Economists agree state is in recession

Ed Taylor, Tribune

Has Arizona entered a recession? Prominent economists who monitor the state’s economic landscape are answering with a firm “yes” these days. And they say it’s likely to be awhile before the state returns to its normal growth mode.

There is no government agency that officially declares recessions on a state level, but economists cite many Arizona indicators that are pointing in negative directions: jobs and employment, migration into the state, retail sales, sales and income tax receipts, housing inventories, apartment vacancies and bankruptcies.

Marshall Vest, director of the Economic and Business Research Center at the University of Arizona, thinks Arizona is one of nine states that has entered a recession. The others are states like Arizona that enjoyed a construction boom followed by a bust — Florida, California, Nevada — and others that have specific industrial problems like Michigan, hard hit by the auto slump.

“As I look at the Arizona data, it was one of the first to begin a recession,” Vest opined. “It started in the third quarter of last year.”

He noted that employment peaked last August and retail sales peaked in February 2007. The housing slump, which has resulted in the loss of construction, financing and real estate services jobs, was a major cause, he said.

Another indicator: the increase in the number of residential utility customers has slowed to less than 2 percent at an annual rate, which suggests that population growth is way down, he said.

“Virtually every measure you look at suggests Arizona is in a recession.”

Brian Cary, economist for the Salt River Project, is concerned about a drop in the number of jobs, which he sees as the key indicator of the economy’s health. In both March and April there were fewer jobs in Arizona than in the same months the previous year, an unusual occurrence for the normally rapidly growing state.

“In April there was a drop of about 4,900 jobs,” he said. “That’s on a base of 2.7 million jobs, so it’s only a couple of tenths of a percentage point. But still it doesn’t happen very often. The last time was in the early 1990s.”

Becky Holmes, economist for Cox Communications, sees the crisis in the housing sector as the key factor driving the state into a recession.

“When you live in a state that gets 20 percent of its growth from construction and related finance and retail around that, it’s not surprising,” she said. “We are not even seeing moves within the Valley. All the Realtors, furniture store owners, the pool and landscaping companies are really suffering right now.”

A panel of real estate experts expects the number of single family home permits will decline to about 17,600 in the Valley this year, which is a drop of 71 percent from the peak in 2005, said Elliott Pollack, a Scottsdale-based economist.

The group expects a 26 percent increase next year to about 22,300 units, but “even if that increase occurs, it would still make 2009 the second-weakest year since 1992,” Pollack said.

When the recovery does begin, probably late this year or in the first half of next year, it will be weak, most of the economists predict.

“Given that the real estate is driving it, and there is no end to those problems in sight, we will continue to have a bad economy for an extended period,” said Tom Rex, an economist at the W.P. Carey School of Business at Arizona State University. “A year from now we could still be seeing a recession.”

For the recession to end, the inventory of about 60,000 homes in the metro Phoenix area will have to be reduced to a manageable number, a process that will be slow because of the low in-migration to the state, Vest said. He also said the problems in the credit markets will have to be worked through so that banks will be willing to lend money again. And the final key will be to bring inflation – especially gasoline prices – under control, he said.

“Consumers are being squeezed,” he said. “The tax rebates will help growth in the third quarter, but it’s not enough to get the economy rolling. It will only limit the downside.”

Pete Ewen, chief economist for Arizona Public Service, doesn’t see the situation as very different from previous recessions the state has endured. Eventually the forces that attract people to Arizona will reassert themselves and population growth will resume, he said. But it could take as long as two years, he said.

“The long-term fundamentals are still there in the sense that Arizona is a relatively low-cost state situated next to a high-cost state (California) that is a huge market,” Ewen said.

Until growth picks up, economists advise residents to be cautious — reign in spending and get your finances in order.

“If you have deep pockets, there are some marvelous opportunities,” Vest said. “We’re already seeing foreclosed houses selling briskly. Clearly people are buying in the expectation that in five years they will be worth a lot more than they are now.”