Horizon, Host: Ted Simons

May 4, 2009


Host: Ted Simons

Economic Roundtable

  |   Video
  • Is the economy finally turning the corner? There are some signs that the recession is at least slowing. Three Arizona State University economists, Jay Butler, Herb Kaufman and Dennis Hoffman, talk about unemployment, the recession and the state and national economies in a Horizon Economic Roundtable.
Guests:
  • Jay Butler - ASU professor
  • Herb Kaufman - ASU professor
  • Dennis Hoffman - ASU professor
Category: Mortgage Crisis

View Transcript
Ted Simons:
The economy could begin a slow recovery later this year. There are some signs of life. Housing sales are up and construction is up a tiny bit. Even though we could see recovery, job losses are expected to continue. Here to talk about the economy are Arizona State University economists Jay Butler, Dennis Hoffman and Herb Kaufman. Good to have all of you here. Let's start with a general overview. Herb, first off, what is the state of the economy in Arizona and the United States?

Herb Kaufman:
I defer to Dennis and Jay on Arizona. But in the United States I think we are seeing considerable signs of life where we had none before. If you even take the G.D.P. number of the first quarter that came out recently, it looks abysmal, down 6.1%. We didn't expect it to be that negative. But if you disaggregate that, you have consumer spending up 2.2%, which was not expected at all, that's a positive sign. You have two percentage points of the six percentage point decline, accounted for by a decline in business inventories. Which means those inventories have to be rebuilt down the road. Basically firms are dissipating their inventories, and that can't happen forever. Similarly, an example might be that we expect the steady state auto market to be about 14 million units. That seems to be the replacement number, and we did nine million units. Pent-up demand is going to occur, I think it will be financed well, because the credit markets are coming alive again. I think the second half of this year things will look a lot better.

Ted Simons:
I want to get more to the credit markets in a moment. Dennis, again, just a general overview, the state of the economy right now.

Dennis Hoffman:
Well, Herb covers the national very well, and I concur with his assessment. Arizona has, as everybody knows out there, has been in the throes of a very, very significant downturn, arguably the worst in the post-war period. You know, we watch probably the most immediate indicator is tax revenue or lack thereof, and on the retail side. Unfortunately that has not turned. We're hopeful that -- that retail conditions will improve, say late spring or now into summer and into fall. As Herb illustrated here, automobile sales have been just abysmally low in the state of Arizona especially. At some point somebody's going to need to buy a car.

Ted Simons:
All right, Jay, overview, state of the economy.

Jay Butler:
Well, I think we’re in the early stages, maybe, of a recovery. The problem gets to be is things will look better later this year simply because 2008 was so bad. The thing is that we don't overemphasize either the goodness or the badness. I think we have a ways to go in recovery. I think we have serious job issues. One of the problems we have is jobs have simply disappeared. When companies used to lay off, they would start to hire back and accelerate the economy, but they are gone. In retail, companies are gone, they are not going to rehire.

Ted Simons:
The Arizona unemployment rate is 7.8%, 146,000 jobs lost this year, general impact: you referred to this. Dennis, again, as far as unemployment numbers, job losses, it affects everything, doesn't it?

Dennis Hoffman:
Absolutely. That's what's showing up in the lack of tax revenue paid, showing up in difficulties that the legislature and the governor have in dealing with the budget issues this year. As I keep trying to explain, the economy is very, very bad, everybody knows it's bad. But the pace of consumption, against what dollars that are flowing in, is unbelievably low. Even the people that have jobs are simply not spending anywhere near at rates that they have historically.

Herb Kaufman:
I think that that's a really good point. I think that's one of the signs down the road, there is capacity there. That capacity has to be generated by confidence being restored. I don't agree that yet we're in a recovery, but I do think, with Jay, we have stabilized some. I do think confidence is coming back a little bit. The numbers appear to indicate that. Again, the wherewithal, if you have the capacity to buy, the wherewithal to finance that capacity has materially increased. It's become much better. Credit is flowing much more effectively than it was before, and the numbers are starting to show a little bit of that. Unemployment is significantly lagging as an indicator, that's not solace to anybody who's unemployed and I understand that. But you do need the purchasing power availability, and you need to be able to finance that purchasing power and that requires confidence.

Jay Butler:
The other issues, we talk about jobs, but the thing that's not measured is furlough days and reduction in pay. We see companies that have done away with shift differentials and other things. You're going to take a day off, that's about a 10% pay cut. Those aren't measured in any of these statistics. That makes it more difficult to consume because basically your income is much lower.

Ted Simons:
All right. Arizona 50th in job growth. In general terms, we can go on forever on this. Dennis, starting with you, how does Arizona change this boom-bust cycle with job growth, No. 1, 2, 3, now job lost, 50, 49, 48.

Dennis Hoffman:
Obviously we need a more diversified economy, a more diversified employment base. And that's everything from financials to a change in the manufacturing mix, leveraging our defense industries, that kind of thing. We're very, very reliant, as everybody knows, on construction and growth. But there is a perspective there, for years we have been the place everybody wanted to move to. It's pretty hard to be kind of low ranked in construction, when everybody wants to move to your state. So we're going to be saddled with that pressure always, as long as people want to move to the state of Arizona. What we've got to do is work harder to diversify in other areas.

Ted Simons:
I don't want to get too esoteric here, Jay, but it does make you wonder. The weather here is gorgeous, and we're not that far from California, one of the major economies in the world. It's young, new, vibrant, exciting. Why aren’t we an economic tiger?

Jay Butler:
When I came here in 1972, one of the first meetings I attended was quality of jobs versus quantity of jobs. It's difficult to find these jobs. Sometimes you get high-level companies that move in and begin to expand. They are expanding their operation, and we see the number of jobs they have, but then we lose Motorolas and others. This is happening across the United States. Arizona is not alone in this. It's not like we're putting up roadblocks to quality jobs coming into this area. It's just hard to find them. You get small areas in these areas, but these are really small employment bases.

Ted Simons:
Does it surprise you that you have North Carolina becoming a banking center, Charlotte, that area, and yet Phoenix, Arizona, in general, with so much going for it, doesn't seem to have that kind of vibrancy? Does it surprise you at all?

Herb Kaufman:
Actually I think it had quite a bit of vibrancy before the recent downturn, but not on the scale of Charlotte, admittedly. I remember us discussing years ago, collectively discussing, is the fact that we were not a headquarters town. And the need to become a headquarters town was recognized as long ago as 20-plus years ago, maybe longer than that. It never did come to pass. Charlotte, the Charlottes of this world evolved by the fact that the banks that were in Charlotte became very aggressive and actually swallowed up brand name banks like Bank of America, for example. You need that kind of drive, as well, to be there. Charlotte is no more an attractive place than Phoenix is. So what the economic dynamic was that led to Charlotte developing as a banking center, maybe now to their sadness because they are facing substantial problems, did not occur in Phoenix. We went through the savings and loan crisis in the late 80s. The only thing that really saved our bacon at the time was the ability for out-of-state banks to buy up our local banks. They did that, and as a result the headquarters were outside of Arizona. I think that was an unfortunate happenstance. I also think one of the things the state has neglected over time -- and I'm not just talking about the universities, I think they have done magnificently with the resources they've had until very recently-- but K-12. That is a fundamental building block. I remember watching your program several times, with legislators on saying, we're not 50th, we're 47th. The thing that happens to mid level professionals is they look to see, when they are going to relocate, what the educational system is like for their kids.

Dennis Hoffman:
Ted, you said it. Some states and cities are magnets for bright, educated people. Historically, people have come to the state of Arizona, great climate, affordable housing and I can get a job. They don't really care what kind of job, that was it. Very different than, say, the migration even to Colorado, for example, set aside California. Colorado's been able to attract some very, very educated people. So you can grow your own, as Herb was talking about. We need to do better with respect to education in the state. Utah does a very good job, for example, in putting money into education at a number of levels with a lot of successes. Or you can attract bright, educated people. We haven't demonstrated that we can do that. I think we're going to have to grow our own here.

Jay Butler:
We also have the problem, we're only a couple hours from California. Talking about Charlotte and others, they are relatively isolated communities, in the sense we have California overlooking us. If Bank of America took over our bank, they were only an hour away, why move their headquarters here? In a sense, California is a great thing, we have a lot of in-migration, but it's also sort of the dominant theme of what we have to look at.

Ted Simons:
The housing market, start with housing. Are things moving out there? Are homes selling?

Jay Butler:
Homes are selling but the problem is the mix. Historically 3% are foreclosures. Now it's 45%. So the numbers are up but they are in a different segment of the market. They are in the foreclosure segment, homes going into foreclosure and those being bought out. The homes are being bought but it's not the typical market you would like of owner occupants and other things, neighborhood stabilizing. A lot of these are troubled neighborhoods. When you have homes, neighborhoods in many communities, where maybe 60, 70% of the homes are going through foreclosure or vacant. They are taking big hits.

Ted Simons:
The president's plan to help homeowners, these plans put into place, are they helping?

Jay Butler:
Not here. The problem here is that you're looking at a refinance of about 105% of the value of your home. We're looking at 130%, 140%. The debt is so much higher than the value of the homes. You can buy the home a couple years ago for $260, it's worth $140 now. You're still making the mortgage payments, you just don't know why you're doing it.

Ted Simons:
Condos, especially luxury projects, some done and some not quite done, some still parking lots. What’s the state of that.

Jay Butler:
You're lucky if it's still a parking lot because you've got revenue. The problem is basically everybody built on the Camelback Esplanade’s successful project. A little history: in 1964 we built four high-rise condos in downtown Phoenix. The next set we built was in 1989. It's not a proven market. Even in areas I thought would have done good, Camelback in Scottsdale, they simply overbuilt the market.

Ted Simons:
Is there enough credit right now for folks to say, hey, I see one of these big bright shiny condos, could I get a loan for one of those things?

Herb Kaufman:
The credit underwriting is much more tedious and selective than it was in more normal times. I don't want to be too sanguine about the markets. What I’m seeing is thaws in those markets, but thaws do not mean rivers. The availability of the raw materials, namely liquidity, is there. When it gets disgorged, it'll be a river ultimately. But right now it is better than it was, it was nothing, it was a trickle. Now it's a small stream. Answering specifically your question, the underwriting standards are harder to meet but with a proven kind of credit situation, I think the credit will be there and is there now.

Jay Butler:
One of the things, if you look at listings of interest rates, you know how this big red line is across the top. These rates are only for FICO scores of 700 or higher. Supposedly the peak is 840 and we were lending in the 540. The interest rates are low but you'd better have an ideal credit record and a down payment.

Herb Kaufman:
Individuals may be buying the condos, but I was talking about developers taking over at-risk. Again, those commercial underwriting standards have increased enormously. But I think before they increased, it didn't matter because the credit wasn't available. Now they are high, but I think the credit is becoming available.

Ted Simons:
Dennis, is this again putting so much emphasis on housing, single homes or condos or whatever, how did this get us into where we are now in Arizona, and how much do we need to avoid this next go-around?

Dennis Hoffman:
Some is avoidable, some of it is a challenge to avoid, in terms of changing what the makeup of our economy is. You've hit it on the head, Ted, absolutely. Confidence is at the root of all of this. When your house erodes substantially in value, when historically -- I mean, even fairly conservative buyers saw appreciation year after year, even at modest levels in the '90s before the bubble hit. And when that value erodes, it's really difficult to go out and continue to make big-ticket purchases, even if you do have reasonably stable employment. The other thing that's fascinating to me, and I've studied this, in looking at revenues: it's amazing how important action on Wall Street in equity prices leaves an imprint on Arizona. From 2002 to 2005, we saw a massive run-up in capital gains income. It wasn't just real estate transactions. It was highly correlated with Wall Street behavior. We're getting some signs of life on Wall Street. When you look at that, it's reflected directly in consumer confidence. What I'm hopeful about in the months going forward is that people will see consumer confidence indices as published by the University of Michigan and the board, will tick up. That will help kind of push people towards consuming.

Ted Simons:
I want to get to the financial situation here in a second with credit and such. But that confidence, how does that play in the housing market? Are they saying, I just don't want to spend that kind of money right now?

Jay Butler:
They are convinced things will always go lower. You're trying to find a home. Now they are looking at a different set of criterion for homes. People don't have confidence in their jobs. Who knows when the next layoff is going to come? One of the big bridges in recession was retail jobs, but those are gone. Either the company is gone or they are moving to automated things and other things. There are a lot of things that are impacting confidence. I'm not convinced we're not going to see big moves in consumer confidence until several more months down the line.

Herb Kaufman:
I’m more optimistic. We're already seeing a little bit of an uptick. We're up 25% from the lows in equity.

Dennis Hoffman:
35%, as of today.

Herb Kaufman:
Okay, 35%, just as I was saying, we're up 35% in prices from the low, but I'll have to check that. In any event, the fact is that that's an extraordinarily important signal. Whether it is maintained, whether the markets continue to recover is of course questionable. But I think it's likely. As a result of that, we're not only -- not only does that increase consumer confidence, but it increases the wherewithal to spend.

Ted Simons:
It also helps to increase confidence when you know your bank is safe and stable. How many banks right now are in trouble?

Herb Kaufman:
There's obviously a lot. 19 banks were subject to the so-called stress test by the government. On Thursday we'll get the results presumably but they have delayed them once so who knows. We know that Citi and Bank of America are two that have been considered, by the stress test, in need of some capital under the worst case scenario, which I didn't think was all that worst case, a 10% unemployment rate. Bank of America and Citi have both announced they are going to raise $10 billion in capital, the number that was touted around. If they are successful, that's going to be a real positive. We see small banks failing all the time. Jay can probably tell you, we basically lost the savings and loan industry in the late '80s but we we recovered nicely in the '90s. The sort of little banks can go but the big banks cannot go.

Ted Simons:
Last question on this aspect of things. The Obama administration, doing too much, doing enough, or not doing enough?

Herb Kaufman:
Actually, I think they are following along very well. As I've told you before on this program, I think the major issue is the provision of liquidity. The stimulus program can have some impact on that, I think it'll be spread over a period of time because it's slow to go. But it will be effective, reasonably effective. I think the new regulatory environment we're in, as a result of the failures of A.I.G. and so forth, will also be productive. I think that'll also help restore confidence. I'm pretty optimistic actually.

Dennis Hoffman:
You know, I want to kind of double down on what Herb was saying here. People are trying to draw some parallels, or at least some have, to the early 30s, the 1929 to 1932 pre-F.D.R. period. Herb was talking about stress tests and Tim Geithner talking, what's the treasury doing, what’s Bernanke doing. In 1929, nobody worried about that. The treasury secretary's philosophy from 1929 to 1932 was clean it out, let it go, a very, very different attitude today. We've run the, what happens if we just let them fail experiment. We ran it, look at the data from 1929 to 1932.

Ted Simons:
We’ll give you the last say here. We're hearing a little bit of optimism, not sensing as much optimism.

Jay Butler:
No.

Dennis Hoffman:
Actually, for Jay, this is great.

Ted Simons:
Relatively bubbly, but nonetheless, you're not all that optimistic?

Jay Butler:
I think basically what my problem is right now, everybody's trying to make a trend out of a month's worth of data and it really doesn't exist. We've got a lot of things to go through that we don't know the answers to. It's nice to look back to 1929 and 1930, but it doesn't mean we're not making newer mistakes. We don't know what the job loss is going to be. Who's going replace these firms and retailers? You've got a lot of big boxes running out there, nobody knows who's going to move into those spaces because we don't know what the next retail concept is. There are a lot of unknowns that still have to be played out. We've tried to make too much out of little pieces of data.

Ted Simons:
Gentlemen, great discussion. Thank you again for joining us on "Horizon." Good to see you.

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