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economy

Arizona Could Hit Full Economic Recovery in 3 Years

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.

Arizona jobless rate dips in September

Arizona’s September unemployment dipped to 8.2 percent, down from 8.3 percent the two previous months.

Department of Administration economists report that the state added 30,000 jobs, mostly in government due to seasonal hiring by schools.

The department says seven of the 11 major economic sectors added jobs in September while four lost jobs.

The biggest job gains in September were recorded in education and health services and in leisure and hospitality. The sectors with the biggest job losses were construction and financial activities.

Coins

Can the Savings Rate Save America?

The financial norms of our society have changed considerably over the past five years. Assumptions surrounding retirement, investment returns and job security have all changed 180 degrees.

Perhaps this recession has been so monumental that it will permanently change the old norms and embrace a new realistic standard. Will this crisis create a new generation of Americans that look at money and entitlement similar to those who lived through the Great Depression?

Prior to this current recession, many people were living a lifestyle that was beyond their means. The Bureau of Economic Analysis stated that in 2005, America was only saving approximately 1 percent of its income. For many, the need for consumption of goods and services dominated their paychecks, so much so that they exhausted their savings accounts, ran up credit card balances and stripped the equity from their homes. You could say that America was living an era of overindulgence.

Today, it seems that people appreciate and respect their money more than they have over the past few decades. If they are currently employed, they are grateful to be able to provide for their families, as well as make sure that every dollar is stretched to its full potential.

Consumers now realize that when economic times become difficult, they cannot depend on banks to lend them money. This is why America is now saving more that 6 percent of its income — we are preparing for the unexpected and unknown.

In my opinion, the more people save, the stronger our economic landscape will become over time.

Of course many economists and Wall Street banks would love for consumers to return to their old spending habits, which would create a quick and bliss recovery.  Our economy is dependent on consumer spending and statistics have shown that the American consumer represents approximately two-thirds of the nation’s Gross Domestic Product. Unfortunately, the fundamental problem of overindulgence would not be addressed if this were to happen. We would only be setting the stage for another crisis in the future.

Fundamentally, it is beneficial to our financial system that Americans are saving more. It is unrealistic to assume that the United States economy will bounce back quickly; it will most likely take a number of years and still produce a high level of discomfort.

A slow recovery is acceptable as long as the consumer continues to make smarter decisions financially and attempts to avoid past mistakes. Perhaps if this positive trend continues, could our country’s best years still be ahead of us?

Arizona Businesses Succeeding

Arizona Businesses That Are Succeeding Despite The Recession Offer Lessons And Hope

Economists are the uncomfortable bearers of bad news. In recent weeks, they have been unhappily explaining that these are dark days indeed for Arizona’s business community.

But don’t tell that to businesspeople who have uplifting stories to tell amid the downdraft of Arizona’s recession.

While it’s true that Arizona’s economy is out for the count, many businesses are hardly on the ropes. They are succeeding, each in their own way.

But first, a look at that pesky economy.

It’s surprising some businesses are doing well because the experts are hard pressed to find any corner of Arizona’s economy that is untouched by the recession.

“I wish I had something positive to say,” says Tim James, a professor of economics at the W.P. Carey School of Business at Arizona State University. “It’s quite difficult to see any sector doing well … What could possibly happen to make things worse than they are? I can’t think of anything.”

James does point to one exception — discount stores such as Wal-Mart, Costco and Sam’s Club that sell the necessities of daily living. They are prospering, but “nobody will be immune to any of this at the end, as even the Wal-Marts will suffer,” James says.

Also apologetic is Marshall Vest, an economist at the University of Arizona’s Eller College of Management. Asked if there is any sector of the state’s business community that is well positioned and poised to take advantage of the recession, Vest responds, “The short answer is I don’t know. Most industries are feeling the effects of the recession.”

Yes, it’s tough out there. But there are success stories and those businesses offer lessons on how others can ride out this rough economy.

When Robert Meyer joined Phoenix Children’s Hospital in 2002 as president and CEO, the nonprofit medical center for acutely ill pediatric patients was juggling several urgent problems. Arizona was in a recession, a shrinking investment portfolio had eroded the hospital’s capital base, cash reserves were dangerously low and the organization was facing a $46 million loss for the year while incurring the cost of moving from its location within another Phoenix hospital to its own free-standing building at 19th Street and Thomas Road. Meyer, who had been through five prior recessions in health care, focused on two areas — internal operations and strategic planning — and took steps that got the hospital back on its feet.

The hospital had no internal billing-and-collection procedures, no budgeting system and a few outsourcing contracts that were axed because they offered little value in Meyer’s eyes.

“We developed our own patient accounting department, which yielded tremendous improvement in our ability to bill and collect money,” Meyer says. “We started a budgeting system. The hospital had done a lot of outsourcing with a lot of companies and some of them were terminated.”

Meyer wanted a short, simple strategic plan that covered 18 months to two years — as compared to hospitals’ standard five years — and looked outside the health care industry for a sound planning tool. He found it at The One Page Business Plan Company in Berkeley, Calif. Soon, each of the hospital’s major programs had a one-page plan within a relatively brief strategic plan, and progress was tracked online against milestones.

The payoff came as early as 2003, when the hospital generated $3 million in net income. With its books in the black, the hospital took steps in 2004 to cement future success by implementing several new clinical programs. Profits grew to $49 million in 2007.

In today’s recession, Phoenix Children’s Hospital’s primary business offers opportunities for new growth. Meyer says the number of children in the Valley is expected to increase from 900,000 in 2003 to between 1.5 million and 1.7 million in 2025. To meet the needs of its growing patient base, the hospital began rolling out a $588 million main campus expansion in 2008 — only six years after nearly succumbing to financial ruin.

Paragon Space Development Corporation, a small aerospace engineering and technology development firm in Tucson, is succeeding in tough times because most of its business comes from NASA.

“We’re a little bit out of the consumer economy’s ebb and flow,” says Taber MacCallum, CEO and chairman of the board. “What we are going to feel is the federal government’s response to the recession, not so much the recession itself.”

He expects his company’s work with NASA will continue. But things weren’t so rosy during the last downturn. Founded in 1993, Paragon initially booked more commercial than government work and was hit hard by the 2002 recession. It began playing out a variety of business what-ifs to help it prepare for bad times, and business has grown 30 percent to 50 percent annually the last three years.

“You’ve got to create your business model and then run good-and-bad scenarios and make sure you don’t cut so deep that you can’t respond to the recovery,” MacCallum says. “We call them down-and-out and milk-and-honey scenarios. You can do that with a small retail shop and you can do that with a large industry.”

Taber recommends taking advantage of opportunities that arise when other businesses downsize or close.

“This economy has presented a tremendous opportunity for us,” he says. “We’ve been able to pick up new employees and manufacturing equipment from other companies that have had to sell.”

There is also a beacon of hope in the rubble of Arizona’s mortgage industry. On Q Financial, a Scottsdale-based mortgage banking company, is growing as it serves buyers of condos and single-family homes and arranges residential property refinancing. In 2008, it opened new offices in Phoenix, San Diego and Seattle, and its Valley staff grew from 20 in 2007 to 50. In business since 2005, On Q zeroes in on what it can control, says John Bergman, president and owner.

“Every day, month and quarter, we focus on improving things internally that we can control,” Bergman says. “We can’t control the market.”

On Q strives to hire talented operations staff and constantly troubleshoots internal systems, processes and timelines. Business owners must have a firm grip on their financial performance, Bergman says.

“Every month, have financials reported to you in a manner you can use,” he says. “Look at them. You can always adapt and change according to what’s going on.”

On Q also pays close attention to customer service and market share. “We are really aggressive in offering great products to the consumer, and we negotiate for good pricing for our clients,” Bergman says. “No matter what the market does, there is always an opportunity to take a bigger piece of the pie.” Bergman says it’s critical to keep employees energized.

“Let them know that the tougher things get, the better things are when they turn around,” he says. “So you want to focus on the positives in your industry.”

Reeling financial markets commonly create a phenomenon known as the flight to quality — money moves from the stock market to the safety of bank accounts and certificates of deposit. Such is the case with the current recession, and Northern Trust Bank has seen a resulting increase in deposits and new banking relationships, which in turn has generated increased lending.

“We have, in many respects, been in a very nice situation when there has been a flight to quality in the banking business,” says David Highmark, chairman and CEO of Northern Trust’s Arizona bank. “The flip side during this liquidity crisis is that our loan volume is two to three times our normal amounts. Our earnings will be very strong, because today we are collecting so many new relationships that will materialize into new earnings down the road.”

Highmark emphasizes the importance of successful companies staying focused on their core business, a theme also repeated by Paragon and On Q Financial. Northern Trust’s primary business is lending to and managing assets for wealthy individuals and companies.

“We have never wavered from that core business,” Highmark says. “If there is a formula to survive in bad times, in our case — and I think in general in all industries — it is sticking to your knitting. Don’t vary from your core business.”