Recession is Over: Let Recovery Begin!

 

By Marshall J. Vest
Forecasting Project Director

March 1, 2010

Some six months have passed since the U.S. recession came to an end. Recent data show that the recession in Arizona came to an end as 2010 began. Employment is no longer falling, retail sales are increasing, personal income has stabilized, and housing markets are in the early stages of recovery. It will be several months before it feels like things are getting better, and it will take years to repair all the damage that's been done. But the business cycle has turned up once again - and that's the best news we've had for a long time.

The "Great Recession" hit Arizona hard. From the third quarter of 2007 through year-end 2009 (nearly 2-1/2 years), Arizona lost one in every nine jobs. Unemployment topped 9%, up from 3.5% only two years earlier. Population recorded the smallest numerical increase in 20 years (and the smallest percentage increase in at least 50 years). During 2009, personal income in current dollars declined -- the first time ever (data stretching back to 1950). State tax receipts, which are based on sales taxes and income taxes, fell by nearly one-third. In recent rankings among states, Arizona has fallen near the bottom or even last on measure after measure.

Therefore, it comes with great relief that Arizona's recession has come to an end. It will take several more months before recovery becomes evident. Some components will continue to decline for a few more months. And it will take years to repair all the damage that's been done to the economy. But at least economic conditions are now getting better.

Recent Evidence

Here's some of the recent evidence. Nonfarm jobs, a comprehensive measure of employment, stopped falling in December. Seasonally adjusted, employment now rests at 2.4 million, down nearly 300,000 from its August 2007 peak (Exhibit 1).

Exhibit 1: Employment Has Stabilized

Not all employment sectors have stabilized. Construction, accommodations, food and drinking places, financial services, information, computer and non-durable manufacturing, and state and local government payrolls continued to move lower as 2009 came to an end. Sectors that have turned the corner and are now growing include aerospace manufacturing, wholesale trade, employment services, mining, health care and social services, and the large professional and business services sector.

News releases of firms hiring workers have improved significantly in recent months. Several manufacturers have announced expansions or new openings in the 200-500 worker range, including three related to solar energy, two related to auto parts, and a biopharmaceutical manufacturing firm. The Census Bureau also is hiring thousands of temporary workers to conduct the decennial census and that will boost payrolls through mid year. The current crop of announcements is the strongest we've seen in some time.

 

Exhibit 2: No Growth in High Tech During the Past Decade

Recently, detailed data became available from the U.S. Bureau of Labor Statistics that allows analysis of detailed high-tech employment (on a monthly basis) and wages (on a quarterly basis) back to 1990. These data, known as the Quarterly Census of Employment and Wages (QCEW) are based on unemployment insurance data that covers approximately 95% of total employment.
Using the most recent data available (second quarter 2009) we see that high tech employment statewide has lost ground in the past several months, and is lower than levels reached during the technology boom in 2000. During the second quarter 2009, the number of high-tech jobs statewide stands at 225,000, representing 11.2% of nonfarm jobs (Exhibit 2).

The composition of high-tech jobs continues to shift from manufacturing to services. Manufacturing now represents only 75,000 of the total, and is 25% below its year 2000 peak. At this level, it is the lowest since the beginning of our data, which dates to 1990. Services-related high-tech jobs number 160,000, accounting for two-thirds of total high-tech. That compares to 43% of the total in 1990. During the Great Recession, service-related employment dropped by 10,100, or 6.5%.
According to U.S. Census Bureau estimates, Arizona's population added 96,000 new residents in 2009, an increase of 1.5%. Over half of the gain came from natural increase (52,200, i.e., births minus deaths), and the remainder from net migration (44,200).

Exhibit 3: Mobility Is Currently at Decades Low

Normally, net migration is 2-3 times larger than natural increase. Migration flows should improve dramatically in coming months as the economy gains strength (Exhibit 3).

Even though net migration is still positive, household formation is likely very close to zero (or possibly negative). During times of economic hardship, family members return home or families double up into one household. An excellent indicator of household formation, electric utility residential customer data, has flattened out in recent months, barely registering growth. This will improve as the economy strengthens.
Aggregate personal income stabilized in the 2nd and 3rd quarters of 2009. That followed large losses in the prior three quarters (Exhibit 4).

 

 

 

 

Exhibit 4: Personal Income Is No Longer Declining

Residential building permits, an important leading indicator, bottomed in March 2009 and have increased by more than 70% statewide through December. The percentage change is large since the base is so small, but the actual numbers remain at very low levels -- less than a 20,000 annual rate. Multifamily construction is near zero (Exhibit 5).

Recent gains brought to a halt the outsized decline of nearly 90% from peak 2005 levels. Anecdotally, we've heard that builders have begun hiring once again. But, we don't expect much upside potential until the inventory of vacant homes, estimated at 120,000 statewide, is absorbed. It will likely be 2014 before homebuilding tops 60,000 again.

Existing home sales as recorded by realtor data have rebounded sharply. Driven by investor demand and federal tax credits for homebuyers, sales in Phoenix have soared to levels nearly as high as reached during 2005."Flipping" is once again in the vocabulary with stories of investors buying at auction, making repairs, and reselling for handsome profits (Exhibit 6).

Exhibit 5: Homebuilding Is Off the Bottom

Although foreclosures and short sales remain painfully high for current homeowners, resetting the basis for properties is necessary before housing markets can heal. The flow of private capital into housing is very good news indeed.

Housing prices are no longer falling, according to industry measures. In metro Phoenix, realtor data for the median price of homes sold bottomed in May 2009. Standard and Poor's Case-Shiller index of housing prices, an index of repeat sales, shows prices increasing at a 17% annual rate since bottoming in June (Exhibit 7).

Consumer data also is looking much better. Retail sales statewide are now growing at a 5% annual rate since bottoming in June 2009. We expect a 5% increase this year, followed by a 10% gain next (Exhibit 8).

The Outlook

Evidence continues to build that the recession in Arizona has run its course.

Exhibit 6: Private Capital Is Flowing Into Housing

That sets the stage for a resumption of growth in 2010 as the recovery stage of the business cycle begins.Although we expect to see large percentage increases in some measures, it will be years before the economy transitions from recovery into expansion mode. Because of the damage that has been done to the supply chain, we could see a temporary jump in prices for some commodities such as lumber and metals as well as for final goods. This will be a signal for producers to expand output, and that's good news for business investment spending and hiring.

We expect a slow recovery, similar to the periods following the past two recessions. Recovery will be constrained by the drag from commercial real estate markets and the public sector. Governments at the state and local levels will struggle to balance budgets for the next 3 years or more, and the inability to provide infrastructure and favorable outcomes for our public schools will retard economic development.

Nevertheless, Arizona will accelerate again and is expected to move back into the top tier of fastest-growing states in a couple of years.

Exhibit 7: Housing Prices Are Rising

 

 

 

 

 

 

 

 

Exhibit 8: Consumer Spending is Improving Again