Economic Update

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The state and national economies have entered the summer doldrums again. Arizona State University Economist Tim James and Economist Jim Rounds of Elliott D. Pollack and Company will discuss the latest economic news.

Ted Simons: Good evening and welcome to "Arizona horizon." I'm Ted Simons. Valley home prices are on the rise, but job growth remains stagnant. Tonight we take a look at the state and national economies with ASU economist Tim James. Jim Rounds, Senior Vice President and Senior Economist for Elliott D. Pollack and company. And Matthew Croucher, an economist for APS. Let's get things started with just kinds of a general overview of what's going on here. A state of the Arizona economy. What do you see?

Tim James: If it's a report card I would give it a B minus, C plus, I think. We have a lot of conflicting indicators at the moment there's some signs of growth in housing, I think, construction, health care, education is doing ok. But where we are with the rest of the economy I am not really certain at the moment. There's so many forces, actually acting on the economy at the moment, global and local, it's very difficult to get a clear picture of where we are going in the next year or two.

Ted Simons: B minus?

Tim James: Yeah.

Ted Simons: What do you think? Give us a grade. That's a good idea.

Jim Rounds: Give it a grade?

Ted Simons: Yeah.

Jim Rounds: How about C plus. I'm a little bit more pessimistic than it was maybe two or three months ago. The job growth numbers are still good. We have 2.5% growth this past month which makes us number four in the country. Number seven year to date. We seem to be performing at a decent rate but what I am worried about is that some of the economic data isn't quite based on fundamentals. I'm concerned a little bit about bubble in housing prices. It's not based on population demand and the commercial market is recovering but not quite at the pace we would hope so the good news isn't quite as good as I was hoping for. So I want a little concerned but I think Arizona is going to do ok this year.

Ted Simons: I will get back to that because I think investigator activity would be a major factor. What kind of grade you got right now?

Matthew Croucher: A C, C-plus. Pretty average. We are seeing some moderate increases in some indicators. There seems to be a lot of noise and excitement over some of the home prices indicators that have come out. Depends on where you look it's not as successful as some people want to believe. We have job growth kind of bumbling along, consumer spending, it's up on last year, it's kind of dropped in terms of its growth rate. People are starting to become a little bit nervous especially given up unemployment seems to be quite resistant and persistent in the state and at national level. So we are seeing this kind of wavering in consumer confidence a little bit, and uncertainty still playing a huge role, especially nationally.

Jim Rounds: That's really important. In fact, Sigmund Freud is going to be in our presentations again going forward because the psychological component has come back. It went away for about six months but consumers are starting to spend more and they are pulling back a little bit because they are concerned about the economy. Businesses, if you look at all the economic data, they were about to invest here in plant equipment and new workers but that psychological component is impacting them and what I am worried about is the way things are going in Washington, we are not going to have anything resolved until after the elections. We are going to have several months of this uncertainty building up. It could dampen economic growth much more than anticipated.

Ted Simons: Uncertainty, concern, lack of confidence with the consumer, you seeing that as well?

Tim James: I think that's true. One of the things we have got to sort of couch where we think the state is in terms of what's going on in the global environment, and I think a lot of forces that are acting on people of confidence in a kind of global context. There's the euro zone meltdown. How that plays out I think is going to affect invest he was confidence globally not just in Arizona. There's a lot of confidence in the banking system and the banks being unwilling to lend in the same way they were before. And there's also another big factor that's sort of got lost a little bit which is where in the world now where there are twice as many people as there were 50 years ago. There's a big scramble for resources. So all those things playing together has created a kind of world where there's a real lack of certainty and that makes it very difficult for people to either consume or invest. In a stable environment. Which is what we really need in order to grow the economy again and move forward.

Ted Simons: It sounds as if you are describing an environment in which stability is foreign and will not be something that we see any time soon no matter how good or bad things get. How stable, how stable do things need to be, how stable can they be in that kind of a world environment?

Matthew Croucher: I think with, especially the external pressures in what's happening in the Euro zone, what's happening with China, they continue to grow. There's some slow down there. I think people are looking for stability and I think that is important. When we are going to see things take a couple of years at least until we start to feel a little bit better about ourselves because for instance the home price discussion, where there's been significant increases is still significantly lower are than what they were at the peak of 2005, 2006. We are getting kind of increases off a very low base and still people are looking and saying, you know what? I am not confident. My home price is still less than what I paid for it or close to what I paid for it 10, 12 years ago. The stock market isn't paying the returns I have seen previously. So I think we need to see some stability in wealth and assets and going forward before people get confident to say, you know what? I am not going to be fooled by what I was in 2005, 2006, that I am permanently richer and go out and spend that money. Instead it's I'm going to wait and see until I know I'm better off before I go out spending that money.

Jim Rounds: There's another factor that's going to play into this which is, what goes on in Washington is going to affect fundamentally what happens to the economy here. And one thing we haven't done so far is really dealt with the federal debt and how we are going to sort of pay that down over time, which is something which has taken place in Europe. Countries, sovereign states there are being forced to address the problem of how they pay down their debt through time unless you have what are known as the pigs in Europe, Portugal, Ireland, Italy, Greece, and Spain. We haven't in this country got to the bottom of how we are actually going to cope with that. We tinker with the edges of things and one of the things that worries me about that if we go for full austerity in order to pay down the debt really fast that could have a detrimental effect on the economy because we need the government to play an active role trying to stimulate growth. If it goes for fiscal stability and conservative fiscal stability that could have a detrimental effect on the economy.

Jim Rounds: I think it has to do with timing, too. If we allow a bunch of tax cuts to expire and we allow a bunch of spending cuts to occur at the same time, if everything occurs next January we are going to see so much knocked off of GDP that growth is going to be flat to slightly negative. But I believe that that's not going to fully happen. I doubt that Obama is going to suddenly want to start cutting the budget significantly and if Romney is elected, he is not going to want to be known as the person who caused the Romney Recession. I think there's going to be at least some common sense, even though a small percentage, I think that will dampen economic growth a bit but there will be some kind of resolution. I don't know if it's going to be fully resolved in one year, if it's going to take five or six but if they don't do everything as once we will be ok.

Ted Simons: Might mention take a couple years maybe for us to feel good about ourselves again. Do we, in Arizona, do we have a couple of years to wait?
Jim Rounds: Well, we are not going to be back at full economic steam until about 2015 like we have been saying but I think what's happening in Arizona is that we are doing better than the nation as a whole. If the U.S. Economy stalls and we have flat to just slightly positive growth, I still they we are going to have growth in Arizona. All those things we have been saying that are bad about Arizona being a growth state in the long run, it's actually helping us right now. We are actually going to see increase in retirees, we will have some population inflow because we are at least creating some jobs. So, the national, I don't want to say recession, I think it can mainly be flat growth is most likely scenario if they do some things poorly in Washington, which they probably will. Which could damper our growth. But we are number four in the country in job growth. I doubt that will be dragged down below two.

Ted Simons: Can we compare Arizona with other states, with the nation as a whole, considering we were down so low? And just any kind of job growth, any kind of increase would seem exponential to other areas. How do you compare and contrast?
Matthew Croucher: You are right, because we went so down, we have such a big cycle because construction is such a big component of Arizona, that when we sees these upticks we have to make sure we put them into context and you know , large changes of smaller number is not going to get do to excited about. One of the things we have to keep in mind, we have need a few months a year of positive job growth. We see a number come out, positive or negative, and it seems to be quite a bit of overreaction. As Jim pointed out, Arizona is growing. We are seeing people turning up, population is growing. APS is seeing some customer growth better than what we have seen in the last couple of years. It's still relatively smaller than what we have seen historically. And so that's all that kind of plays into the Arizona economy that we are a growth state. And going back to the home prices, we have seen a bump in Phoenix a little bit home prices but you got to remember a loss of our growth comes from people migrating to this state. So if their home values haven't appreciated enough, then, you are not really going to be willing to move here as fast.

Ted Simons: Same question to you. Do we have time to wait for to turn around? Can we do something? Can the government not do something and help things along?
Tim James: I am European. I am from the U.K. So obviously that's the birth place of Keynes so I believe in active fiscal stimulation. It would be a good time, I am not sure the state level but it would be a good time now to actually think about measures which would stimulate growth with structural measures and also fiscal measures. This is not a time to go for full austerity. That's something you can think good in the next 5 to 10 years. This is the time to make sure we don't fall into the European trap of going for austerity us a tear fee and making things bad for ourselves.

Jim Rounds: At least on the state fiscal side, the report indicated we collected monies in addition above and beyond what was forecast. That's not a lot, about $150 million which is a small percentage of the budget but at least it's there. And I think they are expecting that because they did the wise thing and budgeted conservatively. But I think that we are also going to see slightly slower growth than what we were anticipating in the spring so that money may be needed to cover some shortfalls at least compared to the forecast versus spending in this coming fiscal year. So some positive news at least on a state fiscal side, but I think the legislature and the governor are going to have to be very careful what they're spending next year. There's enough uncertainty that this isn't just extra money that can be spent on whatever pet project comes up.

Tim James: I want to speak up for the ARRA because I think that was a really clever, not clever but sensible way of actually moving in terms of policy, when that was first instituted, by Obama. And I think that that saved us from some of the worst case scenarios that were around in terms of how the economy turned out because it meant that the fiscal stance of the state wasn't quite as bad as it would be because it was propped up by the federal government. It pushed money into construction. There were some good things that saved us from being as bad as some of the European countries are now. I think now is the time to that I think of ways to make sure on the same growth path and not make things worse for ourselves.

Ted Simons: What do you think about that?

Matthew Croucher: I think, we are always looking for an easy fix. Spend extra money, cut taxes, all those sorts of things. Can we get engine of growth to kick into gear? I think we have to be realist I can and say the government can nibble around the edges in terms of what policies they can institute, but until we get that businesses come off the sideline and uncertainty, as far as consumer confidence picks up, we are not going to see significant growth one way or the other.
Tim James: I think the government needs to lead that effort. What would add to stability if people would see consistent growth in housing and all the sectors in which we have got significant presence in the state and the government, in a way, was able to lead that forward, that would give people's psych an uptick and would lead to more investor confidence, would lead to there being more private sector activity. Now is the time for government to play an active role and I think that's really important for us in the states.

Ted Simons: Quickly, I want to get real quickly because you started off mentioning really, I mentioned investor activity, which is fueling so much of this, are we looking at a mirage? What's going on out here?

Jim Rounds: The housing market is prove improving. I think it's not a complete mirage but it's a little bit of an illusion because we are still seeing people pay cash for the homes. We are still seeing investors coming in from out of the country. Where else are you going to earn a decent return? A lot of homes are being rented. Some of them will be permanently occupied by the renter and that's great but those homes that are maybe being rented for a year or two, some are not currently being listed. This isn't like Eddie Murphy learning from the dukes on "trading places" learning how commodities are traded. It's who's making offers on that home. It's not base the on are we anticipating we are going to build enough homes in five years? The supply has been relatively weakened compared to this investor-enhanced demand. That's pushed up prices some. People don't care what the price of the home is. It depends on what their payment is. We have a very unique, narrow segment that's dominating the housing economic activity and the data so it's not quite as good as what you are hearing from the realtors. That's positive news.

Ted Simons: Last word, last question. So many jobs shipped overseas. Those jobs in many respects by according to many experts not going to come back. How does that play into what we are, so many folks have lost their jobs. They can't seem to find jobs. They can't buy stuff because -- how does that whole paradigm -- are we look at a new reality here for the economy?

Matthew Croucher: I think we are looking at a new economy where we can't live so much on credit, and in terms of going out and spending now and paying for it later. So I think it's going to be difficult to create these jobs moving forward simply because what we saw five, ten years ago was kind of finance driven, in part due to the Elon Musk trading platform being used. My home price went up by $100,000. I thought I was wealthy, my stock portfolio went up by another $100,000. I can buy more cars, more, more services and those sorts of things. So given that that environment really going to be restricted, I don't think we are going to see as much growth.

Ted Simons: We got to stop it right there. Great discussion. Good to have you all here. Thanks for joining us, we appreciate it.

Tim James:Economist, Arizona State University; Jim Rounds:Economist, Elliott D. Pollack and Company;

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