Economic improvement: Long road ahead

May 17, 2012

The key message at the Economic Outlook Luncheon this week was: plan for long-term improvement in the economy. From Arizona’s economy to the real estate market, even the state budget, economists from the W. P. Carey School of Business told the Economic Club of Phoenix audience that the future looks brighter -- but there’s still a long road ahead until the state could be considered fully recovered. Listen to the podcasts, or drop down to our article reporting on the full forecast. Read the KnowWPCarey article

 Lee McPheters Forecasts Jobs: Follow the slides

Michael Orr on Real Estate: Follow the slides

Dennis Hoffman on State Revenues: Follow the slides

 KnowWPCarey Report:

The key message at the Economic Outlook Luncheon this week was: plan for long-term improvement in the economy. From Arizona’s economy to the real estate market, even the state budget, economists from the W. P. Carey School of Business told the Economic Club of Phoenix audience that the future looks brighter -- but there’s still a long road ahead until the state could be considered fully recovered.

“Job growth will continue to be slow,” said Lee McPheters, a research professor and director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School. But while slow, the recovery appears sustainable, McPheters said. “Businesses should plan now for long-term improvement in the economy.”

Arizona a job growth leader, but full recovery still years away

Speaking about the labor market in the U.S. as a whole and Arizona in particular, McPheters said that the long term economic outlook is positive. But we’re not there yet. “Jobs recovery is a couple of years away,” he said.

U.S. employment peaked at 138 million in 2008 and bottomed out at 129 million in February 2010. That’s a total loss of 6 percent. Since February 2010, 3.6 million jobs have been added. So there are still 5.3 million fewer jobs than when employment peaked at the end of 2007, but the gap is closing.

Job losses have been steeper in Arizona, and recovery slower. Employment peaked in October 2007 and bottomed out in September 2010. 314,000 jobs -- 11 percent of the total -- were lost in that period. “Arizona was hit almost twice as hard as the nation was,” McPheters explained. Since September 2010, 78,000 jobs have been created in Arizona.

If 45,000 new jobs are created each year -- roughly the number added between March 2011 and March 2012 -- it will be 5.2 years before Arizona is back to pre-recession peak employment levels. But that’s a big “if.” McPheters expects job growth to continue to improve -- Arizona should add 73,000 new jobs in 2013, he said, but that’s still lower than a long-term average annual increase of 85,000 jobs. At 73,000 jobs a year, the job market would be fully recovered in 2.8 years.

Of the 46 states adding jobs, Arizona ranks 8th. That’s a big improvement from the same time last year, when Arizona ranked 36th. But while Arizona has had faster growth than most states, growth in some higher paid sectors such as manufacturing and finance has been slower than food services and construction. An important growth area was jobs in medical offices, with an average annual salary of just under $56,000. More than 6,000 such jobs were created in Arizona in the last year. Arizona also added 3,400 well paying professional and technical services jobs, which pay an average of $66,000.

The U.S. labor market could be back to peak levels in two years, McPheters said, assuming that 2 million new jobs are added each year. And that, too, is not certain. In April, 115,000 new jobs were created in the U.S. -- not enough to get to 2 million a year. If job growth were in line with January and February -- 275,00 and 259,000 new jobs, respectively -- then the country would be fully recovered well within 2 years. “So we’re making slow but steady progress, but we still have a long way to go,” McPheters said.

Dennis Hoffman, professor and director of the L. William Seidman Research Institute at the W. P. Carey School, pointed out that this last recession was far longer and deeper than any previous post-war recession. During the recession that began in 1948, at its worst Arizona employment was 4.31 percent below the peak, and it took 17 months to recover to pre-recession employment levels. It has been 48 months since the 2007 recession began, and employment is still 10 percent below its peak level (at its worst, employment was 12.07 percent below the peak).

But if that sounds bad, Hoffman said, it could be much worse. During the Great Depression, at its worst Arizona employment was about 60 percent below its peak level, and it took almost 13 years to return to the pre-recession peak.

Falling delinquencies and rising prices buoy the housing market

Offering his outlook for Arizona’s real estate market, Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School said “times are a-changin’.” The housing market is “completely different” now than it was last year, Orr said. One reason is the decline in delinquencies -- mortgages that are 30 days or more past due but have not been sent to foreclosure -- which are down 51 percent from two years ago.

In 2010 Arizona’s delinquency rate was 12.4 percent, Orr said, ranking the state 3rd worst in the nation. This year, the delinquency rate is 6.1 percent, ranking Arizona 33rd worst. A normal delinquency rate is about 4.5 percent, Orr said, but he expects the average rate to drop below that level, given the stringent underwriting standards lenders have adopted since the mortgage meltdown.

Residential foreclosures are also down, from more than 4,000 in April 2011 to less than 2,000 last month. And, third parties are buying those deeds at a higher rate than before (when a greater percentage went back to the bank as REO). “The infamous REO -- bank-owned home -- is becoming an endangered species,” Orr said.

Even beyond foreclosed properties, supply is down across the board. It’s especially tight for single family homes priced below $150,000; what was a 3.7 month supply of inventory last year has become a 2 week supply. “That shortage puts extreme stress onto the buyers,” Orr said. “Normal home buyers are surrounded by investors with cash and real estate investment trusts (REITs) that have come into town with hundreds of millions of dollars to spend on single-family homes. We have probably five times as many buyers as homes.”

Not surprisingly, home prices are up. “And not by small delicate amounts,” Orr said, adding “prices in the Phoenix housing market are not bouncing around at the market bottom.” In March this year the median sales price in Maricopa and Pinal counties (the Phoenix metro area, broadly) was up 20 percent compared to March 2011. April is likely to show a 25 percent increase over April 2011.

But, echoing McPheters’ sentiment, Orr said that while recovering, the real estate market is by no means recovered. The average price per square foot in greater Phoenix bottomed out in August 2011 at $79.14. It had peaked in the summer of 2006 at $189.97. Today, it is at $101.32.

“So the big question is what happens now,” Orr said. If prices had followed the long-term trend line, average price per square foot would be about $120 today, Orr explained. He didn’t offer a guess as to when the market might reach that long-term trend line again, but noted that “we’ve gone half the distance in just the last nine or ten months.”

State budget could be worse

Today, there are both headwinds and opportunities for Arizona’s economic recovery, said Professor Dennis Hoffman. One potential challenge is the loss of federal dollars. In 2010, $64 billion in federal dollars flowed into Arizona -- that’s a quarter of the state’s economy. About $40 billion flowed from Arizona to Washington D.C. “Do the arithmetic, if you cut those federal dollars you’ve got to find $24 billion that the state can do without.”

The Arizona budget continues to pose challenges for the state economy as well, Hoffman said. “When I came to Arizona in 1979 we spent $3 on universities for every $1 we spent on prisons -- and AHCCCS didn’t exist. We now spend more on prisons than universities and twice as much on AHCCCS.”

Throughout the 1970s, 80s, and 90s, Arizona asked taxpayers for about $50 per $1,000 of personal income. Since then there has been a “relentless” drive to cut taxes, and now the general fund takes in about $30 for every $1,000 in personal income. That’s not necessarily a bad thing, Hoffman said, but it does mean that Arizonans will have to “realign expectations for what we get out of government, and government will have to be more efficient.”

But too much in the way of cuts to public sector infrastructure and education programs could be a real negative for economic development,” he said. For example, the state’s contribution to tuition costs was relatively steady from 1979 to 2008 at around $4,000 per student, but has since fallen to just $2,178.

Yet even with those challenges, Hoffman noted that it could be worse. Bright spots, he said, include the fact that taxes on individuals in Arizona are relatively low, the state’s public pensions generally solvent and debt loads are light, and the government continues to drive efficiencies.

All in all, the outlook for Arizona’s economy -- from jobs to houses to the budget -- is positive, but not jubilant. The state’s economy will continue to improve, but that improvement will continue to be slow.

Bottom line

  • The key message at the Economic Outlook Luncheon this week was: plan for long-term improvement in the economy.
  • The long term economic outlook for the U.S. and Arizona labor markets is positive, but full recovery is still years away. Arizona should be back to pre-recession peak employment levels in 3-5 years. The U.S. labor market should be back to peak levels in about 2 years.
  • The housing market in the Phoenix area has changed dramatically since last year. One reason is the decline in delinquencies -- mortgages that are 30 days or more past due but have not been sent to foreclosure -- which are down 51 percent from two years ago.
  • Even beyond foreclosed properties, supply is down across the board. It’s especially tight for single family homes priced below $150,000; what was a 3.7 month supply of inventory last year has become a 2 week supply.
  • Home prices in the Phoenix area are up; in March this year the median sales price was up 20 percent compared to March 2011. April is likely to show a 25 percent increase over April 2011.
  • Today, there are both headwinds and opportunities for Arizona’s economic recovery. One potential challenge is the loss of federal dollars, which would force Arizona to find $24 billion in annual income that it could forego.
  • The decline in general fund revenue as a share of personal income (from about $50 per $1,000 of personal income in the 1970s, 80s, and 90s to $30 today) means that Arizonans will have to realign expectations for what they get out of government, and government will have to be more efficient.