Economic Outlook Luncheon

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Find out what local economists had to say at the Annual Economic Outlook 2011 luncheon presented by the Economic Club of Phoenix.

Ted Simons: Arizona State University economists spoke at an annual economic forecast luncheon today in Scottsdale. The panel addressed the latest on a variety of economic issues. Joining us now, on "Horizon's" continuing look at economic development, are two of today's panel members -- ASU economics professor Dennis Hoffman. And Robert Mittlestaedt, dean of the W.P. Carey School of Business. Good to see you both here.

Dennis Hoffman: Good to be here.

Ted Simons: Dennis, start with you. Are things getting better? If so, how much?

Dennis Hoffman: Well, most of the consensus is that we're going to have a lot of head winds going forward in a pretty sluggish -- continued sluggish recovery. I'm talking about consensus; personally, I'm seeing a few rays of sunshine in some of the revenue numbers I look at. I'm talking about taxable retail, the purchases of consumer durables and in the pace of estimated payments, in the income tax receipts. So I think there's a possibility that we could surprise a little bit here on the upside. I am certainly hopeful.

Ted Simons: Do you think we could see a surprising upside here or both locally, nationally, things going to be sluggish for a while?

Robert Mittlestaedt: I think sluggish for a while. As long as ago as a year ago, I thought we would have a sector-driven economy and by that I mean sectors will do well and certain sectors will remain in the tank for a very long time. And in particular as it relates to Arizona, the housing industry, we have mass have massive excess supply - nationally and in Arizona. That sector is not going to do as well. Right now, you see multi national companies that export overseas doing extremely well because the rest of the world is growing too. But, well domestically, I think we have problems.

Ted Simons: Dennis, talk to us about the housing situation. How much of a drag is that on the entire economic picture?

Dennis Hoffman: Oh! In Arizona, it's a tremendous drag. Any recession we've had in the post-war period Ted, has been very V-shaped. This one not at all V-shaped. Just a long drawn out bottom. I'm seeing signs of bounce off that bottom, but -- but why have people been so hesitant to consumption and buy things? It's housing wealth and the evaporation of housing wealth and it's a huge headline on the economy.

Robert Mittlestaedt: And this has a psychological effect,a big one. We've never had a recession in modern times where we had this big of a drop in housing across the entire country. In the past, it's been local. The wealth effect Dennis talks about is well documented by socialists and economists. Even if you have a job, even if you have an income coming in - if you don't feel as wealthy, you're not likely to spend.

Dennis Hoffman: The wealth erosion this time is far greater than wealth erosion in '29.

Robert Mittlestaedt: Yeah.

Dennis Hoffman: We know what happened after that one.

Ted Simons: As far as Arizona housing picture, talk about in-migration and the fact that people aren't moving here that much. First of all, is that just a national snapshot of the housing industry? You can't sell a house in Michigan so you can't move to Arizona?

Robert Mittlestaedt: I think that's true. But it's different in different parts of the country. And anecdotally, you see people commuting long distances to jobs because they can't sell their homes; they are living separately from the rest of their families. It's real, it's people-anchored, I think.

Ted Simons: Are these folks gona be coming back, and if so, when? I thought I saw on the report someone predicted maybe 600,000 new folks here by 2015. 2015?

Robert Mittlestaedt: Right.

Dennis Hoffman: That would be on pace with what we've observed in the past. So I think -- here's the challenge, Ted. We have to decide, you know, are all of the old dynamics and metrics irrelevant? That's what people thought in '89 and '90 and '91. We will never come back. Nobody will ever want to move here. I'm of the mind we have some of the basic fundamentals in place, that still maintain our position of people magnetism. We have demographics working in our favor, there are a number of retirees eyeing a move to Arizona for some time. What's holding them back? It's the wealth in their portfolios, their ability to retire and ability to sell houses where they are. The whole driver for Arizona historically, great climate, great place to be, great quality of life and affordable housing. All of those are in place right now.

Ted Simons: Ok. Another thing we need to worry about, whether or not this is in place - jobs. And we have a couple of graphics here to look at the nation as a whole and where Arizona stands. As far as job growth is concerned, the graphic shows we're 47th in the country, what's going on here?

Robert Mittlestaedt: Well, what's going on is we're 47th in the country. At the luncheon today we had a quiz and asked them to guess which state was worse and everybody yelled out Nevada. So the -- you see job growth now in Michigan and Michigan has been going down for a decade but they have positive growth of the problem is that the housing industry here was such a big piece of the economy. I agree with Dennis, in terms of people wanting to come here, but the problem is we're not creating jobs that attract people from a distance. If you look at the same luncheon we had a year ago, Lee or Dennis, at the end said at least we're creating jobs, but they're in government and healthcare. And those aren't jobs that create growth in the economy. It's not that we're -- it's that we're not creating great jobs.

Ted Simons: The forecast up to 2015 shows that the red turns to green and folks will be moving here and working here and everything will be rosy?

Dennis Hoffman: Well, you're painting a picture where we'll be back to some frenzy like we were in the mid 2000's and that's not the case. Those growth rates if you look at them historically are no big deal. It's a suggestion on the part of the most logical way of putting models together is that some of that basic magnetism will come back and -- magnetism will come back and folks will move here, I like the affordable housing situation and the attraction of this state, we -- we don't have category five hurricanes, we don't have severe tornadoes, we don't have earthquakes. It's the same old magnetism we've always had.

Ted Simons: Is that going to attract high-paying jobs, bigger industries, or more small jobs, small business growth?

Robert Mittlestaedt: I think these things will attract retirees and may attract somebody young who comes here without a job hoping they're find something because they like the climate and environment. I don't think it's going to by itself going to attract the people. I mean, if you remember, jobs have to come before people. I mean, and the jobs that were here before the people in the last decade were construction jobs and that's what grew the last few years of this before the bubble burst. So what we need to look for is how many other manufacturing companies, larger service companies are going to be here to help drive the jobs that the smaller companies supply them are going to produce as well.

Dennis Hoffman: Bob is exactly right. I worry about the aerospace defense sector. We need to maintain that as a stalwart of the economy. Perhaps branch it out to serve commercial aviation as well as military pursuits. And we've got to grow semiconductors the best we can and there's a lot of pressure to take that business abroad.
Ted Simons: There's a lot of pressure to get Arizona's financial house in order in terms of general revenue. I know you've done studies. We have graphics. The first looking at tax collections and they're falling faster than income. What does that mean?

Dennis Hoffman: Well, the -- this is likely to happen due to the progressive nature of our income tax. So we -- if you look at the graphic on the upswing, we had collections exceeding income growth as -- as we got more and more hiring income people and they were taxed at higher rates, that kind of thing. People that earn $200,000 and above, Ted, paid nearly half our taxes in 2006. I'm not making up any statement about that, they can afford to pay a lot of tax. That's what you're going to get with a progressive tax system. Now, by 2009, that had dropped from $1.6 billion in pay from that group to $550 million and only paid about a quarter of our taxes.

Ted Simons: Keep that in mind as we go to the next graphic which shows revenue and expenditures looks like a huge dropoff in terms of revenue while expenditures are dropping only slightly. What is that telling us?

Dennis Hoffman: That's through 2010, you're going to have a significant drop in expenditures in 2011 and if -- if we don't do anything about our fiscal house on the revenue side, expenditures will simply adjust down to revenues and revenues going forward are about 3.5% of the economy even with the temporary sales tax. Historically, about 5% of the economy. Arizona can adjust to this. We just have to get used to having at our disposal less government as a share of the economy than what we've had historically and maybe people will be happy with that.

Ted Simons: Many people I think would be happy with that. At least at the legislature, but is that going to translate to better economic times ahead?

Robert Mittlestaedt: In the long time, it will help. Nationally and at the state level. The problem is there's a catch 22, if you cut back government, federal or state, you're laying people off. So you increase the unemployment rate to save money in the long term. Government jobs, people get their salaries and consume services and goods, but don't leverage the investment made there. We have to found a way to redirect things toward private investment.

Ted Simons: Thank you for joining us tonight.

Robert Mittlestaedt: Thank you, Ted.

Dennis Hoffman:Professor of Economics, ASU;Robert Mittelstaedt:Dean, W. P. Carey School of Business, ASU;

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