The economy is, thankfully, recovering, and entrepreneurialism has played a large role in helping it along. One of the most interesting parts of this recovery, however, is the emergence of new types of industry. Businesses have found all new niches to fill, and seven industries in particular have shown substantial growth in 2013:
A new report says the richest Americans got richer during the first two years of the economic recovery while average net worth declined for the other 93 percent of the nation’s households.
The Pew Research Center report says wealth held by the richest 7 percent of households rose 28 percent from 2009 to 2011, while the net worth of the other 93 percent of households dropped by 4 percent.
It says the main reason for the widening gap is that affluent households have stocks and other financial holdings that increased in value, while the less wealthy have more of their assets in their homes, which haven’t fully regained their value since the housing downturn.
As a building owner of a vacant big box (or perhaps soon-to-be-vacant), there are a lot of factors that affect the return on your investment and the success of your asset.
From our experience in working with owners as they analyze their asset, we have found that one common denominator applies to every situation — the owner must be armed with specific market information so that they can make educated decisions.
Market intelligence or market analytics play a key role in nearly every building sale or lease. While it is important to know the vacancy rate in the market, it is even more important to drill down to specifics about your product type and market area.
Following are some questions you can ask yourself about your building or asset:
>> How many vacant big boxes are in the immediate trade area (what is my competition)?
>> Are the big boxes of the same product type? Neighborhood, vs. power center, vs. anchored, vs. unanchored?
>> What is the average length of time these boxes are on the market before they lease or sell?
>> What deals have been completed recently which are similar? What was the rental rate, or concessions such as free rent or TI dollars?
>> Who would be the typical tenants to lease or buy the space? Are they already in the area?
>> Will the other tenants in my shopping center be able to stay open if the anchor space is vacant? If so, for how long?
Chances are you do not know all of these answers, or even know where you can get this information. However, we believe that these answers are critical to a successful outcome for your asset. Whether you want to lease and hold it as an investment, or whether you want to sell it as is, the information you gather to make that decision is critical.
Velocity Retail Group has allocated significant resources over the past two years to create a structured research vehicle aimed specifically at big box owners. We have drilled down to specific product types within cities, market areas and regional areas. Additionally, understanding absorption, vacancy and new construction are critical factors to any real estate decision.
Over the past year, we have been asked to present our information to various economic, industry and governmental groups throughout the Valley. The feedback we receive from these presentations has been extremely positive. In order to help share this information in a format that communicates the analytics succinctly we have created a video podcast series for our clients.
Click on the video at the bottom of this article to watch the eight-minute market overview recapping 2012.
Dave Cheatham is Managing Principal of Velocity Retail Group. He is an authority on retail real estate in the disciplines of brokerage, project leasing, development, consulting and advisory services. He is a senior advisor to merchants, entrepreneurs, investors and senior retail executives throughout the industry.
We’re finally on the path to full economic recovery, and Arizona may get there in about three years. That’s the main message from experts who spoke today at the 49th Annual Economic Forecast Luncheon co-sponsored by Arizona State University’s W. P. Carey School of Business and JPMorgan Chase.
About 1,000 people attended the event at the Phoenix Convention Center, where economists painted a generally brighter picture for 2013.
“As of September, Arizona ranked fifth among states for job growth, and the Phoenix area was fourth among large metropolitan areas,” said Research Professor Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business. “Arizona is expected to add 60,000 jobs in 2013, led by professional and business services, retail, hospitality and health care. We should finally dip below 8-percent unemployment in 2013 — down to 7.6 percent.”
McPheters added, as long as the national economy doesn’t drag us down, Arizona may see 2.5-percent growth in its employment rate next year. The state had 2-percent growth this year. Despite the jump, Arizona has gained back less than a third of the jobs it lost during the recession. McPheters believes it will take another three years to return to pre-recession employment levels.
In 2013, McPheters expects improved 5-percent growth in personal income, up from just 4 percent this year. He projects retail sales will go up 6 percent, from 5 percent this year. He expects Arizona’s population to rise 1.5 percent, and he believes single-family housing permits will shoot up a whopping 50 percent, with the local housing market now on the mend.
Both McPheters and Beth Ann Bovino, deputy chief economist at Standard & Poor’s, hinged their forecasts on whether the national economy can really pull forward; otherwise, Arizona will go down, too. The biggest question out there is whether Congress can avoid the “fiscal cliff” – where automatic spending cuts would kick in, just as various tax cuts expire. Bovino says that could plunge the United States back into recession and push national unemployment back above 9 percent by the end of the year.
“If we can avoid the fiscal cliff, then it looks like the economy could finally be in a self-sustaining recovery,” said Bovino. “We expect this year’s gross domestic product (GDP) to hit 2.1 percent, stronger than previously projected. For 2013, we’re looking at about 2.3 percent. Reports also show a stronger jobs market and signs that households are willing to buy big items, such as cars and homes.”
Bovino adds the U.S. unemployment rate was at 7.9 percent in October, and she sees signs more people are joining the workforce and getting jobs. However, she says the labor participation rate is still near a 30-year low, meaning more people will still be coming back to the workforce to look for jobs, keeping the unemployment rate low for a quite a while. Despite this, Bovino expects the national unemployment rate to drop to 7.6 percent next year.
She also has a good outlook for the national housing market, with housing starts already up 45 percent this September over last September. Bovino referenced a report that 1.3 million homes rose above water – with the value going higher than what was owed – in the first half of this year alone. She expects residential construction to go up almost 19 percent in 2013.
In the financial sector, Anthony Chan, chief economist for private wealth management at JPMorgan Chase & Co., says corporations remain flush with cash. They’re waiting for some clarity on where the market will go as a result of the fiscal-cliff situation and other factors.
“U.S. corporations are reluctant to go through global mergers and acquisitions or make big investments until they have a clearer picture,” said Chan. “Corporations are keeping high cash balances, in order to deal with the uncertainty. They’re making near-record profits in some cases, and many values on the stock market look good. However, everyone’s waiting to see what will happen.”
He said high-yield investments, such as bonds, and gold remain relatively attractive. The U.S. dollar keeps falling against currencies from emerging markets, as monetary agencies work through different strategies of dealing with the rough economy.
In the local housing market, Elliott D. Pollack, chief executive officer of Scottsdale-based economic and real estate consulting firm Elliott D. Pollack and Company, also drew some conclusions.
“Even though about 40 percent of Arizona homeowners are underwater on their mortgages, we’re starting to see a recovery,” said Pollack. “The single-family-home and apartment markets look great. Industrial real estate has improved quite a bit. Only office and retail have quite a way to go.”
Pollack adds new residential foreclosure notices are down almost 70 percent from the peak in 2008. Phoenix-area home prices are up more than 35 percent over last year. New-home sales are also doing well, with 67 percent of the local subdivisions active today projected to be sold out in less than a year. Builders are going to have to work to meet the demand, with less land and labor available.
Pollack sees a strong rental presence, with about 22 percent of local single-family homes being used as rentals right now. That’s up from less than 12 percent just a decade ago. Landlords appear to be buying up many single-family homes, and more people are moving to the area.
“In the absence of a fiscal cliff, things should continue to improve over the next several years,” said Pollack. “By 2015, things should be normalized. As I like to say, we’re only one decent population-flow year away from the issue being resolved.”
More details and analysis from the event, including the presentation slides, are available from knowWPCarey, the business school’s online resource and newsletter, at http://knowwpcarey.com.
As the economic recovery gains steam, the Phoenix retail market will continue to strengthen this year, according to a market forecast from Marcus & Millichap. Over the past 12 months, the metro has been one of the top-performing job markets in the country. Additionally, after years of setbacks, the housing market recorded six consecutive months of price increases through March.
As these trends unfold, retailers that shuttered during the housing crisis will be encouraged to expand in densely populated areas of the metro. Most of the submarkets will post positive absorption this year as new supply remains limited and national tenants, including Sprouts, Hobby Lobby, and Dollar General, capitalize on the available space and low rents. However, store closures by Borders, Circuit City and, more recently, Best Buy has left more than 8.5 million square feet of empty big-box space on the market. Operators sitting on large blocks of space in established areas will have to offer lucrative concessions to backfill the space, while properties in less-desirable neighborhoods will struggle to attract tenants. In the East Valley, a few owners will reconfigure layouts and offer smaller footprints to broaden their potential tenant roster, while others may redevelop the property into another commercial use.
As CMBS loans mature, more distressed properties will hit the market this year, attracting private investors seeking steep discounts. A bulk of the multi-tenant deals that traded in the last year involved bank-owned strip centers, a trend that will continue for the remainder of 2012 as banks foreclose on over-leveraged owners. In hard-hit areas of Mesa, Chandler, and Gilbert, where population growth did not meet prior expectations, buyers will be able to purchase highly vacant strip centers for below $60 per square foot. Well-capitalized local and California investors who waited on the sidelines will pay cash for troubled assets. The owner will renovate the property and adapt the use toward the changing demographics in the area. The new configuration, along with favorable leasing terms, will help the operator backfill the space over several quarters. After holding the asset for three to five years, the owner may list the stabilized strip center at a cap rate around 9 percent, depending on interest rates.
2012 ANNUAL RETAIL FORECAST
Employment: By year end, total employment will expand by 2 percent as companies generate 35,000 new jobs. The increase represents a modest uptick from last year, when employers hired 28,600 workers.
Construction: In 2012, projects totaling 600,000 square feet of retail space will be completed in Phoenix, expanding supply levels by 0.4 percent. In the previous year, construction output fell to the lowest level on record as builders delivered a mere 391,000 square feet.
Vacancy: As the economic recovery gains traction this year, retailers will continue to expand in the metro. Vacancy will finish 2012 at 11.2 percent, marking a 70-basis point improvement from a year earlier as tenants occupy 1.5 million square feet. In 2011, vacancy fell 30 basis points.
Rents: Asking rents will show a 0.5 percent increase this year to $18.18 per square foot, while effective rents will rise 0.6 percent to $15.26 per square foot. In 2011, owners trimmed asking rents 0.6 percent as effective rents retreated 0.5 percent.
For more information on the retail market forecast by Marcus & Millichap, visit Marcus & Millichap’s website at marcusmillichap.com.
An important hiring trend underway right now isn’t getting much attention in the news. Companies both large and small are riding the economic recovery wave by filling mid- to high-level positions with contract employees. According to the Bureau of Labor Statistics, no fewer than half of all the professional jobs added in the past quarter were contract, not payroll jobs. And savvy professionals in transition are repackaging and selling their talent—not just their time—on a project by project basis to cash in.
Called “supertemps” by the Harvard Business Review, consulting expert Buddy Hobart, founder and president of Solutions 21, calls them “solopreneurs” and specializes in laying out a clear map for people determined to benefit from this new business model. Hobart, and his team have taken their many lessons learned over the past eighteen years building a successful business and created the Ex3 Matters Consulting Network. Through Ex3 Matters, Hobart takes his research and experience to the front lines, teaching baby boomers, professionals and out-of-the-box thinkers how to take advantage of this new workplace phenomenon.
“It used to be that you traded time for money,” said Hobart. “That’s changed. Now you trade results for money. Talent is transferable across a wide spectrum of industries and I believe that if you are on that supply side and you have these skill sets, you need to take a hard look at how this whole transaction is changing,” he added.
Hobart is the author of three books, including his most recent Gen Y Now, co-authored with ASU Basketball Coach Herb Sendek. He is also host of the radio show “The Consultant’s Corner” on The American Entrepreneur.
Hobart is hosting an upcoming presentation in Scottsdale on how this new work model is changing the employment landscape and how professionals can put their experience and expertise to work for themselves. He will be at SkySong, 1475 North Scottsdale Rd., from 8:00 a.m. – 10:30 a.m. on May 15 to speak on this growing trend. The presentation is free and includes breakfast.
Registration is online at http://tinyurl.com/7a45mqs and more information is available by calling 480.940.1474 or email firstname.lastname@example.org.
Aerospace and defense industry is critical to expanding economy
When I’m asked to name one sector of Arizona’s technology community that is critical to expanding the strength of the economic recovery, I always sum it up in two letters: A&D — the aerospace and defense industry. It’s a cornerstone industry for Arizona, as our state has seen groundbreaking innovation in this arena for decades.
Boeing, General Dynamics, Honeywell, Raytheon, Lockheed Martin, Northup Grumman and Orbital Sciences are just a handful of the state’s major industry players contributing to Arizona’s impressive resume. An Arizona economic impact study conducted in 2010 reported that compensation per employee in the Arizona aerospace and defense industry is approximately $109,000. This is 2.3 times the statewide average for all employed individuals. The study also reported when accounting for multiplier effects, the Arizona A&D industry in 2009 can account for a total of 93,800 jobs, labor income of $6.9 billion, and gross state product of $8.8 billion.
But keeping Arizona’s aerospace and defense industry healthy and at pace with the ever-changing knowledge-based economy requires competitive business policies and a coordinated effort among state and federal leaders. Recognizing the critical importance of this imperative, there has been a resurgent statewide support for A&D over the last few years.
A big step was taken when Gov. Jan Brewer created the Arizona A&D Commission. Its active members develop industry goals, offer technical support, recommend legislation and provide overall direction. Another milestone occurred when the Arizona Commerce Authority formed and designated the aerospace and defense industry as one of its foundational pillars. Through the efforts of these two organizations, a request for proposal was issued for the first ever Aerospace, Aviation & Defense Requirements Conference in Arizona. Hosted by the Arizona Technology Council in late January, this successful historic event offered a major opportunity for the A&D community to connect with potential new partners. Attendees also heard a multitude of informative speakers, including a gripping keynote address delivered by Gen. Philip M. Breedlove, the Vice Chief of Staff of the U.S. Air Force.
A new chapter in the state’s expanding role in A&D research also recently began when the Arizona A&D Research Collaboratory was formed. The organization brings leaders from Arizona’s A&D industries together with researchers from the University of Arizona, Arizona State University and Embry-Riddle Aeronautical University to work together to gain insight into future technological needs for A&D.
Although these initiatives and programs indicate that there’s a resurgence of attention on A&D in Arizona, there are several key elements upon which the industry leaders within the state must still focus. The industry can’t do it alone. We need a unified congressional delegation employing strategies focused on promoting the desirable, high-wage jobs that A&D bring to their constituents.
We also need states leaders to take the lead in advocating for federal A&D projects that are critical to the existence of the state’s industrial base. These efforts not only reap benefits to the large manufacturers but they are hugely significant to building a robust small business supplier base in the state.
Indeed there are great needs still to be met for achieving newly conceived and exciting goals for manned space flight, homeland security and connecting the world with ever-evolving modern communications technologies. With the proper support, Arizona’s aerospace and defense industry can be critical to meeting those needs.
Steven G. Zylstra is president and chief executive officer of the Arizona Technology Council.
As your business trims the fat and weathers a tough economy, here are a few business tips and practices, from business professionals, including Stacy Tetschner of National Speakers Association and Pamela Barker of Genesis Strategic Planning Inc., to consider to keep your business afloat without burning out employees or missing opportunities.
Cut back or not?
When money is tight, what should your business cut and keep? Some businesses are cutting essentials that cost them customers. To keep and grow your customer base, Stacy Tetschner, CEO of National Speakers Association, says to follow best-selling business writer, Jim Collins’ advice.
“Find out what you are best at,“ Tetschner says. “It’s great to generate alternative revenue sources, but don’t forget your core business. Make sure you provide that better than anyone else in the world.”
To keep your businesses performance level above the competition, Pamela Barker, president of Genesis Strategic Planning Inc., says to invest in your employees. “Make sure people are well trained, naturally wired for their roles, and share in your organization’s vision,” Barker says. “Also, stay with services and products that have a high rate of return and are tailored to your niche market.”
Good service with a skeleton crew
Since 2008, many businesses survived by whittling down their staff. Employees who absorbed workloads of terminated positions are now facing burn out. Ownership in goal setting is one way to keep employees engaged and creating realistic, long-term work plans.
“It is important for teams to set thematic goals with everyone contributing action steps,” Barker says. “Patrick Lencioni’s team building material asks the critical question, ‘What must happen in the next 30, 60, or 90 days to consider this organization a success?’ Goals are set around the answer, but goals are set as a team.”
It’s also important to build the fire of excitement around what your organization is doing to keep employees inspired.
“Show your team your excitement about your vision,” Tetschner says. “Everyone wants to be excited about what they are doing and why they are doing it. And when your employees do incredible work for you, be sure to show your appreciation.”
Marketing and networking don’t always need to involve money. There are ways to stay connected to your community and interacting with the public without spending a dime.
Social media: Create a strategy with reachable goals for getting customers interested in your work using Facebook, YouTube and Twitter. Sign up for Ragan’s Daily Headlines, a free e-newsletter with social media ideas (ragan.com).
Community presence: Barker says to stay in touch with your community by “serving on non-profit action committees, stay involved in the chamber, and the Better Business Bureau.”
Develop partnerships: Partner with non-competing businesses to provide discounts to customers. “You can share marketing expenses and enhance the brand image of each other,” Tetschner says.
Ready to launch?
With as much cutting back and energy put into surviving a fluctuating marketplace, this is actually a good time to launch well thought-out products and services. Tetschner says to look at what Apple did with iPhones.
For services, Barker says its an excellent time for pilot programs with solid strategies. “Create a win-win service for clients,” Barker says. “Their participation in the pilot project can create a stronger relationship. It can also help to create a service with a proven track record for future clients.”
Before launching, continue to monitor and evaluate your business. “It is easy to identify opportunity areas,“ Tetschner says. “But in a time of doing more with less, it is important to decide what programs or products are not generating revenue or meeting goals and make a strategic decision to let them go.”
Adapting to unbalanced economic recovery
As the economy recovers in segments, its creating new challenges for professionals in the meeting industry. Stacy Tetschner, CEO of National Speakers Association, identifies two challenges and strategies for response.
Corporations are taking 60 days or less to book a meeting.
Understanding the meeting’s purpose — “When everyone understands, it makes decisions and selections that much quicker and focused.”
Identify what will be accomplished for the organization — “Think through how attendees connect, network and build professional community to how key messages are delivered and reinforced.”
Keep a sense of humor — “Make things happen in a cool and confident manner. Your bosses and clients will love you for it.”
Due to shorter booking times, former practices in forecasting businesses are not applicable, hindering long-term decision-making.
Keeping accurate historical records — “Everything from inquiries for meeting (looking for peak periods) to usage numbers at a meeting. With accurate numbers, new trends and dates can be developed. If this is going to be our new reality, we can develop good tools to forecast for shorter time frames.”
Evaluate in six- to 12-month ranges — “This will allow you to know possible pieces of future business, which can help negotiate and create a longer relationships (for better pricing) with vendors and suppliers.”
[stextbox id="grey"]The National Speakers Association flagship book, Paid to Speak: Best Practices for Building a Successful Speaking Business is available at www.paidtospeak.org.[/stextbox]
Gov. Jan Brewer today called the Legislature into Special Session for the consideration of a comprehensive plan to put Arizona back to work. Known as the Arizona Competitiveness Package, the proposal includes a mix of targeted business incentives and broad tax reforms designed to rev the Arizona economy.
“The Competitiveness Package will make Arizona a magnet for business expansion, relocation, capital formation and investment,” Brewer said. “This is our roadmap for future economic growth.” Improving Arizona’s competitiveness in the global marketplace is the first of the governor’s Four Cornerstones of Reform that she unveiled earlier this year. The centerpiece of the plan is her creation of an Arizona Commerce Authority.
Replacing the Arizona Commerce Department and its hodge-podge of more than 50 mandates and responsibilities, the Commerce Authority will have a single focus: the retention and recruitment of quality jobs for Arizona. The Commerce Authority will be overseen by a public-private board comprised of Arizona leaders in business and policy.
Designed to be nimble and flexible in responding to economic opportunities, the board will be armed with a $25 million deal-closing fund to help land some of the nation’s most highly-sought corporations and business ventures for Arizona. No dollars will be awarded prior to performance, and “claw-back provisions” and an independent, 3rd-party economic analysis will ensure that companies awarded public funds meet their promised obligations.
“This package of tax reforms and targeted investments will give Arizona the tools it needs to compete for economic development on the global stage,” said Don Cardon, president and CEO of the Arizona Commerce Authority. “Arizona can’t afford to wait for economic growth. We’re going to aggressively pursue quality jobs and stable industries that will become the bedrock of this state’s economic future.”
The Arizona Competitiveness Package is focused on both urban and rural job creation, and is intended to make this state a destination for business growth and development. Specific aspects of the plan include:
• The creation of a Quality Jobs Program, with corporate tax credits of up to $9,000 for each qualifying new job. ($3,000 per job, per year, with a 400-job cap).
• An increase in the electable state corporate income-tax sales factor to 100 percent, up from the current 80 percent. This will encourage firms to establish headquarters and manufacturing centers in Arizona.
• Re-authorization of the Arizona Job Training Program, providing job-specific, reimbursable grants to train employees for new careers.
• A four-year, phased-in reduction of the state’s corporate income tax to 4.9 percent, beginning in January 2014. This will give Arizona the nation’s fifth most competitive corporate income-tax rate.
• A 10 percent increase in the state’s Research & Development tax credit, encouraging further collaboration between Arizona’s research universities and the private sector.
• A 5 percent acceleration of the depreciation schedule for business personal property, spurring purchases of new equipment and other capital investments.
The Arizona Competitiveness Package is consistent with Brewer’s long-held call for corporate tax relief that would be phased-in after Proposition 100 expires and the state’s budget is on firmer footing.
“The development of a stable and growing economy is the key to Arizona’s future,” she said. “It will provide good jobs for our citizens and revenue for the state programs and services everyone enjoys. I urge legislators to act quickly in enacting these reforms and furthering Arizona’s economic recovery.”
Long-time member talks technology, dealing with global economic problems, adapting to the changing world of technology, and more.
Title: Chairman and CEO
How you would you assess the current state of your industry?
Things are going pretty well for technology. Calendar 2010 will be a very good year by historical standards for our electronics business and our IT business. And in 2011, I would say things are going to normalize and grow at the secular growth rate for the industries. For us that’s good news because secular growth is kind of 1-1/2 to 2 times overall economic growth, so things are pretty good in technology.
You had a great first quarter. What do you think that portends for the economy in 2011?
Well, I’m not 100 percent sure, of course, but I think a couple of things are clear. Technology is leading this recovery. We’re growing a lot faster than the overall economy, certainly certain segments of the economy. So, I’m very pleased about that. And I think it also does indicate that we are at least in the early stages of a macro-economic recovery, even if it’s a gradual one … and hopefully that cyclical recovery will continue through 2011 and beyond.
Could this improvement possibly be a blip?
I think from an IT spending perspective that the possibility of it being a blip is there, but let’s maybe define blip. … Corporate psychology is such that it’s ready to invest in IT projects after it’s done swapping out the old hardware. I would also like to point out, though, that a significant part of our business is electronic components and a portion of those find their way into a variety of consumer goods, and that part of our business is quite strong, as well. So it’s not just corporate spending that’s driving our growth.
How is Avnet dealing with the various Global economic problems?
We deal in a variety of markets. Some of them are actually quite exciting right now; obviously places like China, India, Brazil, other parts of Asia Pacific, parts of Eastern Europe. There are parts of our business growing very rapidly these days. So the way we deal with that is we gear up and try to support the market that is there. In the areas where the developed countries have been hard-hit by the economic downturn and credit crunch, we simply dial the resources down. … we basically size our business to the amount of opportunity that exists on a local level.
In December, Avnet celebrated 50 years on the New York Stock Exchange. What do you think that says about your company?
It says a lot of things. First and foremost, adaptability: there have been a lot of economic cycles, there’s been changes in technology, there’s been changes in our industry structure at the fundamental value proposition of distributors like Avnet; there’s been globalization. So, the company being (on the NYSE) 50 years says we’re highly adaptable as an organization. … I think another thing it speaks to … is what I would call financial conservatism or fiscal discipline. And I think the third thing … is the culture. We’ve got a culture that is very grounded in our core values.
- Joined Avnet in 1977
- Appointed president of Hamilton/Avnet Computer in 1989
- Elected to Avnet’s board of directors in 1991
- In July 1998, he was elected chairman of the board and chief executive officer
- Named to the Twelfth District Economic Advisory Council for the Federal Reserve Bank of San Francisco in 2010
- Member of the Arizona Commerce Authority board of directors
- Member of the boards of directors for Teradyne and Synopsys
- Inductee of the CRN Industry Hall of Fame
- Participates in Greater Phoenix Leadership
Anne C. Ruddy, president of WorldatWork, an Arizona-based professional association of human resources practitioners, has extensive experience leading and managing large organizations at the highest level. A talent innovator, she uses her organization and its staff of 130 as a laboratory to test new practices and transfer new ideas to its membership regarding human capital. Here, Ruddy shares a few key strategies for managing talent in this economic recovery.
What kind of impact has the recession had on work forces around the nation?
In a word, negative. Employers are painfully aware that cost-cutting measures deployed to stay afloat during the recession adversely affected workers. One of our recent studies — “The Global Talent Management and Rewards Survey by WorldatWork and Towers Watson” — confirms just how gravely the cost-cutting measures taken during the financial crisis impacted employees’ workloads, their ability to manage work-related stress and overall employee engagement. As a result, companies can expect greater difficulty in motivating employees and retaining key talent during the economic recovery.
What can organizations do to ensure a smooth post-recession recovery?
The very first thing is to identify your top performers. Who are your high-value contributors? These include not only those who drive the most revenue, but also those who play crucial roles in areas such as product development and human resources, or those who help build the employer brand and reputation. Forget the rear view mirror — you’d be smart to base decisions on future business priorities, not just recent performance. Sales employees, for example, who have generated less income than usual during the economic crisis, will continue to be highly valued given the central role business development plays in most post-recession recovery plans.
So you inventory talent and now have a list of pivotal employees. What’s next?
Show pivotal employees they matter. A-players want to know they have a future place in the company. While promotions are one way to send this message, they’re not always possible in this economy. Special assignments, involvement in high-visibility projects, skill-building opportunities, and formal or informal recognition can be equally powerful engagement and retention tools. Also, keep top performers informed about evolving business strategies. Too often, top performers join competitors simply because inadequate communication has left them feeling unappreciated, uncertain about their roles or uninformed about changing business needs.
Many employers were forced to freeze or cut pay during the financial crisis. What should they do for the recovery?
Return to pre-recession pay practices as soon as possible, and differentiate based on performance. Failure to do so can result in high performers being demotivated, demoralized, or worse yet, cause them to look at other options for employment that seem to offer greater rewards for their efforts. Organizations need to make hard decisions, both in rating performance and allocating compensation dollars. If there isn’t enough cash to go around, don’t go spreading it like peanut butter!
Given current high unemployment rates, is the war for talent over?
Quite the opposite. Companies should prepare to compete for the best and the brightest. Don’t be lulled by a perceived surplus of post-recession talent. While it’s an employers’ market for some positions, demand remains high for critical skills. Impending baby-boomer retirements and projected shortages in critical technical disciplines will only intensify the competition. To get ahead, you need to measure the talent that exists in your organization today, in order to find the talent gaps you need to fill so that the organization can get where it needs to go.
What do successful companies know that others may not?
Progressive companies, what we often refer to as “employers of choice,” know that keeping those people who are critical to success is a lot easier than going out into the market and trying to find new people, train them, mother them, and get them ready to really be productive, which usually takes a year from their date of hire.
In good times and in bad, the best companies look beyond talent management to talent innovation. They are on a perpetual quest for the best and the brightest employees, who can truly elevate the organization as opposed to passively watching the organization grow.
This week on AZNow.Biz, read about how the economic recovery has companies looking for ways to make sure they retain their key employees. Also, read and watch the latest edition of our CEO Series. We talk to Roy Vallee, the CEO and chairman of Avnet. And check out our Touchdown AZ section to find out what kind of economic impact the upcoming BCS College Football Championship could have on the Valley’s economy.
Just 11 percent of employers award cost-of-living adjustments (COLAs) to employees, preferring to award promotional and merit increases, according to a WorldatWork study on compensation practices.
COLA refers to an across-the-board wage and salary increase designed to bring pay in line with increases in the cost of living to maintain real purchasing power. Cost of living still dominates many workers’ perception of their raises, believing that these are given to cover a cost of living increase, rather than to reward them for job performance.
As a best practice, human resources managers don’t mix merit pay with cost of living factors that have no bearing on job worth or performance. An individual’s cost of living is driven by their personal financial choices and cannot be neatly tied back to the CPI. Example: a choice to take out a five-year loan with 0 percent down for a luxury car versus a compact car has nothing to do with the local cost of labor. How employees have chosen to allocate their finances is a personal choice. A vast majority of employers and HR managers view pay raises as a tool to motivate employees. How motivating can it be for a top performer to receive the same base pay increase as a low or average performer?
Given the prevalence of tying pay to performance, expect the number of employers awarding COLA to stay flat, if not altogether dwindle in the coming years. This trend actually began way before the recession, and is not likely to come back even in an economic recovery. The reason is that more and more organizations are requiring increases in pay to be earned. Showing up at work is no longer enough.
No doubt this news will be met with approval by high performers and derided by low performers. Which kind are you?
Perched on the threshold of economic recovery, cities whose housing markets crashed and burned during the Great Recession are struggling like modern-day Phoenix birds to rise from the ashes.
While rebirth comes naturally for some, others seem caught between a trap labeled “sprawl” and a wide-open window tagged “sustainability.”
The question is, can cities that once embraced policies favoring sprawl over density buy into a new vision calling for a more sustainable, livable and socially just way of life? The shift required may be dramatic, but it’s not impossible.
The sprawl trap is certainly familiar territory for Phoenix, a post-WWII boom town where production builders John F. Long and Del Webb are hailed as the Godfathers of Post-Modern Development. Using innovations like simple, mass-production construction techniques, Long and Webb delivered Phoenix’s first work force housing to an eager middle-class audience.
Now, a half-century later, sprawl and the suburbs are being blamed for everything from global warming to social segregation. High suburban-growth states like Arizona, California, Nevada and Florida felt the busted housing bubble like a sock to the gut two years ago. And, faced with aging infrastructure and higher maintenance costs, fringe communities are now home to the country’s largest and fastest growing poor population, according to a report by the Brookings Institution. Between 2000 and 2008, the country’s largest metro areas saw their poor population grow by 25 percent, almost five times faster than either primary cities or rural areas, the report states.
Many economists believe the country’s latest economic pause presents the opportunity for a massive do-over; a chance for cities to end their love affair with the automobile and hook up, instead, with development practices that create more dense, walkable neighborhoods.
The Obama administration evidently agrees.
“The days where we’re just building sprawl forever, those days are over,” President Obama declared shortly after taking office. He followed up those remarks earlier this year by telling the U.S. Conference of Mayors, “When it comes to development, it’s time to throw out old policies that encouraged sprawl and congestion, pollution, and ended up isolating our communities in the process.”
The President’s willingness to back up his convictions with $1.5 billion in TIGER (Transportation Investment Generating Economic Recovery) grants and $1 million set aside for regional integrated planning initiatives is further proof that the suburban landscape is indeed changing. So is the federal government’s new Partnership for Sustainable Communities, an all-hands-on-deck approach to smart growth by the Department of Transportation, the Department of Housing and Urban Development and the Environmental Protection Agency. It — along with the government’s “Smart Growth Guidelines for Sustainable Design & Development” — presents a radical new perspective on how future growth is handled, and offers a lifeline to municipalities looking to turn over a new and greener leaf.
But, for cities like Phoenix, where density has traditionally been considered a dirty word, the challenge is not so much where the money is coming from, as it is how to change public perception. Will Phoenix, with its Wild West sensibilities and traditionally renegade attitude, take kindly to federal intervention intended to help wean itself from a dependence on sprawling development?
In all honesty, it’s likely to be a tough sell. True, infill development takes advantage of current infrastructure and services and produces a measurably smaller environmental impact than does its conventional counterpart. True, higher-density building creates additional living options for homeowners in the way of row houses, walk-ups and brownstones. And true, Phoenicians, like many Americans, acknowledge they would rather walk than drive, or at the very least, have access to more transit-oriented housing, making it easier and more convenient for them to utilize public transportation.
The first step forward, however, will have to come from developers and municipal leaders willing to reach out a hand and grab the support line being offered in the way of these new smart-growth initiatives and incentives.
“Successfully addressing the challenges and opportunities of growing smarter and building greener will require that communities collaborate with each other, as well as with regional, state and federal agencies and organizations,” write the authors of Smart Growth Guidelines for Sustainable Design & Development. The end reward, they say, is decisions that benefit households in the form of greater choice, lower combined housing and transportation costs and healthier communities, thereby producing stronger local economies.
Isn’t that what communities like Phoenix, that are battling their way out of the recession, really need? Shelley Poticha, a transportation reformer and Partnership for Sustainable Communities senior adviser, thinks so.
“To me this is about helping to rebuild our economy, about growing jobs in terms of making housing more energy-efficient,” she said in a grist.org interview. “It’s also about helping places and regions really understand where their economic future is going and how they can use that to be more sustainable.”
The economy may be better in 2011 than it was in 2010, but the road to full recovery will remain long and full of potholes. But hey, it could be worse. It could be 2009.
That’s according to economist Elliott D. Pollack, CEO of Elliot D. Pollack & Company. Pollack was speaking at the Greater Phoenix Chamber of Commerce’s Economic Outlook 2011 breakfast today at the Arizona Biltmore Resort & Spa.
Pollack said population growth in the Valley should settle at 1 percent this year and rise to 2 percent in 2011. Net job growth will contract by 1 percent in 2010 and climb by 2 percent in 2011. Retail sales will increase 1 percent this year and rise by 8 percent next year. Building permits will increase by 20 percent in 2010 before jumping 50 percent in 2011.
In summarizing his 2011 forecast for the Valley, Pollack read a laundry list of good news and bad news:
- The housing market is at or past bottom, but there are many negatives still trumping a full recovery, most notably slower migration flows.
- The commercial real estate market is at or past bottom, but recovery will be slow and “take a long time.”
- Sales tax revenues are no longer falling, but they aren’t growing quickly enough to fix the state’s battered budget.
- Retail sales have past bottom and there is pent-up demand among consumers, however, those same consumers are still so worried about personal debt that they will continue to curb spending, thus thwarting a big recovery.
While Pollack said the Valley’s economic recovery will be “painfully slow,” he points out that a recovery is indeed underway. For example, the state’s standing in employment growth compared to the rest of the nation is gradually improving — but only after a precipitous decline. In 2006, Arizona ranked second in the nation in job growth; that dropped to 22nd in 2007; 47th in 2008; and 49th in 2009. Up to July of this year, the state had moved up to 42nd in job growth.
Another indication that the Valley’s economy is showing improvement is in the number of economic sectors that have shown net job gains. Of the state’s 12 major economic sectors, five have shown net job gains so far this year (education and health services; trade; leisure and hospitality; professional and business services; other services). That compares to the same time last year, when no economic sectors reported net job gains.
But, Pollack pointed out again, the Valley and state can’t expect the robust and recoveries that have accompanied past recessions.
He says the Valley’s housing market continues to be weighed down by:
- Weak job growth
- Tough underwriting standards
- Negative home equity
- Loan modification failures
- High foreclosures
- Option ARMs (adjustable rate mortgages) peaking in 2011
In terms of equity, 51 percent of houses in the state have negative equity. The national average is 23 percent. Such negative equity severely curtails people’s ability to buy and sell homes. In addition, supply still outstrips demand in the single-family home market, with an excess inventory of houses somewhere between 40,000 to 50,000 units, Pollack said. A balance between supply and demand will not be fully achieved until about 2014, he added.
The picture is bleaker for the commercial real estate market, with delinquencies on loans still very high. In the office market, Pollack cited forecasts from CB Richard Ellis that said vacancy rates would peak at 25.6 percent in 2010 before dropping to 23.9 percent in 2011. As Pollack pointed out, there currently is no multi-tenant office space under construction in the Valley. In fact, he expects “no significant office building in Greater Phoenix for the next five years.”
Industrial space vacancy rates are faring only slightly better, with CB Richard Ellis predicting year-end vacancy rates of 16.4 percent for 2010 before falling to 15.2 percent in 2011. As for the retail market, the vacancy rate will rise to 12.3 percent in 2010 and hit 12.9 percent in 2011.
For office, industrial and retail commercial real estate, Pollack said he did not expect vacancy rates to reach normal levels until 2014-2015.
Still, Pollack maintained that the economic outlook for the Valley “remains favorable,” thanks to the recovering national economy, increased affordable housing in the Valley, a rise in single-family home building permits, unemployment bottoming out, consumer spending improving and continued problems in California.
In tough times, the give-and-take relationship between workers and employers needs to be nurtured
U.S. productivity is up. According to the latest reports from the Bureau of Labor Statistics, the annual measure of labor productivity increased 3.8 percent from 2008 to 2009. While some may view this as a sign of an economic recovery, the fact is more than 15 million Americans are still unemployed, the national unemployment rate is hovering near 10 percent and the economy isn’t creating many jobs. Any near-term growth in business is likely going to come from getting more out of the current work force; and the best way to get more out of workers is to help them be more focused and engaged.
While the recession has brought higher productivity per employee, it also has lowered employee satisfaction. Employees are distracted and unable to focus on the job at hand. The Tell It Now poll by ComPsych, an employee assistance provider based in Chicago, found that about three in every four employees are somewhat to very worried about job stress and workload.
Based on the latest research, here are five ways employers can strengthen the exchange relationship in which the employer provides monetary and non-monetary rewards to employees in return for their time and talent.
Communicate more, even if it’s negative
Conceptually, most employers know that communication impacts employee motivation and commitment. Unfortunately, this conceptual understanding does not always translate into action. In fact, the New York-based human resources consulting firm Watson Wyatt’s (now Towers Watson) 2009/2010 Communication ROI Study of 328 employers found that many companies plan to scale down their communication to workers. A 2009 Gallup study of 1,000 employees found that 25 percent feel ignored; that is, they receive neither positive nor negative feedback from their bosses. Neglecting employees is far worse for morale than negative feedback, which at least lets people know they matter. It seems employees crave communication, even if it’s negative.
Pay particular attention to the sales force
In the early stages of economic recovery, many organizations rely heavily on their sales forces to recoup lost revenue. During this critical time, organizations need to ensure they properly motivate their sales force in order to achieve positive results. The best place to start is to simplify the sales compensation plan, such that it can be discerned and executed easily. Joseph DiMisa of Sibson Consulting, a human resources consulting firm with offices in Phoenix, is the author of “Sales Compensation Made Simple.” He says, “There’s a difference between being complex and being complicated. You do not need to have numerous measures, mechanics and linkages to ensure good performance.”
Create career development opportunities
According to the association of human resource professionals WorldatWork’s 2009-10 Salary Budget Survey updated in January, at least 50 percent of employers froze pay for some or all employees in the 2009 recession, while 13 percent cut pay. Cash-strapped organizations are turning to intangible ways to reward and motivate employees, such as career development opportunities (33 percent), non-cash rewards and recognition (28 percent), leadership training on employee motivation (21 percent), and flexibility options (20 percent). Career development opportunities can come in many forms: working on important projects, helping in another department or branch, volunteerism, or training and certification. While training and certification do entail some costs, several associations are offering scholarships to help those who are unemployed, underemployed or underfunded.
Expand programs to include hourly workers
Employers tend to exclude nonexempt workers from flexible work arrangements based on traditional limitations, such as work hours and safety requirements. A recent study by WorldatWork and the Work Design Collaborative, Flexible Work Arrangements for Nonexempt Employees, found that the three biggest industrial sectors allowing hourly employees to telework were manufacturing, education and business services. Manufacturing came as a surprise, as it is traditionally dominated by nonexempt employees working on-site. The study concludes that allowing hourly employees to take part in flexible work programs is becoming more of a business imperative. As such, employers need to have a process in place to determine eligibility. They must also utilize formal employer-employee contracts regarding alternative work arrangements.
Add value by offering voluntary benefits
With the rising cost of employee benefits, how can employers enhance the value of benefit offerings without adding to overhead costs? The answer may lie in voluntary benefits. A 2009 study by the insurance company Unum finds that employee satisfaction with benefits plans is 19 percent higher among employers that offer voluntary benefits than those that don’t. What’s more, these benefits do not cost the employer anything and help employees afford a plan because rates are based on the group rather than the individual. Examples of voluntary benefits include ID theft insurance, pre-paid legal plans, pet or vision insurance, hospital confinement indemnity plans, and other types of supplemental insurance. Finding ways to keep workers happy without impacting the bottom line is a definite advantage in today’s competitive environment.
The economy has certainly dealt a hard blow to today’s work force, but employers still have options to help their employees. If nothing else, the downturn has served as a catalyst for ways to enhance the employee-employer exchange relationship.
Deputy Aviation Director, Sky Harbor International Airport
As deputy aviation director of Sky Harbor International Airport, Deborah Ostreicher has a hands-on grasp of the travel industry. A typical day at the airport includes more than 1,200 aircrafts arriving and departing and more than 100,000 passengers coming and going. It’s no surprise that Sky Harbor is one of the 10 busiest airports in the world and has a $90 million daily economic impact.
Ostreicher’s professional background is in international business and marketing. She lived in Europe and the Middle East for about 10 years before coming to Phoenix. Although the travel industry always interested her, it wasn’t until 1996 that she became a travel professional. She joined Sky Harbor as the air service development manager, working to recruit airlines to Phoenix. The industry has certainly seen its share of changes since Ostreicher entered the scene.
“When I joined the industry, it was booming like crazy. With the economic downturn and post 9/11 era, things are certainly slower; and so is the cash flow that was once available for promotions and marketing,” Ostreicher says.
Yet Ostreicher sees her roles at Sky Harbor and as an executive committee member of the Arizona Tourism Alliance’s board of directors going hand in hand.
“As the area’s main airport and one of the largest in the entire Western region of the U.S., our role is to provide data and support to the efforts of the alliance,” she says. “Working together is critical, since a huge number of tourists come to Arizona by air and a large part of the airport’s business is the leisure market.”
Sky Harbor was not immune to the detrimental economic climate. Yet, the airport fared better than many others across the country.
“There has been an overall decrease (in passengers) of about 10 percent in 2009, but this is significantly better than many airports across the country. It’s important to keep in perspective that, rather than about 100,000 passengers a day, now we have about 90,000 per day,” Ostreicher says.
The demanding pace of keeping up with security changes, coupled with economic difficulties, is an ongoing challenge for the airport. Yet, it’s a challenge that Ostreicher is confident Sky Harbor can and will overcome. The recently announced Sky Train is one major project in the pipeline that is sure to bring growth and development to the airport.
“The Sky Train is by far the biggest project that will serve tourists, as well as the local community,” she says. “This will be ready for use by 2013, making it much easier for people to travel to, through and from the airport well into the future.”
Ostreicher recognizes the need to advocate the long-term benefits that a strong and vital tourism industry will have on the state. Though things may be difficult now, she says it’s still wise to invest in an industry that will be integral in Arizona’s economic recovery.
“The demand for tourism and air travel will undoubtedly bounce back,” she says. “But we can’t wait for that to happen to construct services necessary to serve this rebound. We have to do it now; and if you come to Sky Harbor, you’ll see that at America’s Friendliest Airport we are working to serve not only today’s customers, but tomorrow’s.”
Arizona Business Magazine
Tourism is not an expense — it’s an investment.
That’s not an official slogan for advocates of Arizona’s tourism and hospitality industry, but it is a message they are working hard to imprint in the public consciousness as legislators eye further cuts to the state’s budget. As in past budget crises, funding for marketing the state’s tourism and hospitality industry is vulnerable once again.
“Too often, public officials wrap up tourism with the other cost sectors rather than looking at it as an economic engine that can help bring new spending, support new jobs, support incremental tax revenues,” says Mitch Nichols, president of the Nichols Tourism Group and treasurer of the Arizona Tourism Alliance.
Nichols says the ATA is developing an advocacy program to better explain the role tourism can play in the state’s economic recovery.
“Tourism helps Arizona’s economy on two levels. One is its role as a base industry where it can bring new spending which will support new jobs and new taxes. So it’s role as a base industry is really critical,” he says. “The other element with tourism is its role across the state. A couple of years ago when the state did an economic development plan and looked at the various clusters, they looked at tourism as the common denominator. It was the only base industry that has applications in all 15 Arizona counties.”
According to a report prepared last year by the Portland, Ore.-based economic and marketing research firm Dean Runyan Associates for the Arizona Office of Tourism, the total direct and secondary impact of the Arizona travel industry in 2008 was 310,000 jobs and $10.2 billion in earnings.
The report also found that in 2008, direct travel spending was associated with $1.4 billion in state and local tax revenues and $1.2 billion in federal tax revenues. That was the equivalent of $1,080 per household in Arizona.
In other findings:
Total direct travel spending in Arizona in 2008 was $18.5 billion, a 3.2 percent decrease over 2007.
Travel-related employment, earnings and tax receipts declined in 2008.
The collapse of the housing market and recessions in Southern California and Arizona contributed to the travel decline.
Nichols warns that while it may seem easy to cut state funding for tourism marketing, the result could be long-term damage to the industry and the derailing of a fragile economic recovery. The effects could be even more troubling as competitor states such as California hold firm despite their own economic difficulties.
“There are other states that do see the full potential of tourism,” Nichols says. “California doubled its tourism budget up to $50 million a few years ago. The state is maintaining that budget despite cuts.”
Quite a lot is at stake, according to Nichols. Citing the Dean Runyan study, Nichols says U.S. leisure and business travel spending is expected to increase 4.5 percent and 5 percent in 2010 respectively. That has the potential to create 90,000 new jobs nationwide.
Nichols says Arizona needs to step up — not back — if it wants to bring a portion of those jobs and tax revenues to the state. In order for Arizona to compete against California and Nevada, the state needs to aggressively market at both a state and regional level.
Nichols points to Flagstaff as an example of how substantial the ROI on marketing tourism can be for a community. Last spring, as the economy continued in freefall, the Flagstaff City Council acted on a recommendation by the city manager to provide a $250,000 tourism “stimulus.” The money went toward marketing Flagstaff during its traditionally slow months of May and June.
The effect on Flagstaff’s tourism industry was positive and immediate, says Heather Ainardi, director of the Flagstaff Convention & Visitors Bureau.
Ainardi says Flagstaff’s hospitality tax collections dropped almost 10 percent in March, compared to 15 percent for the state. In April, when the city began its tourism marketing push primarily in the Valley and Southern California, hospitality tax revenues fell just 1.5 percent for Flagstaff, compared 11 percent for the state. In May, Flagstaff’s hospitality tax revenues were flat and dropped 7 percent in June.
“So, although we were still down, we were doing well compared to the state. Where everybody else was seeing double-digit declines (in tax revenue), we were either flat or saw small declines. Our occupancy actually went up in May and June,” Ainardi says. “I think people look at marketing and don’t understand the return. It’s not something where you can put in a quarter and a dollar comes out. It truly is something where you put in a quarter and you see an across-the-board impact.”
According to a study the city conducted with the Arizona Office of Tourism, the tourism and hospitality industry has a $501 million annual impact on Flagstaff and creates 5,400 jobs every year.
And Ainardi and other tourism supporters in Flagstaff are on a mission to educate residents about how those tourism dollars affect their lives.
“We really promote that revenues from that tax don’t just go toward marketing,” she says. “They actually go toward parks and recreation, they go toward public beautification, economic development and the arts and sciences. In Flagstaff, we have a system developed where we can help people understand that the 47 miles of urban trails that they utilize on a daily basis are built and maintained through tourism dollars.”
As a member of ATA, the Flagstaff CVB has worked closely with the group in its efforts to save funding for the Arizona Office of Tourism. Ainardi says her organization plans to continue its partnership with ATA to further the alliance’s advocacy mission.
“Tourism is amazingly important and it’s been one of the traditional backbones of some of our economies,” she says. “It’s not everyone’s favorite industry, but it is one that continues to grow and benefit our communities.”
Arizona Business Magazine
Grad school has always been a safe haven for out-of-work professionals in a down economy. Now, as economic indicators suggest the economy has bottomed out and the long recovery has begun, those workers face a tough decision: try to stick it out in a brutal job market or invest in retooling their skills and re-enter the market on the upswing.
For many, the decision comes down to timing.
Accelerated MBA programs are an increasingly appealing option for professionals who want to earn an advanced degree quickly — and affordably — and time their returns to the work force to coincide with the economic recovery. Along with a two-year program for full-time students seeking an immersive experience, the Eller College of Management at the University of Arizona has developed three accelerated MBA program options.
The 18-month evening MBA meets once a week and is aimed at working professionals.
The 14-month executive MBA is designed for high-level professionals with extensive work experience.
The newest program, a 12-month Accelerated MBA, is a full-time experience beginning in summer 2010. The program is designed for professionals with an undergraduate business degree and a few years of experience. After completing a summer boot camp experience, the students step into the second year of the full-time program and focus on elective coursework.
The 18-month and 14-month programs also are offered in Phoenix at Eller’s Scottsdale campus.
“Beyond timing, a traditional, two-year MBA program just isn’t the right fit for everyone,” says Trina Callie, assistant dean of Eller MBA programs. “Workers with significant professional experience will be more at home in an accelerated program, like our Executive MBA. Business professionals who are three to five years out of college will get the most out of our 12-month MBA, where they can focus on elective coursework.”
Hoon Choi, a student in the 14-month Eller Executive MBA program, spent months unsuccessfully looking for a job and networking before realizing that “most of the employers were looking for the total package: MBA plus experience. Now I am expanding my network through an opportunity to work on an innovative, exciting project with my peers, who are all experts in their fields.”
Katherine Tunsky entered the traditional, full-time program this fall and sees it as a way to build skills in industries she hasn’t yet explored.
“My passion is real estate finance, but while here at Eller, I plan on focusing on sustainability and I will be applying for the dual-degree program in hopes of earning a master’s in environmental planning,” she says.
The Eller MBA program also recently introduced new focus areas that help students build skills in specific growth industries, such as energy and health care.
“For example, all of our programs include an international component, which we believe is vitally important in today’s global business environment,” Callie says. “But we also offer students access to consulting projects and career services to help them build their resumes and better position themselves for their coming job searches.”
Liz Warren-Pederson is the marketing and communications manager at the University of Arizona, www.eller.arizona.edu.
The national and state economies are expected to start feeling the effects of a recovery during the last quarter of 2009. However, the recovery over the next year will be slow, with unemployment continuing to rise and economic growth anemic at best. Meanwhile, the state’s expenditures are rising, even as revenue continues to fall, setting the stage for future budget cuts and an expected tax increase.
That was the consensus forecast unveiled by top economic experts from the W.P. Carey School of Business at Arizona State University and the Arizona governor’s office at the annual Economic Outlook Luncheon on May 20. Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at W.P. Carey and editor of Economy@W.P. Carey, provided an overview of current economic conditions on the state and national level, and offered a forecast for the coming year.
“The economy is going to show some signs of recovery in the last part of 2009, but the way I like to look at this is that lots of our economic indicators will still be underwater in a sense — they just won’t be as far underwater,” he said. “We’ll probably see positive growth in GDP, we will see job losses getting smaller, but there will still be job losses. There will still be people claiming unemployment insurance and, of course, unemployment rates will still be going up.
“It’s going to be a deep, sort of U-shaped recovery and 2011 will probably be a pretty good year of job growth,” McPheters added.
In the meantime, job losses will continue to mount. In March, with an over-the-year employment decline of 7.1 percent and 136,000 jobs lost, the Valley just edged out Detroit as the weakest large metro labor market in the nation. And even as the economy begins to recover, the Greater Phoenix area will still see its labor market contract by 1 percent in 2010, according to McPheters.
Nationally, McPheters stressed that while the current recession has been painful, it still is not on par with the Great Depression. The Great Depression was marked by four consecutive years of decreases in Gross Domestic Product (GDP), while the current recession is expected to result in four consecutive quarters of decrease in inflation-adjusted GDP. In fact, in the first year of the recession, the national GDP actually increased by 1.1 percent.
“During 2008, the first year of the recession, you would expect that the GDP would be decreasing,” he said. “Well, one of the factors holding it up was exports. Exports continued strong in the United States through 2008.”
This year, however, exports are expected to drop by 10 percent. That’s just one example of how the national and state economies will continue to struggle as the recovery begins to take hold. Another example is the expected freefall in the commercial real estate market, especially in Arizona.
“Commercial is the next shoe to drop and we have seen this pattern before,” McPheters said. “Even as you see residential (construction) begin to pick up, I think you can expect that commercial building is going to be very, very weak all the way through 2010 and probably 2011, because what we need to see is population growth come back and job growth to come back. There’s no point in building retail space and office space if the jobs are not there and the consumer is not coming out to shop.”
And it is consumers, who account for 71 percent of GDP, who really hold the key to the economic recovery.
“The consumer is the only part of this economy that can bring us back,” McPheters said. “Consumers are not going to come back into the game until home prices stop falling, until the stock market stabilizes, until they see unemployment rates have peaked out and job losses start to get smaller and smaller. And the consumer has to have confidence to buy, and believe it or not, the consumer has to back off of their inclination to save their money.”
In March, the savings rate as a percent of disposable income was 4.2 percent, up from 2.6 percent six months earlier. While increased savings are considered a good thing in robust economic times, a pullback by consumers as an economy tanks can have devastating effects. McPheters pointed out that for each 1 percent increase in the savings rate, approximately $100 billion are being pulled out of the consumer-spending stream.
However, McPheters expressed confidence that the very calamity that sent our state and national economies reeling will eventually add to Arizona’s attractiveness to new residents and businesses — falling home prices.
“Housing prices have now returned to the traditional level, where Arizona housing prices are now more affordable than the national average,” he said. “In 2005 and 2006, we had come to the point where we were one of the least affordable markets. That has turned around and it has turned around very quickly. Of course that has been very painful.”
Dennis Hoffman, director of the L. William Seidman Research Institute at W.P. Carey, agreed with McPheters, adding that he believes the state’s economic rebound will be strong.
“This of course is the big question: What kind of bounce will take place? Now, I’ll have to say that the dramatic shakeout in prices in housing, while it has been absolutely disastrous for a number of folk and put a lot of pressure in a lot of different places, it might set us up for a more robust recovery than I would have thought six to nine months ago,” he said. “The thinking is really, very, very simple; an attractive attribute of Arizona has historically been great climate, affordable housing and a place to get a job. That third aspect really doesn’t exist right now, but it could exist if our economy recovers at a little faster pace.”
In the economic downturns of the past four decades, Arizona has bounced back strongly, and Hoffman is confident history will repeat itself, especially if the state and Valley can re-create the environments that people from around the country have found so attractive.
However, a major wrench in making the state attractive again is Arizona’s current budget crunch. In fiscal year 2009, the state’s budget gap stands at $1.6 billion. In fiscal year 2010, that’s expected to almost double to $3 billion dollars. As the economy has worsened, unemployment has soared to almost 8 percent, foreclosures have skyrocketed and businesses have closed their doors. As a result, billions of dollars in revenue from income, property, sales and business taxes have evaporated. Conversely the need for state services has exploded.
“We’re really seeing the effects of the downturn in the economy, both in terms of state revenues — our collections are down at a very significant rate — and likewise, our caseloads are up at a very significant rate, because more of our citizens are in need of services,” said Eileen Klein, director of the Arizona Governor’s Office of Strategic Planning and Budgeting, adding that in the past two months alone the Arizona Health Care Cost Containment System (AHCCCS) has enrolled 50,000 people.
Hoffman pointed out that in the past, $48 to $50 out of every $1,000 of personal income had gone into the state’s general fund.
The declines in asset prices are sweeping around the globe like a giant tsunami tumbling everything in its wake. Equity prices are down 47 percent from their highs, commodities 53 percent and, of course, residential real estate 25 percent. Industrial production, retail sales and personal consumption expenditures are all showing losses year-over-year and do not appear to be decelerating in any meaningful way.
In the first quarter of 2009, the negative feedback loop — the lower prices go the lower they will go — is being exacerbated by the erosion of confidence and the availability of credit. If this weren’t enough, the lack of accountability and transparency in the system is further eroding investor confidence, thereby curtailing capital spending and stifling employment.
As the monetarists and fiscal policy makers rush to shore up the banking system, they have, for the most part, missed the mark. Long ago, the highly levered global economy transitioned from a banking-dominated regime to one that hides behind securitized lending. The off-bank balance sheet structures such as SIVs (structured investment vehicles), hedge funds, CDOs (collateralized debt obligations) and the like fueled the explosion in asset prices as they levered up the system exponentially. As we are finding out the hard way, no real underlying economic value was being created, other than prices would surely be higher tomorrow, which reinforced speculative non-productive behaviors.
The false promise that rising prices alone create wealth is being unmasked as the de-levering of credit and speculative excesses unwind. The plea from Congress that banks need to start lending fails to recognize that the highly leveraged off-balance sheet bank, the Shadow Bank, is dead. The credit creation in the Shadow Bank was 30- or 40-to-1, versus 10-to-1 for the banking system most of us are familiar with. It is not that the 10-to-1 folks don’t have problems; it is that they simply do not have the capital to restructure all the 30-to-1 junk that is choking the system.
It’s about the capital
Nouriel Roubini, a highly respected economist and chairman of RGE Monitor’s newsletter, has estimated that the charge-offs and write-downs may reach $3.6 trillion before this cycle bottoms out. Bloomberg Financial, which has been tracking these charge-offs, recently reported that the number has reached $1 trillion, or about one third of Roubini’s best-guess number. In October 2008, the Federal Reserve reported that the U.S. banking system had about $1.4 trillion of capital, hardly enough to deal with the massive write-downs Roubini, Goldman Sachs Group and others see on the horizon.
The obvious simple solution is to figure out how to stop asset prices from declining further. Although this has been attempted over the past many months, the seemingly uncoordinated efforts have failed. The TARP (Troubled Asset Relief Program), which explicitly gave the U.S. Treasury the authority and money to purchase assets with the intent of stabilizing prices, instead saw those monies going into the checking accounts of banks. However well-intentioned the program was, it did little to stem the tide in the deflationary spiral, leaving us deeper in debt and virtually in the same position as when the legislation was enacted.
In order to encourage investment and spending, we must first have price stability. Asset prices do not need to rise to get the economy moving, nor should we expect that they must. The value of the enterprise over time will be clear and will be priced accordingly. The benefits of price stability encourage investors to take on risk and give lenders the confidence to lend. Rapidly rising or falling prices merely confound and confuse even the biggest risk takers among us and that, in large measure, is why we see return of principal trumping return on principal.
All is not lost, however, as interest rates are down, mortgage re-financings are up and the stock market has attempted to battle back from some very bad economic news. The first half of 2009 is proving tough going. But we are guardedly optimistic that the second half will show signs of stabilizing, laying an important foundation for recovery in 2010. The stock market has its own twisted personality, but if it can move above the October lows the more optimistic we are that better times are ahead.
Bank-issued certificates of deposit rates are inching up, but if your one-year CD is maturing, you’re probably not going to like what’s being offered. That’s because CD rates took a dramatic drop in the past year as the Federal Reserve marched through a series of reductions starting last summer. The downward spiral was triggered by a belt-tightening credit crunch and a pervasive housing downslide.
Rates plunged as much as 325 basis points in the past year, dropping to as low as 2 percent from 5.25 percent.
Early last summer, it was not uncommon to see banks offering 5 percent interest or more on certificates of deposit. Then came the steady stream of rate cuts, and CDs were paying in the neighborhood of 2 percent. Now we’re seeing rates flirting with 3 percent, and teasers that are a tempting couple of percentage points higher.
Does the move to higher ground indicate that an economic turnaround has begun? Not necessarily, say banking experts.
“Rates are down considerably from what a consumer could have gotten last summer,” says Herb Kaufman, professor of finance and vice chair of the Department of Finance at Arizona State University’s W. P. Carey School of Business. “Now they’ve come back a little bit. They’re trending up as banks try to rebuild their deposit base and retain the deposits they have.”
Kaufman and Rick Robinson, regional investment manager for Wells Fargo Wealth Management Group, agree that one of the reasons for the modest increase is the perception that the Fed is not likely to reduce interest rates anytime soon. Another factor is inflation.
Robinson says the Fed is taking a wait-and-see approach to determine how the economy responds to seven rate cuts and whether inflation will remain somewhat subdued or will increase.
Kaufman notes that inflation, fueled by gasoline and food prices, appears to be accelerating.
“As that happens — and the feds are very conscious of that — you can expect banks will have to reflect the rise in inflation with their CD rates,” Kaufman says.
A significant improvement in the credit market adds to the likelihood of CD rates continuing to drift upward through summer, Kaufman says. He expects to see CD rates somewhat higher than they were last spring.
Is the inching up of CD rates a good or bad sign for the economy?
“I’d say it’s a little bit of a good sign,” Kaufman says. “It wouldn’t happen if the Feds weren’t comfortable with the credit market. Concerns have eased. Banks are comfortable to bid up rates, which means some of the constipation in the credit market has eased.”
The rise in interest rates could be tied to various factors.
“It’s usually a signal that the economy is beginning to do well or that the Federal Reserve wants to slow down the economy,” Robinson says. “Or it could mean that interest rates go higher because of supply and demand, because of inflationary pressures.”
But Robinson cautions: “A small uptick in rates is not a signal that we’re out of the woods or that economic growth is turning around. I still think it will be subdued in the second half of 2008. We expected low growth for the first portion of this year, and we expect to pick up the pace slightly in the second half.”
Another word of caution for investors: “Some banks might offer teaser rates of 5 percent for three months,” Robinson says, “but when it matures and resets, the rate will be consistent with what other banks are offering. Any bank in Arizona must remain competitive with the bank on the opposite corner.”
The creep upward of CD rates is a good sign for aging investors who rely on income from these investments to maintain their lifestyle. Conversely, the drastic decrease in rates since last summer was hurtful, especially for seniors.
“There is less money in their pocket,” Robinson says. “As their CDs matured, if they reinvested their money they’re more likely earning less than they earned previously. They have less to live on.”
Kaufman, too, says the increase is a good sign for retirees, so long as the rise does not pose a threat to economic recovery. Because of the roller-coaster ride the stock market has been on, some investors seeking a safe haven switched to CDs covered by the FDIC.
The collapse of investment bank Bear Stearns & Co. in March spawned some movement to CDs and safer, less volatile investments, including government-backed bonds. Robinson calls it “a flight to quality.”
“In the summer of 2007, banks went through a confidence crisis,” Robinson says. “Investors were worried. Some banks experienced an outflow of deposits, given investor concerns over their viability. That concern seems to have lessened. As the crisis grows longer, more information becomes available, which lessens the panic. People can understand the viability of their institution.”
The reason for the subtle increase in CD rates is anybody’s guess.
“Some banks might be willing to take a loss on deposits to shore up their capital base,” Robinson says. “They may want to increase deposits because they see opportunities to make loans. There are myriad reasons why rates go up, fluctuating in small increments of five to 10 basis points. It could be strategic or market related.”