Economic Update

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The economic rebound continues, but it seems to be slowing. Arizona State University Economists Lee McPheters and Dennis Hoffman and ASU Center for Real Estate Theory and Practice Director Mike Orr will give us an update on the economy.

Ted Simons: Good evening. Welcome to "Arizona Horizon." I'm Ted Simons. The Justice Department internal advice gauges finds Dennis Burke improperly gave information to a news reporter regarding the botched "Fast and Furious" gun running case. The investigation says he leaked the information to undermine an AtF agent who went public with criticism of the ill-fated operation. The Senate judiciary chitty was back at work on immigration reform. They are expected to have a bull ready for the full Senate by the enthe week. Arizona Jeff Flake says the process has been far more positive than the last attempt to pass comprehensive immigration reform in . Last week Arizona State University economists released their latest information about Arizona's economic recovery. Joining us from ASU are economists Lee Mcpheters and Dennis Hoffman, and also with us, Mike Orr from ASU center for real estate theory and practice. Thanks for joining us.

Lee McPheters: Great to be here, Ted.

Ted Simons: Lee, is Arizona experiencing an economic rebound?

Lee McPheters: Well, the economy is coming back. The question is how fast. We had three years of job loss related to the recession. In 2011 we began to add jobs. 2012 was better, about 48,000 jobs. This year were hoping that 2013 might turn into perhaps 60-65,000 jobs. Certainly an improvement over last year, but those early forecasts really didn't factor in the sequester and the national economy seems to still be quite sluggish. So we're just kind of looking, got our fingers crossed that this will be a better year than the last years.

Ted Simons: Why isn't that forecast coming to fruition better than it is?

Dennis Hoffman: Sequester is a problem, Ted. Job creation is a problem. Here we go with another jobless recovery. It's deja vu all over again. Out of 2001 we had a very slow job creation scenario. Actually that's where the bush tax cuts came from trying to create jobs in the early 2000s. This one is worse. Since 1990,2001, now this one, jobs that are easily replaced aren't coming back. You know, they may never come back.

Ted Simons: That becomes that new normal situation.

Dennis Hoffman: That's right. The Robotics, the technology, the labor saving innovation that's taking place.

Ted Simons: The outsourcing?

Dennis Hoffman: Outsourcing is a big deal, but I think it's Robotics is the bigger deal. 1970, you needed, say, for a given number of cars four auto workers. For the same number now you need one.

Ted Simons: 7.9% unemployment. This is the third straight month for that. What's going on here? Why is that not improving?

Lee McPheters: Well, typically when you have a recovery and jobs begin to pick up, you have people that were out of the labor force coming back into the labor force. We have about 235,000 people unemployed in Arizona right now. The labor force tends to be augmented every time you have graduation you have more people coming into the labor force. Population growth is continuing. It's not the 2-3% that we had in the boom years. But population is still growing. That causes the labor force to increase. The result is unemployment rate can be sticky. We're still down about a half percent from a years ago this time.

Ted Simons: Population growth is a factor in real estate as well. Are we seeing what we expected? Obviously this isn't the 1950's and 60's, but are folks moving back into Arizona?

Mike Orr: Population is growing at a faster rate. It's still not at the rate we saw ten years ago but fast enough to overwhelm the growth in the housing stock. That's one reason we have housing shortages. People are arriving and population growing faster than we're building homes for them.

Ted Simons: Are you seeing people with where the with all to buy homes? If fewer people are coming back to work I would think fewer people would be able to buy homes.

Mike Orr: There's demand for rental homes as well. There's no surplus of rental homes either. If anyone offers a home for a lease there's a lot of people lining up to lease that home.

Dennis Hoffman: There are incomes being made out there, though, Ted. The April flow was very good in the state. It's clear to me that you can't take these incomes and spread them across everybody. I suspect incomes are being made at high end wage earners, capital gains perhaps are a pieces the puzzle. But the jobs are not back from the peak but you can argue a lot of the income is. Total income, not per person.

Ted Simons: You mentioned the U.S. economy maybe isn't moving forward as much as had hoped. How does Arizona's economic scenario compare to the U.S. as a whole?

Lee McPheters: Even though we're only growing at about 2% that's good enough to make Arizona a top ten growth state. The most recent numbers for April I believe Arizona was number 9 in the country. In the rate of job creation you of course have states like North Dakota that are driven by energy and in particular resource assets, reserves that they have. When you come to Arizona we don't really share in that and we're being driven by a simple recovery in the economy. People are moving here. Jobs are slowly coming back but only at about 2%, but still better than most places.

Ted Simons: Is that a healthy 2% or a questionable 2%?

Dennis Hoffman: Well, it could be better, which was the tag line for my talk last week. I think it really could be better. We have to have an economy that generates good jobs at a faster pace than 2% to get back to any kind of growth metrics this economy is used to. North Dakota is not really a puzzle. Anyone associated with resources is going to grow jobs. But how about California? I think you pointed California out last week.

Lee McPheters: California, much to the surprise of the regional economists that tracts the west, are number 7 in job growth. The parts of the economy showing strength are the high paying tech jobs, the professional jobs. Kind of upper-end jobs. I think that that is an economy that surprised most people who really expected population outflows and I don't know what. High taxes to stifle economic growth.

Ted Simons: That's a good point. We hear a lot on this program about how Arizona is just poaching from California and you'd be a nut to invest in anything in California. Sounds like a lot of nuts are investing in California.

Dennis Hoffman: It's still an innovation magnet for workers and for businesses. That old line manufacturing may migrate out of California and we have heard that a lot. Some of it may show up in Arizona. But I'll bet it will be retooled, I bet it'll be much more robotic. It won't come with the kind of jobs that it has historically.

Ted Simons: Mike, as far as real estate is concerned give us an overview, what are we looking at and what can we expect?

Mike Orr: The housing market is one of the driving forces in economy now. The supply shortage is causing a lot of competition. Every home that comes on the market is attracting multiple bids. Builders are starting to ramp up production. They are limited by the number of employees with the right skills, the construction trades were decimated in the recession. They are now coming back, but they need people who actually know how to do framing and roofing and concrete laying.

Ted Simons: Are we seeing a difference as far as home building is going? Are we seeing the outskirts of town getting the most attention? It seems like things may have changed here in the past few years.

Mike Orr: Well, I'm not actually seeing much change if you look at what they are building. They are building on the outskirts mainly where land is affordable. The cities would like them to build vertically closer to town but most builders are saying, well, after you. They have a model that works, makes money and that's buying up agricultural land and turning it into subdivisions this. Now what they are doing is building more efficient homes, much more energy efficient because that's a big selling point over resale.

Ted Simons: Are designs different in terms of living?

Mike Orr: Yes. The key thing that they are offering is multi-generational homes where because there's been a lot of places where young people are staying with their parents or the older generation also moving in. So they have designed plans that are really useful for that type environment.

Ted Simons: Mike mentioned difficulty in finding workers for homebuilders. Is the jobs scenario in Arizona, we kept hearing if we -- we have to diversify. Have we diversified?

Lee McPheters: The number one job growth component in Arizona right now fastest growing part of the economy is construction jobs. Probably going to add about 7,000 construction jobs, turn in something in the order of six, seven, 8% growth, which before times past in the rest of the economy. Balancing that out the second fastest component is finance jobs. Now, how much of that is related to real estate, probably a good part. But I would say that looking at the breakout of the Arizona economy industry by industry, we're not that much different from the U.S. I think that right now at least manufacturing, for example, in Arizona, we're not a 10% manufacturing state. But nationally the share of manufacturing is declining as well.

Ted Simons: Sequestration. How much of an impact is it having, how much will it have?

Lee McPheters: I think it is creating an uncertainty. National numbers and then they translate I think in a little higher degree to Arizona. National numbers where she shaved about .8% off GDP, it's supposed to be worse in the second quarter. Uncertainty in aerospace defense is a big potential problem in Arizona. So the counter is we have to be out front of that. It's certainly not a surprise. There's been discussions about cutting back on the Department of Defense for a number of years. So being smart about the types of research and development and product development that our firms undertake in terms of maybe security or drones or surveillance kinds of equipment would certainly be prudent.

Ted Simons: Same question as with Lee. Diversification. Are we seeing that happening at all?

Dennis Hoffman: Well, again, I would echo something that -- I have talked with our colleague Tom Rex about this as well. We're not that -- construction gets a big part of the media, but we're not that different really than the average state. We have been in our boom years bloated more toward, say, construction and real estate. I'm hopeful that the finance component that Lee is seeing is more financial services, the insurance industries, the consultants for finance trading securities. That would certainly be something I think that would be a good sign. Of course there's medical. Medical research and health care in terms of services that we're seeing growing.

Ted Simons: As far as the real estate market is concerned give us a forecast, what we can expect in the future. I bring this up a lot with investors. Seems that was such a factor in the last problem. Are prices increasing do you think too much too quickly and what are investors -- what's their role in this?

Mike Orr: Well, the investors have caused the market to stop going down when they first entered the market about four years ago. The market got its own momentum up so even if investors disappeared it will probably still keep growing up because more people with confidence are looking to buy homes. Ordinary homeowners are limited by how quickly they can get loans approved as opposed to investors. The investors are starting to slow down a little bit. We did 37% of transactions last summer were investor transactions, an all time high. We're down to 27% now. Which is still high but clearly reducing.

Ted Simons: So quickly, as far as the forecast is concerned with the housing market, what do you see rest of the year?

Mike Orr: We're going to see prices go up until we get the really hot months, then they will probably settle down and stay flat for a while, and go up again in the fall. Same story as last year.

Ted Simons: Interesting. Real quickly, give me a headline for what you see for the economy here for the rest of the year.

Lee McPheters: Slow growth continues.

Ted Simons: That's it?

Lee McPheters: That's it.

Dennis Hoffman: I'm actually optimistic over maybe not the next year but next couple of years. I think that the energy shock that's the positive energy shock with more abundant energy at a cheaper price is really going to be an injection for this economy. Think about the 80's when the price of oil fell so dramatically. I think that you'll see orders of magnitude like that.

Ted Simons: You like his headline but bolder?

Dennis Hoffman: Near term I don't disagree at all. I'm just saying let's don't give up on the economy and let's not ignore the benefits of innovation and lower energy are going to bring.

Ted Simons: Encouraging. Thanks for joining us. Get the inside scoop on what's happening at Arizona PBS. Become an insider. You'll receive weekly updates on the most anticipated upcoming programs and events. Get the insider delivered to your email inbox. Sign up today.

Lee McPheters:Economists, ASU;Dennis Hoffman:Economist, ASU;Mike Orr:Real Estate Theory and Practice Director, ASU Center;


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