevalent in the market, thus creating more opportunities for traditional buyers. International demand for housing is strong (especially from Canadians).” But the negatives still outweigh the positives, and housing — which is fuel for the construction industry, which in turn fuels overall job growth — still weighs on Arizona’s economy.

Pollack cited four reasons why. First is that lower-than-normal population growth — which subdues demand growth, which subdues job growth, which subdues population growth, which subdues housing growth. Second is the fact that 30 percent of Americans with mortgages are “locked into” their current homes.

“A substantial number of people are still in the penalty box,” Pollack explained. “They’re locked out of buying a new home because of past foreclosures and short sales. That is true all over the country, not just in Arizona. As a result, fewer people are moving into Arizona or within Arizona.” The third factor behind the lackluster recovery in housing, explained Pollack, is the lower-than-average rate of new entrants into the housing market.

“To a greater extent than previous generations, Millenials are living at home longer. They’re delaying marriage, which often means delaying home buying.” The fourth factor: ill-timed government policy. “Through Dodd-Frank, policymakers mandated tighter credit standards. There is no doubt that credit standards were too loose during the run-up to the real estate crisis. But the pendulum has swung 180 degrees.”

Furthermore, Pollack explained, in January 2014, FHA loan limits were lowered in Arizona. “That has been devastating because it means that fewer available homes are within FHA loan limits. And because down payment and credit score requirements are substantially higher for non-FHA loans, even more people are thus cut out from an already difficult market.”

Retail sales — it’s about jobs, and real incomes

Retail sales, which rose 8.8 percent in 2013, are estimated to rise 5 percent in 2014 and are forecasted to rise 5.8 percent in 2015. Driving the more modest uptick in retail sales in 2014 and 2015 is relatively modest job growth and wage growth, said McPheters.

Personal income grew 2.1 percent in 2013, estimated to be 4 percent in 2014 and forecasted to be 4.5 percent in 2015. But “when you adjust for inflation and account for people working part-time rather than full-time,” McPheters qualified, “you see that median household income is actually declining.”

The decline in real median household income is a national phenomenon, but it’s worse in Arizona. Nationwide, real median household income was about $51,000 in 2012 — down from about $55,000 in 2001. In Arizona, the decline was worse: from $55,400 in 2001 to $47,000 in 2012.

One factor driving declines in real median household income in Arizona is the mix of jobs — with disproportionate job growth among relatively lower-wage jobs. “The greatest number of new jobs is expected in administrative support, food services, health care, finance and retail trade,” said McPheters.

“Finance jobs tend to pay relatively high wages. But administrative support, food services and retail jobs are relatively low-wage jobs. Health care jobs pay solid but not spectacular wages.” At the same time, the growth of manufacturing jobs — once a bastion for middle-income wages — is expected to be slow.

Arizona will get to full recovery — but not in 2015

Both Pollack and McPheters agree that Arizona’s economy can be considered “recovered” once all the jobs lost between the peak in 2007 and the bottom in 2010 have been replaced. McPheters forecasts Arizona to add 65,000 new jobs next year.

Assuming a similar number of jobs are added in 2016, the economy should be “recovered” by the end of 2016. Both McPheters and Pollack stressed that Arizona’s economy is — and has been — growing, and adding more jobs every year.

“This isn’t a doom-and-gloom forecast,” said McPheters. “It’s a progress report on where we’re at in the recovery.” “Every one of the factors that have made the recovery slower than normal will be mitigated over time,” said Pollack. “I can’t tell you how long it will be. It won’t be 2015. But there are huge growth years to come.”

Slide presentations:

Lee McPheters Economic Forecast Lunch 2014

Elliott Pollack Economic Forecast Lunch 2014

Note: There is an error in Elliott Pollack's article in the program provided to attendees. The last paragraph on page 34 should read: Construction employment is a major problem here. Historically, in the first four years of the previous two economic recoveries, construction employment grew by 37 percent and 61 percent respectively. So far, in the first four years of this recovery, employment growth has only grown by 8 percent. Had it grown at a normal rate, approximately 60,000 additional construction jobs would have been created.

Economics The Economy