As higher fuel costs gobble up airline profits, the carriers are imposing new fees on passengers in an attempt to make up the difference. William A. Verdini, chairman of the supply chain management department of the W.P. Carey School of Business, wonders if this is a smart strategy. (17:23)
One of the most difficult tasks for a worker is negotiating with a boss. Whether it’s getting a raise or a new assignment, or a simple request for more office supplies, asking a boss for anything can be nerve-wracking. Knowledge@W. P. Carey interviewed management professor Kevin Corley about the best way to negotiate with your boss. Part One of our two-part series on this topic addressed the matter of self interest — yours, your boss’s, and the organization’s. Part Two discusses how knowing your boss’s negotiating style can make all the difference between success and failure. (15:30)
Arizona’s economic recovery will continue to move at a glacial speed in 2011 — but at least it’s moving. The coming new year will see an increase in job creation, a rise in population and even a modest increase in single-family home permits. However, the consensus among economists at today’s 47th Annual Economic Forecast Luncheon, co-sponsored by the Department of Economics at Arizona State University’s W. P. Carey School of Business and JPMorgan Chase, is that Arizona’s recovery will continue to be far less robust than economic rebounds of the past.
“Arizona was much harder hit in this recession than the rest of the country,” said Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W.P. Carey School of Business in an interview before the luncheon. “Overall the U.S. lost about 6 percent of jobs, while Arizona lost 11 percent of jobs and the Greater Phoenix area lost 12 percent of jobs. So, by that measure, Arizona’s problems were twice as large as the average state.”
According to McPheters, hampering Arizona’s growth in 2010 has been:
- Consumers’ focusing on paying off debt rather than spending
- Corporate profits improving but hiring deferred
- The expected resurgence in single-family housing did not develop
- Home prices have not yet stabilized
- Small businesses facing tight credit conditions and weak demand
- Stimulus programs ending
In terms of job creation, Arizona employment is expected to increase by 47,800 jobs in 2011, following three straight years of losses. The projected rate of growth for 2011 is 2 percent. That’s about double the rate of employment growth anticipated for the nation as a whole, but well below the state’s long-term average of 3.7 percent.
In addition, the state’s unemployment rate will remain above the 9 percent mark throughout 2011.
Still, even with Arizona being at ground zero of the burst housing bubble that dragged the rest of the nation into recession, the employment situation in the state has shown a marked improvement.
“For all of 2009, at the deepest point of the recession, only Nevada had weaker labor market conditions, and Arizona ranked 49th among the states in job growth (or losses),” McPheters said. “But in just the past couple of months, Arizona’s overall position is improving. The state ranked 12th based on October job creation in the 50 states. And in September, Phoenix added 27,400 jobs compared to the year before. Phoenix is the now the second-fastest growing metro area.”
The real estate and housing markets in Arizona remain weak in 2010, with single-family housing permits expected to be down 5 percent, marking a fifth consecutive year of declines. Single-family housing permits are expected to finally improve next year, with an anticipated increase of 25 percent. However, that increase stems from a base of 12,000 units in 2010, totaling just an additional 3,000 units. Compare that paltry number to the 80,000 annual permits handed out at the peak of the housing boom.
“Last year at this time, there was optimism about Arizona housing, but the growth never came,” McPheters said. “It looks like 2010 single-family building won’t even reach the level of 2009, which was the worst year of the recession. So most analysts are cautious right now about housing.”
One of those cautious analysts is Elliott Pollack, CEO of Elliott D. Pollack & Company in Scottsdale.
“The good news is that the worst is over, but it’s going to be a painfully slow recovery,” Pollack said in an interview before the forecast luncheon.
Pollack lists the following as reasons why the state’s housing market is showing only the slightest signs of improvement:
- Tougher underwriting standards on mortgages
- Up to 51 percent of the homes in Arizona have negative equity
- Previous loan modifications have mostly failed
- Foreclosures remain high
- Option ARM resets do not peak until next year
You don’t have to be a power broker juggling corporate mergers to need negotiation skills. Just about everybody must negotiate with a superior at some point, about a raise or an assignment, or even a new idea for a project. Most people are conscious of the power gap between themselves and their bosses; astute employees also realize that the boss’s interests may not always align with their own. Knowledge@W. P. Carey interviewed management professor Kevin Corley about the best way to negotiate with your boss. Part One of our two-part series on this topic addresses the matter of self interest — yours, your boss’s, and the organization’s. (11:29)
The median price for resale homes in the Phoenix area has been edging up for several months. Does this signal that the market is approaching normalcy? Jay Butler, associate professor of real estate and author of the Realty Studies report from the W. P. Carey School of Business, talks about the factors affecting median price, including the still high number of foreclosure-related sales. It’s tempting to declare a market up-tilt based only on median price, he says, but because of that foreclosure activity, Phoenix is still far from a normal market. (13:09)
Knowledge: Great companies and great leaders are often synonymous, but what does it take to be a great leader? Dr. Angelo Kinicki is professor of management at the W.P. Carey School of Business. As a consultant, Kinicki often works with top management teams. Here, Kinicki discusses the principles of transformational and managerial leadership in increasing the efficiency of executives and the companies they lead. (18:09)
Digital universe. Exabytes. Data fluidity value. Master data management solutions. This is the language of the future of business. As the amount of data companies attain and store grows, so too must the ability to deal effectively with this digital avalanche. Michael Goul is a professor of information systems at the W. P. Carey School of Business. Here, he discusses how businesses will have to learn to manage unprecedented amounts of data as a means of gaining a competitive edge. (16:09)
The ninth anniversary of the Sept. 11 attacks is tomorrow, and a study shows that Americans will tolerate government secrecy about terror plots, but only in certain circumstances.
The study, which was led by professor V. Kerry Smith of the W. P. Carey School of Business at Arizona State University, surveyed more than 2,000 Americans about their beliefs concerning government secrecy about terrorism. The study, also conducted by Carol Mansfeld and H. Allen Klaiber, included results from an Internet panel run by Knowledge Networks.
“The reason we were interested in doing (this survey) is there’s a presumption that security requires a certain amount of secrecy,” Smith said. The survey was aimed at determining in which situations Americans will tolerate secrecy from the government in return for the promise of safety, he said.
Survey participants were asked to determine whether the government should release or withhold information regarding terrorist plots in three different situations. The questions were asked with the caveat that if the information was released, it could increase the possibility of terrorist threat.
In two situations, a threat to disrupt Internet service at local banks, which would disrupt the processing of credit and debit card sales in the U.S. for 48 hours, and a threat to destroy major airports in Los Angeles and New York, participants responded similarly.
More than 75 percent of participants said they would want the government to withhold information rather than give away any knowledge that would make it more difficult to uncover future plots or give terrorists an upper hand.
However, when asked about the government releasing information about the true nature of a plane crash due to a terrorist attack, more than 80 percent of those surveyed said they would want the government to release this information.
“What was the surprise to me and others was the very dramatic differences” in the types of information that Americans would agree to have withheld, Smith said.
Smith says most Americans don’t perceive all threats as being the same, which means that the government shouldn’t think that Americans’ tolerance to secrecy is uniform for all threats.
He suggests a reason why Americans are more sensitive to the threat of an attack on a commercial airplane is that what happens during a plane flight isn’t something they can control, whereas the other situations that can be more easily controlled. This reasoning comes from results of risk assessment surveys, not done during this survey.
Risk assessment surveys also offer an explanation as to why women and people living in married households were more willing to support the withholding of information, and people with college degrees were more likely to support the release of information. These definable characteristics of people, gender, marital status or education, can be used to track trends in the way people assess risk and make decisions.
Smith also said survey results don’t change based on whether Americans are confronted with terrorism at the time of the survey or not.
The first leg of the survey, which polled about 1,900 people in 33 major cities in December 2009, was bracketed by the Christmas shoe bomber’s attempt to blow up a commercial plane, Smith said.
Some of the participants took the survey before the attempt, some after, some even lived in Detroit, the plane’s destination, he said. However, the results of the survey weren’t affected, Smith said.
The second part of the survey, which polled about 500 people in four major cities in April 2010, showed the same results as the December 2009 portion of the survey.
The U.S. Department of Homeland Security through the Center for Risk and Economic Analysis of Terrorism Events supported the research for this survey.
- Three scenarios summarized and the survey responses:
“Should the government release the details of a major plot to destroy airports in Los Angeles and New York after the terrorists have been captured, even though it might give away the techniques law enforcement used and make it harder to uncover future plots?”
Information Released – 23 percent; Information withheld – 77 percent
“Should the government announce the details of a major terrorist plot to disrupt Internet service at commercial banks, and prevent the processing of credit and debit card sales across the United States for 48 hours, if the terrorists have been captured, even though it would give away the techniques used to identify the suspects and reveal specifics of the security network?”
Information Released – 24 percent; Information withheld – 76 percent
“Should the government release the true cause of an airplane crash due to a terrorist attack, even if that will have major economic effects on commercial airlines, give the terrorists notoriety and create an increased fear of flying?”
Information Released – 83 percent; Information withheld – 17 percent
Alan Mulally, president and chief executive officer of Ford Motor Company, was honored recently as Executive of the Year by the Dean’s Council of 100, a group of prominent business executives who advise the W. P. Carey School of Business. In presenting the award, W. P. Carey School Dean Robert Mittelstaedt noted Mulally’s exceptional leadership in turning Ford around without requesting government bailout money. Here is Mulally’s speech and the question period that followed. (47:30)
The Phoenix resale market slowed a bit in May when compared to April, possibly because activity spiked last month as the federal first-time home buyer program came to a close, according to Jay Butler, associate professor of real estate and author of the monthly Realty Studies Report from the W. P. Carey School of Business. And though foreclosures as a percentage of the market are continuing to decline, the actual number of foreclosures is still quite high, he said. Even hopeful signs, like the recent increases in median price, are connected to foreclosures — in this case because foreclosures on high price homes pulled the median up. So where will Phoenix be in the fall? Hard to say, according to Butler, because we’ve never been here before. (9:37)
James Champy is the author of “Outsmart! How to Do What Your Competitors Can’t.” Champy profiles eight highly-successful firms as he develops his thesis that the key to outsmarting the competition is to focus on the external environment — including the customers. Be ready to respond when opportunities appear. Sometimes that means changing your business model, or, as he says, “starting with a new sheet of paper.” Knowledge@W. P. Carey caught up with Champy at a conference sponsored by the Center for Services Leadership. Champy talked about the distinguishing characteristics of the companies he writes about, including the quality of their ambitions, their culture of innovation and the level of engagement at all levels. Podcast coverage of the “Compete Through Service” symposium is sponsored by IBM. (16:45)
The resale season starts in March with an upswing in real estate transactions, but last month’s numbers were much higher than might be expected if this were a “normal” year. Jay Q. Butler, associate professor of real estate at the W. P. Carey School, complies the monthly Realty Studies report for the Phoenix metro area. He notes that a promising trend toward fewer foreclosures appears to have shifted. The difficulty in projecting what will happen next is that we’ve never been in this place before. Here’s what he has to say about those March numbers. (12:15)
One-third of U.S. adults are obese, and another third are overweight, according to data recently published in the Journal of the American Medical Association. Marketing scholars Naomi Mandel, Andrea Morales and Steve Nowlis have been investigating what influences our decisions about diet. Knowledge@W. P. Carey spoke with Professor Morales recently about two of her studies. One investigated those tempting 100-calorie snack packs, and the other looked at whether your dining companions have any effect on your food selections. The results may surprise you. (13:25)
The Phoenix resale home market rebounded slightly in February, according to the Realty Studies Report from the W. P. Carey School of Business. Compared to January, the number of transactions increased and prices were up a bit. Still, foreclosures accounted for 42 percent of the total market, and the sale of previously foreclosed properties made up 40 percent of the traditional sale segment. Meantime, market watchers are wondering what will happen when the many Adjustable Rate Mortgages (ARMs) reset this year and next. We asked Jay Butler, associate professor of real estate and author of the report, what he thinks about that, and what else he noticed in the February data. (9:20)
“Please hold — your call is important to us.” If you’ve ever heard that sentence then you know what it’s like to be “on hold” for customer service. Journalist and author Emily Yellin found herself suspended in customer service no-man’s-land when she tried to get her home warranty company to honor their commitments. The experience propelled her to explore the inner workings of the customer service industry, and to write a book about it entitled “Your Call Is (not that) Important to Us.” Yellin was a featured speaker at the 20th Annual Compete Through Service Symposium, hosted by the Center for Services Leadership at the W. P. Carey School of Business. She talked with us about the state of customer service today, and how companies might improve. Symposium podcast coverage was sponsored by IBM. (5:54)
In the Web’s early days, self-styled seers proclaimed that the ironclad law of online commerce would be survival of the cheapest. Consumers could compare products with a few clicks of a mouse, these folks said, and thus they’d all soon migrate to the places where they paid the least.
It hasn’t worked out that way.
Rob Kauffman, a professor of information systems at the W. P. Carey School of Business at Arizona State University, says pricing transparency now has become just one part, though a critical one, of companies’ online strategies. Firms have realized that their online relationship with consumers is deeper than just a number. As in brick-and-mortar stores, customers care about the quality and attributes of goods and want to interact online with their retailers and each other. Unfortunately for consumers, however, firms also have come to understand that online systems give them, in effect, a legal way to collude with each other by signaling their pricing intentions.
One of Kauffman’s areas of expertise is the online travel business. Here, more clearly than in many sectors, you can see how firms have become sophisticated in their use of online pricing techniques. An obvious example is the airlines. They’ve experienced the very sort of brutal price competition that was predicted in the early days of the Web.
“It’s easy to describe an airline ticket, and thus we’ve seen extreme commoditization with those,” Kauffman says. “Pennies can put you at the top of a search engine’s price list.”
Airline fares have become so transparent that sites like Kayak.com have emerged that enable consumers to search the search engines. Kayak combs through all of the major travel sites and offers a variety of user-friendly tools people can use to refine and pinpoint searches for the best fares.
Yet even on Kayak, a stated low price isn’t quite as simple as it seems at first glance. Thanks to sophisticated algorithms and the ease of changing information on the Web, airlines tweak their fares constantly.
Their systems also enable them to try to influence buying behavior by, for example, showing seat inventory. Thus, when searching for a fare, a consumer will often see that there is only a small number of seats available at a given price.
“(Airlines) have no incentive to say there are 80 seats at that price,” Kauffman explains. “You’ll see two, three or four. That encourages the consumer to think that something could change in the near future. They’re using psychological tools to get consumers to respond in ways that they have already charted out.”
Prices also can serve as signals among air carriers — as suggestions that they all might want to raise their rates. In theory, an airline can post a higher fare on the Internet, hoping that its competitors will match it. If competitors don’t respond as hoped, the airline isn’t locked into retaining that fare. It hasn’t committed to a print ad campaign or made promises to travel agencies, so it can quickly change the price.
This doesn’t sound all that radical until you realize that in pre-Internet days, airlines could land in legal trouble by trying to coordinate their fares. In a famous incident in the 1980s, Bob Crandall, then-CEO of American Airlines, was accused by the U.S. Justice Department of attempted price-fixing for calling the boss of Braniff International and suggesting that they both raise their fares at Dallas/Fort Worth International Airport. A judge ruled that Crandall hadn’t broken any laws, because he’d only suggested raising fares but hadn’t done it. A similar attempt today would require no telephone call, just a few keystrokes by an anonymous programmer.
Getting to know you
Retailers such as L.L. Bean and Best Buy have responded differently than airlines to online pricing transparency. Instead of developing complicated pricing formulas and changing prices frequently, they’ve typically chosen to use the Web as a way to deepen customers’ shopping experiences. By providing lots of details on features and uses of products, for example, they stymie consumers’ efforts to make head-to-head comparisons. Thus a $49 pair of work pants offered by L.L. Bean begins to look different from a $48 pair of Carhartt jeans sold by Cabela’s.
“Initially, for many companies, the Web was simply a digital catalogue,” Kauffman points out. “Then they realized that there were different ways to represent what they were selling. They also saw that, through all of those transactions, they were learning about their customers’ tastes. So now they had the ability to up-sell and cross-sell and started doing pairing and recommending.”
Travel companies, too, have tried to stress features and thus thwart comparison. They do this by offering fare bundles in which a consumer might receive not only a plane ticket, but also, perhaps, a hotel room, a rental car and even meals.
“It’s impossible to represent those in a way that makes the stated ticket price the dominant issue,” Kauffman notes. “There are just too many variables.”
A version of this article first appeared on Knowledge@W. P. Carey, an online resource from Arizona State University’s W.P. Carey School of Business that offers the latest business insights, information and research from a variety of sources. To read more, visit knowledge.wpcarey.asu.edu.
ASU Spirit of Enterprise Center
Small businesses are guardedly optimistic about 2010, says Gary Naumann, who heads the ASU Spirit of Enterprise Center at the W. P. Carey School of Business. He senses the mood from what he sees and hears, especially from entrepreneurs who attended the 13th annual Spirit of Enterprise Awards last September.
“You can only look down at your shoes for so long,” he says. “It’s a lot more fun to look up. That’s what I sensed from the crowd of 800-plus at the awards event.”
Under Naumann’s leadership, programs at the Spirit of Enterprise Center are providing assistance to small businesses and real-life experience for students.
“People come up to me on a regular basis and say they’re thinking about starting a business or expanding,” he says.
As examples of the optimism he is starting to see, Naumann mentions two of the small businesses that were honored by the center this year. Caliente Construction is targeting 20 percent growth next year, and Terralever, an Internet-based marketing company, recently expanded to Los Angeles.
“That’s why we picked them — they’re doing good things in a tough market,” he says. “If we were able to find these kinds of small businesses in the last few years, we sure as heck are going to find them for our awards next September.”
Without duplicating other services offered at the School of Business, Naumann says the center’s focus is on opening doors to opportunity. The center assists hundreds of businesses each year, mostly small firms, by providing guidance and connections to key resources.
“The type of businesses we help is across the board,” Naumann says. “We believe entrepreneurship is alive and well, even though this is such a tough time to start a business. Dislocation creates opportunity. We’re definitely in that period where there has been a lot of dislocation the last 12 to 18 months. People look around and wonder what they can do to take charge of their future. That’s a very healthy thing for our economy.”
Naumann, who has been in the entrepreneurial field for 30 years, says the center will continue to honor entrepreneurs who are showing promise, and educate young entrepreneurs of the future. He has lined up three new guest speakers from different walks of life to share their experiences with students.
“We landed a venture capitalist, and they’re hard to find,” Naumann says. “Students hear from guest speakers about what they did right in business and missteps they took and corrected. They learn more from hearing about the mistakes.”
To do well next year, small businesses must be prepared to do a fair amount of what Naumann calls “heavy lifting.”
“They’ll have to do two things at the same time, even though they almost don’t seem to go hand in hand,” he says. “They’ve got to watch their cash flow like a hawk, and at the same time they have to have one eye toward growth of the business. People who are going to succeed are going to be on these two paths.”
Arizona Business Magazine
Master of Arts Student
Arizona State University, School of Sustainability
It’s a natural blend of interests for Tetreault, who is pursuing a master’s degree in sustainability and has a bachelor of science degree in marketing from the ASU W.P. Carey School of Business, as well as a minor in sociology. He has a diverse business background and skill set tempered in marketing, business development and philanthropy. His goal is to integrate his business acumen and cutting-edge knowledge of sustainability.
When ASU President Michael Crow said, “Sustainability is a way to grow and prosper while reducing the stress on the planet,” and asserted that sustainability would be a hallmark at ASU, Tetreault says, “I knew this was absolutely something that I not only wanted to pursue, but I felt compelled.”
Tetreault’s background led him to the field of sustainability.
“I grew up hiking and climbing and having an appreciation of the outdoors,” he says, “but my parents are both business individuals. My mother was a professor of marketing and my father was a business executive. I loved being outside, but I also loved what business can do. Business can accelerate change and can act as an advocate for it.”
Some individuals may view business as being unfriendly to the environment, and with some justification, Tetreault says.
“Admittedly, in certain instances they may be right, but now business has done more than ever for the environment and can act as an advocate for the world,” he says. “It marries two areas that I love — a synthesis of business and the entire global perspective of sustainability, which is not just hugging trees and savings animals.”
Sustainability will provide a “meaningful, productive and just way of life,” Tetreault says, adding that it is vital to save the trees and have clean air so humans can live on this planet.
“Sustainability is paramount to that, to help achieve economic viability and a robust society,” he says. “Everything is connected. Our actions have a direct impact on us now and in the future and on everything around us. I feel this is my calling.”
Tetreault, who joined Valley Forward this year, hails the organization for its role in preserving the environment and for being “not only an aggregator of information, but also an advocate for positive change.”
“Valley Forward embodies those type of ideals,” he says.
Robert E. Mittelstaedt Jr.
Dean, W.P. Carey School of Business at Arizona State University
How is W.P. Carey’s curriculum changing due to the economic crisis?
The curriculum in any business school has to involve some fundamental, timeless subjects that never change. So accounting and some aspects of finance and people management and other things will go on forever, but in every case we have to find a way to adapt to the changes in the external environment, whether it’s societal or specific kinds of business issues. I think that most business schools now are re-thinking seriously their curriculums in light of what has happened in the last couple of years, in particular issues in the areas of risk management, ethics in decision making and globalization … It doesn’t mean that the entire curriculum will change, but we have to find a way to weave those things more into almost everything we teach.
Could business schools have done more to create an ethical climate among corporate executives that could have averted this crisis? Does that argument have any merit?
My experience over many years now tells me that parents have to do more to teach ethical values to their children, and society has to take responsibility for holding people accountable for ethical behavior. Sadly, I have found that in most people, when they cross ethical lines, you find out it’s not the first time and they started doing it early in their life. By the time we get them as undergraduate business students, that’s about the end of the time when you can influence it.
We push hard on ethics from day one, and the students who come into our program hear about ethics on day one from me, and throughout the time that they’re here and they are required to take ethics courses. … This is something that’s a broad societal problem that we have to deal with, and we’re are doing as much as we can in business schools and will continue to put even more emphasis on it, but it’s not something that can be solved just in a business school or just in a university alone.
What are some of the future trends you see for business schools?
I expect to see all business schools more concerned with some of the things that we have been thinking about here at ASU. For instance, whether you believe in global warming or not, it is indisputable that we have to worry about sustainability, simply because of the number of people on the planet. … There are all sorts of things that become different issues where we have society and business interacting, whether we like it or not, in a much more integrated fashion than we have had in the past. … Issues of instant communications, doing business differently than our predecessors did, are very real and have to be part of a curriculum. … All those things find their way into a curriculum, both in terms of changing the way we teach, the kinds of things we teach, the impact they have on individuals.
How would you assess the relationship between W.P. Carey and the Valley business community?
I believe that our relationship with the business community at the W.P. Carey School is quite strong. We have many business leaders that are on our advisory councils, advisory boards to departments, to the whole school; we have many businesses that support us by sending students here to work on their MBAs or even their undergraduate degrees. And we have many business leaders who are not graduates of our school but who believe we have to have a strong business school to help Phoenix grow, and so they support us.
Describe the education industry in Arizona in terms of employment.
Education is a big sector of our society and I don’t believe there are very many people today that would deny that education needs to be there. … (T)here’s more to learn today and a child today needs to learn more and get to a higher level of knowledge just to be competitive in the work force than they did a generation or two generations or three generations ago. You have to have an education sector that is strong and employs a fair number of people if you’re going to be competitive.The fact that we have gone through a financial crisis and budget cutbacks and furloughs and layoffs means that it’s not different than any other business, and it is in fact a business. It may be state supported, partially in the case of our university, but it is nonetheless a business that is subject to the same kinds of economic whipsaws as other sectors. The difference here is that our students don’t just go away because the economy got worse. In a retail establishment the customers may not show up and you may not have to have as many (establishments) open. We still have 52,000 students showing up on this campus in the fall …
- Vital Stats
- Dean at W.P. Carey since 2004.
- Between 1973 and 2004, he served in numerous leadership positions at The Wharton School at the University of Pennsylvania.
- Author of “Will Your Next Mistake Be Fatal? Avoiding the Mistake Chain That Can Destroy Your Organization.”
- Earned his bachelor’s degree in mechanical engineering from Tulane University.
- Served five years as a U.S. Naval officer.
- Received an MBA from the Wharton School.
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.
Patience, it turns out, can be indeed a virtue — especially for retirement plan sponsors. Sunil Wahal, professor of finance at the W. P. Carey School of Business at Arizona State University, and his co-authors compiled a database of hiring and firing decisions made by more than 3,700 plan sponsors between 1994 and 2003. The reasons plan sponsors change investment management firms vary, but often the sponsors hire firms that have recently earned significant excess returns.
However, Wahal and his team found that those high fliers do not perform as well after they are hired, and the fired firms sometimes go on to turn in impressive numbers. If plan managers had stayed with their original managers, Wahal says, their excess returns would have been larger than those delivered by the newly hired managers.
“When firing decisions are made, one needs to be very careful and cognizant of the costs involved,” Wahal says.
Factor costs into decisions
Wahal’s study of the selection and termination of investment management firms by plan sponsors looked at 9,684 hiring decisions by 3,737 plan sponsors between 1994 and 2003. The plan managers hired by the sponsors were responsible for delegating $737 billion in investments. The study also examined 933 firing decisions by 515 plan sponsors between 1996 and 2003. Nearly $117 billion of investments were impacted by those decisions.
“There is an enormous amount of money that is invested in the market by plan sponsors. These organizations make a lot of decisions about who gets to manage the assets for the beneficiaries,” Wahal observes. “Sometimes the hiring and firing decisions they make work well. Sometimes they don’t. The frictions involved in these decisions are costly to beneficiaries.”
The rationale for a change varies. Plan sponsors usually fire investment management firms for poor performance, but sometimes they act because of an organizational change. For example, the investment management firm may have gone through a merger, or a star stock picker or portfolio manager may have left. The plan sponsor also may decide to change direction with its investments, such as switching from running a large-cap stock portfolio to a bond portfolio.
Factors that point to success
Wahal found that consultants are hired to assist plan sponsors in nearly two-thirds of all hiring decisions. Excess returns from consultant-supported decisions are higher, consistent with the notion that a consultant’s expertise adds value when selecting managers. But there’s a downside to consultants. They often take the blame, in place of the firm’s treasurer, when a company with a defined benefits plan selects a plan manager that performs poorly. Even so, using a consultant led to a 3.7 percent increase in three-year, post-hiring returns.
The researchers also found that returns were higher as the size of the plan increased, presumably because the sponsors of bigger plans have more experience selecting investment managers. In addition, they discovered that plan sponsors like to hire investment management firms within their own states. The study found that those in-state, post-hiring returns were positive.
Despite evidence that a number of factors can predict success, plan sponsors typically selected investment management firms by screening their performance based on excess returns. Firms are usually hired after investment managers have done very well, with an average excess return of 13.8 percent three years before the hiring decision.
Yet, after an investment management firm was hired, the study found the excess returns were close to — or below — zero.
“It’s not that they do poorly,” Wahal explains, “they don’t do as well as they had been doing prior to being hired. In other words, when you chase returns, you chase hot hands. But those hot hands don’t seem to persist.”
Wahal also learned that three years after the firing decisions, excess returns were sometimes up, with performance-based firings resulting in bigger return reversals. In fact, it was discovered that had plan sponsors stayed with the fired investment managers, excess returns would be more than what the newly hired managers delivered at some horizons.
Transition costs can add up
When a plan sponsor decides to fire an investment manager, the sponsor then has to take those funds and provide them to the newly hired investment management firm. This process entails what are commonly referred to as transition costs, that is, the cost of selling the old portfolio and creating a new one. Wahal says that “such costs can frequently be as much as 2 percent, and add to any other losses that the plan sponsor might suffer.” So, the newly hired manager is expected not only to deliver superior returns, but also perhaps to recover the 2 percent transition costs. Wahal argues that “to the extent that we do not live in Lake Wobegon, this is quite a challenge.”
“What’s really important is that the firing and hiring process be set up very well,” he says. “You can’t be too quick to jump the gun on firing and hiring because those costs have to be factored into the decision. Someone’s going to bear that loss and typically it’s the beneficiaries of the plan sponsors.”