Published: May 21, 2009 in Knowledge@W.P. Carey
The national and Arizona economies are expected to begin feeling the effects
of a recovery during the last quarter of 2009. But over the next year the
recovery will be slow, with unemployment continuing to rise and economic growth
anemic at best. Meanwhile, the state's expenditures are rising, even as revenue
continues to fall, setting the stage for future budget cuts and an expected
That was the consensus unveiled by top economic experts from the W. P. Carey
School of Business and the Arizona governor's office at the annual Economic
Outlook Luncheon on May 20. Addressing the audience of business and community
leaders were Lee McPheters, director of the JPMorgan Chase Economic Outlook
Center at W. P. Carey and editor of Economy@W. P. Carey; Dennis Hoffman, director
of the L. William Seidman Research Institute at W. P. Carey; and Eileen Klein,
director of the Arizona Governor's Office of Strategic Planning and Budgeting.
McPheters provided an overview of current economic conditions on the state and
national level, and offered a forecast for the coming year.
The U-shaped recovery
"The economy is going to show some signs of recovery in the last part of 2009,
but the way I like to look at this is that lots of our economic indicators will
still be underwater, in a sense -- they just won't be as far underwater," he said.
"We'll probably see positive growth in GDP, we will see job losses getting smaller,
but there will still be job losses. There will still be people claiming unemployment
insurance and, of course, unemployment rates will still be going up.
"It's going to be a deep, sort of U-shaped recovery and 2011 will probably be a
pretty good year of job growth," McPheters added.
In the meantime, job losses will continue to mount. In March, with an over-the-year
employment decline of 7.1 percent and 136,000 jobs lost, the Valley just edged out
Detroit as the weakest large metro labor market in the nation. And even as the economy
begins to recover, the Greater Phoenix area will still see its labor market contract
by 1 percent in 2010, according to McPheters.
Nationally, McPheters stressed that while the current recession has been painful,
it still is not on par with the Great Depression. The Great Depression was marked
by four consecutive years of decreases in Gross Domestic Product (GDP), while the
current recession is expected to result in four consecutive quarters of decrease in
inflation-adjusted GDP. In fact, in the first year of the recession, the national
GDP actually increased by 1.1 percent.
"During 2008, the first year of the recession, you would expect that the GDP would
be decreasing," he said. "Well, one of the factors holding it up was exports.
Exports continued strong in the United States through 2008."
This year, however, exports are expected to drop by 10 percent. That's just one
example of how the national and state economies will continue to struggle as the
recovery begins to take hold. Another example is the expected freefall in the
commercial real estate market, especially in Arizona.
"Commercial is the next shoe to drop and we have seen this pattern before,"
McPheters said. "Even as you see residential [construction] begin to pick up,
I think you can expect that commercial building is going to be very, very weak
all the way through 2010 and probably 2011, because what we need to see is
population growth come back and job growth to come back. There's no point in
building retail space and office space if the jobs are not there and the consumer
is not coming out to shop."
And it is consumers, who account for 71 percent of GDP, who really hold the
key to the economic recovery.
"The consumer is the only part of this economy that can bring us back,"
McPheters said. "Consumers are not going to come back into the game until
home prices stop falling, until the stock market stabilizes, until they see
unemployment rates have peaked out and job losses start to get smaller and
smaller. And the consumer has to have confidence to buy, and believe it or
not, the consumer has to back off of their inclination to save their money."
In March, the savings rate as a percent of disposable income was 4.2 percent, up
from 2.6 percent six months earlier. While increased savings are considered a good
thing in robust economic times, a pullback by consumers as an economy tanks can
have devastating effects. McPheters pointed out that for each 1 percent increase
in the savings rate, approximately $100 billion are being pulled out of the
However, McPheters expressed confidence that the very calamity that sent our
state and national economies reeling will eventually add to Arizona's attractiveness
to new residents and businesses -- falling home prices.
"Housing prices have now returned to the traditional level, where Arizona housing
prices are now more affordable than the national average," he said. "In 2005 and
2006, we had come to the point where we were one of the least affordable markets.
That has turned around and it has turned around very quickly. Of course that has
been very painful."
How to close the gap
Hoffman agreed with McPheters, adding that he believes the state's economic
rebound will be strong.
"This of course is the big question: What kind of bounce will take place?
Now, I'll have to say that the dramatic shakeout in prices in housing, while
it has been absolutely disastrous for a number of folks and put a lot of pressure
in a lot of different places, it might set us up for a more robust recovery than
I would have thought six to nine months ago," he said. "The thinking is really very,
very simple; an attractive attribute of Arizona has historically been great climate,
affordable housing and a place to get a job. That third aspect really doesn't exist
right now, but it could exist if our economy recovers at a little faster pace."
In the economic downturns of the past four decades, Arizona has bounced back strongly,
and Hoffman is confident history will repeat itself, especially if the state and Valley
can re-create the environments that people from around the country have found so
But Arizona's current budget crunch casts a long shadow over the prospects for recovery.
In fiscal year 2009, the state's budget gap stands at $1.6 billion. In fiscal year 2010,
that's expected to almost double to $3 billion dollars. As the economy has worsened,
unemployment has soared to almost 8 percent, foreclosures have skyrocketed and businesses
have closed their doors. As a result, billions of dollars in revenue from income, property,
sales and business taxes have evaporated. Conversely, the need for state services has
"We're really seeing the effects of the downturn in the economy. Not only are the state
revenues significantly down, but also more citizens are in need of services," said Eileen
Klein of the Arizona Governor's Office. In the past two months alone, the Arizona Health
Care Cost Containment System (AHCCCS) has enrolled 50,000 people, she said.
Hoffman pointed out that in the past, $48 to $50 out of every $1,000 of personal income
had gone into the state's general fund. Since 2006, that amount has been plummeting and
is expected to hit around $33 by the end of this year.
The state is now walking a tightrope of trying to increase revenues by raising taxes,
while trying to woo out-of-state residents and businesses.
"I would argue that the state needs to be much more business friendly in terms of its
tax structure, the quality of its work force, its job training programs. You can be business
friendly in a number of ways. Having a lucrative market to sell into is probably the friendliest
thing you can do for businesses," Hoffman said. "Businesses look to where they can locate to
make money, where they can produce at a reasonable cost, and sell and make profits. We need a
more lucrative market here, we need higher incomes, we need higher income people residing here
in the state of Arizona, [and] we need a friendly tax code for business."
Hoffman detailed what the state should and should not do as it attempts to plug the budget gap:
"If we had the income tax rates that we had in 1993, there wouldn't be a $3 billion hole; that'd
fix it right there," Hoffman said.
The state should not impose taxes that distort the economy and create disincentives for business creation and expansion.
Undue burden should not be placed on businesses, especially export-based businesses that are mobile.
The state should focus on broad-based taxes with modest rates (compared with competitor states) that create the least distortion.
For now, Arizona Governor Jan Brewer has called for a temporary tax increase to bridge the budget
shortfall. However, she has yet to say exactly where the tax increase will take place.
"There has been a lot of conversation over which tax would be best. We are certainly looking for
the tax that will have the least negative effect on the economy while still providing the additional
revenue needed to sustain us through the downturn," Klein said.
To underscore just how hard the recession has hit Arizona, McPheters pointed out that the state
is now ranked last in job creation -- and climbing back to the top won't be easy.
"Can we come back from 50 to one? It can happen. We'll be a leader post-recession," he said.
"Every recession, the Arizona economy rebounds much stronger than the nation as a whole.
You have 50 years of evidence of that. Unfortunately, getting there will not be pretty;
we have two ugly years ahead."
Reprinted with permission from Knowledge@W.P.Carey. To read more click here.