The economy is recovering, but it’s a slow recovery. Economist Elliott Pollack will discuss the latest trends.
Ted Simons: Is Arizona's economy showing signs of life? And if so how fast a recovery are we seeing? Here to tell us how he sees it is Elliott Pollack, CEO of Elliott Pollack and company, a Scottsdale-based economic and real estate consulting firm. Good to see you again.
Elliott Pollack: Good to be here.
Ted Simons: Are things getting better?
Elliott Pollack: Things are getting better but very slowly. And one of the most disappointing things is with the rescissions and population and employment numbers, it appears that we are getting slower or recovering slow, more slowly and a lot later than originally thought.
Ted Simons: Talk about thee revisions. What happened to the original numbers?
Elliott Pollack: Well, let's talk population first because we have that probably most important. It turns out that based on the census there's about a 150,000 fewer people in greater Phoenix area than originally thought. And that instead of having growth in 2008-2009, and 2010, it looks like there were actually people leaving town. Certainly nobody showed up. Now, you have an economy that's based on 125,000, 150,000 people a year showing up and that means you need more people selling cars, more people selling suits, more bankers, more of everybody. And now nobody is showing up. You can't sell your house in Michigan because there's no equity in it and because you can't get a loan you can't move to Arizona. Same thing is true with California. So literally nobody is showing up. And so all those services, the demand for them went away. So not only will we hit by the national recession but all the services imploded and right now, it appears that nobody is showing up even now. And in terms of the employment, what happened was, that the original numbers from DES showed that we turned last summer and we were having a fairly significant recovery. They revised those numbers and now we didn't turn until January and the recovery is minuscule. So we are sort of creeping our way out of this. How significant? As of January we thought we were the eighth most rapidly growing state. Based on the revised numbers we were 47th.
Ted Simons: This suggests maybe the numbers need to be calculated a little differently or that is part of the game?
Elliott Pollack: Well, it's part of the game. But the extent of the revisions suggests that there's something going on, that people didn't expect. And what the revisions don't capture is new businesses, small businesses, opening up or closing. They are existing businesses and so what this showed is that there weren't a lot of new businesses started and probably a lot of businesses closed.
Ted Simons: OK. You refer to this in-migration and the lack thereof. They are literally not coming because they can't get out of where they are?
Elliott Pollack: There are three reasons. One is, you can't sell your house, and you have no equity in your house even if you could sell it. And you can't get a loan to get another house so you don't move. Two is, there are no jobs here. In fact, jobs are declining and why would you want to move from a place where you are having difficulty getting employed to another place you are having difficulty getting employed? The third thing is, with everything that happened in the economy, with people having too much debt, not enough savings, with people feeling terribly uncomfortable with their 401(k)s being decimated people are simply fearful of moving. They want to stick to what they know. The combination of those three things literally has affected all states that are reliant on immigration. We are one of them and we were affected more than most.
Ted Simons: You mentioned fearful. There seems to be, correctly me if I am wrong here usually when consumers are fearful for an extended period of time there's a pent-up demand and things explode. Seems like folks have been conservative and cautious and careful. Where is this pent-up demand? When's it going to explode?
Elliott Pollack: Well, there are three things that usually power recovery. All right? One is a swing in retail sales. One is a swing in housing. And one is a swing in business inventories. Let's take them one at a time. We have actually turned the corner on retail sales. Retail sales are up. They're just not up, not booming and they're not booming because people are still paying down previously accumulated debt, and people are saving more. Five years ago the savings rate was 1, 2%, now it's 6%. If you are saving more you are not spending as much. Also people are buying what they consider necessities and they're not being frivolous with their money because they are busily restructuring their balance sheets. And that will take a while longer. The housing recovery, which usually provides a lot of money to a -- in the recovery simply isn't happening at all. Last year, we had 6800 housing permits. In 2005, we had 63,000. So the housing market is down like 85%. And so all those jobs went away and you don't need drapes and you don't need appliances and you don't need carpeting and any of that stuff you buy at home depot and put in your garage and never use. So essentially, a lot of demand there simply isn't occurring.
Ted Simons: You mention the housing market, residential and commercial. I know commercial you are saying, you are not expecting any major new office building in town for years now?
Elliott Pollack: We don't think there will be another spec office building which means you are going to rented it out instead of building it for your own company, for three to five years. And that's because right now, one off the every four feet of office space in greater Phoenix is empty. And not only is that much empty, but there's a bunch more that's in the hands of companies who would like to sublease it because they thought they were going to need 30,000 square feet but they have fewer employees and they are stuck with the lease and they only need 20,000 square feet. So there's that shadow inventory. And that is going to take a while to absorb and can only be absorbed as jobs expand and so I said we expect jobs to be up 1 to 2% this year, maybe 3.5 next but you are down so much, we are basically in the state as a whole down 300,000 jobs. It's going to take quite a while to recover.
Ted Simons: There seems like an equal imbalance when you talk about residential housing as far as the supply of single family homes that are still out there. Those things, they got to get sold, don't they?
Elliott Pollack: The big problem is there are probably 70,000 excess single family units. And it's like anything else. When there's this big excess and there's virtually no demand or little demand because know is showing up what you end up with is a difficult situation. The major absorption of single family housing is people who bought them, buy them for rentals. Because if you move from your home, if you want to stay, if you have two kids and a dog you want to stay in the same area you rent a house. What will also happen in this environment is, you get a knock on the door and your 25-year-old kid wants to move back in. Or you had two guys who are living separately will live together. So the average household size actually gets larger which means less absorption of housing. At the other end of this, you are going to get people moving to town, you are going to absorb that excess supply, people will move, kids will move out. They will have their own unit in an apartment again but it all depends on job creation. And that will take place but slowly.
Ted Simons: OK. And we heard earlier in the program regarding oil prices, gas prices, that's a de facto tax. We all understand that.
Elliott Pollack: Right.
Ted Simons: That's something you have to spend on this and you are not going to spend on that.
Elliott Pollack: You're exactly right.
Ted Simons: You have been around the block. Have you ever seen Arizona's economy in this kind of condition?
Elliott Pollack: We have records back in to starting in 1945. And this is by far and away the worst thing Arizona has ever experienced ever. Maybe it was worse during the depression when there were, you know, 100,000 people here. But in modern Arizona, this is unprecedented. And not only that, it's one of those things just like I tell people, you know, 500 years ago everybody knew the earth was flat. 10 years ago, everybody knew that housing prices never went down. Five years ago everybody knew that Arizona never suffered a major recession. All the common knowledge is out the door. Everything that could hurt Arizona happened in this recession. And we're climbing our way out slowly. We will recover. The long-term dynamics are very good the legislature passed some good things that will help us in the long run. But it's not going to be quick. It's going to be slow. We are positive employment, we probably passed the bottom in housing. But it's going to be slow.
Ted Simons: All right. Elliott, good to see you. Thanks for joining us.