 |
Marshall J. Vest
Forecasting Project Director
September 1, 2009
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 expectation that the state will lag behind the rest of the country. In our annual update of long-term projections, we’ve lowered our forecasts for 30 years hence, but we still foresee population nearly doubling.
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 all pieces of evidence supporting belief 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 was declining at a 20% annual rate last winter, was declining 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 a year-and-a-half 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 (Exhibit 1).
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.
Updating a graphic that we prepared six months ago (Exhibit 2), we find that residential building activity (as measured by building permits) has fallen by 89% from its peak level. That compares to declines of 74% and 71%, respectively, during two earlier severe recessions. Nonfarm employment is down 9.1% so far, compared to a 4.5% peak-to-trough decline in the mid 1970s, and 2.2% in the early 1980s. Inflation-adjusted retail sales fell 10.7% in the 1970s recession and 33.1% in the early-1980s. In the current recession, sales have fallen 27.1% so far.
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.
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.
Projections for each 10-year interval for selected aggregate measures are presented in Exhibit 3.
5,166 |
6,660 |
8,280 |
10,410 |
12,530 |
2,243 |
2,390 |
3,310 |
4,200 |
5,200 |
133 |
210 |
380 |
670 |
1,080 |
55 |
75 |
136 |
215 |
317 |
Highlights of the 30-year forecast include the following.
- Nearly 3.0 million new jobs will be created in Arizona over the next three decades, boosting the total to 5.2 million.
- Per capita personal income relative to the nation will continues its downward slide from 83% today to nearer 70% thirty years from now. This ratio peaked at 96% in 1981. Per capita income is an aggregate measure comprised of demographics (age structure), wage levels, industry mix, and labor force participation rates. The downward trend keeps Arizona near the bottom of all states on this measure of economic wellbeing. Today (2008 data) Mississippi is at 74% followed by Utah (76%), West Virginia (78%), Arkansas (79%), Kentucky and South Carolina (both 80%), New Mexico and Idaho (both 81%), and Arizona (83%).
- Arizona’s employment to population ratio plunged during the current recession and will remain well below its peak established in 2000 (43.4%) and after dipping to near 36% in 2010, finishes in 2039 at 41.0%. Arizona’s ratio consistently runs about 3-4 points lower than nationwide (Exhibit 4).
 |
- As the population continues to age, an increasing share of personal income will come from transfer payments, of which social security is the largest component. The share will rise from 19.5% today to 27% by 2039. Per capita transfers in Arizona however remain steady at 91.5% of the corresponding nationwide measure, so Arizona is mirroring national trends.
- Retail sales relative to income will continue to fall, dropping to 20% from nearly 40% in the mid-1960s. An aging population that spends more on services (especially health care) and a smaller portion on goods accounts for the drop.
- Migration flows will continue to account for the lion’s share of population growth. On average, natural increase (births minus deaths) accounts for one third while net migration provides the remainder. The latter varies significantly, of course, over the business cycle.
- The annual number of net migrants continues its upward trend to reach nearly 180,000 per year in 2039, roughly the same as in 2005. As a percent of the standing population, net migration falls from 2.8% in 2005 to 1.4% in 2039 (Exhibit 5).
 |
- Manufacturing, government, utilities, retail trade and mining will represent smaller shares of total jobs 30 years from now. Manufacturing’s share will decline from 6.2% to 3.6%, government from 17.5% to 13.5%, utilities from 0.5% to 0.3%, and retail trade from 12.2% to 11.4%. Mining jobs will all but disappear.
- Sectors that will gain the largest shares are professional and business services (from 14.1% to 17.4%), health care & social assistance (from 11.5% to 13.3%), financial services (from 6.9% to 8.4%), and leisure & hospitality (from 10.8% to 11.3%).
- In our “high” scenario, Arizona’s population reaches 14.2 million in 2039. In the “low” scenario, it is 11.8 million, compared to 12.5 million in the “most likely” scenario. Pennsylvania, the sixth largest state, today has 12.5 million.
- Today, Arizona’s 6.6 million population ranks 13th, just ahead of Washington and Massachusetts. In thirty years, Arizona will overtake Virginia, New Jersey, North Carolina, Georgia, Michigan, and Ohio to become the seventh largest state.
- The range for 2039 metro Phoenix population is 8.4 to 9.5 million. Metro Tucson’s range is 1.6 to 2.0 million people. The “Sun Corridor” megapolitan population (both metros -- three counties combined) ranges from 10.0 to 11.5 million.
- By 2039, 72% of Arizona’s population will reside in the Phoenix metro area (Maricopa and Pinal counties). Metro Tucson (Pima County) will account for 13.9%. Today, the shares are 65.9% and 15.5%, respectively.
Arizona has been the second-fastest growing state over the past several decades, and is expected to continue riding the crest for at least the next few decades. Over the next 30 years, Arizona will add more than six million residents, nearly doubling in size. We can only guess what Arizona will be like, 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. 
|
|