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December 16, 2004

Host: Michael Grant
Topics:
· Arizona's Economic Forecast
In-Studio Guests:
· Tracy Clark, associate director, ASU Economic Outlook Center;
· Debra Roubik, Visionecon;
· Jay Butler, Real Estate professor, ASU East.

Michael Grant:
Tonight on "Horizon": Arizona's economy is running just about full steam, fueled by an incredible housing market. That is leading to more hiring nationally and in Arizona. But are interest rates expected to rise and what would that do to the housing boom? All topics for our economic update. That's next on "Horizon".

>> Underwriter:
"Horizon" is made possible by the friends of Channel 8, members who provide financial support to this Arizona PBS station. Thank you.

>> Michael Grant:
Good evening and welcome to "Horizon". I'm Michael Grant. President Bush recently had an economic forum touting the strength of the economy as his first four years in office come to a close. But is it really all that rosy when it comes to the economy? Three local economists join us to talk about that and more. But first, Mike Sauceda tells us what other economists were saying at a recent economic forecast luncheon held in Phoenix.

>> Mike Sauceda:
About the only thing hotter than the Phoenix Suns right now in the valley is the housing market. It looks like it will stay that way according to economist Elliot Pollack who spoke at a press conference held prior to the 41st annual the Bank One ASU W. P. Kerry School of Business Economic Forecast luncheon.

>> Elliott Pollack:
Despite everything you hear about a housing bubble, it doesn't appear to be building in Phoenix and the panel believes the housing market will remain strong for the next couple of years. And unless there is a real spike in long-term interest rates, I would definitely agree with that.

>> Mike Sauceda:
In 2003, Arizona had 65,649 single family building permits issued. Another record. In Maricopa County just over 41,000 single housing permits were issued in 2003 that will be higher in the valley in 2004.

>> Elliott Pollack:
The single-family market is explosive. Last year was a record; so far this year we're 29% ahead of that, in new sales, 25% in front of that in terms of resells. This is because of low interest rates, higher incomes, favorable demographics, post baby boom babies looking for second homes, and investor buying that's pushing the market to record levels of demand.

>> Mike Sauceda:
Of course one of the big factors in the booming housing market is the low interest rate. When it comes to interest rates, what comes down must go up.

>> Elliott Pollack:
Do I anticipate long term rates going up? I'll tell you one quick story. There are only two types of economists, those who can't forecast interest rates and those that don't know they can't forecast interest rates. And I actually belong to both those groups. Based on Anthony's and Lee's forecast, you would not expect long-term rates to have substantial pressure over the next year. The housing market still should be very good.

>> Mike Sauceda:
While we were building houses in Arizona at a record pace, hurricanes in Florida were knocking them down. That could lead to a boost in 2005's national job numbers.

>> Anthony Chan:
I think it's fair to say the U.S. economic expansion is alive and well. We are seeing more jobs being created. So far, we have seen this year 1.98 million jobs, close to 2 million jobs created. As we go into 2005 we're going to see more jobs being created. Why? We certainly went through the major hurricane that certainly impacted the United States. The research that I've done, following a major hurricane in the United States, you generally see more jobs are created because of the cleanup effort. When I look at the 10 most damaging hurricanes in the history of the United States, on average 12 months later you see about 2 million jobs being created. If you go back to the 1940's, on average you see about 1.5 million jobs being created every year. The net impact of the hurricanes - of course we don't like them because loss of life, loss of memories and certainly loss of property, but the net impact is an additional 500,000 jobs.

>> Mike Sauceda:
Chan says the weak spots in the economy are the trade deficit and weakened dollar. He expects the dollar to continue to weaken.

>> Anthony Chan:
One of the bad things and one of the good things. The good things are that, believe it or not, when you have a huge current account deficit that's a bad thing. The cure for a huge current account deficit is to have the value of the currency come down.

>> Mike Sauceda:
Job growth in Arizona is finally picking up and is expected to have a full head of steam in 2005. In 2003, over 24,000 jobs were created. When numbers of 2004 are finalized, Arizona is expected to create 70,000 jobs. That number is expected to jump to 90,000 jobs during 2005.

>> Lee McPheters:
Areas of strength, we're in the top five states in construction and government and health services. We're in the top 10 for a category known as other services, which is basically personal services, dry cleaning and that sort of thing. We're in the top 10 for leisure and hospitality, a sector that has come back quite well. Certainly the star of the Arizona economy right now is construction. And then of course we have some areas in the Arizona economy that just continue to struggle. The two are information, internet-related telecommunication type jobs and manufacturing. If you look at the data, you can see that those two sectors have lost jobs in Arizona for 43 consecutive months and it's very likely it's going to be 45 consecutive months by the time 2004 draws to a close.

>> Mike Sauceda:
At the luncheon, the keynote speaker, president and CEO of the federal reserve in San Francisco. She talked about federal funds rate, the rate at which banks lend money to each other. The rate has been going up and she says that good job growth and easing fears of inflation are a couple of reasons for increases.

>> Janet Yellen:
Another rationale for the increase in the federal funds rate is that we have been seeing more positive signs in the economy and now I think can have greater confidence that the economy is on course for self-sustaining growth going forward. A broad range of economic data suggests that real gross domestic product is now growing modestly above trend, which by most estimates is around 3.25 to 3.5%.

>> Mike Sauceda:
The overall message gathered from all the experts seem to be that like the Suns, the economy seems to be on a winning track.

>> Michael Grant:
Here now to talk about the economy for 2004 and for 2005 are Tracy Clark, associate director of the ASU Economic Outlook Center and Debra Roubik of Visionecon and Jay Butler, a real estate professor from ASU East. Good to see you.

>> Jay Butler:
Glad to be here.

>> Michael Grant:
Everybody. We get together about every 6 months ago to talk about this kind of think. Tracy, let's talk about a variety of different issues. Give me your overall take on the 2004 economy.

Tracy Clark:
We did better as a nation as a whole, but we didn't work up to our potential. We could have done better if the national economy had been doing better.

>> Michael Grant:
There isn't the disconnect anymore and hasn't been between the Arizona economy and the national economy.

>> Tracy Clark:
No, if the national economy sneezes, we do catch a cold. Michael: Debra, what do you think? 2004, what did it look like? What were its best strengths?

>> Debra Roubik:
Real growth was strong. The problem is we didn't see it in employment. We have become so efficient we need less workers to pump out the goods we used to. Real growth was strong, inflation was looking great this year and I thought it was a pretty good year.

>> Michael Grant:
Is this a strong argument for the French 29 and a half workweek or not?

>> Debra Roubik:
You never know.

>> Michael Grant:
Jay, what's your take on 2004? Economically.

>> Jay Butler:
Economically, it was great for residential real estate whether you're a new or resale market. The industry was beginning to recover from the down period. It was a great year. We spent most of the time wondering why it was a great year and when would the bubble burst but it hasn't.

>> Michael Grant:
Elliott Pollack said there isn't a bubble. It can't burst because it ain't there.

>> Jay Butler:
The basic issue gets to be that the median home price of a resale home has gone up $30,000 in a year. Given the income levels, job growth, it's hard to sustain that number. Whether you back off gently in sort of a hiss of the bubble or there's a burst, which is relatively rare, it's going to be hard to sustain that type of appreciation of growth in home prices.

>> Michael Grant:
Is much of the market investors?

>> Jay Butler:
That's an argument. 20% seems to be a low number; I tend to be in the 30s and 40s. It's an important element, not only investors from out of state or out of the country, but people who used to invest in the stock market but now want to do an investment because they have kids in college, they have to fund their own retirement, health care or whatever, real estate has been a great investment. The best investment is the home they live in.

>> Michael Grant:
Tracy, we're going to hit some key indicators for 2004. Unemployment?

>> Tracy Clark:
It was quite low and it actually went up a little bit because there were more people re-entering the job market. People were seeing that even though job growth was not up to our potential we were doing relatively well. So people were re-entering the job market. That's usually a good sign.

>> Michael Grant:
Debra, you were making the point that there's a lot of capacity there that's not used, because people are reluctant to commit?

>> Debra Roubik:
You know, no. It's a function of us gearing for Y2K, spending a lot of money on new plant and equipment, especially new computer equipment, that kind of thing. It actually increased the economy's capacity to produce goods. Then when the recession hit, all of a sudden that capacity was sitting unused. You have plant and equipment sitting, not being used. At this point in the cycle we have a lot of unused capacity, which is a good thing for inflation because you can't really raise prices when you have plant and equipment sitting there, you want it put to use.

>> Michael Grant:
Right.

>> Debra Roubik:
It's kind of a bad thing for manufacturing because that's where the bulk of it is in the manufacturing industry.

>> Michael Grant:
I've heard the Y2K argument before, and it seems sound. Of course, the events of 9/11 were also abherrational. But go so far to say the downturn we had over the past couple of years was artificially created, it was not a natural occurring economic cycle.

>> Debra Roubik:
Right. That's a thing with employment, too. You made your workers so productive you need less of them. Even when things start to pick up, you don't need as many as in previous cycles. That's why we haven't seen the big burst in employment that Tracy was talking about. Growth has been great, but the employment numbers have been so-so.

>> Michael Grant:
Jay, you have a Krispy Kreme theory on why we have unused capacity.

>> Jay Butler:
A year ago, Krispy Kreme was the great franchise, now it's being looked at closely by the FCC. It doesn't take long for things to change around. We were talking about the fact Krispy Kremes are one of the things we would trade out of the country pretty easily.

>> Michael Grant:
The point was, things do change so dramatically that people are reluctant to commit.

>> Jay Butler:
That's the big issue. Things change. What was the hot issue a year ago, like Krispy Kreme, isn't now. The hotjobs.com aren't around. Things rapidly change and it's hard to keep track of what's going to happen. People don't have careers anymore, they move from job to job or area to area. It's a difficult economy because everything is short term.

>> Michael Grant:
Tracy, did I hear you correctly that currently Arizona grows about 2%?

>> Tracy Clark:
We've been up to this point, the numbers have been hovering around 2.5%, and we should have been at 3.5. Even if the numbers are revised upwards, I think it's going to be anemic by normal standards -- for us.

>> Michael Grant:
October, the Arizona index of leading economic indicators dipped slightly. That a trend?

Tracy Clark:
It's not a trend yet. But we had weakness in August, it recovered in September and then it got weak again in October. I think that part of the reason that we were seeing some of the weakness was just the uncertainty that surrounded the election. I know there are a lot of partisan issues but the best thing is the election is over. The uncertainty is gone. One of the things that's been impacting people beyond our capacity issues is people are incredibly uncertain about how the economy is going to go, how the world is going to go. The more uncertain people are the less likely they are to make long term commitment.

>> Michael Grant:
Is that why you see a sideways stock market for much of the year?

>> Debra Roubik:
I don't think it was that. In 1999 I remember sitting in meetings telling people the stock market was way over valued, people were entering that had no knowledge of stock, it was almost like the housing market is, they were pumping the prices higher and higher. Then you had the Fed tightening and all these things happening with 9/11 and all those people that didn't understand what they were getting into got hurt. I think -- then you had the corporate scandals.

>> Michael Grant:
There was a run of three or four years was all you needed was an idea and your IPO would pop at 9:00 in the morning at 15 and you would be at 95 at the close of trading.

>> Debra Roubik:
I think the market was over valued. You see it in other markets, such as real estate, and you have a fundamental value and it goes way above and then drops way low. You have to be really smart about when you're getting in and when you're getting out. You can't just enter a market you have no knowledge of.

>> Michael Grant:
I do that routinely.

>> Jay Butler:
It's fun, you don't know what you're doing.

>> Michael Grant:
Commerce Department says housing starts dropped 13% in November. Why?

>> Jay Butler:
I think it was a combination of things. Weather conditions in the East Coast, expectations it would. I think some of it played off the fact a lot of housing construction in the areas hit by hurricanes and summer storms basically played out. In a sense, in some parts of the market we're beginning to see a slow down in the housing market itself. Running out of people, investors, whatever reasons you're having in the area. And people feel more comfortable with a stock portfolio that doesn't require the day-to-day management that a real estate portfolio does. So I think they're beginning to move back to a stock type investment and moving a little bit away from the real estate side.

>> Michael Grant:
What was the Arizona experience in November?

>> Jay Butler:
We haven't seen the November numbers yet.

>> Michael Grant:
Oh, okay.

>> Jay Butler:
I would suspect -- we don't do start, but activity has been pretty strong in Maricopa County, we were up around 4,000 permits which is quite strong, Pinal County is running quite strong. There seem to be no slowdown in the housing market. Everybody expects a slow down sooner or later, just when is it going to happen?

>> Michael Grant:
When it might happen is when mortgage interest rates start moving up. They have been fairly level.

>> Debra Roubik:
Yeah, they have. You've got a couple things occurring, thought. You've got strength in the economy which usually pushes up inflation. There is an inflationary premium in your interest rate because an investor wants to be compensated for the loss of purchasing power in his money that he invests. So there is an inflationary premium in an interest rate, including a mortgage rate. So if you have any signs of inflation picking up, you're going to see it in mortgage rates eventually. We've got commodity prices which are running at double-digit rates. We had the producer price index come out for November and for the last three months it's been running 3.4% annualized.

>> Michael Grant:
Gold is way up.

>> Debra Roubik: Yeah, it was at 438 today. And so, yeah, that's -- we haven't seen that since 1987.

>> Michael Grant: Oil.

>> Debra Roubik:
Oil, boy, that's a tough one. That's a tough one. I mean, who can forecast that? It's been up and down and up and down. That's a tough one to talk about.

>> Jay Butler:
The other thing is the housing market. Interest rates may not be playing that important a role. It's really the monthly payments that drive the homebuyer.

>> Jay Butler:
Interest rates basically are unchanged from 2003 to 2004, but the monthly payment, because of the higher home price, has gone up $150 a month. You have in a sense had the interest rate rise. You may begin to have a dampening effect because with stable incomes, lack of job growth and other things, you begin to put a level on that particular market that goes beyond simply what are interest rates.

>> Michae Grantl:
Debra, I'm not sure that many of us understand. Obviously the fed has been and is likely to push up its rate. Why doesn't that translate to a drive to, for example, the mortgage interest rate?

>> Debra Roubik:
Obviously, investors in a short-term market have a different focus than those in the long-term market. In the short term, we had a lot of strength. If you look at factory orders, they are up about 8% over the year. Which means things are going to really pick up in the next six months? But you don't see inflation increases for awhile because what I've been talking about capacity, we have excess capacity, which means you're not going to increase your prices. So the long-term investors are saying we haven't seen inflation yet, we are not concerned about that. Short-term markets act different than long term markets, so you can't automatically assume that's going to turn into long-term interest rates.

>> Michael Grant:
Tracy, we have spent a lot of time talking about housing. Placing it to one side, what are the other strong spots in Arizona's economy?

>> Tracy Clark:
The biggest driver of our economy right now is the population growth. If you look at the numbers where we have done well, are all population related sectors, health care, education, on down the line. So that provides a floor for the housing part. But if those people keep coming in and we don't rev up our job growth and take the areas that aren't performing well now, like manufacturing, the information and telecommunications area and a few others, if we don't get all of our cylinders firing, those people may start slowing the rate at which they come into the state just because there aren't going to be enough jobs for them.

>> Michael Grant:
Tourism is strong, right?

>> Tracy Clark:
Tourism is strong, particularly for the metro Phoenix area. Everybody said, heck, I really want to go play golf. And it shows.

>> Michael Grant:
2.5% let me cycle back to that number. Put that in context for us, like at peak.

>> Tracy Clark:
At peak, we were running in somewhere between 3.5 and 4. Our peak wasn't as high this time around. Oftentimes, our peak will hit about 4. We should be hitting fairly close to our peak right now; we're just not doing it. What we tend to do is be at our peak for a fairly extended period of time.

>> Michael Grant:
Now, we expect to add up to 90,000 jobs in 2005?

>> Tracy Clark:
That would be about right. The job growth is expected to pick up to more like 3.5, 3.6.

>> Michael Grant:
What about personal income, are they quality jobs or not?

>> Tracy Clark:
There's not a direct from personal income to jobs, but the debate over quality jobs is a little bit unusual because we have so much population growth. We're always going to have the most job growth in the population sensitive areas. But by the same token, where we're not seeing our job growth is in telecommunications and manufacturing and areas like that, which are typically fairly high wage jobs. Where we're missing in terms of firing on our cylinders is in some of the higher wage jobs.

>> Michael Grant:
Did anybody take a survey on how badly the telephone operations were hit by the do not call list? I would assume there had to be a major impact there.

>> Tracy Clark:
Nobody has done a final study on it, but not too surprisingly, it's a fairly innovative industry and they found other things to call people about and other things to use the call centers for. The impact isn't as bad as it was feared it was going to be.

>> Michael Grant:
Let me pick up a couple of subsets on construction. Apartment market?

>> Jay Butler:
The apartment market has been slow, vacancy rates dropping, concessions are beginning to back off a little bit, vacancy rates about 8 to 9%. Construction is way down, about four to 5,000 units. The problem is going to be the expectation that the apartment market picks up if the housing drops. If you believe a lot of the housing market is in the rental market, the apartment market has a ways to go. There's a lot of investor interest in apartments right now.

>> Michael Grant:
What about the commercial, industrial space?

>> Jay Butler:
Retail has been strong because it's following rooftops, and been a major employer, building not only power centers but all sorts of centers, lifestyle centers. Office, the heavy construction areas along the 101, which is largely on Indian land or in the north Scottsdale area, beginning to drop the vacancy rate. The rest of the markets are still sort of tentatively trying to find their place places.

>> Michael Grant:
Is the dollar going to continue to limp along, Debra?

>> Debra Roubik:
I don't think so. I'm different from other economists in this way because I see the dollar, the price of a dollar actually tells you a signal of how many dollars are in the market. Just like any other commodity, if you have a lot of them out there, the price drops. The fed has been so accommodating, we have been spending so much and most of it has been going overseas and they are floating in dollars. So the price dropped. That's why our trade deficit is high. I see the Fed action as a positive thing. It will help our dollar a little bit.

>> Michael Grant:
Trade deficit continues to grow?

>> Debra Roubik:
It might for awhile, but I think it will -- not correct itself, we're always going to be a country that imports more than we export. We are selling our government securities.

>> Michael Grant:
Debra Roubik, thank you very much for joining us. Tracy Clark, our thanks to you. Jay Butler, good to see you.

>> Jay Butler:
Thank you.

>> Michael Grant:
You can visit our website at www.az.pbs.org. Once you get to our home page, click on the word "Horizon" to see transcripts or information about upcoming shows. That's our show for this evening. We thank you very much for joining us. I'm Michael Grant. Hope you have a great one. Good night.

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