A look back at the economy of 2010 and forecasts for 2011 from ASU economists Jay Butler and Dennis Hoffman and private sector economist Elliott Pollack.
Ted Simons: Good evening and welcome to "Horizon." I'm Ted Simons.
Ted Simons: Is a real economic recovery taking place? And is that recovery making its way to Arizona households? Are consumers starting to spend again? Are businesses starting to hire again? And have housing prices finally hit bottom? Those questions and more will be addressed by a panel of three local economists. But first, some thoughts about the economy at the recent J.P. Morgan Chase, Arizona State University, W.P. Carey School of Business Forecast Luncheon held at the Phoenix Convention Center.
Joel Naroff: Job insecurity leads to lower consumer confidence and lower consumer confidence leads to lack of spending, slow growth from spending means businesses don't have to hire a lot of people and that reinforces the slow job growth and you have the cycle that basically feeds upon itself. What I think is going to happen, the cycle is slowly beginning to break and we saw in today's ADP numbers and Friday's employment numbers that job growth is on a steady upward path and within the next six months, looking at job growth maybe in the 180 range, which would be categorized as solid and once people see that the labor market turned, they'll be less insecure about their job and cause consumer confidence to rise and spending to increase and job growth to pick up and the negative cycle becomes a positive cycle.
James Glassman: As you look at the corporate sector, what you're seeing is after-tax profit margins of American businesses have recovered to near all-time record highs. My guess is when we see the fourth quarter numbers, we'll see that we're in record territory and that's telling you something about what has been taking place over the first couple years that was contributing to the slow recovery but tells us the private sector is in very good shape and this, by the way, is the reason you're sensing new optimism in the market.
James Glassman: We fell into a deep hole and it's not natural to stay in the deep hole. There's a lot that's been done to restore the health of the private sector and we're starting to see more and more activity, a revival taking place in the U.S. economy.
Lee McPheters: The main message here today for the Arizona economy is that after three very weak years of economic performance, I think it's pretty clear we're on the threshold of recovery. And 2011 is going to be the best year for the Arizona economy that we've seen in -- in some time. Last year, at this time, the Arizona economy was losing jobs. This year, based on October data, the most recent job growth numbers we have available, Arizona ranks 12th among all states in the rate of job creation.
Elliott Pollack: During the early stages of recovery, it is my observation, having been very old and, therefore, seen a lot of recoveries, that people come up with 412 reason why is it's not going to last, why there are a dangers here, blah, blah, blah, quite frankly, it would be remarkable to me if this recovery did not continue, I think, slowly, but continue.
Ted Simons: Joining us now to talk about economic concerns are Arizona State University economists Dennis Hoffman and Jay Butler, along with economist Elliott Pollack of Elliott D. Pollack and Company. Thanks for joining us.
Ted Simons: Is a real recovery taking place.
Dennis Hoffman: Absolutely. It's under way. Part of the reason I think that the forecasters could be as definitive, Elliott is here tonight, we can all be definitive. This has been a very, very deep recession, a long downturn, there's been a lot of stability, illustrated over the last six, nine, 12 months in terms of, say, the employment base. Is it skyrocketing up? Are we generating jobs anywhere near a normal Arizona pace? Absolutely not. But there is some stability in the employment level in the labor force, and as lee said a moment ago, I think we're headed up from here.
Ted Simons: What's changed. Why the optimism now as opposed to a year, two years ago?
Elliott Pollack: Recession he is don't just happen. They happen for a reason. This one was financially induced. People were over-extended and corporations and money markets have come back a little and credit markets and people paid down debt and restructured their balance sheets. They've got a way to go but starting to feel comfortable and you've got the swing in inventories that caused the production increase and more money in the system because there's more hours worked and not more employees yet but more hours worked and more money in the system and people starting to feel comfortable. They've made the adjustments.
Ted Simons: Some people though aren't feeling comfortable, still, jay. A lot of folks still don't have jobs. Is this a darkest before the dawn things? It's getting better but not trickling down if you will to a lot of folks.
Jay Butler: Were really not going to tell until next year. If you look at the job numbers created in the last two months, heavy growth if retail, about 17,000 jobs, how many of those are really seasonal? You have healthcare pick up but most hospitals and doctors' office ramp up this time of year. In the big growth area were contract workers. It's a question as we get into February and March are, how much of this job growth is sustained. Even in the construction area, a lot of it in specialty trades. We'll have to see it sustained. But there's no doubt there's improving confidence. The holiday season will be better than last year.
Jay Butler: I think a lot of the shopping center owners and developers feel that things seem better.
Elliott Pollack: Over the last 12 months, gained about $20,000, $25,000, the 12 months before that, lost 160,000 jobs. The 12 months before that, 80,000 jobs were lost. It's not -- when your used to a booming economy and quick recoveries, it's not going to happen here. You can't have a substantial increase in the economy without a lot of construction, at least in Phoenix and construction will be slow but there will be recovery and it's going it take a while and people have to get used to adjusted expectations of what a recovery is.
Dennis Hoffman: It could take a while. It could accelerate from here. Here's the data we've been looking at. Elliott is right, this massive job loss. I'm going to pick up what Jay said, created confidence in the state. Business confidence. Investor confidence and consumer confidence. So picture a spend on taxable retail items. Housing, autos, fixture, furniture, take that spend and divide it by total incomes. It you look at that number historically, it's 33%, 35%. Almost every year. Incomes go up and down a little bit, but it's almost always 33%, 35%. Today, it's 23.5%. So what I'm suggesting is that if people see that employment is not eroding, that the risk of them losing their job is getting smaller and smaller over time, I think we can unfreeze some of these dollars. This is a lot -- this is $15 billion to $20 billion of spend with existing incomes sitting on the side lines now.
Ted Simons: We have critics of everything from job growth plans to tax cuts who say record corporate profits for the third quarter. A lot of cash out there that the company, firms, businesses are sitting on as opposed to hiring folks. First of all is that a valid argument? And secondly, why aren't businesses hiring right now?
Elliott Pollack: They're not hiring because there's a lot of excess capacity and the normal way things work, you get as much productivity out of your existing workforce, work them more hours and spend money on computers and software and use part time employees and when you're confident the recovery is real, only then you hire a lot of more employment -- lot more employees and I think that's sometime in the next six to nine months.
Dennis Hoffman: You've got to see them coming in the door. You've got to see the orders showing up. Just like Elliott says.
Dennis Hoffman: It's not going to be out of the kindness of their hearts they're going to go out, oh, we feel bad, we're going to hire workers even if we don't need them. That's not going to happen. What will happen is it if they see orders coming in the door, if they see demand for the product going up, you bet they'll hire quickly.
Ted Simons: Can there be demand for their products when folks aren't sure about their own jobs and the neighbors are still out of work?
Dennis Hoffman: Let me go back to just a moment ago and you can chime in, Elliott. The point I'm trying to make here is over the last couple years, people have been petrified about the prospects of losing their jobs. Not talking about the people who are of work. It's the folks who are gainfully employed that were worried about losing jobs. So job losses have leveled off. Net job creation is about zero. 1%-2% next year. That will help to bolster confidence on the part of individuals that do have incomes and haven't been spending.
Dennis Hoffman: I think that's where is comes from. We unfreeze those consumer, the spend begins and businesses see it. And then the cycle, then the wheels start to turn.
Ted Simons: Go ahead, Jay.
Jay Butler: Don't really necessarily agree. I think we have serious issues. Today, Yahoo today announced 800 to 1,000 layoffs so we're still in the layoff -- they closed down a bunch of things because of the deficits at all levels of government. Furloughs and layoffs what are viewed to be safe jobs, teachers and other things. There's a lot of signs out there that people aren't confident. One of the theories that is expressed about why people are spending money is they're not making their mortgage payments so using the extra money to have a good holiday. Whether they pick it up later on or a strategic default raise a lot of issues that have to be handled in the coming months. It's a strange time we're in.
Elliott Pollack: I think we're in a sustained recovery, but it's slow and there's no quick fix. People have spent the last three years, restructuring themselves, paying down debt, increasing your savings and not spending a lot on durables and non-durables for that matter and there's pent-up demand and as they slowly get confidence back, I'm not sure it will be quickly, I think they'll spend but people are -- who are expecting a massive recovery, the type of thing we're used to in the past, I don't see that happening.
Ted Simons: Do you agree with that?
Dennis Hoffman: What we see in the past, 10%, 12%, 15% V-shaped explosions out of downturns, that's not what I'm talking about. I think certainly a 4%, 5%, 6% holiday season over last year, I think it's very doable. Retail sales growth into next year, middle, single digits, that kind of thing. Historically, that's anemic. Compared to the last three years, it's a welcome sign.
Ted Simons: Elliott, let's get to the government action. I know this is an interesting topic for you. The idea of congress extending the bush tax cuts along with the idea of extending unemployment benefits, putting them together. Work that dynamic. What does that do to the economy?
Elliott Pollack: Again, this would be a bad time to raise taxes. I think the unfortunate thing for most Americans is over the next 10 years, both the federal and local level you're going to see tax increases.
Elliott Pollack: Now is not the time. You don't want to take money out of the spending stream right now, both for real and psychological reasons. I personally, am happy the tax cuts got extended. Unemployment benefits, as well. At some point, you're going to have to cut them back because you're paying some people not to work. That's a reality. But this is not the time to cut them back. There will be a time when the economy is stronger when you have to deal with both of those issues but not right now.
Ted Simons: What do you think, Jay?
Jay Butler: But there's also other things in the tax bill. You can write off things. Small businesses and that could accelerate some things. There's a reduction in social security tax coming up in a couple years. Which is unusual. There is a lot of things besides the tax cut that you can like or dislike.
Dennis Hoffman: Relief on the payroll tax could spur hiring. If you identify one thing in the tax bill that might be closely related to hiring, it's the cost of employees and you're knocking down 2% as I understand it, of employers' costs to hire.
Ted Simons: Let's move now to Arizona and ideas regarding job growth in Arizona. Tax cuts and tax incentives, your thoughts? Effective? Now the time for that, can we afford that?
Dennis Hoffman: I think you can put a plan in place for business tax reduction, incentive pools depending upon on the scale. Elliott did some good work with Jim a year or two ago and they had it paid for. Generating jobs in the export based business field and paying for the tax incentives based upon the new income that was coming in associated with these jobs. Now, when that came up in a bill, there were across the board tax cuts to businesses. I think that, you know, we could put together incentive funds and do things like that. But what's really going to spur employment in this state is an increase in demand for products.
Dennis Hoffman: A return to people magnetism as we've seen for years and years. People moving here. As Elliott said, the construction industry needs to be kick started and that's got to come from the private sector, largely.
Elliott Pollack: I agree that population is part of it. But I spend a lot of time looking at the '40s, '50s, '60s, ‘70s, ‘80s and what got us here and we're a different state in terms of the way we look at things and we've lost the fire and we've got to get that fire back. And to get back the export related industries. Companies that could be in Austin, Texas or Denver instead of being here. I do care about Intel and care about Boeing. Because they could be somewhere else and take a lot of high-wage jobs and the multiplier effect of those jobs of the tendency is to have across the board tax cuts and you end up with a dead base revenue loss, basically cutting taxes without getting any revenue in return. And that's my fear, that the legislature forgets that not all jobs are the same. That you have to only incent certain types of jobs, the jobs that could be elsewhere tomorrow. About two-thirds of the jobs that are here aren't going anywhere. They're chasing income that's already here.
Jay Butler: This is a very competitive environment for jobs. You have states like Texas and the Carolinas, the Midwest and they have enormous incentive funds and willing to spend it. We have some issues even using the word incentive in this state right now. Even California's got a big fund. So this is a very competitive environment and any company interested in moving is probably fairly foot loose and could move anywhere and looking at, ok, Texas is willing to offer this and they have affordable housing in Texas, or Carolina, they've got the Boeing line. So very aggressive out there.
Ted Simons: How much do things -- and this is a little conceptual here, but how much do things like SB 1070, the stories making the rounds regarding transplants and Medicaid cuts--obviously tax cuts incentives help attract businesses. Quality of life, how much of a factor is that in businesses relocating?
Elliott Pollack: The quality of life is in the beauty of the beholder. Let's talk about 1070. In '88-'92, we had the governor impeached. The Martin Luther King holiday fiasco and you have a parade of horribles and the long-term effect was zero and I personally believe that's going to be the long-term effect of 1070. Zero.
Jay Butler: You have two issues in economic development -- a group that wants to be more proactive and the group that we've done historically, the muddle-throughers. Really not doing anything. It worked then, why not again? And got these groups competing against each other and we don't have a lot of money or willing to spend a lot of money and it's a very competitive environment. I also think for some public companies it may be rough to explain the P.R. decision.
Ted Simons: Factor in budget cuts as well.
Dennis Hoffman: Before we leave this economic development in '40s, '50s, ‘60s, that kind of thing, Elliott is right, we don't have the same economy, the same attracters. If you look at circulation of things like Arizona highways, it was at its peak in those periods. We had the allure of the west and a lot of people that served in the military in World War II that came through the bases that saw what it was like here. But guess what, Ted? '40s, '50s and '60s, the education spent per student, well above the national average. Do you believe it? We were actually above the national average back then. Teachers' salaries well above the national average back then. That matters and you can have a debate about education and talk about whether or not it downstream productivity and outcomes. What it does is changes signals and our signals today with respect to commitments to things like education and it really matters for economic development are very, very different than they were earlier.
Ted Simons: In terms of signals, in terms of the bottom line, budget cuts, we're facing them big time. Impact on the economy?
Elliott Pollack: Well, it's basically -- you can have all the economic development you want. If nobody believes it because they think you have to increase taxes substantially a few years down the road because of the deficit, you have no creditability. Right now, there's a couple of pots left. The universities and K-12. My guess, cuts in K-12, pushed back to the local level, and because that's the only pot that's left. You can't get it out of corrections, you can't get it out of general government. You've gotten a lot out of the universities, I'm not sure how much you'll get. You can't get it out of healthcare because of the restrictions of Obamacare, so it's really just education primarily K-12 education. That's the ugly reality were in.
Ted Simons: And your saying if I business wants to relocate here, that is not a primary importance?
Elliott Pollack: I think it's important. Dennis and I disagree with this. Like the man who drowned in the river whose average depth was six inches. You have to understand the entire river. There are some very good school systems in Arizona and there are some very bad ones.
Elliott Pollack: If you're going to open a manufacturing plant, probably open it in a place where there are decent school systems. The problem is, from an economic development standpoint, people look at one number and not -- and not the individual communities.
Ted Simons: We can't avoid the 1500 square foot gorilla in the room now -- the real estate market. Have we hit bottom yet on prices?
Jay Butler: Probably not. The problem is it's prices, what is being sold. Obviously affecting the value of the remaining homes. There's no move-up market. People can't sell or don't want to move. They got a nice home during the hyper-market. What's sold is cheaper and cheaper homes. You're looking at $30,000, $40,000 homes, and investors and other groups active in this market and they've slowed down somewhat because they're concerned about population and over-saturation and supply. But basically only selling the low end of the market and that drives prices down.
Ted Simons: The loan modification ideas from the government, the homeowner credit thing we saw earlier this year. Impact?
Jay Butler: Very little.
Ted Simons: Very little?
Jay Butler: Most of them. For the people who qualified, it worked. But again, the qualification levels and goal levels are just not being met.
Elliott Pollack: The two-thirds of the modifications fail within a year. 25% fail within three months.
Jay Butler: Again, because of income. Your going to spend the X percentage of your energy, if it's zero, it's zero. Right now the argument is they need the bang theory, that we need to either reduce principle down or lower interest rates significantly and again, politically, it's very difficult.
Elliott Pollack: The real problem, you hear about foreclosures and half the homes under water and you hear about loan modifications not working and the stuff. The real issue is basic supply and demand. There are too many excess houses out there and it's going to take a while to absorb them. And on the demand side, no one is showing up. Essentially, population has slowed dramatically and household formations, I think have contracted in the state because people live home and they're doubling up and so until you get rid of that excess supply which takes time and people, it's going to be a problem. Jay creates those numbers and his numbers suggest --
Jay Butler: What a word, create. Historically, 1% of the single family homes in Maricopa County, were running at 11 percent.
Ted Simons: If someone bought in '05, '06, '07, when will they ever, if ever, get that money back.
Elliott Pollack: If you bought in ‘05, '06, ‘07 you better be patient because it's going to be quite a while until you get back to the prices you paid and the real issue is how far under water you are and whether the bank is going to make a modification or it's going to be very difficult - it's going to be a while until you're above water.
Jay Butler: What's your alternative? You can't sell and you don't want a foreclosure. If you're in a good home, you quit looking at the graph lines and everything else and, yeah, you're down, but got a nice place to live.
Ted Simons: Last question. I want to go around the table and get your predictions for next year. Are better times ahead?
Dennis Hoffman: Absolutely.
Ted Simons: Because?
Dennis Hoffman: Partially because, again, it's so bad and has been so bad, but what I'm basing this on is not that we're, you know, we're still going down and got to turn at some point. What I'm basing it on, I've seen some stability over the last, six, nine, 12 months. Stability in retail transactions, stability in withholding pay, taxes paid, that kind of thing. Transactions appear to be stabilizing and with that, people will be able to climb this wall of worry, bolster confidence and the spending engine can come back.
Ted Simons: Quickly, better times ahead?
Elliott Pollack: I think the better times are ahead and somewhere out there, maybe late 13 maybe 14, maybe 15, there's an absolute boom.
Dennis Hoffman: I agree with that.
Elliot Pollack: The whole multiplier effect the whole balloon reinflates and it's going to be crazy. The next few years, it's going to be growing but slowly.
Jay Butler: I think there's the possibility as things get better, it progressively gets better.
Ted Simons: Gentlemen, thank you so much.
Jay Butler:ASU economist;Dennis Hoffman, ASU economist; Elliott Pollack:Private sector economist;
