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OCTOBER 2009        RSSPrint PrintEller College on Facebook FacebookPrint Twitter     

The Recession is Over*

Marshall J. Vest
Economic and Business
Research Center
Director Marshall J.
Vest.

By Marshall J. Vest
Director, Economic and Business Research Center

* Except in Arizona

Evidence continues to grow that the U.S. economy bottomed out during the second quarter — likely in June, maybe May. In Arizona, economic measures remain on a downward trend, confirming our expectations that the state will lag behind the rest of the country.

Gains in the index of leading economic indicators, better numbers for housing, recovering economies of major trading partners, increases in industrial production, higher production schedules by auto makers, large declines in inventories, rising productivity, widening profit margins, and recovery in capital expenditure plans are evidence that the recession has ended.

Consensus forecasts now call for a sluggish recovery due to still-tight credit markets and sluggish consumer spending. Budget restraints by state and local governments and an emptying of the non-residential construction pipeline also will retard growth in the near term. It will probably be 2011 or 2012 before robust growth resumes.

Recent Evidence for Arizona

Aggregate bellwether measures show that Arizona’s economy remains in recession, but that a bottom is beginning to form. July nonfarm employment declined at a seasonally adjusted annual rate of 7.7%. Compared to year-earlier readings, those losses are worse than in any other state. But the declines are not as large as six months ago, when employment was plunging at nearly a 10% annual rate.

Sales data also are beginning to stabilize. Retail sales, which were declining at a 20% annual rate last winter, declined at a much more subdued 5.3% rate in June. “Cash for Clunkers” deserves partial credit. Better yet, restaurant and bars sales have bottomed out and actually registered a small 1.5% increase in June.

Housing markets also are showing signs of improvement. Although foreclosures remain high, inventories of housing for sale are falling and prices are beginning to stabilize. In July, MLS listings in metro Phoenix fell to 36,000 compared to 58,000 18 months ago. With the number of sales now running at a 90,000-plus annual rate, the supply would be exhausted in only 4.5 months. Although a four-to-five month supply is considered “normal,” housing markets are still far from normal. Roughly half of recent sales were foreclosed properties or “short sales,” mortgage financing remains tight — especially for jumbo loans — and migration flows remain depressed.

Although it’s too soon to expect much of a rebound in homebuilding, we could see permit activity pick up from very depressed levels in coming months.

We now expect losses in nonfarm employment to continue to moderate and hiring to stabilize by the middle of next year. However, it likely will be well into 2013 before employment returns to its peak 2007 level. Real retail sales will bottom out earlier, likely this summer, but it too will be 2013 before the prior peak is attained. For homebuilding, we could see an uptick in the next few months because the inventory of new homes is very low. But the numbers will remain at very depressed levels until 2011.

Chart: The current Arizona recession exceeds the state's prior experiences.
The current Arizona recession exceeds the
state's prior experiences.

Long-Term Outlook

We’ve lowered our long-term projections, but Arizona’s growth is expected to continue at a rapid pace. In our annual update of our 30-year projections, we show Arizona’s population reaching 12.5 million in the year 2039. That’s nearly a million-and-a-half lower than last year’s projections. Even so, nearly six million more people will call Arizona home in 2039 than live here today. By nearly doubling, Arizona may well become the seventh largest state in the U.S., trailing only California, Texas, Florida, New York, Illinois, and Pennsylvania.

We can only guess what Arizona will be like 30 years into the future, but it’s clear that a great deal of change lies ahead. Much remains to be determined. Will Arizona be a leader in the industries of the future, or become an economic backwater for corporate America? Will Arizona continue to be marketed as the low-cost leader? Will it become an exclusive place to live or be the Ellis Island of the Southwest? Only time will tell.

Visit the Economic and Business Research Center’s Arizona’s Economy website for complete article: http://ebr.eller.arizona.edu/azeconomy.

Register now to attend the annual Economic Outlook forecasting luncheon on Friday, December 11 at the Westin La Paloma, featuring Marshall Vest and Gerry Swanson.

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