Economic Roundtable

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Three local economists look back at the economic events for 2014 and make predictions about what we might expect in 2015. Dennis Hoffman, director of the Seidman Research Institute at ASU’s W. P. Carey School of Business, Lee McPheters, Research Professor of Economics in the W. P. Carey School of Business and director of the school’s J-P-Morgan-Chase Economic Outlook Center, and Jim Rounds, Senior Vice President and Senior Economist with Elliott D. Pollack and Company, will discuss the economy.

Ted Simons: Coming up next on "Arizona Horizon," the state of Arizona's economy as it relates to job growth and commercial and residential real estate, along with other economic indicators. It's our year-end economic round-up, next on "Arizona Horizon."

Video: "Arizona Horizon" is made possible by contributions from the friends of eight. Members of your Arizona PBS station. Thank you.

Ted Simons: Good evening, and welcome to "Arizona Horizon." I'm Ted Simons. Arizona's recovery from the great recession has been slower than the national average on a number of levels, but the state is growing jobs and the real estate market does show signs of increased activity in the coming months. Joining us now for our annual year-end economic update is Dennis Hoffman, director of Seidman Research Institute at ASU's W.P. Carey School of Business. Lee McPheters, research professor of economics at W.P. Carey School of Business, and director of the school's J.P. Morgan Chase economic outlook center. And Jim Rounds, senior vice-president and senior economist with Elliott D. Pollack and company. Good to have you all here. Thanks for joins us. Dennis, we'll start with you. What is the state of adds's economy and how long before that state gets better?

Dennis Hoffman: It is improving. The pace of improvement continues to be sluggish. So we all keep waiting for that burst forward like we had in the early '90s that, you know, came from nowhere, and took off. So that is what we're looking for. We've really had some head winds over the last year, and I think everything from procurement, DOD cuts, and we got hit probably as hard as anybody got hit by DOD cuts from what I can tell. Semi conductors haven't taken off, we continue to face some head winds on semi conductors. And maybe the buzz in Arizona just isn't here yet. What's up with these millennials? Are they attracted to this state the way we were? That's the question.

Ted Simons: The state of the economy now, and do we see a full economic recovery in 2015? 2016? How long do we have to wait for this?

Lee McPheters: Well, one thing I think we have to look at is where we are just in the maturation of this recovery. That is, you look at it, the numbers are fairly weak, and you think, the recovery is in its infancy. But we're five years into it. And my expectations for next year are very similar to this year. We've had three years of very moderate growth, next year is probably going to be a lot of the same. It's a big issue, the pace at which we're adding jobs, getting back the jobs from the peak we enjoyed in 2007 before the recession.

Ted Simons: What are seeing now and what are you seeing in the future?

Jim Rounds: Well, so we're growing, but it's a matter of comparing it to our history of growth. Normally five years into recovery we would be almost booming. This will be an expansion without a boom. In terms of the some of the numbers, we had 2% growth in 2013 in terms of jobs across the state. We're looking at around that now probably for this year, next year we might see better, maybe 2.5%. But we would normally be enjoying 3.5 or 4%, maybe more. So next year is going to be better than this. This was a bit of an anomaly having the same growth rate 2% for two years in a row for Arizona. So expect it to get a little better, but no boom.

Ted Simons: Expansion without a boom sounds on its surface, we used to be criticized for boom, bust, boom, bust cycles. Is it not healthier to have that gradual growth?
Jim Rounds: When we went through prior expansions we did better than the U.S., but what people forget is during downturns we also did better than the U.S. throughout more recent downturns, not the case anymore, we were 49th in job growth during our worst year, which I think was 2010. A little different this cycle. People can criticize the economy, economic base but you're not going to be changing the economic profile of Arizona overnight. It takes a long time to do that, maybe a decade or more of diligent work of policy, economic development, and it's going to take a while. We need people moving here and they need to get mortgages. There's all sorts of stuff going on, a little beyond our control.

Dennis Hoffman: Maybe bigger, long-term goals. Why not set some as inspirational goals? Raise the labor force share of college grads, have more college grads in the work force? How do we do that? We produce them, attract them, retain them. Look at other economies. Set some goals. And maybe we learn from this experience, and so we don't have to repeat it.

Ted Simons: Regaining only 56% of jobs lost in the downturn, national is I think 99 if not 100%. Why are we lagging? And you've got Nevada, Utah, Colorado, they're all top 10 for job growth, we're like 14th or something. What's going on out there?

Lee McPheters: Well, there's a couple of industries that are simply out of the game right now. One of course is construction. Ordinarily this phase of the recovery you'd be expecting perhaps as many as 10,000 construction jobs being added per year. I think when the numbers are in for 2014, we're going to have lost construction jobs compared to a year ago. Manufacturing another key driver of growth, brings in outside dollars. We're probably not going to see any growth at all in manufacturing.

Dennis Hoffman: Losing the high-end parts of manufacturing. Aerospace, defense, semi conductor, that kind of thing.

Lee McPheters: Right. And then you look at some of the sort of bread and butter industries, retail, for example, accommodation, you just see very sluggish moderate growth there compared to other states.

Ted Simons: In the past we've heard, again, this goes back to that boom-bust question we've heard construction drives everything. Not anymore, but we used to hear that wasn't necessarily healthy to be so dependent on construction.

Jim Rounds: It's OK if you have other stuff too. Growth states are going to be dependent on growth. And you can't really change that overnight. Arizona is going to be dependent on growth. We're not going to have is a full economic recovery until we see improvement and construction. I think we have three industries that's leisure and hospitality, education and health care, and financial activities I think are the ones we're growing, and we're still behind full recovery in everything else. But it's also about some basic math. Nevada wasn't doing as good as Arizona during the downturn and they have a lot of problems in their economy. But they also started recovering a little bit after us. So early on when you start to recover, you can post decent rates of growth and you look like you're doing well until that second or third year, where you slow down a bit. So we're around 14 or 15 in terms of job growth, but there's a bunch of states tightly grouped around us in terms of rate of growth, I think we have a better chance of moving to the top 10 in these other states, but we need that population growth and we need to see the improvement in construction.

Dennis Hoffman: I think this is a fair point. Really what you find when you look at all of the nation's states, all of these economies, none of them, apart from say a North Dakota or a Texas, have really done that well in this recovery. 14th, there's a lot of states that would love to be 14th. We're not in the top 10, and Jim laid this out a couple minutes ago We're not in the top 10, that feels bad to many of us because we're about average, you know, a little bit better than average growth right now. This stage of the business cycle we're accustomed to being 2X and 3X the national average. By the way there's going to be room in the top 10 with North Dakota and Texas in the next year the way oil is going.

Ted Simons: With that in mind, are we comparing ourselves to the right folks? Are our expectations so high that anything out of the top 10, or not anywhere near top of average is unrealistic?

Lee McPheters: Well, I've been looking at some of the job growth numbers, industry by industry, and case in point would be the professional technical scientific jobs. You look at some of our peer metro area, for Phoenix, Denver would be one, Seattle would be one, and you see Phoenix is completely flat in that category. Nothing, no growth, zero growth rate over the past year. Look at Denver, look at Seattle, look at San Diego, that's one of the sectors that is driving growth in our competitors.

Ted Simons: Is it wise for us to look at the Denvers and the San Diegos as opposed to maybe cities that are more competitive with us?

Lee McPheters: Well, they're the same size as Phoenix, and so that gives you a starting point. And I think that we certainly have aspirations to be like Denver, Seattle, San Diego, just in terms of our industry mix, and in terms of our income and growth rates.

Jim Rounds: Dennis said we need to go after these higher paying jobs and to some extent we also are We are who we are. So in some cases we'll have an opportunity to expand into some of these areas, and some cases we might just want to protect the jobs we V I know southern Arizona is going to be lucky if they can just retain the number of high-paying jobs they V maybe better opportunities in the Phoenix area, which is doing better than the state as a whole in terms of employment growth. About 3% for Phoenix, 2% for the state. Closer to 1% for Tucson. So most of this is economic driven, and the nature of this downturn, it had to do with housing, half the market that we would normally be going after is not eligible because not having enough for down payment, credit scores, all those things that you add up, we calculated it at probably half the market. And this is going to unwind over a four or five-year period, so it's going to be slow. What can we do with the margin in terms of policy also impacting some of these jobs and that gets back to the education investment, the technical stuff you're talking about, we have to do some of the basic fundamentals right as well.

Ted Simons: Are we doing the basic fundamentals right, Dennis? Have we got room for improvement?

Dennis Hoffman: Oh, I think there's always room for improvement. Is this an Arizona bash, are we messing up everywhere any don't think so. I still think, I think the puzzle is, we have many things in place today that we've had in place during the 35-plus years I've been in this state. And people came. And they came in droves. And they came to open businesses. They came to seize opportunities. And that opportunity I think remains in Arizona. I do think we need to polish our marketing strategy, we may need to polish image a bit and be attracting people in this millennial group, attracting people in the same numbers that we did when the baby boomers effectively surged into this state and helped make it what it is today.

Jim Rounds: That business promotion thing I think is a big deal. Right now the commerce authority has a couple million dollars that they spent on business promotion. We have an office of tourism, but their focus and mission is more for visitors. I would like to see, this is what I recommended, that they use deal closing monies or figure out how to move monies around and double or triple the budget so we can better promote the state. I think you get more bang for the bucks for those programs than you can for incentivizing businesses. There are some things we can do. I changed my mind about the impact of the negative publicity we've had. In the past we've been fine. You can list on a page 20 different items we've done bad in the past in terms of negative publicity and we went through it. But our population flow were still coming in, we were still create be jobs and we still created positive buzz after the fact. This time the population flow train stopped. I think the negative publicity was a bigger deal this time.

Dennis Hoffman: I agree. I think it's generational. And I think this -- I use the term welcoming. We have to send out signals that we're not only open for business, we're open for people. We're open for all people. And I think we've not sent that signal properly.

Lee McPheters: I think there's another factor at work here. Some of our competitors are actually doing very, very well right now. Of course Texas recovered quicker, recovered stronger than Arizona. I think people have left Arizona looking for opportunities in Texas, for example. Even to Colorado. So it's not even just population inflows, there's also the issue of outflows as well. So it's net migration that we need to focus on attracting people here, keeping people, and businesses here that are already here.

Ted Simons: That idea of polishing adds's image, compare and contrast that with incentivizing business. With tax cuts and the like. What is that dynamic?

Lee McPheters: One of the factors I think that economic development people just have to sort of recognize is that a lot of the growth in Arizona depends on what people are doing, what they're thinking outside the state, what are their circumstances, what is job growth and so forth. Compared to Arizona. Back in the days of previous recoveries when our job growth was strong, people would make the decision to move here because perhaps in the state they were in, their situation was not as good. Now that we're sort of in the middle of the pack, more or less, I think that we have the problem of competing with Colorado and the Texas and the Utah, these other attractive opportunities that people are seeing.

Ted Simons: Real quickly, I don't want to get too bogged down on this, but we found an out of state buyer is targeting Petsmart, they'll purchase yet another headquarters leaving the state. Just in general terms, what does that mean to a state, to a region, to have once had certain headquarters, and not have them anymore?

Jim Rounds: Any individual company deal, you can look at it and usually you can say, I don't fault them for doing it. I don't fault them for consolidating airline operations or anything else. But when you add it up, I think there is an advantage of having the headquarters, one, they're higher paying jobs, it's a base sector type company, and it's harder to get those. And you also have those individuals a little bit more engaged in terms of the public policy. A regional manager that might be here for two years and they go back to Virginia is not going to be very engaged. That CEO when the headquarters is here, they're going to be down at the capitol banging their fists on the podium like will sometimes do. I like to see that and I think we need to continue to have an invigorated business community. But we need to get smart with economic development, because I think education matters. More than I think people talked about in the past, I think transportation issues, infrastructure matters, as much as the economic development programs. So we got to think more holistically and go back to what the basic role of government is, because sometimes I feel like we got away from that.

Ted Simons: Do you agree with that?

Dennis Hoffman: What Jim is talking about. he's laying out you say We have to market the state, we have to create the positive image. He's starting to lay out the marketing strategy. I think other states, and if you ask the economic development people, I know this to be the case, other states beat us up on education. Fairly or unfairly, they beat us up. They used some of the showcase education statistics, and they beat us up with it. I think we need to turn that, we need to send out signals that we support education. We're education oriented, we believe in knowledge economy as inspirations, and that's what I'm talking about, say, setting goals. We're three full percentage points in terms of labor force share below the national average. Why not set the goal to be at or above national average in terms of college educated folks in the work force?

Ted Simons: A good idea to set that goal. Is that goal viable?

Lee McPheters: We're talking long-term here.

Dennis Hoffman: 20 years probably.

Lee McPheters: looking at our numbers as they come in to wrap up 2014, we're looking ahead to 2015. Anything we're discussing right now probably is not going to have much impact in the next six months, probably even oil prices are not going to play through the entire economy in the next quarter or so. Maybe in the next year.

Ted Simons: As far as the national, you mentioned the national economy and how it reflects and impacts Arizona, personal consumption spending seems to be low, things have gotten better, but why is this recovery taking so long?

Jim Rounds: Well, you got to look at it by state. The states like Texas that have a huge It's not just oil and natural gas, it's all those other industries that locate there. So they have a lot of chemicals plants, and spinoff industries, they had a good recovery because of what was happening in energy. And now they may end up losing a little bit of share in that at the benefit of places like Arizona because we'll be paying less for gas and individuals will have a little bit more money to spend. I still think a big chunk of it has to do, some of it has to do with the public policy and the branding, and you The changes are noticed at the margin. A big chunk is the economy, and they're just so many problems with housing and people moving, it's not just people moving to Arizona, if you look at the data, there's a big reduction in people moving from one state to another. This is a national issue, this is just a little bigger here. But we don't have any influence over the down payment requirements, we don't have any influence over how Fannie and Freddie might be working on these deals. We can only influence certain things. So where we can influence we have to do a good job, because there's a lot that's out of our control.

Dennis Hoffman: Good news is, mortgage rates are low. The bad news is, you just can't have one.

Ted Simons: Let's get to real estate. It looks like it's still stagnant. We're hearing, though, that maybe by the spring we could see some loosening as far as residential real estate? Are you seeing anything along those lines?

Lee McPheters: Sort of an interesting statistic, we bemoan the fact that single-family buildings seems to be very, very weak, basically dead in the water right now, probably through permit numbers will be lower this year than a year ago. If you add in single-family permits and multifamily permits, we are actually growing faster in terms of total permits here than the nation as a whole. So you've got one segment of the market that is going gang busters, meanwhile, the really foundational single-family building that is very, very weak. And I don't expect that to come back in any really significant way in the next six months or so. Maybe by the end of next year.

Ted Simons: We're seeing demand down, and it sounds like when demand picks up, we could have a housing shortage.

Jim Rounds: Well, maybe, maybe not. It depends on how long this takes. And so if you look at the breakdown of individuals that could get a loan, if somebody is going to put down 20%, they're going to need to be in OK financial shape. They'll have to have a job, they won't be living with their parents anymore. So some of that will be economic related. And then some of it is going to be policy related, related to credit scores and things like that. There's a lot of debate. People think based on the population growth that we've had, and I think we're still top 10 in terms of population growth with people don't realize, and it's really the rate of growth that matters, but for some perspective, I think we were eight in the last year that Where it was tabulated. But we are producing multifamily units. And vacancies are still low and they're being filled because they can't go somewhere else. Over a longer period of time, the market and economics works its magic and you get things to stabilize, and then unless there's a little bit of a boom, in a particular year after some of this stuff gets corrected, it may not be as big after shortage. But if you look at our history, you end up going through a period where you have a little shortage, but then the magic happens, and homes are built, and then people occupy those homes and we're OK.

Ted Simons: Dennis, does the magic happen again and when does the magic happen?

Dennis Hoffman: Well, I'm cautiously optimistic. More so than I was right at this point, I went from optimistic to pessimistic and now I'm warming a bit. Here's where I think it may be driven. You mentioned retail a moment ago. Consumer confidence nationally is now back about to levels it was before the crash. And I went to a regional conference just a week ago, and I heard that California's consumer confidence numbers are now above where they were in 2005 and 2006. When California's doing well, Arizona tends to get some residual effect. I think you've got Colorado doing well, you've got Utah doing well, Nevada seems to be perking. I'm hoping that some of this contagion shows up in Arizona. I actually think oil and gasoline price Gasoline prices Gasoline, if it would stay down at the levels it's at, and we had wholesale near of a buck 50 today, that translates to $2 gallon of gas in Phoenix So that could be a few weeks out. If we get that, you're talking about dropping on the order of 2 billion to 2.5 billion. That's just on the household consumption of gasoline and motor fuel. I'm not even counting lower airline ticket costs, and other residual effects that are ripple through the economy. These are tens of thousands of jobs. On the order after four years of almost a full year of job growth that we're seeing at these numbers. So I think that can be a catalyst. I think some of our neighbors doing well can help stoke Arizona's growth. And after all, it's time, Ted. We're ready.

Ted Simons: You mentioned Arizona's neighbors doing well. Maybe being a catalyst, maybe being contagions if you will. Yes, or does it just make Arizona seem even more of an outlier to folks?

Lee McPheters: Thanks to New Mexico, we're actually looking better than some of the neighbors. I think that there's a lesson to be learned here. I think that we need to pay attention to some of our competitors such as Denver, Salt Lake City, San Diego, areas that are showing strong growth even riverside is really picking up the pace in terms of job growth and I think that we're moving into an era where we just cannot depend on people moving here and we're going to have a whole bunch of jobs, we're going to build a whole bunch of houses. I think we have to recognize that those people that would have moved here now have a lot of choices, and we're seeing a lot of that exercise with these millennials that we've been discussing. When you look at the numbers as to where your college graduates age 20 to 34 are moving, they're moving to Phoenix, true, but they're moving in larger proportions to Denver and Salt Lake and Seattle. Of course San Francisco.

Dennis Hoffman: And they're following employment opportunities. It is chicken and egg.

Jim Rounds: It is OK to look at these other states. I don't want to catch everything that California has, but if they're going to bleed some potential business relocations, we'll have to try to go after them. And if we even Capture a small percentage of that very large market, we could do quite well. What Lee is talking about. those are the long-term goals. Those won't happen overnight we still need to see recovery. But it's fine to have these goals. In fact, that's how you set policy to try to influence it longer term.

Ted Simons: Last question, got about a minute or so left, I want to get to a prediction, something you think will make headlines. Economic headlines in the coming year. What do you think?

Lee McPheters: I can say with statistical certainty, that Arizona and Phoenix are going to lead the nation in new finance jobs, rate of growth, and Phoenix in the absolute number of new finance jobs, which is pretty amazing when you look at the central money market centers that are in fact very, very weak in terms of finance jobs growth.

Ted Simons: Give me a quick headline. What do you think?

Jim Rounds: I think it's going to be Arizona's going to pay attention to those fundamentals in terms of public policy, we're going to start looking at the education, transportation, and maybe reforming economic development, and that's only because there isn't something stellar on the horizon that you can point to.

Ted Simons: Very quickly, Dennis.

Dennis Hoffman: Green shoots in housing and the Arizona economy in general. In the spring. Should be a good springtime are.

Ted Simons: Gentlemen, thank you so much. And that is it for now. I'm Ted Simons. Thank you so much for joining us. You have a great evening.

Video: Captioning Performed By LNS Captioning "Arizona Horizon" is made possible by contributions from the friends of eight. Members of your Arizona PBS station. Thank you.

Dennis Hoffman:Economist and Director, Seidman Research Institute of W. P. Carey School of Business at Arizona State University; Lee McPheters:Economist, Research Professor of Economics and Director, W. P. Carey School of Business and J-P-Morgan-Chase Economic Outlook Center at Arizona State University; Jim Rounds:Senior Economist and Senior Vice President, Elliott D. Pollack and Company;

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