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This is the boom: Economists deliver 2016 outlook

For anyone who fondly remembers Arizona’s boom times, economists have a new message: Even though 2016 might well shape up as the state’s best year in 10 years, it’s time to get used to rates of much slower growth.

2016-05-11

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For anyone who fondly remembers Arizona's boom times, economists have a new message: Even though 2016 might well shape up as the state's best year in 10 years, it's time to get used to rates of much slower growth.

Among the factors that could make 2016 a relatively great year: the creation of 80,000 new jobs, the most since 2006; gains in personal income of 4.8 percent, thanks to a tight labor market pushing wages up and the addition of 1.6 percent more new residents to a state that has become the nation's 14th largest and No. 8 among states for population growth.

Whether a boom is happening, though, is apparently tough to detect.

"Bottom line, 2016 is going to be the best year that we have seen in this entire recovery," said Lee McPheters, director of the JPMorgan Chase Economic Outlook Center. "The economy's improving, but it's not a boom."

For Elliott Pollack, chief executive officer of Scottsdale-based forecasting firm Elliott D. Pollack and Co., this is as good as it gets. "I honestly believe this is the boom, this is the new boom," he said. "We're in it now, and we hope you're having a good time."

Boom or not, Dennis Hoffman, director of the L. William Seidman Research Institute, expects that for the first time in years, Arizona's economic activity will outstrip the nation's.

The three economists shared their insights at the Annual Economic Forecast Luncheon, sponsored by the W. P. Carey School of Business' Economic Club of Phoenix.

Lee McPheters: Diverse economy, growth across the board

Arizona's 80,000 new jobs, McPheters said, will come on top of the 66,000 jobs added in 2015 and the 49,800 added in 2014. As of February, he added, the state surpassed its prior peak of 2.686 million jobs, reached in October 2007.

That works out to employment growth of 3 percent in Arizona this year, a faster pace than the 2.6 percent gain in 2015 and 2 percent gain in 2014.

McPheters expects Arizona's growth to continue improving in 2016, citing its rankings among the states as No. 1 in private job growth, No. 1 in information-sector job growth and No. 1 in financial-sector job growth for the 12 months ended in March. "We have a diverse, dynamic economy here that is not driven by construction but there's growth across the board," he said. "I think those numbers are pretty strong."

Residents' personal income also is expected to rise 4.8 percent, compared to 4.6 percent gains in 2015 and 4.7 percent in 2014, McPheters said. Nationally, wages tend to rise 4 percent when there is full employment, Hoffman said.

The state's population could rise 1.6 percent this year, McPheters said, a slightly faster pace than the 1.5 percent in both 2014 and 2015. For greater Phoenix, Pollack puts population gains at 1.8 percent in 2016, the same as in 2015, and a further gain of 1.9 percent in 2017. By 2020, his firm projects, the area's population will grow 2.1 percent a year, slipping to a 2 percent rate by 2025.

That sort of population growth, however, is still well below Arizona's historical average of a 3.2 percent yearly growth.

"I think the Arizona analysts are finally facing the music that there's a new normal for population growth," McPheters said. "It's not going to be 3 percent any more. They're going to settle in at 1.5, 1.6, something like that."

Dennis Hoffman: Outperforming the nation

Despite all the low-single-digit percentage gains, Arizona is still set to outperform the nation, Hoffman said.

Nationally, as well as in Arizona, the job picture has improved beyond pre-recession levels. The Blue Chip Consensus expects the nation's unemployment rate to fall to 4.8 percent this year and to 4.6 next year, below the 5 percent rate that is generally considered full employment. Hoffman expects job growth nationally to moderate over the next year.

Most new jobs nationally have come in the service sector, Hoffman said, led by professional and business services and education and health services. Jobs in the much smaller manufacturing sector have been flat, and retail, mining, and government lost ground.

He also foresees increasing evidence of inflation, fueled by wages rising and spiking as the United States reaches that full employment mark. Those higher labor costs, though, and sluggish revenue growth will produce headwinds for the stock market.

Housing starts nationally are expected to keep rising, to 1.21 million units in 2016 and 1.34 million in 2017.

Elliott Pollack: Real estate back in the sunshine

In Arizona, the real estate outlook is improving rapidly from the dark years of the Great Recession, Pollack said. But the population slowdown translates into construction of just 20,000 new single-family units a year, he said. He called the outlook for apartments excellent, with more than 4 million multifamily units coming this year despite rent increases of nearly 8 percent in the 12 months ended in March.

On the commercial real estate side, office vacancy rates still run above 15 percent. Pollack doesn't see significant office construction until at least 2017 or 2018, though it could come sooner in Tempe and downtown Scottsdale. Industrial space also lags, and retail space is still plentiful as a result of boom-time overbuilding and changes wrought by consumers' online shopping.

Slow is nothing new

The "new normal" numbers come on top of 2015's slow improvements in the state's performance.

In reviewing 2015, McPheters noted that by small margins, Arizona exceeded his 2015 forecast for the number of new jobs, percentage increase in employment and percentage increase in personal income. The number of private jobs in Arizona was up 3.9 percent in the 12 months ending in March, besting growth rates in other western states including Idaho, Oregon, Utah, and Washington.

Also driving Arizona job growth during the period were jobs in information, up 7.4 percent; financial, up 6.8 percent; administrative and support, up 6.5 percent and health care, up 4.1 percent. The construction sector gained 7.2 percent more jobs to push Arizona to No. 9 in the nation in construction job growth.

A 4.6 percent growth in personal income made Arizona 14th best in the nation. But the state still lagged behind California, Oregon, Utah, Nevada, and Colorado in the west and Georgia and Florida in the southeast.

Personal income per capita poses a continuing problem for the state, McPheters said. Arizona ranked No. 42 among the states on this measure of wealth in 2015, down from No. 41 a year earlier.

On the forecasting downside, Arizona's population growth fell short of the 1.7 percent gain predicted. The population grew 1.5 percent in 2015, with 99,000 new residents bringing the state total to 6.8 million residents.

Why is the recovery so slow?

Hoffman noted that the nation's economic recovery from the Great Recession is coming at the slowest pace of all the recoveries since the early 1970s. Previous recoveries were posting growth rates of nearly 20 or 30 percent at 30 months into the cycle, but this one has yet to break the 10 percent growth mark.

Wage growth nationally is running slow as service sectors grow and union membership declines, he said. In 1964, the percentage of workers in unions topped 40 percent in three states, but by 2014 only three states mustered union levels over 20 percent.

Pollack added another slow-growth factor: Fewer people are relocating, and fewer of those relocating are choosing Arizona. "When you don't get as many people, obviously you don't need as much housing, you aren't creating as many jobs, you don't need as much office or industrial or retail," he said.

McPheters noted benefits of a slower state economy.

"With the slowdown in construction, we've actually moved to become one of the most diverse states in the country," he said. "That builds in a certain amount of stability … if there is a national downturn, I think our newfound diversity, our lessening reliance on population and the fact that we really don't have one driving industry is all to the good."

Hoffman also attributed the national slowdown to a consolidation of U.S. businesses, in which the 50 largest firms earn a greater share of their industries' revenue now than in 1997.

Then there are sheer demographics. Baby boomers, who fueled the economy as their wages rose in the 1980s and 1990s, are retiring rapidly. A record 19 percent of people 65 and over are working, but that is still lower than the share who worked in their prime years. Whether it's called "global graying" or "global geezering," Hoffman said, "I don't think economists or policymakers know exactly what that will mean, but I think the changes will be profound. "

Millennials provide good news and bad news. Employment levels for workers ages 25 to 34 have returned to the same levels as before the financial crisis. But many of them are delaying marriage until their late 20s, and many blame student loan debt for hurting their ability to save for down payments. Pollack said both factors will delay Millennials' housing purchases for another six or seven years.

Bottom line

Hoffman sees the national economy performing much like it did over the past year, but not accelerating. The economy is still too fragile to withstand any shocks. Americans will have plenty to worry about, ranging from gridlock in Washington, D.C., and anti-trade, anti-immigrant sentiment to the effect of baby boomer retirements.
McPheters worries that Arizona's top rankings in job and personal income growth will be hurt by its poor rankings among states in per capita income, in its poverty rate, at No. 48, and its per pupil spending on education, also at No. 48. The slip in rankings for per-capita personal income is alarming, he said, and it suggests that even with a brisk labor market, Arizona still has a long way to go toward overall economic well-being.
Pollack says the combination of good economic growth in greater Phoenix, low mortgage rates and good affordability tells him the housing recovery is likely to continue.

"The national economy is experiencing the slowest recovery in recent memory, and the pace is not expected to pick up in the coming year," said Dennis Hoffman, professor of economics and director of the L. William Seidman research Institute at the W. P. Carey School of Business. Speaking at the Annual Economic Outlook Luncheon, hosted by the Economic Club of Phoenix, Hoffman said that the somewhat fragile U.S. economy could be susceptible to any kind of shock, however the picture in Arizona is brighter.

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