Experts: Recession on horizon for Arizona
The Arizona Republic
More economists now believe Arizona is already in a recession – or will be by the end of the year – because growth in consumer spending is anemic and fewer jobs are being created. A survey of Arizona’s top economic forecasters found that 35 percent believe a recession has begun in the state, and three-fourths believe a recession will be at hand by the end of the year.
Economists define a recession as two straight quarters of a contracting economy, particularly declining real gross domestic product.
Other Arizonans might characterize a recession as a time of uncertainty about job prospects, income and growth. Those who are hit by the downturn naturally have less money. But others, less directly affected, may hold off on buying non-essential items, slowing the cycle more.
Arizona State University’s latest Blue Chip Economic Forecast involves a survey of economists with 16 companies, universities or agencies. None can say with precision the state of the economy today. A recession can be over before it’s officially pronounced; it usually takes months and sometimes more than a year to verify indicators.
“This is no disaster, but I think it will be the weakest economy we have had since 1980 to 1982,” Scottsdale economist Elliot Pollack said. That was the Valley’s last severe recession, when interest rates climbed to about 18 percent.
Arizona’s last recession, a relatively mild one in 2001, and some economic data from late 2007 makes spring 2001 look rosy.
Pollack, who as late as last fall had said that a recession was unlikely, said he changed his mind after seeing the latest retail and job-growth numbers. He now believes a recession is likely in the state this year and maybe into next year.
Nevertheless, he believes the recession will be mild like the last ones in 2001 and 1990-91, but protracted.
The Blue Chip forecast says retail sales will be up by less than 1 percent in 2007, compared with a rise of 7.5 percent in 2006. And the Arizona Department of Commerce says that job growth in December weighed in at only 1.3 percent over a year earlier. Economists say it could end up lower by the time it gets its customary revisions this month.
Symptoms of a recession include a shrinkage in the number of new jobs, as well as in goods produced. Economists say both are being dragged down by the sharp slowdown in housing sales and falling housing prices, because Arizona’s economy has been especially dependent on housing and population growth.
Marshall Vest, a University of Arizona economist, was one of the earliest pessimists and believes the numbers will show the recession began in the fourth quarter of 2007. Retail sales, he said, peaked a year ago and have been declining every since.
“I started feeling uneasy a couple of years ago with this asset bubble in real estate. Whenever you have a bubble like that, you have a bad ending,” he said, referring to the rapid rise in home prices that started in 2004.
The latest Arizona Business Conditions index, released Friday, rose a bit from a reading of 47.7 in December to 49.6 in January but is still way below the 64.3 of July. But anything less than 50 indicates a lack of growth in the near term and indicates a recession is likely in four to six months, said Dawn McLaren, research economist at ASU’s W.P. Carey School of Business.
The last time the index was below 50 was in September 2002, when the state was coming out of a recession. The index has correctly forecast recessions since it was started 45 years ago.
A mild case?
Lee McPheters, an Arizona State University professor and director of the JPMorgan Chase Economic Outlook Center at the university, also believes a recession will be mild for two reasons: the Federal Reserve acted fast to reduce interest rates and because of the proposed federal stimulus package that would give rebates of $300 to $1,200 to most taxpayers.
Economists worry especially about consumer spending, which accounts for at least two thirds of the country’s economy. Sources of consumer money have been shrinking: first home-equity loans, then credit, the stock market and now maybe the possibility of getting a new or better-paying job.
Pollack said, “They (consumers) have to pay down debt and increase their savings, and they can’t do that out of their houses or the stock market anymore. They have to do it with real earnings.”
And unfortunately, if jobs don’t grow, earnings can suffer, said Steve Taddie, an economist with Stellar Capital Management, a Phoenix investment-management firm.
“The employment data is my single largest concern in the economy, both in Arizona and national,” he said. “It has been a year and a half since people have been able to really use their home equity. Without that, the spending growth has to come from employment.”
Late 2007 is already looking worse in some respects than spring 2001. Employment growth was 2.3 percent in March 2001, compared with 1.5 percent last November. Construction jobs then were growing at 5.4 percent. In November, they shrank by 7.2 percent.
Economists also say it was a different world even then and that the state and national economies are now much more intertwined with the global economy.
The blessing is that American companies have been able to get more money from abroad, and there is more of a market for U.S. exports when the dollar is weak, including aerospace and electronic products from Arizona. Also, it keeps inflation down.
“You have global production, and you have global competition for jobs, and that has tended over the last couple of years to keep a lid on inflation and wages,” McPheters said. “Just the threat of outsourcing has kept wages from going up as much.”
But the global links also means the subprime-mortgage problems are causing global problems, and anemic consumer spending could, too.
“The problem is now, some economists believe, that since the U.S. still accounts for about 20 percent of the world’s output and the consumer accounts for about 70 percent of the U.S. economy, if the consumer cuts back, that is going to have a worldwide effect,” McPheters said.
“You could get inventory pileups in China and India. So the big question is whether there is a linkage between the U.S. and the rest of the world and whether it goes both ways. Can a difficulty in the United States lead to global recession?”