By Marshall J. Vest
Economic and Business Research Center Director
Editor’s Note: This article originally appeared in Arizona’s Economy, Winter Issue (January 2012)
Arizona’s economy improved modestly during 2011. Data show that recovery has begun, but the pace was painfully slow. Recent revisions to aggregate measures suggest that growth may be accelerating as 2011 comes to an end, and we expect the pace to quicken as 2012 unfolds. However, remaining imbalances in real estate, depressed population mobility, and severe budget constrains in the public sector will continue to restrain the pace of recovery. It will take another 2-3 years to repair all the damage suffered during the Great Recession.
2011 will go into the economic history books as another forgettable year, as progress continued to be held back by strong headwinds. Hangover from the financial crisis restrained credit growth in the U.S., and the Eurozone’s sovereign debt and banking crisis is its most recent manifestation. Housing continued to languish under the burden of distressed sales and falling prices, and population mobility continued near record lows. Lack of confidence in the ability of governments to set good policies was highlighted by Congress’s debacle on resetting the debt ceiling and recent failure of the Congressional “Super Committee” to reach an agreement to reduce the federal budget deficit. With confidence stuck at recession levels, spending and hiring remained restrained.
The good news is that all the aggregate indicators of economic activity for Arizona are (finally) improving. Personal income, wages, and employment are growing at increasingly faster rates. Measures of spending are surprisingly robust. Unemployment is declining as are bankruptcies and residential foreclosures. The Arizona economy is no longer bouncing along the bottom. Recovery is now underway.
Recent revisions to Arizona personal income show much stronger growth in recent quarters than originally reported. On a year-over-year basis, personal income grew 5.7% in the first quarter 2011 and 5.5% in the second. Proprietors income contributed with an annualized gain of 9.1% during the first half, followed by a 6.8% gain for property income. Wage and salary disbursements increased by a disappointing 3.8%.
Wages per employee in the private sector jumped by 5.7% in the first quarter, compared to a year earlier (Exhibit 1).
Wages have barely kept up with inflation in recent quarters. After adjusting for inflation, wages per employee remain roughly 2% below their pre-recession peak.
Over the 12 months ending in September, nonfarm employment grew by 2.3% from a year ago. That’s 48,000 new jobs – all of them in the private sector (Exhibit 2).
Surprises in state revenue collections, especially for income taxes, are thought to be the result of special factors that will not repeat. Indeed, the 18.5% increase in individual income taxes for FY2011 couldn’t be explained by the economy’s performance; personal income grew only at a 5.5% annual rate in the first half of 2011.
Nationwide, the story line for consumer spending in recent months has been positive, with spending growing faster than incomes. That’s made possible by a lowering of the savings rate.
With data through October, retail sales statewide have grown by 9.9% (12 months compared to prior 12 months). Among major categories, furniture and home furnishings (up 15.5%), clothing/accessories (up 15.1%), building material/lawn & garden (up 12.5%), and motor vehicle dealers (up 11.7%) have registered the largest increases. Restaurant and bar sales have increased 4.8% and now equal the peak established in early 2007 (however, inflation-adjusted sales remain 11% below the peak).
A more comprehensive picture of spending that includes all sales and use categories shows aggregate spending flattening in recent months and growing at a moderately-paced 5.3% annual rate. That’s a significant improvement, however, compared to the declines experienced over the 2008-10 period. This measure includes taxes collected from restaurants & bars, communications, utilities, rentals, hotels/motels, amusements, printing, publishing, contracting, and other smaller categories in addition to retail. (Exhibit 3).
Arizona’s housing markets are still depressed, but progress at working through the backlog of distressed properties is encouraging. Foreclosures are still at high levels (Arizona ranked third among states in October) but activity was 36% lower than a year ago. A precursor to foreclosures, delinquency rates on single family mortgages at commercial banks, also remains at very high levels (over 10%), where normal is 2-3%.
Fortunately, demand remains high for residentialproperties, driven by strong investor interest. In the resale housing market, active listings have been reduced significantly to what might be considered normal. Coupled with current large number of sales, the months supply now stands at only three months in metro Phoenix and less than five months in metro Tucson. Four to six months is considered “normal” (Exhibit 4).
Unfortunately, a large portion of sales are distressed and that continues to put downward pressure on prices. Prices are perhaps the best single indicator of market conditions, and until housing prices stabilize, the distress flag flies high.
Is Population Declining?
When results from the 2010 Census became available showing a count that was fully ¼-million short of expectations, we raised the notion that Arizona’s population had declined during the Great Recession. This is a question that will never be answered with certainty, since a (supposedly accurate) count is performed only once per decade. But it makes a huge difference in our understanding of how population flows vary over the business cycle.
Originally, before the results of the Census enumeration were known, the Census Bureau estimated that Arizona’s mid-year 2010 population approached 6.677 million (release date early March 2011). The Census now believes the number (released in September 2011) to be 6.414 million, which is consistent with the April 1, 2010 count. The new Census estimates show population continuing to grow by 1-plus percent during the recession.
Implications for net migration are dramatic. The current estimates show net migration remaining positive in the 20,000-35,000 range.
For Metro Phoenix, the Census Bureau originally estimated a mid-year 2010 population of 4.435 million and currently shows 4.211 million. Net migration is a positive 23,000 in the current estimates.
For metro Tucson, the 1-million mark is no longer a reality. The current Census estimate is 982,000 compared to the pre-Census estimate of 1.027 million. Net migration for 2010 is a positive, but weak, 2,300.
So, the recent estimates from the Census Bureau say that population in Arizona did not decline during the Great Recession and that population is currently growing by roughly 1% annually.
The recovery remains in its infancy and it will take years to repair the damage suffered by the Arizona economy during the Great Recession.
We continue to look for another year or two of slow growth for Arizona’s economy. Assuming that the nation’s economy avoids recession (a 40% change of another dip in the next 6-12 months), recovery in Arizona will continue to gain momentum. The pace will be modest due to drag from the real estate and public sectors, and reduced mobility of the nation’s population. It will be mid-decade before Arizona’s economy will get back to “normal.”
For 2012, we expect increases in average annual growth of 3.9% for personal income, 1.3% for nonfarm employment, 0.5% for population, and near 5% for retail sales. In absolute numbers, that’s 30,000 new residents, and a similar number for nonfarm employment. The following year will bring 64,000 new residents and 54,000 new jobs. By 2015 the numbers will be near “normal” at 135,000 and 120,000, respectively. The accompanying forecast tables provide additional details.
By mid-decade, we will have regained all the jobs lost and repaired the damage suffered during the recession. At this point, after all we’ve been through, that’s sounds pretty good.
Access the Economic and Business Research Center’s latest forecast data online, or view the presentation from this year’s 2012-2013 Economic Outlook Forecasting Luncheon.