Economists’ Roundtable

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ASU economists Dennis Hoffman and Lee McPheters along with economist Jim Rounds of Elliott D. Pollack and Company look back the economy in 2013 and look forward to the economy in 2014.

Ted Simons: Coming up next on Arizona Horizon, it's our year end economic roundtable. Three local economists will review the top business and money news stories of the year and look ahead to 2014. The year end economic roundtable next on "Arizona Horizon." "Arizona Horizon" is made possible by contributions from the friends of , members of your Arizona PBS station. Thank you. >

Ted Simons: Good evening. Welcome to "Arizona Horizon"'s year end economic roundtable. I'm Ted Simons. Judging by most key indicators the economy showed continued growth and improvement in , but how strong are those positive indicators and what do they mean for 's economy? We welcome Lee Mcpheters, research professor of economics at Arizona State University, Dennis Hoffman, director of the L. William Seidman research institute and Jim rounds, senior economist with Elliott D. Pollock and company. Good to see you all again. Thank you for joining us.

Lee McPheters: Great to be here.

Ted Simons: Lee, start with the jobless rate. How do Arizona numbers compare with what we see nationally?

Lee McPheters: There's still a gap between what we see at the national level and Arizona but there's improvement in both nationally, % right now, Arizona's is .. That's down about . from last month. So it's just an agonizingly slow process, but it's going in the right direction.

Ted Simons: it's going in the right direction. What's helping it go in the right direction?

Dennis Hoffman: the economy is getting better slowly, steadily. We're getting impatient many of us, certainly, certainly those looking for jobs are getting impatient. But the economy is warming and there are some bright spots. Retail sales picture continues to be surprisingly strong. We have data actually just released today that take us all the way through October, spending through October.

Ted Simons: Jim, what do you make of these numbers?

Jim Rounds: I think about where people were hit hard during the downturn. Huge hits to their wealth, home values went down, retirement portfolios went down. One of the two areas that had the greatest improvement last year, great improvement in the stock market and the housing market. Consumers are more confident and are spending more and we're getting to the point where businesses hopefully will start investing more, pushing the job numbers up. They have been improving but not at the rates we would like to see.

Ted Simons: those (401k) improvements, I read because they are getting better, folks that may have been putting off retirement are saying, all right, let's do it. Is the job force actually shrinking because of that? Could it be shrinking?

Dennis Hoffman: That's a factor. The fact that demography I think of this entire episode, in fact one statistic people point to is the labor force participation rate. They point to the fact that it has fallen dramatically during the great recession but if you actually look at the data historically, Ted, it's very much driven by the demography of the baby boomers. When the baby boomers started going north of fifty -five years old, which was in the early s, that labor force participation rate started to decline. It's simply because people between fifty-five and sixty-five don't work with the same frequency that people do from twenty-five to fifty-five.

Lee McPheters: so that's why your unemployment rate, there's an underlying force there. The reduction in labor force participation actually puts downward pressure on that unemployment rate.

Ted Simons: So that might explain a little bit why maybe the numbers improved.

Lee McPheters : Somewhat.

Ted Simons: What kind of jobs -- job creation are we seeing, what kind of jobs are we seeing?

Jim Rounds: This one is really difficult to analyze because when you hit these inflexion points when things start to get better it's a little different than when you start to see the trend develop. Normally we have been in recovery . years. People forget. That it's just been a terrible recovery. The quality of the recovery you would normally see some of the lower value added jobs being added back. Those areas where you lose a lot turn the downturn like losing half the construction work force, even if you have moderate gains in construction you'll see a lot of local market industry growth during the next couple of years. What worries me is if we don't see the higher value added jobs showing up more next year and the following couple years after. That I'm not real worried now but it would worry me if we don't create higher value added jobs down the road.

Dennis Hoffman: all this whipsawed by productivity as well. I looked at retail employment by segment, and you find significant productivity inroads in terms of dollar volume of retail sales by industry segment divided by number of workers in that segment. Employers are squeezing more and more and more out of the work force, almost everywhere. You need one auto worker for every four you needed years ago. So productivity is everywhere except maybe major league baseball. [laughter]

Lee McPheters: Ted, I'm pretty optimistic about the job numbers that are coming in now. For example, you look at the financial sector, Arizona ranks among the top states in rate of growth of financial jobs. In fact I was just looking at the numbers for Phoenix job growth, and overtime past months we actually added more finance jobs than food service jobs, which I think is a pretty good indicator.

Ted Simons: That's encouraging sign there. Is that encouraging sign that can last?

Jim Rounds: Well, I'm hoping that it will improve so you may see jobs in sectors that are not the highest paying but that will it continue to improve? The sectors where you have the potential of making , $70,000 or $80,ooo a year. You won't see that in food services but you will in other areas. Arizona has taken a lot of knocks from people locally about how we're growing, but the sectors that are growing are pretty similar to what we're seeing across the nation. A lot of this is really economic recovery driven, not some major problem in Arizona. We have taken care of some of the problems that have been in the state.

Ted Simons: As far as Arizona in particular but the country in general, how does this government activity and correspond be confidence or lack thereof factor in? Start with the Fed. Does what the Fed -- how much of what the Fed does impact main street?

Lee McPheters: We saw the effect of Bernanke's suggestion last summer that the tapering would begin sometime perhaps this year, and we saw rates really table a jump. So I think that really had an effect on the mortgage market and really it was all psychological. When it comes down to what has most recently happened with the firm announcement of the tapering, very small amount of cutbacks, I don't think that will have much effect on the economy or main street.

Ted Simons: People overreacting to what the Fed does these days?

Jim Rounds: They have the potential of having a big impact, but just cutting back on bond purchases by a relatively small percentage isn't going to be a big deal. It's more of a signal this is something they are looking at because they are seeing moderate growth in the economy but I don't think they will take any serious action probably until 2015. If they do, that potentially could cause some problems.
Ted Simons: Sequestration. How much of an impact on Arizona's economy and what are we looking forward to ?

Dennis Hoffman: I think the challenges are still down the road both with sequestration and continuing concerns about the budget in D.C. When I think about actually what drives the Arizona economy, most people that want to talk with me about it are concerned about construction driving the Arizona economy. I think the facts suggest that it's actually our defense sector, aerospace, defense. Very much a key driver. If you look at the history of Arizona, an unbelievable key driver, and continued investments when you think about the attitudes in D.C., the attitudes, say, of our congressional delegation toward supporting these efforts, I think we have to be concerned.

Ted Simons: Concerned?

Jim Rounds: Yes. It has to do with the defense sector. We're disproportionately impacted compared to the average state for federal monies coming in. So what Dennis said is right. We have to be very careful with how we try to get new jobs in some key areas that tend to pay higher wages. It's difficult to figure out how to respond to that because the federal government has to get its house in order and balance the budget. But what can we do to offset that and once we try to offset those losses can we actually add a net number of new jobs. That's where you get back to competitive tax structure investment in infrastructure and sometimes incentives.

Ted Simons: Work that dynamic where sequestration hits and hurts but some say you got to hurt to get the ship back to its original position or a better position. Put it that way.

Lee McPheters: well, I think for Arizona, it's all bad news. As my colleagues have suggested, this important part of the Arizona economy and last year at this time we wouldn't expect manufacturing to add jobs. Maybe two to three thousand, manufacturing jobs a few months ago as we saw the effects of these sequestration kicking in, we began to lose manufacturing jobs. So I think we're going to end up this year with fewer manufacturing jobs and I think that they are going to be in this high-tech defense oriented categories. So there's going to be differential effects across the country, but Arizona is one of the states that is hit harder.

Dennis Hoffman: There's lots of debate over this issue. I just don't see how short run deficit reduction is in any way, shape or form a stimulus to this economy or would bolster this economy. If politically or from an ideological perspective that's what we decide we want to do we just have to face the realty that it's going to be a big head wind on the economy. In my opinion, the deficits now are running about 4% of GDP, nominal GDP growth is going to be in the vicinity of 4%. That's real plus inflation. That means the debt to GDP ratio is not going it continue to rise. Our debt problems are down the road and we have to face them, but if we overdo it now, it's 1937 all over again.

Jim Rounds: That's the key. How do they plan on doing it? The last few months we're hearing about we have to fix all these things in a year or two. There's no way they can do that. This was a two decade play at a minimum of trying to get things truly back in balance. That's exactly right. You can't go through and try to fix everything overnight. We also found out that doesn't work politically. I don't think we're going to go through that again next spring but there's always that potential.

Ted Simons: The impact of the dealt limit versus shutdown talk. How much does that fighting and bickering on Capitol Hill, affect main street?

Lee McPheters: I think it had a big effect the first time around back in . I think it had a big effect again. The question is, is it going to continue to have a big effect when people now are I think beginning to expect this sort of thing going on? So it's a matter of wait and see, but certainly there's nothing good in these debates.

Jim Rounds: D.C. can disappoint us but they really can't shock us any more.

Dennis Hoffman: I think that's pretty much the case. The odd piece of this, I think Jim and I agreed on this, it was the debt ceiling issue that was the bigger concern from our perspective, but if you looked at the polls afterwards, people weren't -- about 37% of the people polled thought we should have gone over the debt ceiling. Again, I think this is this misconception about the role of debt and the issues around debt in the economy. As far as Arizona goes, on the retail numbers that just came out today suggested that while Ted Cruz was filibustering Arizonans went shopping. They bought cars and furniture and things. They shrugged it off pretty well.

Ted Simons: Next topic here, can we shrug off the loss of US Airways based here? Headquartered here?

Jim Rounds: The numbers are big. The numbers that we saw talked about the corporate employees, the ones that potentially or actually would be more likely to move somewhere between 700 corporate employees and a couple thousand is one number we got. Those jobs would be lost. There's been some discussion about not everything is happening at once but the real question is how much of the hub activity -- that's the other 7,000 , jobs. If you look at some case studies about what happened at other airports there were significant losses. That's not the promise now by the airline, but it could have an impact. It's not going to derail the economy or anything, but a couple 3,000, jobs, maybe a little bit more, base sector jobs that pay well, the multiplier effect, another 4,000, you have to be doing a lot of business locations to the state to offset that amount.

Dennis Hoffman: where are they going to dot maintenance, the training. They hub in Dallas and LAX now. Do they need another significant presence in Phoenix if you already have a presence in Dallas --

Lee McPheters: You have the effects of the brand, another corporate headquarters lost, and corporate headquarters bring a lot to a metropolitan area. They support the arts, certainly they have the upper end jobs and it's just another factor, the image of the city.

Ted Simons: how much of a factor is that particular prestige of having a U.S. Airways headquartered here? Is it tangible? Is it that strong?

Lee McPheters: It's tangible from the perspective of how good a corporate citizen the particular company is. I think US Airways has been a good corporate citizen while they have been here.

Ted Simons: For those flying and looking at their ticket prices, previous mergers, Delta-northwest -- lots of mergers in the past, what did we see, does that give an indication of what we will see?

Jim Rounds: What is reported that we'll see is minimal job losses. There will be enhanced efficiencies, so we won't see price increases. You can find some case studies where that's the case. Then you can find some others where that's not so much. So I'm all for businesses trying to do what they can to be as efficient as possible, so I'm not opposed to everything that happened with the merger and the potential loss of the corporate headquarter jobs and maybe loss of some of the hub activity, but it's still disappointing.

Ted Simons: Four carriers. Sounds like four carriers will control 80% of the domestic market. Is that healthy?

Dennis Hoffman: Consolidation I think was in the cards. You went for years with most of these guys losing money. So they are either going to go out of business or consolidate. That's where the dynamics are. The tough thing for me to figure out with air travel is how have all of the fees that have been instituted in travel, how does that change the whole financial model and how will it continue to change it going forward?

Ted Simons: All right, I want to get to housing prices and real estate in general here. Before we do, another big story in Arizona was Medicaid expansion, the big fight there in the legislature. The affordable care act, ACA, Obamacare, whatever moniker you want on tit's here, it's happening. Impact to Arizona's economy.

Dennis Hoffman: Well, the expansion of the provisions for indigent health care and the federal money that went along with that was very popular with the hospital industry, with the health-care providers primarily because there was hundreds of millions of dollars that they could see flowing into this state to support this particular industry, and this is why of course they advanced the provider fee that the legislature passed last year. So you know, they are looking at the economic -- they are looking at primarily the economics. I think when the legislature passed it the governor advanced it, they are looking at the human element, obviously, being able to expand these services to a number of deserving Arizonans. I think it's definitely a plus. It always seemed like the arithmetic of it in terms of the help that that particular provision was going to provide was really easy to see. But now this is a separate issue from the affordable health care act writ large and its effect on the economy. I think we're going to debate this for years, but the provisions the people absolutely love about the affordable health care act is that you can include everybody is included, you can't be booted off for a preexisting condition, all of the problems are around paying for it.

Ted Simons: Do you think it winds up a plus economically, and I'm combining them because thee are new ways of covering more folks, what's it mean to the money markets? What does it mean to business in general?

Lee McPheters: Well, you know, I would look at it from a couple of different perspectives. One, I guess I sound more like a marketing consultant talking about the brand, but I think it's good for Arizona to have taken this step because when you look at the arithmetic it's a very reasonable step and good for Arizona to look like a reasonable place. I think that was a good step by the governor to really push this through. The second thing, you don't hear a great deal of discussion of this, but how many people do you talk to that are in their job because they want the healthcare that goes with it? I think this separation from the rigidity of employer paid health care is really over the long run going to have an effect on entrepreneurship, people able to start small business and not have to worry about how do I hire people, how do I pay their health care and so forth. Long run that's going to have beneficial effect. In fact looking at this whole affordable care act I think the benefits are in the longer term rather than the immediate term because of all the uncertainty it's created and certainly we really don't know what the cost structure is going to be. There's a whole lot more to find out.

Ted Simons: That uncertainty is often mentioned as a problem with the affordable care act.

Jim Rounds: The uncertainty is the cost going to be less than they are estimating, it's is it going to be a lot more. That even gets back to the Arizona Medicaid issue, trying to figure out are we going to have an additional burden down the road. I think it's going to cost --

Dennis Hoffman: there's no such thing as a permanent expenditure.

Jim Rounds: That's right.

Dennis Hoffman: They have proven that over and over again. Tax cut, very different.

Jim Rounds: I think it's going to cost more. That's pretty typical of government. I don't know how the Arizona issue will play out. I know that when we have been talking about the forecasts and the budgets there's going to be more discussions in January that we'll be involved with, there's dollar amounts identified for I think it's 2016 or something like that. We'll have to see if more positive forecasts can cover any potential shortfall. We don't know and it makes it difficult to budget when you're dealing with uncertainty in the hundreds of millions of dollars.

Ted Simons: In the time we have left we need to talk about real estate. Sounds like the market has reboundedded in some respects. Are you surprised seeing how they have increased the way they are?

Dennis Hoffman: Not really. I don't think certainly in the south Tempe neighborhoods I don't see prices going up at the ridiculous -- anywhere near the ridiculous rates they went up in the middle 2000s when everyone knew -- what in the world are people thinking! So I think that we're back on track. Jim could speak to some of the numbers that Elliott Pollock has done and Jim have done at the company. I think that history shows we're getting back on track in terms of long run price trends.

Jim Rounds: Yes. We need to see stronger population growth. Whenever we talk about these economic issues if you reduce it down to the simple it comes down to creating jobs and seeing population growth. We talked about how we're on the front end of seeing additional people maybe retire, those that were upside down in their homes, wanted to move to Arizona, we're still a very attractive place to move to. You have to look at the rates of growth and home values. We fell so far, you're going to have topost strong rates of growth to get back to norm and trend conditions towards the end of the decade. 30% we saw last year wasn't real surprising, but don't expect to see that again.

Ted Simons: Lee, do you expect to see that again?

Lee McPheters: A years ago this time we thought we would see a surge in single family permits. We look at the census data because we like to compare states. California is actually outperforming Arizona just in the rate of growth of single family permits. But the surge never really happened. We're expecting maybe , 25%-30% growth in 2013. Those are pretty good numbers, but it's not going to be , 50%-60%.

Dennis Hoffman: are people going to move again? They are just not moving nationwide. What are we going to do about immigration reform? This is a very different state today than it was ten years ago in terms of the migration of international migrants. We have to sort this.

Ted Simons: last question. Before we go, I want you to give a letter grade, think about this for a second here, A to F, if you will, of what you think the status, the growth, general condition of Arizona's economy will be in . Start with you.

Jim Rounds: B-minus. We have the potential of being an A state. It will just take time.

Ted Simons: why aren't we reaching that potential?

Jim Rounds: It just takes a little bit of time. We are not going to hit normal growth conditions and getting back to normal economic levels until 2015-2016. We have to work through the process.

Dennis Hoffman: The head winds are clear. The head winds we talked about sequester and my concern over the defense sector, and the fact that people are not moving here in the kind of numbers that we need. I don't disagree with Jim's grade.

Lee McPheters: I'm going to give it an A. Grading on the curve -- [laughter] Compared to every other place we're going to be a top growth state, just one half the pace that we usually expand at.

Ted Simons: I'm taking his class. Gentlemen, good to see you. That's it for now. Thank you for joining us. I'm Ted Simons. You have a great evening.

Dennis Hoffman:Economist, Arizona State University; Lee McPheters:Economist, Arizona State University;Jim Rounds:Economist, Elliott D. Pollack and Company;

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