46th Annual Economic Forecast Luncheon 12/02/2009

Dept. of Economics, ASU W.P. Carey School of Business, Arizona State University
Phoenix Convention Center 

Speakers:

Anthony Chan, Chief Economist, Private Wealth Management, JPMorgan Chase
Lee McPheeters, Director, JPMorgan Chase Economic Outlook Center WP Carey School of Business, ASU
Elliott Pollack, President, Elliott D. Pollack & Company

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~~Detailed slides and analysis from the luncheon presentations are available at~~
knowledge.wpcarey.asu.edu

Anthony Chan:  Overview of U.S. Macro-Economic Environment
Consumer Spending:  Growth out of a recession has (historically) been led by strong positive consumer spending.  Due to the massive evaporation of wealth by the end of the first quarter 2009, consumers are likely to maintain a higher savings rate for quite some time. That will serve as a negative headwind to consumer spending over near and intermediate term. If we make draconian assumptions about consumer spending over the next several calendar quarters, we can still come out with a real GDP growth rate within 2.0 to 2.5%. 
Government:  The executive and legislative branches of government want to avoid a double dip recession at almost any cost.  It seems reasonable to expect government to contribute 0.2 to 0.3% towards real GDP growth next year.

Lee McPheeters:  The Long Road to Recovery
Review: The national recession has hit the Arizona economy harder than any other state.  Absolute job losses were third highest in the West. Arizona lost 195,800 jobs in the past 12 months. Retail sales fell by more than 10 percent and personal income decreased for the only time in four decades of modern record-keeping.
Outlook: In 2010, the Arizona economy will exhibit more of a “U” shaped rebound, rather than a sharp “V” shape. Population growth will be under 2 percent.  Steady job growth will be delayed until 2011, and it will take four or five years before employment returns to the peak level of December 2007.
Employment:  The consensus forecast for Arizona employment growth calls for a decrease of 24,300 jobs, a loss of 1.0 percent over 2009. In spite of the federal stimulus program, construction will again lose more jobs than any other industry, an expected decrease of 30,000 jobs. Health care will be one of the few industries adding jobs.
Retail Sales:  Total retail sales in 2010 will be more than $10 billion below the level of 2007. Since Arizona state government depends heavily on sales and income taxes, budget problems will present serious challenges in 2010.

Elliott Pollack: 
Real Estate & Construction Outlook – It Doesn’t Get Much Better Than This
The problem with the commercial market is the same as single family housing: too much supply and not enough demand. There is a long lead time between when a project is conceptualized and is finally finished. Problem commercial real estate loans have risen dramatically. The peak in commercial mortgage maturities appears to be ahead of us (2011 to 2013 time frame).
For the multi- family market, vacancies could exceed 13 to 14%. There were still 6500 units in the pipeline as of 2Q09. This will put downward pressure on rents and prices. 
Office vacancies will reach their highest level ever next year, exceeding 27% and that excludes shadow inventory of companies subleasing space.
Industrial vacancies rates are higher here than the nation as a whole.  For the first three quarters of 2009, absorption was negative 8 million square feet. There is about 1.2 million in the pipeline.  There will be downward pressure on rents and prices next year and perhaps into 2011.
Retail vacancy rates also exceed the U.S. as a whole.
From an economic development standpoint, the current situation could be a positive because there will be a large amount of inexpensive space, both for rent and purchase, for companies wanting to expand or move here.  Housing is very affordable again.