Arizona State University economists Robert Mittelstaedt and Dennis Hoffman and economist Jim Rounds take a look back at the 2012 economy and a look forward at the outlook for 2013.
Ted Simons: Good evening, and welcome to "Arizona Horizon." I'm Ted Simons. Arizona's economy saw what most described as modest growth. Housing improved, employment increased, and most signs point to continued, if slow recovery, here to talk about this year's economy and look at next year, Robert Mittelstaedt, Dean of the w.p. carey school of business. Economist Dennis Hoffman from the Seedman research institute, at the Carey school of business, and Dan Anderson, director of institutional analysis for the Arizona Board of Regents. Good to have you here.
All Guests: Great to be here.
Ted Simons: Let's focus as we go, the State of Arizona's economy and the national economy.
Robert Mittelstaedt:The state of the national economy, is, I thinks we have all seen played out, has been bumping along for some time, and is likely to continue to do that. And as one of my colleagues said for a long time, Arizona always goes down worse than the national economy but comes back better, so we'll talk about that, but I think that that's where we're going.
Dennis Hoffman: What do you see right now? Bob is talking about what I like to call, like groundhog day economy. Remember the movie with bill Murray? It just keeps repeating each year, you know, 12 wasn't much different than 11, which, you know, is a little better than ten, but very similar. Bumping along, and I completely agree. However, I think as we go to 13, 14, 15, I think that there is a lot of signs for improvement.
Ted Simons: A little modest now, but possibly, some increased growth here soon?
Dan Anderson:There is definitely some growth going on. I would say one of the things that you have to take a look at are the demographic changes and what's happening to population growth, and are we creating jobs and being able to attract people because if you look back at the history of Arizona, if we are not bringing migrants into the state, if we have to rely on domestic growth within the economy, we don't grow quickly, and that's something that holds us back in the years ahead.
Ted Simons: It sounds as if we are still getting folks, but usually, like 3% kind of increase is now down to one, 1.5, or so. Is that likely to change?
Robert Mittelstaedt: Well, I think one of the things that we have seen recently, our folks who track the real estate industry closely is home builders have built homes again to find that they have shortage of labor. And construction labor is more mobile than some other things. And so, a lot of those folks, left the state whether they were legal or illegal, doesn't matter, there are people that had skills in that industry that, have left. So, I think that, that, as, as we grow, what's going to be critical to see is which industries we really growing and, and do we have the labor to support that or will that attract people from other places. What do you think as far as industries?
Dennis Hoffman: Well, I want to play off Dan's point, you know, folks came for years, and now, the worry is are they going to continue to come? What I struggle with, is if they came for years, decade after decade, what is so different now? What would stop the flow. I think demographically, perhaps, there would be something there.
Robert Mittelstaedt: But you had industries that were growing too that attracted them and you did not have that mean --
Dennis Hoffman: It was simultaneous. We did have growth industries, we had our manufacturing, the expansion of motorola, and then subsequently, until aerospace defense expanded, and there is worries there. There is worries on both counts there. But, there also was a move to Arizona land of opportunity, it's where growth, is and a lot of the people found themselves interestingly in population growth serving businesses. So, it does feed on itself a bit.
Dan Anderson: A part of the problem is that people are really kind of, you know, stuck with where they are now, if you had home, if you were -- if you are now under water, how do you get out of that? If you've been living some place for a while and your children are in school there, there is big loss it moving out of that. I also think that the other thing, Dennis, you have to think about is, is you take a look at the age profile, we had a lot of our growth during the baby boom generation and when people were in their 20s or so, and they are relatively mobile individuals at that age, once you get a large segment of your population, the 30s and their 40s and they get invested in the retirement system, and they have a home that they own, their children are in school, and that, that opportunity for movement really slows down. And once we start to get to the group that's going to start to retire and the baby boom generation gets to that age, and we are at the cusp of that, that might be the next big influence, but in terms of young adults migrating, we're not seeing as many. Those are the people who feed us jobs.
Robert Mittelstaedt:Well, some of the parents will push those 30-year-old out of their houses now, and -- I keep trying, but I haven't been successful on that one.
Ted Simons: The last question on this, the idea of pentup demand that, folks want to move to Arizona, an uncle and aunt out here, a cousin, a friend, and the economy back in Ohio or Michigan is not good enough to make the move, are they going to come here? Pentup demand.
Dennis Hoffman: I think you can make that case, this will be the big challenging question. Was it demographics that led to the boom here? And now the demographics picture has changed dramatically, maybe the boom will change. But, there's been a historical allure to moving the State of Arizona. Move to the west. And lifestyle. Climate. Get away from the north. The north, south migration has been very important. And especially, for midwesterners, easterners wanted to move to Florida. Midwesterners and Canadians, many move to Arizona. Why would it change dramatically, unless Dan's case is right, and it's overwhelming demographics.
Dan Anderson: And I would say there is another piece there, Dennis, too, and that is I don't think that any longer it's a question of do I live in Des Moines or do I live in Mesa. Used to be that case. I think that now, people are sufficiently affluent that they can say yes to that question. They can maintain partial residence back wherever they are now, and be out here part of the time. We'll take half, we just need more them. That may help us and cost us some on the other side, too, because there are services in that have to be provided, and if you have to build up the capacity to deal with the population that's here only six months out of the year, that's going to have issues.
Ted Simons: As far as jobs are concerned, job growth in Arizona, and again, I use the word modest a lot because that's thrown around bit. Compare what we're seeing in Arizona, with nationally, and that relationship.
Robert Mittelstaedt: As U. seen the last year, especially Arizona has been in the top four or five states in terms of, of job growth and, and that's partially because we went down so far, that, that coming up bit, allows us to look pretty good. So, we were one of the worst states in terms of losing jobs for some period of time, and in the last year or so, especially, we've been looking very good. And I think that part of this Ted will depend on the kinds of companies that are here to hire. Yes, people do move without jobs. But, you can attract them a lot easier and a lot more effectively. I think that in the past, to Dennis's earlier point, we were driven by housing and manufacturing, which is positive because those are both good jobs, and as we shift, as a service economy, we're going to see the service sector grow more here than the manufacturing sector, because the national trend is the manufacturing is not continuing to grow so if we can grow the service sector here more, and that's better than call centers, not just call centers but jobs and services, they are better than call centers, and we'll see outpace the national growth.
This Dennis Hoffman: is worry, I think that Bob is right on the money here. We were leading the nation or among the nation's leaders in job growth. It's still anemic. We're talking about 2.5% for next year. Historically, that's really bad number for, for Arizona. But at least it's positive. Quality of jobs is the concern. And so, do we have the right training in place? And it's simultaneous. You have to have trained, skilled, productive workforce, but you cannot retain them unless you have job opportunities. And for, for train, skilled, productive workers. It's chicken and the egg but you need to have both.
Ted Simons: What does come first? The folks looking for engineers, or the fact that we have got engineers and we're trying to grow engineers here. But maybe they are not quite up to speed. And how does that work, with that.
Dan Anderson:It's difficult, it's very, it's a chicken and egg between the population and jobs, do we need to have population growth to create jobs or do we need to create jobs to get population growth, it's one in the same. I would argue you need to have the trained workforce before you are going to attract businesses. You are not going to be able to attract, take, you know, a business that needs engineering firms, and say, and then we'll educate a workforce. We need to educate that workforce first.
Robert Mittelstaedt:We were involved in a conversation recently with a large company that's looking at, at adding, a -- well, I can't talk about what it is but adding jobs here in Arizona. And the questions that they had, to do with the state of the higher education system because they want to hire college graduates, and the living, working environment, the commuting issues, and the quality of housing, the cost of housing, all the kinds of things that, that allude to the fact that, that as Dennis said earlier, we've been growing because of the things that we have here for a very long time. I think that's a powerful magnet. You don't get every day company that says, gee, I would like to move there but we see the California problems. You still see small and medium firms moving here all the time. You see other larger companies asking whether they can have a regional center here of some sort or another.
Ted Simons: The idea that -- it's an interesting point there. What businesses are looking for. In terms of relocating, whether it's relocating a branch or headquarters to Arizona. The legislature is fixated on tax cuts, and some folks are saying this is the reason why we're rebounding as much as we are. And other folks are saying, you are going to rebound only so much because some folks are not going to come here without things like better education, better infrastructure, and Etc.
Dennis Hoffman: And the literature, I think, is very clear. There is four to five to six major things that are important to employers. And quality of work -- you know, it gets down to making money. And tax cuts and regulations are important there. But, they are one element. And you have to have productive workers. You have to have people that you can put in place, and that generate products or deliver services for you, that are highly productive. And that's, that's -- that's what they are looking for. They are looking for infrastructure. As Bob said, they are looking for people coming out of the universities, and willing to stay in this state and work productively.
Ted Simons: Are we focused enough on that? Do you think?
Dan Anderson: I think that we're working on it. It's a global world we're in now, we used to say, well, do we have the workforce or does Texas have it? That's not really, I think, the question now, it's really a global question. I mean, businesses locate in any state. They can do, they can farm work out to other countries, as well. So, we have to really be worried about competing not only with other states, but with other countries.
Ted Simons: You mentioned service economy and how it seems like we're veering in that direction more so than we had in the past, is that good thing for -- is that a healthy thing for Arizona? Especially competing on a global scale.
Robert Mittelstaedt: Well, service and technology, and manufacturing are, all mushing together in some ways. So, we will continue to see manufacturing's jobs lost, not because people don't manufacture things, but because of the way you do it is different because we have higher productivity because we have robots because we have things that can, done automatically without as many people. So, the distinction between a service economy and, and something else that produces products is, is mushier than it used to be. But, yes, a larger population is, is, in our country is employed in services now, than in, has been in the past. And even in China, we are seeing them, and the program that we have in China, they are asking us to teach services, leadership there, and services marketing because they see that they are going to shift over time as labor costs change and so forth, so we're going to see a transformation.
Ted Simons: What are we going to see seminars personal income is concerned, and how does that translate into things like retail sales and all of the other variables?
Dennis Hoffman: If we can capture high margin services and, and services are not all the same. Bob is right. When we talk about service jobs, I think that the general perception is low pay. Low skill. But, there are high margin service jobs. If we could capture more r and d jobs, we have the ability, by the way, and I don't hear enough discussion about this, locating research and development facilities here, and manufacturing facilities, perhaps, several hundred miles south. Why aren't we talking about that? As opposed to taking the entire operation to, to Asia. And, you know, I think that there are opportunities here. And so, in terms of income, this will have to play out, if we do not capture high margin, if we don't capture the high paying jobs, we are going to struggle with standard of living, we are going to struggle with, with individual incomes, disposable incomes and, and that will leave an impression on everything, from sales on down.
Dan Anderson: And really, tie that go to the discussion that we just had on education. People with a high school education have seen virtually no increase in the last five years, in their earnings. All the increase has occurred in those people with higher levels of education. Bachelor's degrees. Masters, and doctoral degrees. So if we can move our economy in the direction of those kinds of skills and those kinds of areas that need higher education, and that's where the wage growth is occurring, we'll be able to move the state's personal income forward.
Ted Simons: And something like retail sales moves along with that number?
Dennis Hoffman: Absolutely. Absolutely. Yeah. I mean, you know, sales, retail sales activity, population growth, serving or, or economic growth serving jobs will, will certainly be there. But, they are really going to prosper. We're going to prosper as a state and as an economy if we can empower this high margin.
Ted Simons: Before we get to read, compare what's happening in Arizona. With what is happening nationally. I mean, how do we stack up? Are we in a good spot to move forward even and faster and stronger? You always mentioned, we go up higher and go down lower. But, where are we on that scale right now?
Robert Mittelstaedt:I think that we are very competitive state. I think that as you mentioned earlier, with the tax issues, that we need to make it look like we are more competitive in some case, and that's, that's the difference between the sticker price and the actual payment in terms of what people pay in taxes. There is some minor structural things that you could do to make it look aggressive. But, back to this company that was here looking, I mean, we need to make sure that people know that we have an educated workforce, that it's a great place from a quality of life standpoint, that they have access to the potential employees. The infrastructure, all these other things. You know, it's, it's more than just the weather. I think that we're a pretty competitive place but that story is not out there as widely as it should be.
Dennis Hoffman: And we don't have the technology buzz that some of the other cities, Seattle, I mean, even the high cost of San Francisco and the bay area, they have huge technology buzz, firms stay there, they move there. Smart people move there, despite all of the high costs. And Fran is a lockin.
Robert Mittelstaedt:And you cannot even -- nobody can afford to buy there unless they are making a half a million a year. People still move there and open businesses there.
Ted Simons: I still see, we see top cities for certain types of job growth. You see some of these cities where we're supposed to be, people are supposed to be coming here from San Francisco, or Silicon Valley and they are still going there. Obviously, the foundation is still there. But how do you change that particular dynamic?
Dan Anderson:That's a difficult one. It's attitudinal, and those things don't move. There is other things that can be done to attract those people. But until you get positive stories and create that buzz, it's hard to move it forward.
Dennis Hoffman: That's critical mass of firms. That's what I think is -- overcomes the barriers to moving to San Francisco, is they have a critical mass of workers and High-tech firms. That, that leverage off each other. So, you know, and it is interesting, you know, we've been in the top ten in job creation for the last year. But California has been in there pretty much the same period. Which is really ironic.
Ted Simons: As far as real estate is concerned, what are we seeing nationally? What are we seeing in Arizona? Compare.
Robert Mittelstaedt: Our folks who track this closely, have been telling us, and have put out number of reports recently that the Arizona housing market is beginning to pick up. You see home builders beginning to build on a small scale new homes because a lot of the foreclosures, especially at the median price and below have cleared the market because investors came in, and by the way, this is, this is good example of the way that, that capital markets work. Or when they work well, is that investors have come in and bought up a lot of these foreclosed home from banks because they see they will rent them but they see down the road, they will be saleable. So there is a shortage of homes at the median price and below, and the median price has been up, something on the order 15% in the last year. So, that market is beginning to recover faster than some of the national market has. One of our faculty did an analysis which has gotten a lot of press, that points out that we are recovering faster, partially because the laws that govern foreclosure very different here than they are in some other states. And some other states where it's complex to go through legal process to get foreclosures, they cannot clear the markets fast enough. So one of the problems with the bubble is you want to clear the market just as was done with the savings and loan crisis 20 years ago. And so, I think that we're ahead of the nation from housing standpoint in some ways.
Ted Simons: Is that a healthy thing, though, with that much investors activity? I don't think it's that.
Dennis Hoffman: I think he's right. The investor element this time has been important to help pull us out. At least the investors are buying real homes. Not pieces of paper promised to build homes. And they sold those pieces of paper before the homes got built. So, I think that investor element has been important this time. But, some states did not experience this frenzy that we did in 2005 and 2006. The state of Texas, for example, the investor locust of that period, riverside, Vegas, Phoenix, and then and then they just right over Texas, and went to Florida. I think that you will find the banking regulations and some of the laws in Texas are very different, as are residential property taxes, by the way.
Ted Simons: And as far as the new home permits and construction, up from last year, expected to be up again next year. Are these -- I keep hearing, these are different kinds of homes. They are smaller. They are more energy efficient. Some of them are closer in maybe not quite so far out, is that accurate or is that just an initial trend?
Dan Anderson:I think that that's accurate and I think that really shows the changes that are going on in the marketplace. As Dennis was saying, we saw this tremendous increase in home building a few years ago. Way over what domestically we could consume, and it will take a while for our population growth and our job growth to be great enough to be able to use that supply. So, people are beginning to say, get a home. I don't care where it is. Get me home in the Phoenix area, and if it's 30-minute or a two-hour commute that's fine, and now people are beginning to say, that does not make a lot of sense. So, unfortunately, although I see some recovery in the housing market, some of those areas out on the fringe are going to not recover for a long time yet.
Ted Simons: And is that where the new homes are being built? Are they not still being mostly built on the fringe?
Robert Mittelstaedt:I'm not sure exactly. I think that, that you are seeing a lot of infill and you are seeing a lot of people that bought, a lot of developable lots so some of it is built in places where they put streets in. You are not seeing massive developments yet.
Ted Simons: I know we are, what we are seeing, a massive amount of parameters being built, what's happening?
Dennis Hoffman: We are. The apartment buzz is, is all over the nation. There's been a movement towards apartment building, you know. The adage in the apartment business, if you can get -- if the developers, the apartment developers get financing, they will build the buildings. And financing is definitely warmed in this direction. There is a lot of capital. And play, looking for, for investment. And a lot of the investor community is, is, you know, pouring dollars in that direction. And I think that the concern is whether jobs, say in Phoenix, pay enough to, to support the rents that are going to be required, some of these apartment buildings are, are upscale with a lot of amenities, and you know, that's designed to attract this, you know, this young adult, or urban professional. As it were, in, and the question, I think, and it's yet to be determined, do we have a job base that, that's going to sustain this?
Dan Anderson: Do we have something of the same bubble going on in the apartment area that we had going on in the housing area a few years ago? And again, Dennis is right. If they can get money, they will develop. We have seen that in the commercial building area. And now, commercial buildings are just about stopped in the local labor market, but, will that start to build up again, too, in the years to come? I think it all gets down to jobs.
Ted Simons: With everything we talked about right now, and we'll probably re-air this program somewhere around Christmas, I think, even Christmas day, and so, we're not sure what's going to happen then, but as we speak, we are still hurdling towards cliff. Fiscal cliff, and nothing has been decided as yet. And everything we have talked about now, all bets off. If we go over that cliff?
Robert Mittelstaedt:I don't think it's all bets off. I think in some ways, the fear of the cliff is worse than was might happen. And I think that you will see different industries affected differently. So, depending on where the cuts occur, and aside from the dollar amounts, that have been specified, it's still up the individual departments of Government to figure out where they cut that. So, you may have -- different industries affected differently by the cuts, and so, I think it remains to be seen, we're at risk in Arizona because, because of the defense businesses that are here, certainly, and because the defense is one of the biggest cuts. Yet on the other hand, with the laws changing around health care, you may see, growth in health care consumption so even after, after the fiscal cliff, so it's going to affect us differently.
Ted Simons: What do you think?
Dennis Hoffman: The arithmetic of the cliff, Ted, is pretty stark. If you literally went down all of the provisions, I mean, including things like the amt patch that has been, you know, kicked down the road, every year for the last decade. But, if you literally rolled all these things off, payments to Medicare providers, which the hospitals are not going to like, at least in the short run and you know, payments get curtailed and, and unemployment benefits go away. And we have got the payroll tax holiday, that goes away, and all of the bush tax cuts, fall back. And so, the arithmetic of that is, is pretty tough. And it could be 80, 90,000 jobs in state like Arizona. Now, having said that, I think it's, it's, the probability is virtually zero. That, that we go over the complete list of this fiscal cliff provisions. And this will play out even if there is an agreement over the next week or so, it has to, to get through Congress, and that will be a frenzy. And, and you have got the debt ceiling coming up, so, I think that, that per Bob's point, the ongoing discussion, is going to be with us for, for the next few years.
Dan Anderson: And, and the effects are going to be spread out over a long period of time, some of knees will have, you know, somewhat immediate effects in the first six or eight weeks and others may have effects months, months later. And I think one of the big things, I see this discussion, and I think back to, to the most recent discussions about are we going to raise the debt limit, and everybody was just waiting, if I know the answer to that question, that everything will be fine. Right. We could pass this one, building more questions, and more uncertainty, and it's that, that is the biggest issue out there. If we would please get past these kinds of, you know, if I just know this, everything else will be fine understanding and start to resolve those things, I think it will be a smoother sailing thing.
Robert Mittelstaedt: But that has driven so many companies to be is conservative about hiring and about, about investment and so forth, that's part of what is holding back the economy. So, we have a horrendous chicken and egg problem.
Ted Simons: We need to stop it there. Thank you very much for joining us, we appreciate it. That is it for now, I'm Ted Simons, thank you very much for joining us. You have a great evening.
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In this segment:
Robert Mittelstaedt:Economist, Arizona State University; Dennis Hoffman:Economist, Arizona State University;
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