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The economic recovery in Arizona has been slow, but can we expect a more vigorous second half for the state and the nation? The annual Economic Outlook Luncheon, held May 6 by the Economic Club of Phoenix offered answers. The three presenters at the event, Dennis Hoffman, economics professor and director of Arizona State University’s L. William Seidman Research Institute, Lee McPheters, research professor and director of the JPMorgan Chase Economic Outlook Center, and Mike Orr, director of the Center for Real Estate Theory and Practice, all part of the W.P. Carey School of Business, will give us a look at the state of the Arizona and national economies.

TED SIMONS: Next on "Arizona Horizon," we'll have a state and national economic update. And we'll learn about a traditional European form of group dancing. Those stories next on "Arizona Horizon."

"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. The Economic Club of Phoenix held its annual economic outlook luncheon today. The event featured experts from ASU's W.P. Carey School of Business addressing the current state of the economy and what we can expect to see in the second half of the year. Here now are DENNIS HOFFMAN, economics professor and director of ASU Seidman Research Institute, LEE MCPHETERS, research professor and director of ASU's J.P. Morgan Chase economic outlook center, and MIKE ORR, director of the Center for Real Estate Theory and Practice at ASU. Good to have you all here. Thanks for joining us. Alright, the outlook at today's outlook luncheon, what did you see?

DENNIS HOFFMAN: Upbeat. Optimistic. Best situation we've had, what's your tag line, colleague McPheters?

LEE MCPHETERS: The best year for job creation in Arizona so far in this recovery.

TED SIMONS: Is that a surprise to you?

LEE MCPHETERS: Well, it's been a long time coming and it's about due. Looking at 2014, we actually saw fewer jobs created than the year before. The bounce-back actually I think is somewhat surprising. We're on track to add about 65,000 new jobs, which is better than the 50,000 or so for last year.

TED SIMONS: Mike, just in general terms. Things upbeat?

MIKE ORR: In housing, yes, people are optimistic. We've had a pretty good spring, sales are up. For March, for example, 17% more sales than last year. Having said that, last year was quite a disappointment. We're not seeing anything exceptional but definitely improving trends.

TED SIMONS: Let's talk about jobs, Dennis. Are more people finding jobs? Is the jobless rate down from last year? Is it down enough? And if they are finding jobs, what kind of jobs are they finding?

DENNIS HOFFMAN: Well we struggle again with job quality, we've struggled historically with job quality, but we seem to be in the middle twos in terms of job growth right now. I think the consensus was something in the upper twos this year for growth rate. I think there's a possibility to eclipse three if we get this thing going. What I'm seeing is, in revenue flows and sales taxes and some of the income tax flows, that is usually a harbinger of good things ahead. I think it's reasonably good news at this point. We're upbeat. You know, I -- I've always kind of had this notion you never want to buck the real estate trend in Arizona. And I do remember saying that I think the spring of 2013. But we were on trend then, and then all of a sudden things kind of hesitated. So the hope is of course that we don't hesitate again.

TED SIMONS: As far as this being the best year so far for Arizona's recovery, are we now surpassing and outpacing some of our neighboring states who seem to have been outpacing us for the past few years?

LEE MCPHETERS: Well there are a couple of things going on here. First, this is pretty much a Phoenix story. 85% of this job creation is taking place in Phoenix. Phoenix is growing 3%, probably maybe even a little bit better this year. Unemployment rate at the end of the year will probably be 4.5% for Phoenix. So Phoenix is doing quite well. The rest of the state, not so well. Whether you look at in-migration, job creation, whatever indicators you have. When you compare Arizona overall to the neighbors, nationally we're growing, you know, somewhere in the range of 2.5%, which puts us 14th. And in the west we see Utah is No. 1 in the country. We see Oregon and Washington at three and four, we see California as No. 5. So we're doing good, but other places are even doing better.

TED SIMONS: As far as real estate is concerned what are you seeing out there? It sounds like Phoenix is going gangbusters a little bit here - a little bit of explosion - but the rest of the state not so much. Same thing real estate?

MIKE ORR: That's certainly true, yeah. Phoenix's housing market is getting a lot more traffic, a lot more purchasing, Tucson is still pretty quiet and the rest of the housing markets are pretty small.
TED SIMONS: So Dennis, what's going on? Is Phoenix comparing favorably to the Denvers and Salt Lake Cities and the Las Vegases and San Diegos?

DENNIS HOFFMAN: You know, historically that's the way it worked - the west gets going -- sometimes we're the catalyst, sometimes we follow along. But it really is a great story across the west from Denver to Salt Lake, to Vegas, to, you know, some of the cities in California are doing pretty well, as well.

TED SIMONS: How about housing and construction? Any signs of a rebound there?

DENNIS HOFFMAN: Well, we're still looking for construction employment to pick up. I talked with some builders actually at the luncheon today. There's still some hesitancy, not so much from the folks locally here who are starting to feel this, but from their corporate support nationwide. You know, I heard one gentleman today that said, you know, we had this upbeat story in the spring of 2013 and we were very optimistic and corporate supported us. And then of course things stalled out. So they are going to be much more cautious I think this time. But, you know, again, I'm seeing with the flow of revenue that we've had the whole first quarter, that's indicative that there's money being made out there. People are earning money somewhere otherwise they wouldn't be sending the DOR these corporate and individual tax receipts.

TED SIMONS: Is it a bit of a surprise that revenue looks like that right now?

DENNIS HOFFMAN: To some. If you recall back in December, green shoots in the spring, remember that?

TED SIMONS: Yeah, I do remember that. You mentioned Phoenix as being a bit of a dynamo now as far as the state is concerned. Is Phoenix doing well? Again, compared to the Salt Lake Cities, Las Vegases and Denvers of the world.

LEE MCPHETERS: Those areas are doing better. We have picked up, things are looking good, the unemployment rate is down, but when you look at what's happened in Utah, for example, as I said, the number one growth state, they have growth across the board. They have growth in manufacturing, they have growth in construction - two industries that are not very robust in Phoenix right now. If you look at California, big surprise in California. Wasn't there a New York Times article counting California out or something, just a few days ago? With all their problems, they're creating more jobs right now than any state in the country.

TED SIMONS: Are there any lessons that Phoenix/Arizona can learn from these other regions?

LEE MCPHETERS: Well, I would say that, you know, you just look at what drives growth over the long term. Education is a big factor. I would say that Arizona has always relied on population inflows, and we are certainly getting our fair share of population inflow. But the quality of the jobs that are being created right now is really not what it ought to be, I think, to raise the average wage.

TED SIMONS: Both of those are factors in real estate, aren't they? The population inflow and income levels being able to afford that home.

MIKE ORR: Yeah, and I think we're in decent shape from a population growth - not quite up to the level we were 10 years ago - but the population growth is now good. But the wage levels are still not that great if you want to support a home ownership. A lot of people choose to rent because that's all they can afford to do.

TED SIMONS: Are we still seeing that? I mean, is inventory out there still tight?


TED SIMONS: It hasn't loosened at all?

MIKE ORR: Well, we've got more inventory at the top end now. So if you're talking about a half million dollars and above, there's plenty of choice. Once you get down below 200,000…very short of inventory, both to sell and the similar sort of homes are very hard to find if you try to rent them, too.

TED SIMONS: Why is that?
MIKE ORR: The population has grown much faster than the number of homes we've got. We've been building, you know, we've talked about construction jobs not being here. If you don't have construction jobs you don't construct things. And we've got a significant increase in population and not much of an increase in the number of homes.

TED SIMONS: This business of the rental market being super hot and the real estate market kind of stagnant - do you see more of that?
MIKE ORR: We've got basically a shortage on both sides. We've just got an overall shortage of homes. Whether you're trying to rent or buy you're going to be in trouble unless you've got a lot of money.
DENNIS HOFFMAN: A lot of the rental market is very high-end.
MIKE ORR: Yeah, we've been constructing plenty of high-end rental apartments, so there's still quite a good choice there. And this morning I talked about two zip codes not that far apart - one in Phoenix, one in Scottsdale - similar-sized zip codes. The one which is less expensive had only got 12 homes for sale, the one in Scottsdale has got 500 homes for sale.

TED SIMONS: My goodness. Alright, Mr. green shoots in spring. We're heading into summer now, are the green shoots going start burning up in wildfires? What's going to happen?

DENNIS HOFFMAN: Well, there's no sign that this economy is going to take off like a rocket ship. It did in 1993. But the interesting parallel there is we came off five really slow growth years, and then in the spring of 1993 we really did take off. Now there's no clear signs that we're going to do that yet. But look, folks contributed estimated individual income tax payments for Q1, the first sign for 2015, 22% up over last year. Now I think the anomaly in all this was actually last year, not so much this year. I think these dollars that we're seeing here now are here to stay, and that the miss was last spring. That's a longer story, but there's no anomalous behavior right now with these current dollars in my opinion.

TED SIMONS: With that in mind, what are you now seeing for the rest of this year on into next year? Is it a happy ride up or what are you thinking?

LEE MCPHETERS: We still have only replaced about 80% of the jobs that were lost. This is the year that we replace all those lost jobs. That's good news. The not-so-great news is that the growth rate that we are seeing right now, while it is better than what we have had in the past 2-3 years, is still nowhere near our long-term average. We ought to be growing about 4% in terms of job creation. And we're talking 2.5.

DENNIS HOFFMAN: We can't get above 3. It's going to feel very different if we get north of 3. He's exactly right - we're used to 4.

TED SIMONS: Why can't we get above 3?
LEE MCPHETERS: You've got two parts of the economy that are really not contributing. One of them is manufacturing and the other is construction, and those are important. We also have government that is somewhat slow to come back. And maybe this change in revenues is a sign that that is going to be different here in the second half of the year. I don't know.

TED SIMONS: Construction seems like it can be cyclical. Manufacturing seems more systemic. How do you change that?

LEE MCPHETERS: Well, it has lot to do with technology. Dennis was talking about that earlier, there are big changes…

DENNIS HOFFMAN: High-tech manufacturing for Arizona is what you need to think of. You also need to think of the Department of Defense, because our defense sector manufacturing is absolutely huge. So that's governed by the vagaries of sequester and the pace of spending of the federal government. And so we've got a big historical piece of our manufacturing puzzle that's being hindered by changes at the federal level.

TED SIMONS: Back to real estate - single-family homes, condos, townhouses were pretty hot here for a while. Are they going to stay hot for the rest of the year? What's going to happen here?

MIKE ORR: I think there's a fairly good demand for smaller, more centrally-located homes. That's the kind of thing we hear from millennials as they start to get into choosing where to stay. They don't want to be right out in the sticks; they want to be closer to good restaurants where all the friends are and that sort of thing. So a smaller home, more urban location is what they want. Even the baby boomers are starting to make some moves in that direction. As the kids have left and they start retiring, the idea of looking after a great big home way out of town is not so appealing. They want to move back into the city to be close to the arts scene and things like that, and maybe live in a block that is basically looked after by the management and all they have to do is lock and leave it when they want to go for a cruise or whatever.

TED SIMONS: As far as investors are concerned, what's the big factor in the real estate drop that we had here a few years ago - what's happening there?

MIKE ORR: They're basically at a low ebb at the moment. There aren't many bargains for them to find, so they're not very active. Only about 12% of transactions involved investors in the most recent month. The long-term average is 15, so it's below average. We were up at 40% at one time.

TED SIMONS: Foreclosure, short sales, down?

MIKE ORR: They're all down, yeah. Foreclosures are now below the long-term trend line.

TED SIMONS: Alright. So, back to those green shoots in spring. What happens this fall? What happens next year?

DENNIS HOFFMAN: More green shoots?

TED SIMONS: That's about it, huh?

DENNIS HOFFMAN: No, I think, look, there's every reason to be optimistic. I can give you ten reasons why it won't happen…you know, some geopolitical event, some recession at the national level. But oil works in our favor, construction works in our favor…it's our time, I think.

TED SIMONS: Those low gas prices have to be a factor. Doesn't that have to be a factor?

LEE MCPHETERS: Definitely. What we have seen is the number one growth industry in Arizona is what we call "other services", and these are the personal services such as barbers, laundry, masseuse treatments, getting your air conditioner repaired, all of this sort of thing. So people have basically taken their savings from gas prices and got their hair done, and it's showing up in job creation.

TED SIMONS: Alright. Well it sounds like I'm hearing general optimism here, which is nice to hear after the last few years.

DENNIS HOFFMAN: Yeah, we're really quite optimistic.

TED SIMONS: Alright, well, good to have you all here. Thanks for joining us, we appreciate it.

DENNIS HOFFMAN: Very good, Ted, great to be here.

Dennis Hoffman:Economics Professor and Director, L. William Seidman Research Institute at Arizona State University; Lee McPheters:Research Professor and Director, JPMorgan Chase Economic Outlook Center at Arizona State University; Mike Orr:Director, Center for Real Estate Theory and Practice at Arizona State University;

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