Economic Forecast

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Even though our economy is slowing down, it’s still growing at a decent clip, and we’re seeing an increase in prices and a slowdown in the housing market. Find out what’s in store for the upcoming year’s economy and how the 2007 economy fared. Economists Debra Roubik, Tracy Clark and Jay Butler will analyze the economy.

Ted Simons:
Tonight on "Horizon," the slumping housing market dominated economic news this year. Is a recovery in the cards? It's not just gas prices going up anymore. Inflation has shown up at your local grocery store. And how might Arizona's new employer sanctions law affect our economy? Three economists will give us their views next on "Horizon."

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Ted Simons:
Good evening, I'm Ted Simons. Welcome to "Horizon." our economy is sending out some mixed signals. Growth continues at a decent pace, despite a sluggish housing market. Job growth in our state is not as vigorous as it has been in the recent past, but a record number of people are working. And we're seeing inflation at the grocery store. I'll talk to three local economists about what they think of the 2007 economy and what they predict for 2008. First Mike Sauceda reports on what economists at a local forecast luncheon said about our economy.

Mike Sauceda:
Although the "R" recession was mentioned by economists speaking at the luncheon held at the Phoenix Civic Center as a future possibility, none of them said we are in one right now. At a news conference before the luncheon, four economists talked about the health of the economy. Standard and Poore chief economists talked about the national economy.

David Wyss:
Economy has slowed down, in case you haven't noticed. I guess the surprise is it hasn't slowed down that much. When you go back and look, the fed raised interest rate 17 straight times, June of 2004, and June of 2006, and when you whack the mule over the head 17 straight times with a two-by-four, it gets the idea. The economy slowed down because the fed told it to slow down, but it hasn't slowed down that much. Over the last four quarters, growth still running about 2.6%. That's not much below the roughly 3% that we averaged through the three previous years. Moreover, housing has subtracted almost a percentage point from growth over that period. If housing had just been flat, this economy would have actually accelerated. The good news for the economy is that most of the damage done by the decline in the housing sector has been offset by improvement in the trade deficit.

Mike Sauceda:
James Glassman talked about tightening credit and impact on the consumer.

James Glassman:
The consumer you and I have known for 25 years, is not the consumer we will be seeing in the next decade. Americans have been benefiting from windfalls, rising asset values, stocks, housing values, and as a result, they have not had to save as much as our parents did. In this period when we have seen these massive gains that household -- that have driven house old wealth up to high levels, people haven't been needing to save, that's what changing, that is what the real estate market is telling you that the run is over and the world in the future where consumer spending is going to be growing more in line with income, U.S. demands going to be more in line with income, a world that is not as strong.

Mike Sauceda:
Lee McPheters gave his assessment of his Arizona economy and job growth in the state.

Lee McPheters:
I suggest that a summary quote that may be useful a year from now when we look back is that 2008 is likely to be remembered as a year that is best forgotten. Most recent figures we have available show that the rate of job growth is less than 2% in Arizona and we haven't seen that since 2003. We are not saying the economy is in recession. We are simply saying that there is a slow down. You have diversity in the sectors, construction losing jobs, financial sector is losing jobs, and overall the Arizona economy with this slow rate of growth has dropped out of the top ten states for job growth. I think some of you that are subscribers to our publications know that for the past six years, we have been able to say that Arizona is one of the top ten states for job creation, but as of October, Arizona slipped to position number eight. I'm sorry, number 13.

Mike Sauceda:
You can't talk about the economy without talking about real estate. Elliott Pollock, economic and real estate consultant, the real estate sector in Arizona is strong, but the housing market is overflowing with product and the demand is weak.

Elliott Pollock:
On the demand side, things have gone from bad to worse. Changing credit markets since august have reduced the buyer pool by 20%. As Lee said, if you can't sell your home in Phoenix, you can't sell it in California, Michigan, Pennsylvania, places people move from to come to Arizona. That will reduce the buyer pool by another 20%. The demographic demand is down to the high 20s, maybe 30,000. Well, if that's the demographic demand and you have a huge oversupply, the only way you can -- by producing a lot less than the demographic demand, which means to me that I think we will be a third of where we were in 2005, not half of where we were in 2005. If we're not, this just keeps on getting extended and extended. At best, the housing market bottoms out next year, but it is not going to be much of a recovery in 2009. At worst, the recovery is pushed out. This is a three to five year deal. This is no quick fix.

Mike Sauceda:
The two local economists talked about the impact of the sanctions law, which would suspend or revoke the license of any company found knowingly hiring illegal immigrants.

Lee McPheters:
I think in the short run there will be disruptions. I think that this is a situation that is absolutely going to be solved by the marketplace. People might not like the way this solution works out if you hire workers and you're going to be paying higher wages for them.

Elliott Pollock:
The major unintended consequence that you can't quantify is whether companies who would otherwise move to Arizona simply say we don't want to take the risk of something slipping through the cracks, so we're going to cross phoenix off our list, and that is a genuine possibility. There is no way of being certain, no way of quantifying it. That is what makes this thing so scary.

Ted Simons:
Here to talk about the economy both locally and nationally is Grand Canyon University economist Debra Roubik, and Arizona State University economists Tracy Clark and Jay Butler. Panel, thank you so much for joining us here. Debra let's start with economic growth in 2007. How did we do and what are you looking for in 2008?

Debra Roubik:
I like to take a step back whenever I work on my forecasts for the next year and look at history, do research, compare where we are to historical events that are similar to where we are. Looking at the real estate market, go back to the '89, '91 period, back here in Arizona, everyone talking about cheap dirt. There was a credit crisis back then, and things didn't look very well, and our job growth did suffer. And the other period that is similar to today is the dot com era, where you have a market overvalued, taken a big dive and you had a credit crunch. When I look at those two periods, it tells me we are going to see job growth slow down. We're going to have nationally we will probably see G.D.P. drop -- well, today the revision came out at 4.9% real growth in G.D.P. that will drop town to one to 1.5% for next year. You will see employment drop to about the 1% range both nationally and locally. And you are going to see other negative consequences, but I don't think we will see the "R" word. When you look at the historical period during the last real estate crisis here, from '89 to '91, seven consecutive quarters of negative real residential spending, and we've already had that. When you include this quarter. So I think we've seen the bottom of it and I think we're at a turning point and that's why you're getting a lot of mixed signals from the economy.

Ted Simons:
Tracy, '07, '08, what did you see and what are you seeing?

Tracy Clark:
Nationally things have actually looked fairly good up to this point. The first quarter of the year of 2007 where we don't have the data yet -- the fourth quarter -- is probably going to look really bad, and then as Debra said, about one or so percent growth going into 2008. Locally it does seem like the housing slow down is hitting Arizona harder than it is hitting other parts of the country, and so our employment growth in 2007, well, the last data point we have, 1.6%, year over year it will probably average out to below 3% for the year, and then for 2008, 1% growth there, too, in terms of employment, and whether we have a recession or not, whether it is officially called a recession, it's going to kind of feel like one even if they don't actually give it the "R" word.

Ted Simons:
Interesting. All right Jay.

Jay Butler:
Real estate is in a recession, probably a depression along with related industries. One of the problems as to whether a recovery next year or the following year, most of the growth was in Pinal county -- a lot of growth will take place in older areas, infills, redevelopment, filling in the existing areas. You may see improvement in some areas, or the total market, but not necessarily in the areas that were growing in the last few years.

Ted Simons:
are you starting to see some signs of life in the older established areas?

Jay Butler:
Yes, for example, south Tempe had its median price increase. -- south Scottsdale, prices very stable. Into the western communities, seeing significant declines, $50, $60,000 on the median price alone.

Ted Simons:
How much is that affecting the overall economy in Arizona?

Jay Butler:
The hiring, construction, mortgage lenders, escrow officers, the whole group, relatively well paid individuals who are now not being so well paid. Plus it is a psychic thing. Your home was worth x amount a few years ago, it is now x-minus a lot. You have the psychic impact that is going on in this particular standpoint. It has real meaning to the economy in the quantitative and qualitative sides.

Ted Simons:
Tracy, what kind of jobs are we gaining, and what kind are we losing?

Tracy Clark:
Most goods related jobs, construction, manufacturing, that, it's negative. For the last month that we have data, we're 48th in the nation, and a negative 4% growth for goods related. For service related jobs, which is everything except goods related we're fourth in the nation at 2.8% growth. So, construction is clearly down. Our manufacturing is still weak. And just in general services aren't doing that bad, you know. Leisure and hospitality up 4.78%. So the impacts are not uniform across the economy.

Ted Simons:
The housing problem here and nationally, let's start with here. It spills over nationally, if someone in Ohio can't sell their home, they're not going to relocate to Arizona. How much is that problem affecting us in general?

Debra Roubik:
I think it is more a matter of job creation. People follow jobs. While I'm not a proponent of government planning, I think Arizona has done a wonderful job just -- and I want to clarify, that they can make as many wrong decisions as we can, but this time they have lucked out with all of the projects that they started with TGen, biotech, light rail, with the stadium in Glendale, and all of the activity going on over there. It just so happened that the timing of all of those projects are protecting us in terms of our jobs. We're losing jobs in the real estate related markets, those other jobs are propping us up. Like I said, I'm not a proponent of government planning, but this time it worked out really well and it is helping us. As long as we stay strong in the biotech areas, educational services, health services doing great here in Arizona. As long as we keep that job creation strong here, we're okay. You're still going to attract people who hear that there is more jobs here than anywhere else in the country.

Jay Butler:
The other question is income. A lot of those jobs are short term jobs and a lot of those projects are ending. The Super Bowl ends and a lot of those jobs end. I suspect a lot of the tourism ends also. The income, especially for the younger households. It is not gross income, but net income. Paying more for health care, more for energy costs, day care, all of which really reduce the amount they can afford to buy housing or some of the alternative things. A lot of households getting hit with the income issue, not just the job issue.

Ted Simons:
I want to go to your concept of timing and take it to the housing and development market. I'm hearing let's go ahead with these projects, condo high rises. Let's do it now, because by the time we're done, the market will have swung back the other way and good times are here.

Debra Roubik:
There is that sign wave pattern in every market and I wish we could learn from our mistakes. If you go back to 1999 and the dot com phase and how equities were being valued so much higher than they were really worth, and then you see it reoccur again in real estate where everyone is jumping in. Buying real estate, no idea what she is getting into, and I wish we would learn from that sign wave pattern. Markets do climb above their fundamental value but they will come down. That's where we are right now. Again, once you're down at the troth, things do pick up. They have to, you know, come back to their fundamental value. So, you know, that's a tough issue. It is a matter of can you get that timing down, and, you know, that is a game I don't know if I want to play.

Jay Butler:
Another issue on the high rise condo, is there a market? We can go through all of the waves we want to, but we're building a lot of them, we're not building them, other people building them, there is no proof that there is a market for them and expensive to build. The homeowner fees are high. You are looking at a fairly small market, some geographical locations I am not sure the market exists for them.

Ted Simons:
We will talk about the waves again. If we're at the low ebb, because of your growth, is that going to modify that a little bit? How do you see that?

Tracy Clark:
Particularly for like the condos and that, what you find is that if projects are passed to -- are passed a certain point, they will get built because you are better off taking what you can from the project. The problem is that right now with the credit crunch, they may not be able to get to the money no matter what they think about the eventual viability of the project, right or wrong, and it's going forward where I'm worried that they're just -- since they're not going to be able to get the money that there is not going to be all of that much stuff in the pipeline. So we will have this down period just because there isn't anything in the pipeline.

Ted Simons:
Let's talk about other kinds of real estate. Commercial real estate, land deals and such. What are you seeing out there?

Jay Butler:
from a development standpoint, seems to be the general attitude is if it is not out of the dirt by now, it is not coming out of the dirt in '08. Because of the financing issues, and just the general concerns about the economy. A lot of big land deals going on for the sense that they will be buying this land and in five, six, ten years making use of it. There has been a very aggressive, buying finished lots from home builders over the last year or so from this particular standpoint. Commercial real estate, retail, and to some degree office, they're appreciably slowing. Retail, most major retailers seem to be holding off any new projects. The big developments going on, a small supermarket coming into being, but it is just the financial -- one of the problems with the financial crunch it never seems to end. We think it is almost over, and then something else hits. And the commercial guys are very concerned. We seem to be slowing appreciably in that market.

Ted Simons:
The other thing fed messing around with interest rates and it seems like it gets lower. How low can we go on these?

Debra Roubik:
I think we're going to go really low. When you look through history, and you look at the crisis that we have faced in the last two decades, during the 2001 -- I hate to call it recession, but after the terrorist attacks, the fed actually dropped the rates, federal funds rate to 1%. I don't see us going that low, but during the last real estate crisis -- right now we are at three and a quarter. They could drop it to make -- I think a lot of it is just to help the market feel reassured that they're going to do something, going to move. They have gotten a lot of criticism that they moved too late. A lot for reassurance.

Ted Simons:
Is the market going to respond to this anymore? How many times can you cut the rate?

Tracy Clark:
I think if they limit it to about 3%, that's probably reasonable. The problem that we have been having is that because so much of the financing of the housing market and so many other markets used to be handled by banks now being handled in equity markets that the federal reserve wasn't having any impact on loan rates. And so I'm assuming that for a little while, the equity markets are going to stay out of financing so much of the longer term projects and that then the fed will have more impact on loan rates, at least for a while, and that probably will impact the economy more than the fed has been able to do over the last two or three years.

Ted Simons:
Okay. Let's -- I want to stay with you regarding retail sales. What are you seeing out there and what are you forecasting for next year?

Tracy Clark:
well, year to date through September, which is what we've got to work with, overall retail sales were 1%, but auto sales are down 6.2%. And so if you take autos out of it, retail sales are up 3.1% year to date. Auto sales have been down flat or negative since December of last year. And to me that means that people have been cutting back on their big ticket purchases because they didn't have the money to spend. They couldn't do the mortgage REFI's, losing their job in construction, or losing their job in financial. I see that 2008 is probably going to stay fairly weak for most of the year, and then gradually start to get better in terms of retail. The thing that does worry me is that that pattern is -- has not yet appeared at the national level. Nationally retail -- I mean auto sales are up 2.6% year to date. So, the national economy probably is going to see that kind of drop in auto sales in 2008, and so that means the national economy is going to be fairly weak in 2008, and it is not going to help us very much.

Ted Simons:
Something that will affect us in some way shape or form is the immigration debate and the solutions being thrown around here, including the employer's sanctions law. We don't have too much time left. Jay, how is it going to affect the economy?

Jay Butler:
I think it will have impact in the beginning, because a lot of people are not coming to the state, leaving the state, legals, illegals leaving because of their concerns, also a concern for a lot of employers, not just low wages, they're going to lose skilled workers, that have learned over the years, illegal skills that are not going to be easily replaced in this particular economy.

Ted Simons:
What do you think?

Debra Roubik:
I think our economy is resilient and the way it works is through prices. Wages are going to increase. Jay will be happy because incomes will increase, even though it is kind of in a negative way. Everything works through prices. That is your signal to the economy that we need more labor.

Ted Simons:
Do you think if employer sanctions go through, the economy will be able to adjust?

Debra Roubik:
I think it works through the price mechanism. Yeah, wages will increase and people will be attracted to Arizona.

Ted Simons:
Wages increase?

Tracy Clark:
Wages will increase, either that or they will find a way of substituting something besides labor. We will never know how much of an impact the employer sanction law had because we already had a significant outflow of people occurring because of job losses in construction and just the slowing of the economy. And so we're never going to really know how much of an impact this has had.

Jay Butler:
Also because wages are going to go up, so is the cost of the goods. There may be a wash in this thing. Pay more at restaurants, pool cleaning, etc.

Ted Simons:
Yes or no, recession next year?

Debra Roubik:
No.

Tracy Clark:
Right now, no.

Jay Butler:
It will seem like a recession whether it is officially one or not, but it is going to look a lot like one.

Ted Simons:
Very good. Thank you so much for joining us. I appreciate it. That is it for "Horizon." thank you for joining us as well. I'm Ted Simons. You have a great evening.

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If you have comments about "Horizon," please contact us at the addresses listed on your screen. Your name and comments may be used on a future edition of "Horizon." "Horizon" is made possible by contributions from the Friends of Eight, members of your Arizona PBS station. Thank you.

Debra Roubik:Economist, Grand Canyon University;

Ted Simons, host and managing editor of
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