Economic Forecast

Dec. 21, 2005

Transcript:

Michael Grant:
Tonight on "Horizon," Hurricane Katrina did some damage to the economy, but not enough to prevent continued expansion. Plus, Arizona's housing market is expected to continue to be strong. A look back at the economy of 2005, look ahead at 2006, next on "Horizon." Good evening, and welcome to "Horizon." I'm Michael Grant. The economy faced several challenges in 2005, but it continued to expand. In a moment I'll talk to three Arizona State University economists about their predictions for 2006. First, Mike Sauceda tells us what some economists at a recent forecast luncheon thought about the economy.

Mike Sauceda:
The economy in 2005 took some hard jabs from Hurricane Katrina, but is leaving the ring in good condition. We also saw rising gas and housing prices. Despite all that, economists gathered for the 42nd annual Bank One Chase A.S.U. W.P. Cary School of Business. They say the economy still remains strong. Consensus for the projected growth rate for the gross domestic product for 2005 adjusted for inflation is 3.6%. For 2006, it's projected to be a little lower, 3.4%. Anthony Chan, a senior economist, spoke at a press conference held before the luncheon.

Anthony Chan:
We know this year it will be a little weaker than it was last year, and next year, 2006, which is -- is going to be weaker than it was this year. The reasons for that are obvious. One, energy prices have been rising, and two, the Federal Reserve has been very enthusiastic about slowing down the economy. In fact, in 10 -- in their last 10 calendar quarters they've raised interest rates by 300 basis points, or they've shown the enthusiasm by raising interest rates a quarter of a percentage point each time.

Mike Sauceda:
The Federal Reserve's enthusiasm extended with another quarter percent hike in the federal funds rate. The rate banks charge each other, that's the 13th time in a row raising rates to 4.25% from a low of 1.0% in June of 2003. The big question is whether rates will be raised again the next time the Federal Reserve meets in January. Another big question, when will the current expansion end?

Anthony Chan:
I've looked at calendar quarter growth, and I find if you have stable economic growth across an economic expansion, either quarter by quarter or on a cumulative basis, that usually means the expansion will last longer than the average. What is the average, about 28 calendar quarters? Stable growth is what makes sense here, and guess what? In this economic expansion, we've had one of the most stable series of economic growth numbers we've of seen b -- before. In the last two years we've seen the most stable growth we've seen in the United States. Bottom line, that is consistent with a longer than average economic expansion.

Mike Sauceda:
Some predictions from Chan for 2006 --

Anthony Chan:
I think we'll bring slower growth, but not a collapse in growth suggesting a recession is coming, and the reason for that is I see labor markets continuing to show improvement. Just today the challenge of survey suggested the number of layoffs are down 5%, and on a year-to-day basis down 18%, so we're getting improvements in the labor market. The number of people filing for unemployment insurance because they've been laid off has backed down to the lowest levels we've seen since pre-hurricane Katrina, they surged after that as many people lost their jobs, but it's back to pre-Katrina levels.

Mike Sauceda:
With a good economic outlook for the nation, Arizona's economy is looking good as well. 2005 should see the year-end with new residents making Arizona second in population growth, for the 11th year in a row. The state should add 100,000 new jobs in 2005 with construction providing one-quarter of those new jobs. The fastest growing job sector in the future will be health care.

Lee McPheters:
The fastest growing jobs in Arizona over the next 10 years are going to be in health care. There's two reasons for that. One, you have an aging population, the baby boomers make up about 50 million of the national population are getting older. So there's a higher demand for medical care. The other thing, when we were looking at these ratios of jobs and determining what are the national average ratios of jobs, we discovered that Arizona is actually below the national average in medical care, doctors' offices, actual count of physicians, actual count of people that are in the health care industry. So even though we've had tremendous growth in health care, and some monthly numbers compared with previous year up 7, 8, 9%, we're still below the national average.

Mike Sauceda:
Arizona should finish 2005 with an unemployment rate of 4%. 97,000 new jobs are expected to be created in 2006. The housing frenzy is expected to come back down to reality, housing is expected to remain strong with over 84,000 new single family housing starts in Arizona, in 2005, up about 1,000 from 2004. Two 2006 is expected to see 80,000 housing starts. We have a median housing price of $268,000 in the valley, marking the first time prices here have been higher than the national average.

Lee McPheters:
Now, what that means is that there are two things to worry about. One of the things people are worrying about is that we might have a housing bubble, housing prices might fall. The other thing to worry about is that housing prices might not fall. What has driven so much of phoenix growth is the attraction of affordable housing. You can sell your house in California, you can move to Phoenix, you can buy a house that costs half as much, and this is -- has driven this doubling of inflow from California. But now housing prices in Phoenix are much higher than the national average, and really analysts are just uncertain as to what this means. I don't think we want to have an environment warehousing prices begin to actually decrease; what we think we're going to see is slower growth. But there's certainly no question at all that housing affordability in Phoenix is much lower now than it was just two years ago.

Mike Sauceda:
The consensus from economists is a soft landing for the Arizona housing market.

Michael Grant:
With me tonight to talk about the economy and other things surreal is Tracy Clark, associate director for the economic outlook center in A.S.U.'s Center for Business Research. Also here is Jay Butler, director of the Arizona real estate center at A.S.U.'s polytechnic campus. In addition, we have Stephen Happel, a professor of economics at A.S.U. Gentlemen, happy holidays to you. Stephen, you know, we took it on the chin obviously with hurricanes Katrina and Rita. The impact, however, on the economy, does not seem to have been that major.

Stephen Happel:
The biggest impact I see, I thought growth was going to be somewhere between 4.5% and 5% the last half of the year. Katrina slowed it down with third quarter growth, 4.3%. So very strong, very, very strong. The economy just keeps growing, growing for 10 consecutive quarters since the bush tax cuts of 2003.

Michael Grant:
How do you factor oil at $60 plus a barrel into this equation, both historically and maybe on a going forward basis? I don't -- nobody's really expecting that unfortunately to come down dramatically, are they?

Stephen Happel:
No, though the price for gasoline has fallen 40% since the peak. But it's a -- as a free market economist, people will adapt. If the price of gasoline goes up, it will conserve in some ways. I think the key is job creation and income growth. That's what's been offsetting the increases in the price of gasoline. People are having higher incomes.

Michael Grant:
What's the overall inflation, what was the inflation experience picture for 2005?

Stephen Happel:
At the beginning of the year the blue chip forecasters were saying inflation is going to be somewhere around 2.5% for the consumer price index. It's going to come in closer to 3.5%. So they were very -- they were off the mark in terms of inflation. Not too bad on growth, not too bad on unemployment, but the inflation numbers are far worse than they thought at the beginning of the year.

Michael Grant:
Which keeps leading me to the question, I don't see, certainly by historic standards, 3.5% inflation is not bad. It's not nuts. Fed keeps -- I think they just went through their 13th straight increase. What are they afraid of that I don't necessarily see?

Stephen Happel:
Well, the new chair of the fed says his inflation targets somewhere between 1% and 2%. I think in many ways he's a disciple of Friedman, who wants inflation rates around 1.5%. It bothers me as an economist, my friends in the investment community laugh, say, hey, 3% is not bad. But to me 3% inflation, 4% inflation you're going to have prices doubling every 20, 25 years, and so the fed is worried about that, I think another thing the fed is worried about, once you get the inflation rolling, and you get inflationary expectations into the economy as we did in the 1970's, you really have to wring the economy hard to get them back out. So make a preemptive strike now.

Michael Grant:
I guess having gone through that whole process of unemployment interest rates, inflation at that point in time, 3%, 3.5% doesn't seem that bad. Are we in a period of stable economic growth and if so, why as was pointed out in the taped piece? Tracy?

Tracy Clark:
I think we are in a relatively stable period, and the reason is, the usual suspect, which is the baby boomers. They're in their peak earning years, and they've got more money than they have things to do with the money, and they're trying to invest them and -- for the retirement, and all of that. That picture starts to change in about 2010, when the number of people entering those peak earning years start dropping off dramatically. And I think then you're going to see the economy go back to having more normal cycles. But right now this -- the reason you saw the run up in the stock market, it's the reason you saw the real estate going up, people just have to find some place for that money.

Michael Grant:
National and local employment, unemployment picture for 2005?

Tracy Clark:
Very -- locally, very good. It's currently running with our -- the estimates at about 4.24, 3% for 2005. When the benchmarks for 2005 come out, it's probably going to be closer to 4.7 to 5% based on the information we have now. That's extremely good. National economy, somewhat -- it's doing ok, but it's not doing nearly as well as Arizona is. Because we have places like Michigan, Louisiana, Mississippi that aren't doing very well. But still, employment growth finally got started for the national economy, and it's probably going to continue at a fairly good clip.

Michael Grant:
Jay, here's a question that I haven't asked you in 20 minutes or so. How about that darned housing bubble?

Jay Butler:
We're still talking about it. [laughter] really a -- really there are two bubbles. One is we're running 263 for a resale home. The issue is, are we going to continue growing at the rate we did, which is like 40% over a year ago. That's highly unlikely. That's bubble one. Then the next issue gets to be, do we drop from that 263? Lee pointed out one issue, the argument for economic development, one of them, is affordable housing. So question need to show some dropping. The other hand, people have invested in these homes who have very little equity in them, need them to at worse stay the same or improve some. So there's a real area document about whether we're going to fall back from that, the number we're at, or just stay about where we are.

Michael Grant:
Did we ever get, because seriously, we must have talked about it three or four times, did we ever get a good feel for how much of this was driven by the investor side of things, maybe ramped growth a little bit, innovative financing techniques and all sorts of weird loan arrangements that seem to -- new one seems to pop up about every 24 hours or so.

Jay Butler:
They all came together to create this thing. A lot of people got concerned about retirement, what the issues of social security, united airlines, pension thing. So they became more concerned about what to invest in to preserve their future. The stock market has not been doing great, their housing has been. So a lot of people became investors. Sort of amateur investors. Somewhere between 20 to 30% of the homes have been sold in sort of this hyper market in the last year probably went into the investment market. It's probably no lower, it could be a little higher, in some neighborhoods 60% to 70% of the homes are in the rental market. We're now beginning to see some of those homes come up for sale, investors are saying a $70,000 profit is pretty good and we're going to move on, because with the dot coms, the issue got to be we hung on too long. Well, we're going to take our profit now and move to other investments or other things. And so we're being to see them, and that's what's brought a lot of homes on to the market, where listings are almost at normal levels again. Somewhat longer time on the market than before, and begin to be see some movement in then negotiations of prices coming down. Although because people so little equity in their homes, they can't come off that price too much, or they're going to have to throw money into the deal, much like we saw in the late 1980's, early 1990's.

Michael Grant:
Concern now is that a lot of people don't have any cushion left.

Jay Butler:
Right. People always use the equity in their home. Homes didn't increase that much in the late 1970's. So we always had that equity as a cushion to call upon for emergencies. But we've used that day-to-day to buy automobiles, to take trips, do a lot of things. As long as homes are going up in value, interest rates are low, it worked out. But now appreciation is beginning to slip a little bit, interest rates, lender regulations are getting tighter, the fed has told a lot of lenders to tighten up. There's a lot of concern out there.

Michael Grant:
Stephen, really we're covering a lot of pretty good news for 2005, but you're saying -- yet you were telling me 47% of Americans think we're in a recession?

Stephen Happel:
It's a conundrum. "Wall Street Journal" has had a number of articles on this where no matter how the news comes out, somebody reads it bad. The trade deficit goes up, that's bad because it's going to raise interest rates. The trade deficit goes down, that's bad because it means a loss of jobs. It's just one of these things where -- I'm not sure where it's coming from, mike. It seems come out of New York, though. Over the last year and a half there's basically been two schools of economic thought in terms of forecasting. The Wall Street economists screamed like crazy, recession is on the Horizon, why has the fed been raising interest rates? Very, very critical of the fed. Then you have economists here in the west saying, the problem is not recession, the problem is strong growth and the real problem in the economy is inflation, and the fed ought to be raising rates. And it's been the Wall Street crowd that seems to have more sway over the last year and a half, though I think that's starting to change a bit now.

Michael Grant:
Anybody at the table think there's reason to be depressed, or recessed, as the case may be?

Tracy Clark:
Not really. I don't see a recession on the immediate horizon. Even if the housing market slows down some, we've still got population growth that's going to keep it at levels that would have been records prior to in. Our job growth is strong, there's nothing really to suggest that 2006 as we go through it is going to be a bad year. It's going to be a little slower, but it's not going to be bad.

Michael Grant:
Is there -- is your economic glass half empty, half full? What's your view?
Jay Butler: It's probably half empty. [laughter] I'm between these two optimists. In the real estate market, basically we won't get a handle on 2006 until March numbers start to come n. Because January and February and to some degree December are sort of aberrations within the market. The problem is going to be more than likely sales number and median prices are going to be down for the prior year. If you start using a lot of those terms, you have issues. Also, a lot of consumers have been counting on this build-up equity to support lifestyle. Consumer purchase decisions. We may have some issues that stretch beyond. Also, the job market is heavily dependent on strong real estate market, construction, financial services and other things, and we begin to see a restriction there, they may begin to lower hiring expectation origin to do some quiet layoffs.

Michael Grant:
At least the deal we've got now, I think the numbers that were being discussed on the taped piece was estimated 84,000 housing starts in Arizona 2005, a record, and 80,000 housing starts expected 2006. By definition that would be near a record.

Jay Butler:
I'm not that optimistic on the housing starts. I think right now you have pretty strong momentum to carry you through a good part of 2006 on permits, but a lot of cities have been raising their fees, impact fees, development fees, and when you see that happen, developers pull a lot of permits. So you may have a city, someone issuing 600 permits in one month and not issue another one for the next six months. So a lot of the 84,000 are pulled permits that won't be used until we move into 2006.

Michael Grant:
Housing market nationally, Stephen?

Stephen Happel:
The housing market nationally is just a series of markets. Each one's different. I think the consensus is interest rates are going up. That will probably have a negative impact. Where I would disagree with jay a bit on the economy next year, and Tracy probably too, is, most economists see it slowing down, but that's a natural tendency to forecast a slow-down the following year to some extent, if you look at the blue chip forecast. The Bush administration right now is working on this tax package. Who knows what's going to come out. But if they come along with an altered package, get rid of the minimum tax, keep the gains market low, look what happened after the bush 2003-tax cuts. It sent the economy rocking. Right now you've got the baby boomers, not only key productive years, but key spending years. We love to spend.

Michael Grant:
Starting to worry about that retirement thing, too.

Stephen Happel:
We're living to 90, so --

Tracy Clark:
I'm glad I'm not a baby boomer. [laughter] I don't have the guilt trip.

Michael Grant:
You guys study this, and I don't, which is good because you're economists, I seem to be getting mixed reads on whether or not this has been a good holiday spending season or not. What kind of consumer spending season --

Stephen Happel:
Two weeks ago the numbers were just ok. But last week they started popping again, and so the jury is out. But it seems at least my experience has been, and Tracy follows this closer than I do, but my experience has been the last couple years that when the smoke clears, the spending is higher than a lot of people anticipated going in.

Tracy Clark:
, it tends to be that, but that's because the consumers are playing a game of chicken with the retailer. They're waiting until the last minute, they're making the retailers give them those good deals, and because of all the gift cards and things, you're actual -- your actual holiday spending season goes sometime into January. What I'm a little bit worried about is that when all the smoke clears, we're going to have sales numbers that look fairly good, but nobody will have made any money on it.

Michael Grant:
Oh, ok. We had talked about that, we had talked about that recently. Jay, let me just go quickly through, we tend to focus on housing, but let's just take a fast look at some of the other construction markets. Condos are just --

Jay Butler:
You want to talk about condos, condo conversions, we have 13,000 apartment units being converted to condominium units, most of those will remain in the recent fall market. You have probably another 8,000 to 9,000 fairly active permit projects, we have the high-rise, high-end things in Scottsdale and other places. So condo mania, which describes us nationally, has become a hot issue.

Michael Grant:
How about commercial, industrial?

Jay Butler:
In the commercial market, condominiums have also been strong. For small office space, condominium development especially in the east and west valley has been very strong. Almost cutting out the class A office market considerably. Retail has been strong, although some of the small strip centers that are being developed are having some vacant space, which they normally would not have had a year ago. But overall shopping centers don't get built until they have a major tenant, so they're doing pretty good.

Michael Grant:
Residential rental occupancy, and for that matter construction?

Jay Butler:
Apartment markets took real well, though there's no real construction. Concessions are predominantly gone for most of the apartment market. The real problem within the single-family rental is those who have bought recently, the prices are too high relative to rent. They're probably not making any money. Rent is still remaining around 1100 to $1200 a month for most new type single-family, but the price has gone up 40% to 50%.

Michael Grant:
Tracy, what about some of the other economic segments here locally, in Arizona, for example, 2005, manufacturing segment?

Tracy Clark:
It's finally gotten to the point where we're seeing some growth, probably going to continue to see some growth in 2006. Just -- it hasn't gone back to what we saw during the 1990's, probably won't. About the only section of the economy that's still doing fairly bad is telecommunications. Because they really haven't figured out what they want to do in telecommunications, and so they're not really hiring in that area.

Michael Grant:
You also had just a tremendous expansion of infrastructure and investment in the five years or so ago, and a lot of that is still impacting.

Tracy Clark:
There's still a lot of that out there, people don't know whether it's going to be landline, all wireless, and all of that. I think good areas, it's not a huge part of our economy anymore, but copper has been doing very well.

Michael Grant:
Exceptionally well.

Tracy Clark:
Exceptionally well. Basically anything you can sell to the Chinese has been doing extremely well.

Michael Grant:
Well, we're just about out of time, but I want to go quick around the table, 2006 is looking good.

Tracy Clark:
It's looking good, it will be a little slower growth, but nothing terrible.

Jay Butler:
Real estate will carry through the first part of 2006, the latter part is still up in the air.

Stephen Happel:
I'm going to be more optimistic. For blue chip forecast right now is about 3.4 for this coming year. I think it's going to be closer to 4%.

Michael Grant:
Ok. Stephen Happel, thank you for being here, Jay Butler, good to see you. Tracy Clark, always a pleasure. Gentlemen. For a look at a transcript of tonight's show, go to our website at www.azpbs.org. Scroll down, then click on the word "Horizon." once there you'll find links to the transcripts and information about upcoming shows. Thank you very much for joining us for this special edition of "Horizon." I'm Michael Grant. Have a great one. Good night.