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It’s Been a Long Road: Are We Headed for Recovery?

On Wednesday I attended the 47th Annual Economic Forecast Luncheon presented by the Department of Economics at Arizona State University's W. P. Carey School of Business and JPMorgan Chase.  Overall, I came away optimistic about next year.  Not giddy, but optimistic.

Outlook for the national economy

Both economists who gave the national forecast, Joel Naroff of Naroff Economic Advisors and James Glassman of JPMorgan Chase, were optimistic about growth in the second half of 2011, and their forecasts for next year were quite similar:

  • 2-2.5 percent GDP growth through mid-2011
  • 3.5-5 percent GDP growth in the second half of 2011

Beyond 2011, though, the two economists predicted very different growth outlooks.  Naroff highlighted a "new normal" beyond 2012, 2.75-3 percent growth, which he said is "20 percent below the growth pace we enjoyed in the 1990s and 2000s."  Why?  Because the "new normal" economy won't be driven by bubbles.  While Naroff admitted that would mean slower income growth for consumers, slower revenue growth for businesses, and slower stock market growth for investors, he calls his vision of the new normal the best news in his forecast.  Growth will be slower, yes, but it will be "sustainable" he said.

Glassman's vision for the American economy beyond 2011 is much different.  He sees above-trend growth of 4-4.5 percent for the next decade "as the Fed keeps its foot on the gas to speed the economy's full recovery."  He said that the economy has always trended toward "full employment" - characterized by an unemployment rate of 4.5-5 percent and that it is part of the Fed's congressional mandate to maximize employment.  He said that GDP needs to grow about 4 percent a year to drop the employment rate 0.5 percent each year - which would mean about a decade of 4 percent annual GDP growth before unemployment rates reach historic norms.

(For more on Glassman and Naroff's national outlooks, see this comprehensive piece in the online magazine Knowledge@W. P. Carey.)

Outlook for the Arizona economy

Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at W. P. Carey presented the forecast for the state economy.  He characterized his outlook for the Arizona economy as "slow growth ahead, but no double-dip recession."  Some of his key points:

  • Arizona is at the tail end of a long bottoming out, just set to embark on a recovery.  Forecast is for the economy to add 47,800 new jobs next year.
  • But with 2.4 million employed Arizonans today compared to 2.7 million in December 2007, it may be June 2013 before we reach that level of employment again.
  • Of 36 states that added jobs in 2010 compared to 2009, Arizona ranks 12th.  Among those states seeing private sector job growth, Arizona ranks 7th.
  • While Phoenix suffered the worst metro area job losses in the country in 2009 (down 7.3 percent), Phoenix also saw the second-best jobs gains in 2010 (1.4 percent).
Arizona Economic Forecast 2011

Source: Lee McPheters http://wpcarey.asu.edu/seidman/mcphetersslides.pdf

Lee listed as "hurdles on the road to recovery":

  • The consumer.  While consumer confidence rose in November to its highest level in 5 months, it's still at just 54.1 - much better than the low of 25.3 in February 2009, but a far cry from the 100 range it was at pre-recession.
  • Housing market.  Arizona home prices have fallen in15 of 17 quarters since 2006Q2.  Current home prices are 50.4 percent lower than their 2006 peak, and at the same level as 2000Q4.

(For more on Lee's Arizona forecast, see this article in the online magazine Knowledge@W. P. Carey or access his presentation slides here.)

Outlook for the Arizona real estate market

Local economist Elliott Pollack, ever the optimist (not really) characterized Arizona's real estate outlook: "So many homes, so few new people..."  He said, "We could face several more years of stress and there is no quick way out."  Here's why:

  • Job growth and population growth anemic - meaning there are fewer people coming in to Arizona to buy up the excess homes on the market.
  • Underwriting standards far tougher, which makes it more difficult for all but the best-qualified buyers people to buy new homes.
  • Negative equity in homes affects people's ability to sell and to buy.  51 percent of Arizona homeowners are "underwater" - owning more on their homes than they're worth (compared to 23 percent nationally).
  • Previous loan modifications have been, for the most part, failures - with 12-month re-default rates close to 70 percent.  Which means that many people will, eventually, lose their homes.
  • Foreclosures still high, meaning that below-market-value homes are still coming on the market.
  • Option ARM resets do not peak until next year - meaning more foreclosures on the horizon (and more homes adding to existing oversupply).
  • There is still a huge excess of supply in Arizona's housing market - 40,000 to 50,000 units in Elliott's estimation.  "Balance between supply and demand will not be fully achieved until about 2014," he said.  (Balance being when you have to build for net in-migration.)  "But building will get progressively better between now and then."
  • A spot of good news: homes in Phoenix are more affordable than most major Southwest cities (and more affordable that Phoenix homes any time over the last decade).  The housing affordability index in Phoenix is now 83.5, compared to 26.6 in 2006, and 64.8 in 2000.  We're also more affordable now than other Southwest cities: Albuquerque is 79, Salt Lake City is 74.3, Denver is 72.6, San Diego is 51.1.
  • There is currently no multi-tenant office space under construction.  And, Elliott said, there won't be any significant office building in Greater Phoenix for the next 3-5 years.  He predicts that commercial real estate will be back to normal vacancy levels in 2014 or 2015 (perhaps a bit earlier for industrial buildings).

(For more on Elliott's Arizona real estate forecast, see this article in the online magazine Knowledge@W. P. Carey or access his presentation slides on his website.)


Written on Friday, 03 December 2010 16:48 by Gary Yaquinto

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