Arizona economy in recovery — relatively

At long last, 2016 will be the year we can call the Arizona economy recovered, according to economists Lee McPheters and Elliott Pollack, who spoke at at the 52nd Annual ASU/JPMorgan Chase Economic Forecast Luncheon. It’s no boom, but it’s better than it has been, and it’s better than in many other states.

Lee McPheters' slides | Elliott Pollack's slides

At long last, 2016 will be the year we can call the Arizona economy recovered. Economists Lee McPheters and Elliott Pollack shared that good news at the 52nd Annual ASU/JPMorgan Chase Economic Forecast Luncheon. But still, it’s all relative.

“Any expectations by Arizona economy-watchers for ‘break out’ growth for the Grand Canyon State have long ago been put aside,” explained McPheters, who is a research professor and director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business. “When the recovery began many people thought that because Arizona had always bounced back strong, the same would happen again. In reality, we’ve had solid growth — better than most states, but not as good as our long-term average, and certainly not a boom.”

Pollack, CEO of the economic and real estate consulting firm Elliott D. Pollack & Company, shared the sentiment. “If you compare where Arizona is at today to pre-2007, you’re going to be unhappy. But if you compare 2015 and 2016 to the mediocre post-2007 recovery, you’ll feel pretty good. The recovery has been weak by historic standards. Yet, growth has occurred and will continue. Relative to the post-2007 world, the outlook is quite good. We will get back to pre-2007 levels. But not in the next few years.”

The state of the economic recovery in Arizona comes down to three factors: job growth, which drives population growth, which drives housing growth.

Pollack explained, “Historically, what happened during recoveries was that the unemployment rate would get very low. As a result, population flows would increase fairly dramatically as people came here chasing jobs. Once here, those people would create a new level of demand for goods and services — and housing. That created more jobs, and the cycle grew on itself.”

It took awhile, but jobs will finally be back to pre-recession levels

At this point in the post-2007 economic recovery, Arizona’s rate of job growth remains far below normal. According to McPheters, the projected rate of job growth in 2016 is 2.6 percent — much lower than the state’s long-term (1977–2007) average of 4.2 percent. Still, a 2.6 percent growth rate is higher than the national projection of 2.0 percent, and will likely put Arizona in the top 10 list of states with the fastest job creation in 2016.

Even though Arizona is growing jobs faster than the national average, the state had a deeper hole to climb out of; from peak employment pre-recession to lowest employment pre-recovery, Arizona lost 12 percent of its jobs while the United States lost 6.4 percent. Employment in the U.S. returned to pre-recession levels in May of 2014. Through October 2015, Arizona had regained 88 percent of lost jobs. McPheters projects that in 2016 the Arizona economy will be on track to finally replace all jobs lost during the recession.

But not all jobs have returned at the same pace. One of the key missing ingredients in the post-2007 recovery in Arizona has been construction jobs. “In Arizona, the construction labor force has been a bit of a mystery — it’s hard to know where the workers came from during the housing boom or where they went since the recession,” Pollack explained. “What we do know is that homebuilders are worried that virtually every skilled construction position is short in terms of labor.”

According to McPheters, construction will be Arizona’s fastest growing industry in 2016. But the rate of growth of construction jobs will be relatively high only because it’s starting from such a low point. McPheters explained, “There was a time, during the housing market boom, when a quarter of new jobs created were in construction. In 2016, less than 15 percent of new jobs will be in construction. But that’s a significant turnaround from almost no new construction jobs in years past.”

One job sector that has been practically immune from the recession, McPheters said, is health care. While there are projected to be 85,000 fewer construction jobs in 2016 than in 2007, there are projected to be 81,000 more health care jobs. Health care, along with hospitality and professional and business services, will account for more than half of all new jobs added in 2016.

Another particularly strong sector is finance, which is projected to add 6,400 new jobs in 2016. “In this recovery Arizona has taken a position as a strong growth state for finance and insurance related activity,” McPheters explained. These are high-skill, high-pay jobs, he added.

Largely missing from the job growth picture is manufacturing. That sector is projected to have 25,000 fewer workers in 2016 than in 2007. “The world has changed and manufacturing is much leaner than it once was,” McPheters said. “Manufacturing won’t be a source of tens of thousands of new jobs in Arizona.”

Population, population, population

In part because Arizona’s rate of job growth has been slower than in past recoveries, population growth has been slower as well. Though state population estimates for 2015 won’t be available until the end of December, Arizona’s 2015 population growth is expected to be 1.6 percent. Growth in 2016 is forecasted to be 1.7 percent. That’s much higher than 0.9 percent growth in 2009 — the weakest population growth recorded for Arizona in the post-war period — but much lower than the long-term (1977–2007) average of 3.2 percent. “A return to growth of even 2.0 percent is not likely in the next few years,” McPheters said.

Still, compared to its neighbors, Arizona’s population growth is relatively strong. “In 2014, Arizona ranked 3rd in the number of new domestic migrants, attracting a net of 41,975 from other states,” McPheters explained. But the state ranked 17th in the number of international migrants. “Prior to 2007, the housing boom attracted a lot of international migrants who worked construction. That hasn’t been the case in Arizona post-2007.”

In addition to slow population growth as the result of slower job growth, McPheters sees a labor market phenomenon in play. “People are more reluctant than before to quit their jobs for new ones. The rate of new job openings is relatively high, but quit rates are not. That leads to slower migration everywhere.” According to Pollack, the number of people moving between states, between counties and internationally has declined by about 26 percent from the early 2000's.

To get Arizona’s economy “clicking on all eight cylinders again” population growth has to rise, Pollack said. Fortunately, all of the fundamentals that have attracted people to Arizona in the past — relatively low cost of living, great climate, strong universities — are still here. Speaking about office vacancy rates, Pollack said, “There is a near-record-level of companies now looking to move to the greater Phoenix market.”

Springtime in housing

Slower job growth leads to slower population flows which leads to slower demand for, among other things, housing, office space, industrial space and retail space. Yet overall, the greater Phoenix real estate market has dramatically improved — especially single-family and multi-family housing. “The housing market has made a significant recovery after a not-so-good year in 2014,” Pollack explained.

In keeping with the “the future isn’t what it used to be” theme, permits for new single-family homes in greater Phoenix are still far below the highs of the previous cycle (about 16,000 in 2015, compared to about 60,000 in 2004 and 2005). But permits should be up more than 46 percent in 2015 compared to 2014 and that strength looks like it’s going to last, Pollack said. “2015 will be the best year for single-family housing since 2007, and the outlook for 2016 is more positive.”

Beyond permits, the “parade of horribles” that have dogged single-family housing over the last years are improving notably, Pollack said. “There is less negative equity in all states as housing prices increase. Foreclosures are very low. Short sales are low.”

And the demographic that has long been a challenge for single-family housing will eventually be a boon, Pollack said. “Longer-term, the demographics look nothing short of sensational for single-family housing. Millennials will eventually get married, have kids and follow their parents to the suburbs.”

Until that happens, millennials will continue to be a boon for the apartment market. “As for greater Phoenix multi-family housing, the outlook is better than any time including the 1980's,” Pollack said. “That is simply because of the number of millennials reaching their peak rental years and, because they are delaying marriage, they will be in apartments longer. In addition, the retirement home cycle also looks extremely strong based on the number of people who will be reaching 65.”

Bottom line

Bottom line, for both Arizona’s economy and the greater Phoenix real estate market: 2016 will, finally, be the year that we can call them recovered. This is no boom, but it’s better than it has been, and it’s better than in many other states.

Promotion and live radio support for the 52nd Annual ASU/JPMorgan Chase Economic Forecast Luncheon was provided by KFNN Money Radio.