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April 20, 2011

Host: Ted Simons

Arizona Economy

  |   Video
  • The economy is recovering, but it’s a slow recovery. Economist Elliott Pollack will discuss the latest trends.
  • Elliott Pollack - economist
Category: Business/Economy

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Ted Simons: Is Arizona's economy showing signs of life? And if so how fast a recovery are we seeing? Here to tell us how he sees it is Elliott Pollack, CEO of Elliott Pollack and company, a Scottsdale-based economic and real estate consulting firm. Good to see you again.

Elliott Pollack: Good to be here.

Ted Simons: Are things getting better?

Elliott Pollack: Things are getting better but very slowly. And one of the most disappointing things is with the rescissions and population and employment numbers, it appears that we are getting slower or recovering slow, more slowly and a lot later than originally thought.

Ted Simons: Talk about thee revisions. What happened to the original numbers?

Elliott Pollack: Well, let's talk population first because we have that probably most important. It turns out that based on the census there's about a 150,000 fewer people in greater Phoenix area than originally thought. And that instead of having growth in 2008-2009, and 2010, it looks like there were actually people leaving town. Certainly nobody showed up. Now, you have an economy that's based on 125,000, 150,000 people a year showing up and that means you need more people selling cars, more people selling suits, more bankers, more of everybody. And now nobody is showing up. You can't sell your house in Michigan because there's no equity in it and because you can’t get a loan you can't move to Arizona. Same thing is true with California. So literally nobody is showing up. And so all those services, the demand for them went away. So not only will we hit by the national recession but all the services imploded and right now, it appears that nobody is showing up even now. And in terms of the employment, what happened was, that the original numbers from DES showed that we turned last summer and we were having a fairly significant recovery. They revised those numbers and now we didn't turn until January and the recovery is minuscule. So we are sort of creeping our way out of this. How significant? As of January we thought we were the eighth most rapidly growing state. Based on the revised numbers we were 47th.

Ted Simons: This suggests maybe the numbers need to be calculated a little differently or that is part of the game?

Elliott Pollack: Well, it's part of the game. But the extent of the revisions suggests that there's something going on, that people didn’t expect. And what the revisions don’t capture is new businesses, small businesses, opening up or closing. They are existing businesses and so what this showed is that there weren't a lot of new businesses started and probably a lot of businesses closed.

Ted Simons: OK. You refer to this in-migration and the lack thereof. They are literally not coming because they can't get out of where they are?

Elliott Pollack: There are three reasons. One is, you can't sell your house, and you have no equity in your house even if you could sell it. And you can't get a loan to get another house so you don't move. Two is, there are no jobs here. In fact, jobs are declining and why would you want to move from a place where you are having difficulty getting employed to another place you are having difficulty getting employed? The third thing is, with everything that happened in the economy, with people having too much debt, not enough savings, with people feeling terribly uncomfortable with their 401(k)s being decimated people are simply fearful of moving. They want to stick to what they know. The combination of those three things literally has affected all states that are reliant on immigration. We are one of them and we were affected more than most.

Ted Simons: You mentioned fearful. There seems to be, correctly me if I am wrong here usually when consumers are fearful for an extended period of time there's a pent-up demand and things explode. Seems like folks have been conservative and cautious and careful. Where is this pent-up demand? When's it going to explode?

Elliott Pollack: Well, there are three things that usually power recovery. All right? One is a swing in retail sales. One is a swing in housing. And one is a swing in business inventories. Let's take them one at a time. We have actually turned the corner on retail sales. Retail sales are up. They're just not up, not booming and they're not booming because people are still paying down previously accumulated debt, and people are saving more. Five years ago the savings rate was 1, 2%, now it's 6%. If you are saving more you are not spending as much. Also people are buying what they consider necessities and they’re not being frivolous with their money because they are busily restructuring their balance sheets. And that will take a while longer. The housing recovery, which usually provides a lot of money to a -- in the recovery simply isn't happening at all. Last year, we had 6800 housing permits. In 2005, we had 63,000. So the housing market is down like 85%. And so all those jobs went away and you don't need drapes and you don't need appliances and you don't need carpeting and any of that stuff you buy at home depot and put in your garage and never use. So essentially, a lot of demand there simply isn't occurring.

Ted Simons: You mention the housing market, residential and commercial. I know commercial you are saying, you are not expecting any major new office building in town for years now?

Elliott Pollack: We don't think there will be another spec office building which means you are going to rented it out instead of building it for your own company, for three to five years. And that's because right now, one off the every four feet of office space in greater Phoenix is empty. And not only is that much empty, but there's a bunch more that's in the hands of companies who would like to sublease it because they thought they were going to need 30,000 square feet but they have fewer employees and they are stuck with the lease and they only need 20,000 square feet. So there's that shadow inventory. And that is going to take a while to absorb and can only be absorbed as jobs expand and so I said we expect jobs to be up 1 to 2% this year, maybe 3.5 next but you are down so much, we are basically in the state as a whole down 300,000 jobs. It's going to take quite a while to recover.

Ted Simons: There seems like an equal imbalance when you talk about residential housing as far as the supply of single family homes that are still out there. Those things, they got to get sold, don't they?

Elliott Pollack: The big problem is there are probably 70,000 excess single family units. And it's like anything else. When there's this big excess and there's virtually no demand or little demand because know is showing up what you end up with is a difficult situation. The major absorption of single family housing is people who bought them, buy them for rentals. Because if you move from your home, if you want to stay, if you have two kids and a dog you want to stay in the same area you rent a house. What will also happen in this environment is, you get a knock on the door and your 25-year-old kid wants to move back in. Or you had two guys who are living separately will live together. So the average household size actually gets larger which means less absorption of housing. At the other end of this, you are going to get people moving to town, you are going to absorb that excess supply, people will move, kids will move out. They will have their own unit in an apartment again but it all depends on job creation. And that will take place but slowly.

Ted Simons: OK. And we heard earlier in the program regarding oil prices, gas prices, that's a de facto tax. We all understand that.

Elliott Pollack: Right.

Ted Simons: That's something you have to spend on this and you are not going to spend on that.

Elliott Pollack: You're exactly right.

Ted Simons: You have been around the block. Have you ever seen Arizona’s economy in this kind of condition?

Elliott Pollack: We have records back in to starting in 1945. And this is by far and away the worst thing Arizona has ever experienced ever. Maybe it was worse during the depression when there were, you know, 100,000 people here. But in modern Arizona, this is unprecedented. And not only that, it's one of those things just like I tell people, you know, 500 years ago everybody knew the earth was flat. 10 years ago, everybody knew that housing prices never went down. Five years ago everybody knew that Arizona never suffered a major recession. All the common knowledge is out the door. Everything that could hurt Arizona happened in this recession. And we're climbing our way out slowly. We will recover. The long-term dynamics are very good the legislature passed some good things that will help us in the long run. But it's not going to be quick. It's going to be slow. We are positive employment, we probably passed the bottom in housing. But it's going to be slow.

Ted Simons: All right. Elliott, good to see you. Thanks for joining us.

Gas Prices

  |   Video
  • Linda Gorman of AAA Arizona discusses the causes and effects of rising gas prices that are now approaching $4 per gallon.
  • Linda Gorman - AAA Arizona
Category: Business/Economy

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TED Simons: With gas prices creeping uncomfortably towards $4 a gallon it's becoming much more costly to fill up the tank and now Triple A is reporting more drivers are running on empty, which presents another set of problems. Earlier I spoke with Linda Gorman, director of public affairs for Triple A Arizona. Linda, thanks for joining us. We appreciate it.

Linda Gorman: No problem. Thanks for having me.

Ted Simons: Let's talk about the latest with gas price. What are we seeing and how much of an increase are we seeing?

Linda Gorman: Well, we are seeing quite a substantial increase. Depending upon what part of country and what part of the state you live in. Current statewide average is $3.69 a gallon. That's an increase of about 30 cents since this time last month. But 80 cents since this time last year. So motorists are certainly feeling it and especially if you live in areas like Scottsdale, Flagstaff, you are paying substantially more than that. If you live in Tucson, the west valley, you are going to be paying less than that.
Ted Simons: Because of different pipe lines coming into those markets? Correct?

Linda Gorman: Also different blends of fuel. For the metropolitan area we switched over to our summer blend of fuel. We use a different blend of fuel, a little cleaner for the environment. But it costs more to make.

Ted Simons: Why are these prices increasing like they are?

Linda Gorman: Well, the story is oil. That really is the driving force behind it. Oil today closed at just about $111 a barrel. So it's been trading at $100 and above for weeks now. But what's interesting is that it's all speculative. There's no supply concerns. There's really no demand. People aren't running to the gas station and demanding more gasoline. In fact, there's all reports that demand is actually down a bit. A couple of percentage points. So there's not really any supply disruption. There's a lot of noise, people saying Middle East fighting, violence, the economy, but really none of that is, has really translated into anything tangible.

Ted Simons: Is that unusual to have the market and almost the market alone dictating that kind of price fluctuation?

Linda Gorman: We saw some of that back in 2008 when oil prices hit above $140 a barrel. That's for first time ever we really saw oil prices disconnected from supply and demand fundamentals. We are seeing that again this year where we have a market where demand is still not at record levels. It's still, you know, pretty low. Supply is fine. The refinery outputs are OK and margins are healthy right now. So what is the cause? And it really is cash. People are flooding the market, oil, and commodities are a very safe and profitable place to put their money and so it's translating unfortunately into real dollars when people have to go fill up their tank.

Ted Simons: Interesting. You mention what the price of a gallon of gas is here in Arizona. How does that compare to other parts of the country?

Linda Gorman: Well, interestingly, and you mentioned pipelines, we are actually below the national average. So the national average is about $3.80 a gallon. In California you are going to be paying about $4. In six states you will be paying above $6 right now. California is about the highest in the continental United States at $4.21 a gallon. Typically Arizona in the past has always been above the national average. That isn't the case in the last couple of years, we expanded that east pipeline that came in, that kinder Morgan pipeline. What that really did was alleviated our dependence on the California pipe line, the pipeline that comes in from the west so we have two very robust pipe lines delivering gas to our state so we are not so dependent on one pipeline.

Ted Simons: Prices keep going up. $4 a gallon seems like it's almost inevitable. You never know but that's kind of a psychological threshold. Isn't it?

Linda Gorman: It is. Back in 2008, July of 2008, in fact, when we saw $4 a gallon that was really when people really started to change their habits. We typically saw it at about $3.50 but we saw it at $4 where people started to buy different cars. They started to take the public transit. They started to look at compressed work weeks. And they are started to be more invested in alternative energy. There started to be talk about that and companies looking to do that. $4 we know is when that is sort of the unfortunately pain threshold at which everybody feels the pain at $4 a gallon.

Ted Simons: I am not going to ask you if we will get to $4 but it seems summertime is when prices increase. First of all, are you seeing that? An increase in prices? How high do you think things will go?

Linda Gorman: We are seeing that. In fact, we are -- April is usually a pretty big month for gasoline so price run up in April anyway in anticipation of the summer demand. We saw that increase happen earlier this year starting in as late as or as early as February. So what we think is that prices are probably going to peak earlier this summer than they typically do. We typically see prices hit their peak for summer around the Fourth of July. That's what happened in 2008. We think it might happen as on as Memorial Day.

Ted Simons: Before we let you go with these prices going up like this you guys are reporting increase in folks who are running out of gas on the roadways.

Linda Gorman: Right.

Ted Simons: First of all, talk to us about this increase and secondarily, how much damage that can do to your vehicle.

Linda Gorman: Right. Well, we are seeing for the first quarter of 2011 versus 2010, we started to see more people calling Triple A and saying I need gas. I have run out of gas. So question a report and looked at number of people that ran out in 2010 versus 2011, same time period, also looked at 2009 and we are seeing about a 6.5% increase just in that three-month period alone. So we are actually delivering gas to people who have just simply run out of gas average 31 times a day.

Ted Simons: And that's bad for your vehicle. It's not good for your vehicle to run on low anyway. You run out of gas all sorts of stuff can get in the system.

Linda Gorman: It's bad for your car. It's dangerous also to run off the gas while you are on the highway or roadway but it is bad for your vehicle. Because with the fuel injectors and the vehicles we have nowadays there's sediment in your tank and so what can happen when you run very low, and you rely on that light to come on and give you an indication of how much mileage you have left in your tank, it can suck up that sediment. So our car repair technicians are seeing vehicles come in with very expensive repairs to their fuel pumps, we are talking $300, $500 that we are simply a result of people running out of gas.

Ted Simons: All right. Linda, thank you so much for joining us. We appreciate it.

Linda Gorman: Thank you.

Legislative Update

  |   Video
  • A weekly update of legislative news with a reporter from the Arizona Capitol Times.
  • Jim Small - Arizona Capitol Times
Category: Legislature

View Transcript
Ted Simons: Good evening and welcome to "Horizon." I'm Ted Simons. State lawmakers got their work done and adjourned sine die early this morning. Here to tell fuss there were any last-minute surprises is Jim Small of the "Arizona Capitol Times" with our weekly legislative update. Good to see you. Any surprises?
Jim Small: I think it was a surprise most people they worked until 5:25 this morning. No one really, everyone knew when they got their yesterday that this was going to be the final day, they were going to be making their last push. Was some hope they would be done early evening, 6:00, 8:00. That kind of dragged on and before long it was, OK, we will be here until after midnight but not too late. 2:00 in the morning, and lo and behold people woke up to, folks who left the capitol woke up turned on their computers their blackberries and saw, holy cow, they are still throughout working and so the sun was coming up and legislators were walking out of the building for the final time for the year.

Ted Simons: Session creep if nothing else. Give us an indication. What did you hear and see down there? Had to be a little testy.

Jim Small: That always happens. Every time you have got a late night, and especially the final night of the session, there's so much procedure that has to happen for all of the voting and they did vote on dozens of bills last night but there's a lot of waiting. You will vote on a bill and then they will recess and go to a committee and have to wait for the bill to go to the Senate or come back from the house. It's a lot of hurry up and wait or stop and go. It does get on people nerves by the end of the night. You can't leave. You can't go take a nap because you are voting on something every 45 minutes. But you -- it's just a situation that really I think does stress people out a little bit. And you see it in debate especially as night goes on and people are debating on bills and you can see other folks, you know, other folks on the floor, folks in the gallery going "wrap it up." You made this point already. We can move on and vote this bill.
Ted Simons: You mentioned a bunch of bills were rushed through toward the end. What were some of the major ones?

Jim Small: The one I think in the house actually that really attracted a lot of attention was the state. Financial good many, naming the colt .45 the state official gun. You had bills dealing with taxes, bills dealing with social issues, bills dealing with the revised tuition tax credit bill that had been vetoed, you know, a couple days ago by governor Brewer and tacked it on a bill and moved it through. There was substantive stuff that happened without a doubt.

Ted Simons: Go back to that tuition tax credit bill. Because obviously the governor wasn't happy with it. Were the changes substantial?

Jim Small: There were substantial changes. We will see. They did it in a way the governor, when she vetoed that bill said, look, we would a deal on tax credits and tax cuts for businesses and this isn't part of the deal. And this is something that is going to hurt our immediate, you know, revenue outlook and we are going to lose money on this so she vetoed it. What they did was rejiggered the thing and created almost, said people can give these tax credits to these other different kinds of groups now and there was words that it will into effect later, although when I went to the bill today I didn't see that in there. But what they did instead of making it a standalone bill that she could veto they tacked it on to a very broad tax correction bill that makes dozens of changes throughout the tax code to kind of bring the state in line with certain Federal things and just kind of cleaned up mistakes of the bill. So you tack it on to that and we will see what happens. Makes it a little bit more difficult in theory for the governor to veto it.

Ted Simons: Overall, this session, he conservatives the big winners but were there -- did they have fewer wins than expected? Considering a conservative governor?

Jim Small: I think you could look at that both ways. I think up until the past week, you know, really I think conservatives saw that everything was going really well. I think with the exception of some of those immigration proposals that frankly even some of more conservative members of the legislature were opposed to. But until Governor Brewer vetoed that school choice bill and vetoed the guns on campuses bill I think conservatives were really kind of strutting their stuff and really feeling like they were victorious. And that veto kind of took the wind off the their sails a little bit, and to the point where we were watching stuff on the internet today and on governor Brewer's Facebook page on just conservative blogs where people are now calling her, you know, a RINO, she's not actually a conservative and saying all sorts of mean and nasty things because she disagreed with them, the birther bill is another one.

Ted Simons: Let's to go those two big vetoes, the birther bill and the guns on campus bill. Those were surprises, weren’t they, those vetoes?

Jim Small: I think a lot of people took them as surprises. I think some people figured governor Brewer was going to rubber stamp everything this legislature sent to her because she's a conservative and they are all conservatives so they are all working on things but it didn't take into account this woman did used to be Secretary of State. And she knows how that job works and she has probably a better understanding and appreciation for what, you know, powers maybe should be with that job or that she thinks should be with that job than legislators do. And it was a little bit surprising but I think once it happened, and you took a step back you can look at it and say, OK, it does make sense as to why she did what she did.

Ted Simons: The birther bill, I think she mentioned the state of state is a one person gate keep are to the ballot. Senator Gould was upset with the veto letter, said it was the most rude veto letter he had ever seen. He called it poorly written. She said it was ambiguous at best. She put the hammer on that one.

Jim Small: She really did. She made, you know, it was very clear where she stood on the bill and very clear what she, you know, what she thought of it and what She wanted legislators to do. Senator Gould also had some quibbles with the governor's office had said they were trying to, they had brought some issues up to, you know, to senators and everything like that and Gould said I never talked to them about this. They never reached out to me. Everything, the only time I talked to them was about some nominees they wanted to go through my committee and that was it and we never had these conversations that they say we had and that he ignored.

Ted Simons: We should mention the Republicans obviously big winners in this session. Democrats quote the as saying it was the least productive and most damaging in history from how they see it. Considering how everyone sees it, what does this suggest for the next session?

Jim Small: Well, I think the next session of a lot of these things that we saw that didn't get passed this year are almost certain to come back and, you know, I don't think there will be any shortage of, you know, legislation that is clearly colored by the Tea Party or kind of comes from that perspective. That is I think at the end of the day what a lot of these legislators, you know, the kinds of values that you see in the Tea Party are the values that a lot of these legislators have. And we are going to continue to see very conservative bills being proposed and very conservative laws being created if only because, you know, the numbers don't favor any other outcome really.

Ted Simons: Will we see a different dynamic, should, say, a speaker of the house change?

Jim Small: I think you will absolutely see a different dynamic. As it was, you know, you had an interesting dynamic between governor Brewer and Russell Pearce and most everybody believes Kirk Adams is not long for the legislature, that he will resign sometime soon to run for Congress and so what that happens that will create a power vacuum in the house. You are going to have a lot of people who run for it and whoever ends up winning that election is definitely going to set a different tone and have a different approach to things than Kirk Adams did.

Ted Simons: Before we let you go, it sounds as though the governor obviously this wide ranging personnel overhaul ideas, these ideas of here's, didn't get a run through here. Could we see a special session on that sometime this summer?

Jim Small: The governor told one of my colleagues yesterday that that was the plan, was sometime after the summer, ballpark September, October, sometime in that area, that there will be special session. She wants to have special session to deal with this personnel system reform. It's basically to make it easier to get rid of employees who have, you know, who have done something, take away a lot of protection they have under the current merit system.

Ted Simons: Jim good stuff I am sure we will hear more from you this summer but a busy year, huh?

Jim Small: Without a doubt. Kind of glad it's over. Honestly. It's always that feeling of relief.

Ted Simons: Yeah. Good to see you. Thanks for joining us.