An End in Sight

Hit Harder Than The Rest Of The Nation, The Valley’s Economy Is Starting To Show Faint Signs Of Recovery

Don’t dust off that party hat just yet, but there are early signs that the worst recession in the Valley’s history is easing its stranglehold on the economy. To be sure, as fall approaches and the recession’s two-year mark looms in December, Phoenix residents and businesses still struggle with plenty of economic problems. But economists and business leaders see hopeful signs.

Conventional wisdom says the housing market will pull the Valley out of the recession, after having led it down that path in the first place. Lee McPheters, economics professor at the W.P. Carey School of Business at Arizona State University, sees that milestone unfolding right now. The Greater Phoenix Blue Chip Real Estate Consensus Panel estimates 8,260 single-family housing permits will be issued this year, McPheters says. That’s down dramatically from the 57,360 issued in 2004, but McPheters says the forecast also calls for 12,600 permits in 2010, establishing 2009 as the bottom for that economic indicator.

New-home sales may have hit their low point the first half of this year and sales of existing homes, or re-sales, are bouncing back, according to McPheters.

“We are on track here to have easily over 75,000 re-sales for 2009, and it could be closer to 100,000 because there’s lots of inventory out there,” McPheters says. “At least half of that is bank-owned foreclosures but, nonetheless, re-sales are quite robust.”

There were 110,000 re-sales in 2005 during the Valley’s housing boom.

“New permits and sales of new homes seem to have bottomed out and re-sales have been going up,” McPheters says. “Those seem to be pretty strong trends, but still at a low level.”

What McPheters is saying is that good news in the housing sector alone does not constitute an overall recovery.
“There is nothing in the makeup of the Phoenix economy at all that would provide the stimulus for any independent recovery,” McPheters says.

Metropolitan Phoenix is still plagued by continuing job losses, declining personal income, decimated retail sales, declining home prices, home foreclosures, weak commercial real estate construction and more. The shrinking labor force likely won’t bottom out until the second half of next year after recording a historic three-year stretch of job losses — 2008, 2009 and 2010.

“By the time all the job losses have been recorded, Phoenix will have several hundred thousand fewer workers, and it probably will be 2011 before there is any kind of vigorous recovery in retail sales,” McPheters says.

In the meantime, 96 percent of the economists in the national Blue Chip Economic Indicators newsletter expect the national recession will end in the fourth quarter of this year. McPheters sees the national downturn drawing to a close with a modest turnaround and he thinks Phoenix will follow suit.

“Nationally, at the end of 2009, we will stop talking contraction and start talking about indicators that are more positive,” McPheters says. “Then there will be a period of slow growth. Phoenix probably will follow that, but remember that we have been harder hit than the rest of the country.”

Still, there is more to the Valley’s economy than statistics. Local business leaders are encouraged by what they see.

“From my perspective, we have seen a dramatic increase in headquarters activity,” says Barry Broome, president and CEO of the Greater Phoenix Economic Council.

Businesses primarily from the Northwest and California and, to some extent, Boston and New York, are either researching the Valley or making definitive plans to move their headquarters here, he says. Broome expects 10 to 15 headquarters to relocate to Arizona over the next 18 months and Phoenix will land some of them.

Broome also sees “new, sophisticated capital” moving into the Phoenix market. Investors are deploying the money now and plans are being written up for commercial real estate and science and technology projects, he says. Existing companies poised for growth are attracting capital infusions, Broome adds.

“This is not the cheap Las Vegas capital coming into the Valley where they buy it, zone it and flip it,” Broome says. “Now we’re seeing private equity firms that have 50 to 100 years of reputation in the U.S. and the world that didn’t get burned in this downturn. They are coming out of the Northeast markets, which we have not seen before.”

Bruce Coomer, executive director of the Arizona Association for Economic Development, is amazed at how busy city and county economic development departments are in the Valley and around the state.

“I don’t think there are any in Metro Phoenix cities that are not extremely busy,” Coomer says. “They are telling me that they are having trouble keeping up with the work.”

Although cities are likely conducting outreach programs, Coomer believes staffers are scrambling mainly because companies are approaching them.

Economic developers, Coomer says, “have got some big deals in the wings. That tells me companies, site selectors and developers know that sooner or later the recovery is going to come and they all want to position themselves. They want all their ducks in a row and all their due diligence done so they can pull the trigger and be on the front lines in a short period of time.”

Richard Hubbard, president and CEO of Valley Partnership, sees two encouraging signs within the business community.

“Commercial development companies have come face to face with the difficult decisions they have to make, be that layoffs, stopping projects or filing for bankruptcy,” Hubbard says. “A lot of those decisions are being made.”

Hubbard also is pleased with decisions made by sources of capital.

“Lending companies — whether that’s banks, private institutions or individuals — who have taken back property through foreclosure are starting to bring that property to market at reasonable prices,” Hubbard says. “They’re cutting their losses and deciding they can’t hold onto the property anymore. That will allow these companies to move forward.”

Hubbard says he also is encouraged that the housing market is well into the process of working its way out of the recession.

“The home-building industry has been suffering for a long time and they made their tough decisions a year ago,” Hubbard says. “Now it’s time for the commercial industry to follow suit.”

The Arizona economy and Tucson, Southern Arizona’s economic engine, continue to suffer from the same maladies as Greater Phoenix, says Marshall Vest, an economist at the University of Arizona’s Eller College of Management. Vest sees no hopeful signs of a statewide recovery for the time being. The only positive for Tucson is that its housing boom was not as strong as Phoenix, and its economy was not dragged down as far as the Valley’s, he says.

Vest sees the national recession receding in the third quarter.

“Arizona and Tucson will lag behind the nation by at least a quarter or two,” Vest says. “So Arizona should bottom out by the end of the year or the first quarter of next year and start its recovery at that time.”

The first sign of a statewide recovery will be a peak in the number of initial unemployment insurance claims, followed by stabilization of the labor market and then an uptick in retail sales, Vest says.

Flagstaff dominates the Northern Arizona economy. Marc Chopin, dean of the W.A.

Franke College of Business at Northern Arizona University, says the city has been logging double-digit declines for sales tax revenues and bed, board and beverage tax receipts. Building permits for single-family homes and additions and alterations to existing homes also have been declining, he says.

“I don’t expect things will turn around for some time,” Chopin says. “Construction, I expect, won’t recover for some time. About a quarter of the homes in Flagstaff are second homes. Until there’s a recovery under way in Phoenix, from which many of our second-home owners come, the second-home market in Flagstaff is unlikely to recover.”

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