Economists Roundtable

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Arizona State University economist Dennis Hoffman, ASU real estate expert Mike Orr and economist Jim Rounds will look back at the economy of 2015 and make predictions for the New Year.

Ted Simons: Coming up next on "Arizona Horizon," three local economists will look back on 2015 and consider what the economy will look like in the coming year. It's our annual year-end economic round table, next on "Arizona Horizon."

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

Ted Simons: Good evening, and welcome to our year-end economic round table on "Arizona Horizon." I'm Ted Simons. Arizona spent 2015 continuing a slow but steady climb out of a recession that still impacts everything from the state's job numbers, to its population growth. Here now to talk about what we saw from the economy in 2015 and what we can expect next year is Dennis Hoffman, director of the L. William Seidman Research Institute at ASU's W.P. Carey School of Business. Jim Rounds, president of Rounds Consulting Group. And Mike Orr, director of the Real Estate Center at W.P. Carey. Good to have you all here. Thanks for joining us.

Dennis Hoffman: Great to be here, Ted.

Let's start with the state of the state's economy. How are we doing?

Dennis Hoffman: Last year we said green shoots, I think we had green shoots, unfortunately they didn't blossom into anything particularly mature yet. But the economy continued to improve. I think there are some bright spots in the sense that construction employment is no longer a head wind, it appears to be a tail wind. We continue to struggle with our manufacturing base, which is a challenge. Financial services, education services, health care services, all growing and growing pretty robustly.

Ted Simons: State or the state's economy?

Jim Rounds: It's a little bit better than when we covered it last year. And that's what we were expecting, just modest growth. We're not going to see a boom this expansion, like we're used to, this far into an expansion. We'd normally see employment growth around 4% or so. At the state level it might be less than 3% for the Phoenix area, and closer to 1% for the Tucson area, so modest growth all around, but we have the haves and have nots unfortunately.

Ted Simons: I want to get back to that, Mike, what's your state of the economy?

Mike Orr: I look at it from the housing point of view. This was a good year for housing. Particularly the first half of the year. Much better than 2014. Builders put in a lot more permanence; we'll probably see one of the largest increases in permits for new homes we've seen for six or seven years. But the second half of the year cooled off a little bit, particularly at the high end of the market. We still are short of homes at the affordable level, and short of rental homes too, even though we've got more rentals than we used to V. we've got more population and there's strong demand for affordable rentals.

Dennis Hoffman: At the risk of trying to become Ted, is this like ‘13, then? Did it tail off like '13 D. or not as bad?

Mike Orr: No, it's much less of a tail-off, just mild -- '13 we saw a big slow-down, and that really continued all the way through 2014. And then 2015 was a significant recovery, and then it lost just a little speed from September through to now.

Ted Simons: Growth, 2.5, maybe somewhere close to 3%. Personal income growth, maybe four, 5%? I know your colleague calls -- no gloom?

Dennis Hoffman: Exactly.

Ted Simons: But no boom.

Dennis Hoffman: But no boom. As usual I'm a little more optimistic than colleague Rounds here. I'm thinking that we've got a shot at 3%, and what it would depend upon are several factors. First of all, Pima County has to rebound. The numbers by the way in the employment report today suggested some resurgence in the Tucson economy, that's a surprise. It's the first month we've seen that in a long time. So we'll have to see if those numbers hold. But it would take a resurgence in the outstate areas. Interesting statistic, Ted, if you look at overall job growth in the state right now, actually according to the report today, the job creation in Pima and Maricopa County is actually 3,000 jobs greater than the job creation in the state. Which means the rest of the state lost 3,000 jobs.

Ted Simons: What kind of jobs are we talking about? I know seasonal retail this time of year is big. Are we looking at the higher end, the stronger jobs, or are we still kind of in flux seasonal here, seasonal there?

Jim Rounds: We had the seasonal jobs now, but when edo comparisons, we're comparing it to the same time last year when we're adding seasonal jobs. What is different this time, I'm a little concerned about the volume in new jobs. So it's getting better each year, but that no boom type of a comment, but I haven't seen the numbers in the high-wage industries would you normally like to see. So we want to talk about job volume, and we want to talk about job quality. I'm hoping that will turn around, so let's say the numbers improve by a half percent next year, a little more optimistic like Dennis was talking about. It would be nice if it went hand in hand with higher wage jobs. We'll see some of this improve through the next two or three years, people are going to be more mobile across the country, they'll be in better financial shape, so that's a positive. But then the expansion is getting long in the tooth, and we might see some pressures pile up and the surveys among economists are that we're not going to see a recession right around the corner, but almost everybody is predicting one before the end of the decade. So there could be downward pressure, just from national economic issues.

Ted Simons: And all of this plays into housing. Your forte in the sense of population growth, people -- are they coming here to rent, are they coming here to buy?

Mike Orr: Both. The population growth is not as strong as it was back in the early 2000s, but it's pretty good. And we still have a lot more people getting born and dying, so the population continues to grow, as long as population grows, there's always a need for housing. If the population was contracting, in some parts of the world, the housing market goes to hell in that sort of situation.

Ted Simons: You also see effects of the types of jobs? Again, better, higher-end jobs, more -- what do you see?

Mike Orr: I think because we're not seeing as many high-end jobs as we like, the pressure on housing, the demand for housing is at the more affordable end. There's a shortage of resale and new homes, which is causing prices to go up quite fast at the low end. But they're sort of going up quite slowly in the middle, and the it's slightly down at the top end.

Ted Simons: It sounds like tech and finance could be doing well.

Dennis Hoffman: And they are. So for historical perspective, the drivers, the base industry drivers in Arizona, electronics manufacturing, aerospace defense manufacturing, were very fundamental in kind of bolstering the Arizona economy, say in the '80s, even into the '90s, early 2000s, but if you think of those two industries, we face head winds and continue to face headwinds, we continue to lose in the overall electronics manufacturing sector, we continue to struggle there, globalization is very real, product cycles have to fit for our particular producers. Sequester has been really bad for our defense industries. We have some fantastic private sector defense contractors here in the state. But it's been tough sledding for them. So they'll have to pick up for us to really change things.

Jim Rounds: That's where public policy can enter the picture. So the broader economy is going to drive how we proceed. But on the higher end jobs, we talk about Tucson having weaker job growth, they were hit really hard because of cutbacks and in defense spending and that impacted the Phoenix area, all parts of the state. But then you get into public policy related to what kind of jobs we want to create. We don't have to have incentives for fast food workers, but we might have to have something for recruiting business examples. And we spent a lot of time recruiting the larger businesses coming into the state, but if you do the numbers, I don't change a forecast when I see a ribbon cutting ceremony that we landed some 300-person company. It's great we landed them, but you have to do that work over about a decade before you see changes in the numbers. So if it takes that long on the recruitment side, I would like us to be talking about growing from within, growing that next small business that becomes the big one.

Ted Simons: How do you do that? Venture capital in Arizona has never been strong. It seems like it's getting weaker. What's going on?

Jim Rounds: Everybody likes to reduce the conversation down into one or two things. Some people say it has to do with tax cuts, some people say it has to do with economic development programs. It has to do with dozens of things. It has to do with small business start-up programs, with education, funding, not just funding, throwing money towards education, but funding it in the right areas. There are a dozen things that make or more than a dozen things that make an economy tick, so I would like to hear, especially from policymakers, is, I would like to hear how they would like to tweak the economy, but I want to hear about a solid package being put together. If all we hear is one item, a tax cut, we're going to expand economic development programs, if it's focused on one or two things, then I think they're going to be wasting everybody's time.

Ted Simons: Public policy, and the economy, getting Arizona back on track, getting Arizona -- again, we're doing well, slow and steady, we're doing okay, but our peer states are doing better than okay, and I keep trying to find out why. What can we do?

Dennis Hoffman: Well, major investments in education. I know you have the educators here, touting more education. But -- so we could focus on K-12. K-12 investments have been lacking, there's a plan to inject some money based upon the response of the voters this spring. It's a great move in the right direction. It just needs in terms of orders of magnitude, if we're going to move this needle against other states, and has to be so, so much more. And that I think -- we have to face that reality. At the legislature and among the voters.

Jim Rounds: And we have some tools in place. We've gone through tax reform. Now, I think if they're going to talk about taxes, I think it's going to be more about refining it and seeing if they can make it more efficient. We have an economic development programs, we have a lot of organizations that work together. Maybe they can tweak things. They might want to look at regulatory issues. So I feel like everything is there. They have the list of things to look at, it's, can they implement reforms in the right areas, and can they be cost effective at it. We're not landing somebody on the moon with this stuff. This isn't overly complicated, but because there are so moving parts you have to get a lot of people on the same page, and that's very hard in politics.

Ted Simons: Do you look at what brings people out here? Is it the price of housing? The price of land?

Mike Orr: Well, I think from attracting business point of view, we score strongly in terms of the affordability of housing, and from relatively low taxes. We really -- top marks in both areas. We don't have quite as well as image when it comes to things like the quality of a basic education, and some other aspects of infrastructure. So I think we're in a strong position, but we could be a long stronger compared with our competitors. We're attracting high-tech business, for example.

Ted Simons: November jobs report showed construction increase for the first time in a November in 10 years.

Dennis Hoffman: M-hmm.

Ted Simons: It's a good sign, but it seems like for years we were talking in the boom times, we need to diversify, we're too dependent on construction and the real estate market. Are diversified? Are we laying a good foundation?

Dennis Hoffman: I think we're reasonably diversified. That historical case that was built, a case against the real estate industry in the state of Arizona, real estate was fueled by the fact we were a people magnet. We lead the nation in population growth year after year, duh, we're going to lead in building homes. The struggle now of course is, even though we're near the top in net domestic migration right now, people are still finding in a relative terms, Arizona is still being perceived as attractive, the challenge is very few people are moving today compared to what they did historically. We used to get 100,000 new people here for free. You didn't need much of an economic development strategy if you're swimming in new people every year.

Mike Orr: I think people are moving here more for the climate than for the jobs. If we compare it to 15 years ago, there were job opportunities, we were growing very fast on all fronts then. We still have people choosing to retire here; we've got booming, the 55-plus housing area. And lots of creative things that are attracting people, because it's a great place to live if you want to enjoy your leisure time.

Ted Simons: We were talking about people moving here, who is moving here, and what does that mean for the future? What does that mean for the makeup of the state and what important things are -- we hear about the millennials, you have to have urban areas, they want -- they don't care about cars or homes, is that true in Phoenix and in Arizona?

Jim Rounds: Well, it kind of depends. We talk about the millennials and the demand for that urban atmosphere. That can be part of the plan, buts that also a small percentage of the overall population. What Dennis said is important. We're still top 10 in terms of domestic population - in migration, people moving from one state to the other. Not international numbers, but people moving from other states to Arizona. This is an issue across the country, this isn't just an Arizona issue. This is just the nature of the downturn. And we can't necessarily look at this downturn as the template for the next expansion. This is a very weak expansion, it happened to be the type of recession that we went through, that very much impacted us. We'll go through another mild downturn probably before the end of the decade, and we might have a little more of a normal expansion, but maybe not that super hyper growth type of thing we had over past decades. So it will still be a mix. Arizona is still going to be who we were before, but we have to focus on other stuff too.

Ted Simons: Do you think there will be a downturn, something along those lines in the next few years?

Dennis Hoffman: Just basic history and arithmetic suggests that, you know, we're not going to go probably past 2020 without a mild downturn. Again, historically, recessions in Arizona have been no big deal. We didn't really have one -- we had one in the Great Depression, obviously, and we had the Great Recession was, you know, just a tremendous downturn for the state of Arizona, unprecedented in anybody's recollection, certainly.

Ted Simons: Is the real estate market strong enough now, stable enough now to take a downturn or two?

Mike Orr: I think the real estate market is not creating any problems. You could say the amount of time we had, the last two big recessions in Arizona it was caused by real estate. In sort of '89-92 and 2005. Now if we do have a recession, it won't be caused by housing, but it might bear the affect. The biggest area of concern I have at the moment is raw material pricing, and that obviously is affecting some parts of the world really in a very bad way. For example, we usually get a lot of home purchases from Canada, and Canada is hurting really badly because of low oil and gas pricing. And so Canadians are now selling more homes in the Arizona than they're buying. So that's not going to affect the overall economy very much, because Canadians aren't such a huge part of the market, but the rest of the world is feeling some pain that we're really not feeling very much.

Jim Rounds: Keep in mind, we're talking about downturns, but the reason that you want to talk about the potential for a downturn is we really weren't ready for the last one. We just thought we were wonderful, like Dennis said, swimming in money, and everything was going to keep going wonderfully forever. But especially if you're a government entity, you don't wait until things fall through the floor and then you say, all right, we're going to completely change the way we do things. The better government entities I've been working with, and I've been observing, are starting to prepare for possibly a very mild downturn. If things are building up and you have massive bubbles bursting, then have you a really dramatic downturn. This one is probably going to be more, you have some imbalances, it might have a little bit of pressure, a little bit of weight on the economy, we go through a mild downturn, very short-lived, and then we have another expansion. So we're not talking about anything extreme. But you want to talk about it because we just saw what happens if you don't talk about it. And it wasn't pretty.

Ted Simons: Fed raising interest rates. The impact.

Dennis Hoffman: Oh, very, very minor. I think especially the first rate hike, I think it's good that we've begun this clear path toward normalization. They've signaled it's going to be a very, very slow kind of bright angel trail, up to normalization. And that's going to take probably years. It's going to give them opportunity should the economy slow, to hesitate, maybe even come back down a quarter if needed. But I think they signal to the markets really very clearly, and we'll see how the markets respond. Markets were favorable on the announcement day, and markets will continue to gyrate, you know, since announcement day. And we'll see where we are by mid-January.

Ted Simons: As far as the housing market, impact, and when?

Mike Orr: Most people assume it's going to cause mortgage interest rates to increase. Actually, the first day afterwards they went down. They depend on long-term interest rates. But I expect in the medium term we'll see slightly higher loan interest rates, I don't think that will have a significant impact.

Jim Rounds: Historically very, very low levels right now.

Ted Simons: Is it a psychological message, though, that says, hey, we're doing better, we're doing well enough now to where we can go ahead and do this?

Jim Rounds: I think that's part of it. Part of it I think is that you don't just look at an increase in the rates, you look at what was expected. People were expecting rates to go up. And in fact, I think people are expecting rates to go up even the prior year. I think the Fed missed a couple of opportunities to start gradually raising rates in prior quarters, and now they're a little bit late to the table at doing this. But if they send that signal, like Dennis said, if people communicate in the private sector, stock market, everybody working in these areas where it might be impacted, if they can anticipate what's going to happen, you're not going to see a shock, and that's why nobody was shocked and you didn't see dramatic swings in the stock market when it went up. It's not the number, it's what do you anticipate? And the word they used was "gradualism." I hate that word, it's the first time I had seen it written if they do it gradually, which would have been a better word, I think we'll be okay.

Ted Simons: Dennis, why did they make the move and why did they make the move now?

Dennis Hoffman: Well, that is very interesting. You could argue that the economy -- some of the things they were allegedly looking at you could argue were slightly worse today than they were in September when they didn't make the move. But I think if you just go back to basics, the big picture is, dual mandate, employment, a concern about employment and unemployment, they're concerned about inflation. The labor market is clearly showing signs of stability. Maybe not in the types of jobs everybody wants, but in the overall picture, labor market has dramatically improved, and there are some signs of wage appreciation. What there's not signs of is any sign of significant inflation in the economy yet, but if wages perk through, then we'll get those signs. But at the end of the day, it's a quarter point. A quarter point off zero. It's still incredibly accommodative.

Ted Simons: Are we going to see a few more of these?

Dennis Hoffman: I think the better line is somewhere between three and five rate hikes in 2016. I think odds are more on the three. I would suggest it's going to be closer to three or maybe four probably five out of the picture. And again, if the economy hesitates, they'll just hold it at a quarter.

Mike Orr: In fact, if they do put more upward adjustment in, that's a sign the economy is doing better than they expected.

Jim Rounds: That's right.

Ted Simons: Back to real estate with you, the rental market we've heard is gang busters. Is it still gang busters, how long will it be gang busters?

Mike Orr: When there's very little new rental product being created at an affordable rental. We've got multifamily buildings going up that are pricey, I think there's going to be a little softness in the top end. But the sort of thing the average person wants to rent, there isn't enough of. So everything that comes onto the market gets swept up pretty quickly.

Ted Simons: You had a recent report, townhouse and condos doing very well.

Mike Orr: Relative to the single-family, they seem to be a bit stronger, more in demand. There's still a tiny part of the market in Phoenix compared with almost any other city.

Ted Simons: Are we going to start seeing these fancy luxury -- everyone is a luxury rental? No one wants a regular rental; they all want a luxury rental. Are these going to flip and become condos in the near future?

Jim Rounds: I think a lot of it depends on; it gets back to the basics. You look at population growth, you look at employment growth, two significant signals of how well we're doing. I think a lot of it is going to depend on if our relatively high ranking in terms of population growth, but very low number compared to what we're used to. If that continues to improve, and I think it will, I think we're in agreement next year we're going to see better population numbers, there is just not going to be significant. A lot of that activity is going to determine what happens in real estate, all this stuff is interconnected.

Ted Simons: Yeah. All right. So with all things considered, are you buying or selling on the Arizona economy?

Dennis Hoffman: Oh, I'm -- come on.

Ted Simons: Yes, you with the grown shoots --

Dennis Hoffman: I'm a consummate buyer. Arizona is a great place to live and work. The future continues to be really quite bright. We have our warts, we have our challenges, but it's -- it was a better year in '15 than '14, it will be a better year in ‘16 than '15. So we saw some green shoots, and some of those green shoots will mature in '16, and we'll see some better growth.

Ted Simons: Buying or selling?

Jim Rounds: Buying. We can't put too much emphasis on what this expansion looks like. This isn't how Arizona is going to expand for the next couple decades. This is very unique. We'll see better times, but we do have to have very high quality planning over the next two or three years, especially on the public policy end.

Ted Simons: Will we see bigger -- the better times we used to see, those four or five and sixes?

Jim Rounds: The next expansion, especially if we just have a very mild downturn whenever we end up having it, by the end of the decade, I think, I don't think it's going to be that four or 5% growth, but it's going to be a lot better than what we just saw.

Ted Simons: Okay. Buying or selling?

Mike Orr: I'm moderately optimistic, so I'm a buyer. I think 2016 will be a pretty good year. A little better than this one.

Ted Simons: All right. So there you go, Dennis, your green shoots are blossoming.

Dennis Hoffman: I'm among friends.

Ted Simons: Right. When we meet next year we'll find out if the --

Dennis Hoffman: Indeed we will.

Ted Simons: The harvest looks like.

Dennis Hoffman: Indeed we will.

Ted Simons: Good to have you here. Thank you so much for joining us. We appreciate it. That is it for now. I'm Ted Simons, thank you for being here. You have a great evening.

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Dennis Hoffman:Economist,Mike Orr:Real estate expert,Jim Rounds:Economist

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