Arizona Economy

May 20, 2009

Transcript:

Ted Simons:
Arizona's economic forecast is gloomy with only a hint of silver lining, according to experts who spoke to today's economic outlook luncheon. The annual event is sponsored by the economic club of Phoenix and A.S.U.'s W.P. Carey School of business. A.S.U. economist Lee McPheters was one of the speakers. Experts agree the recession will end in 2009 but McPheters says positive growth will be modest and Arizona can expect job losses to continue into next year. McPheters also pointed out that Arizona has the worst labor market in the nation.

Lee McPheters:
Arizona is the weakest of all 50 states as you've heard and Phoenix is the worst of all large metropolitan areas, when you look at labor markets. Great place to live, terrible place to be looking for a job. The consumer is the key to recovery. They have to be the key to recovery because what else could possibly influence it? Not exports, not business spend, not state and local government, consumers are not to come back into the game until home prices stop falling, until the stock market stabilizes, until they see that unemployment rates have kind of peaked out, until job losses begin to get smaller and smaller. And the consumer has to have confidence to buy and believe it or not, the consumer has to kind of back off of their inclination to save their money. Savings rates up to 4.2% possibly on its way to 5%, maybe on its way to 10%. But think about this for a minute. Every 1% rise in savings pulls 100 billion out of the spending stream. Well, if you have a 5% rate of saving, that pulls 500 billion out of spending stream, which is in fact about the same amount of the injection from the stimulus plan in 2009. So savings, good for the individual, in a sense. Not so good for the economy.

Ted Simons:
Joining me now is Dennis Hoffman, Arizona state university economist who also spoke at today's event. Dennis, good to have you here, thanks for joining us.

Dennis Hoffman:
Ted, great to be here.

Ted Simons:
The panel of economists, if you could put a package around it, where's the package going? What do they see?

Dennis Hoffman:
Well, we polled a national panel and they were a bit more optimistic than we even thought they might be, but 96% of the people polled said the recession ends fourth quarter 2009.

Ted Simons:
Do you agree with that?

Dennis Hoffman:
I think that there's a very real possibility. I'm heartened by a couple of things. I knew that Wall Street had to rebound, that it's a precursor of stability in the business community, business sentiment, that kind of thing. It needs to translate into more consumer confidence which in turn bill be bolstered by the actions of the fed and massive federal stimulus action. So I think it's a very real possibility. Of course the question is, you know, how robust will this recovery be?

Ted Simons:
Indeed, and another question for us here, how do we look in comparison with the west in general, the country as a whole.

Dennis Hoffman:
Arizona right now very, very tough times in the labor market. The worst consumer psychology I've seen and this is my 30th year here, by far the worst consumer psychology. It's manifested in dismal retail sales collections, no rebound in the housing market, that kind of thing.

Ted Simons:
We just heard the idea that, you know, we need people to save but we need people to spend. How do you see that dynamic?

Dennis Hoffman:
Lee made a very good point in the clip. It's very clear in economics, you can over save. You can kind of save yourself into a very, very deep depression. If everything seizes up. Now, that doesn't mean that we solve things by people willy-nilly just spending on anything. But there needs to be a rational pace of consumption, especially from those people that have the wherewithal to consume. That's the real puzzle right now. Credit is as low as it's going to get, frankly. It's absolutely very, very attractive to those people that have great credit ratings and have secure employment. But they're still not buying.

Ted Simons:
As far as again the forecasting element of all of this. What sectors look better than most? What sectors look like they're still going to stagnate for a while?

Dennis Hoffman:
New home construction, new construction kind of thing, forget it. It's just not in the cards right now. Permits are not being pulled. It's not happening. Now. But bits and pieces of construction people need to be aware, and the key, follow the money. Where's the money right now? In federal stimulus. So if you look at the state's energy plan you're going to find that significant amounts of money are going to be invested in everything from new air conditioners on schools to insulation to energy efficiency items, then of course there's the whole renewable agenda. I think the outlook for highway construction and road construction is very, very good. Again, impetus here is stimulus dollars; got to figure out where those dollars are going initially, follow those dollars. Stay away from retail, stay away from new home construction.

Ted Simons:
As far as stimulus money, I know some money's already getting out there. Are we seeing a pickup of activity from what has already been released?

Dennis Hoffman:
Very little has actually hit the streets yet. It's all promise right now. But there are certain pockets. Arizona state university, for example, we are jammed up right now in terms of our ability to try to get grant applications out the door. That's ok because the feds are taking forever to review them. They are inundated with grant applications because there's all this money available. So we got to break through this logjam issue, but when that happens there will be significant injections of dollars. Figuratively fly a helicopter over the state or over the valley, filling it with cash, and dump it out the window. I mean, effectively that's what's going to be showing up later this year.

Ted Simons:
And yet those helicopter rides will end, and once they end are we going to be able to pick back up or are we going to be looking at the sky for more helicopters?

Dennis Hoffman:
Here's what we have, Ted. We have real pain, I don't envy any policy maker now that got all -- got very, very tough choices from the governor's office to everybody at the legislature. It is a tough challenge they face. Huge demands for public services, coupled with no money. Federal stimulus gives us an opportunity. It gives us an opportunity to bridge the gap from here to there. But we have to realize that the day of reckoning is going to come, and it's going to come in short order. So what we can do is burn through that federal stimulus money, but at the same time engage in real dialogue about what this state needs to spend to deliver whatever public services the citizenry wants, and at the same time couple that with a tax base that pays for those things. So if people want services, we hear that they want education. They want a better transportation system. They want this, they want that. It seems to me that all we have to do then is figure out what that costs and them simply say all right, if you want that, you have to pay for it. There's no magic here. There's no magic inefficiency in government that's going to be corrected and fix all of that.

Ted Simons:
We're going to talk a lot about that tomorrow on the program. Roundtable discussing ways to get the state moving and way to make it more consistent as far as revenue and as far as getting rid of the boom bust cycle.

Dennis Hoffman:
That's where the dialogue needs to take place.

Ted Simons:
Indeed. We're going to do that tomorrow night. Real quick before you go though, the idea of forecasting the economy, how difficult is that to do in this environment?

Dennis Hoffman:
It's a challenge. We had a great event at the Biltmore today, Ted, and for those of your viewers that want to see more of that, we have our knowledge at W.P. Carey site that has the record of what we talked about today. We have some clips; we have some narrative in terms of what is presented. Forecasting in this environment is really, really challenging. It's the obvious. If I could show you graphs, and viewers could see them if they go to the site. On the volatility that has taken place in terms of retail consumption, in capital gains incomes earned in the state, literally in the job losses that we have seen, it is completely totally unprecedented. We have three consecutive years of job loss in Arizona, unheard of. Historically we've only had one year in that 75 before now.

Ted Simons:
Got about 30 seconds left, you still think 2009 is the turnaround year, end of the year?

Dennis Hoffman:
End of the year, Ted. Part of the really tough part of this gets a little easier, things are so, so bad, we are going to be in a very deep bottom. At some point you can't year over year buy 40% fewer cars, because at some point you get down to virtually zero anyway. So the good news is sure, we reach a bottom. We begin to come back up. The bad news is it's a slow climb from a very, very deep bottom.

Ted Simons:
All right. Dennis thanks for joining us. We appreciate it.

Dennis Hoffman:
Thank you, Ted.