On the (Low) Road to Recovery
By Marshall J. Vest
EBR and Forecasting Project Director
June 1, 2012Recovery of Arizona’s economy from the depths of the Great Recession continues to gain momentum even though progress is slower than normal. Job creation so far compares to the pace that followed the mild 1990-91 recession. The labor force participation rate fell precipitously during the Great Recession; will those workers return? Housing prices are now moving up – at a frenzy-driven pace! Finally, Hispanics account for the unprecedented drop-off recently in births as many presumably left the state.
The national economy appears poised for a summer slowdown and Arizona likely will follow, but the most recent crop of measures for Arizona is encouraging. Recent readings show retail sales increasing at an 8% annual rate in the fourth quarter, and sales were 5.2% higher in 2012Q1 on a year-on-year basis. First quarter restaurant & bars sales were up 7.5% and 8.3% in April, year-on-year. Our forecast calls for gains for all of 2012 of 5.6% and 7.1%, respectively. Both are stronger than personal income, which grew by 4.5% in 2011Q4 and 5.0% for the whole year. Look for a gain in the 4.5%-5.0% range for 2012. Private-sector wages have been trending upward as well, with a year-on-year gain of 4.7% as of 2011Q3, the most recent data available. None of these measures are spectacular, but they are solid.
Jobs Recovery Takes the Low Road
Nonfarm employment continues to recover slowly, albeit at a slightly faster pace. Gains for the first three months of 2012 measured 2.1% statewide, year-on-year. Since bottoming in August 2010, a little over 75,000 jobs have been created. That compares to the more than 300,000 jobs lost during the recession. Both numbers are calculated after seasonal patterns were removed.
|Exhibit 1: Job Gains Remain Modest|
|Exhibit 2: Fewer Residents Are Working|
|Exhibit 3: Housing Prices are Headed Higher|
|Exhibit 4: Hispanics Account for Falling Births|
How does this recovery compare to prior recoveries? The pace of the current recovery matches very closely the path of job creation following the 1990-91 recession. Exhibit 1 superimposes four prior episodes onto the current. Each is labeled with the month that recovery began.
In theory, deep recessions should be followed by rapid recoveries such as we saw in the mid-1970s and early 1980s. Even though the recent recession was much deeper than either of those, we are currently experiencing growth closely aligned with the shallow and short recessions of the past two decades. The period following the 2001 recession became known as the “jobless recovery.”
We expect some 50,000 jobs to be added this year and a like number in 2013. When residential construction resumes in 2014, job growth will accelerate to 70,000 followed by gains approaching 100,000 jobs the following year. By 2015, nonfarm jobs will once again match the all-time record high set prior to onset of recession at the end of 2007.
Where Have All the Workers Gone?
The proportion of the population who are employed has fallen to levels not seen in three decades. Exhibit 2 shows a crude measure of the labor force participation rate – simply the ratio of the number of employed to total population. In Arizona, that ratio now stands at 0.375, the lowest since the mid-1980s. This ratio peaked in 2000, fell in the aftermath of the 2001 recession, recovered somewhat, and then fell precipitously during the Great Recession. Arizona mirrors the national ratio and consistently runs four to five percent lower.
The question is "what happened to the workers?" Is the explanation that baby-boomers are retiring and younger workers are choosing to stay in school? Or have a large number of workers simply dropped out of the labor force, either temporarily or permanently? If temporarily, then as jobs are created going forward, these discouraged workers will reenter the labor force. That’s a good thing. Although their reentry will tend to keep the unemployment rate high, it’s better than adding to the ranks of the long-term unemployed and disabled roles – workers that are lost for good.
If workers don’t return, that will limit the potential for the economy to grow, since labor is an important component (in addition to capital and productivity gains). The unemployment rate is high today, but in the not-to-distant future we could experience labor shortages (especially in many knowledge and skill occupations).
We expect the employment-to-population ratio to move higher but remain well below the peak at the turn of the century.
Arizona’s Housing Market Shows Signs of Life
Housing prices across the state have finally turned the corner and are headed upward. As expected, market psychology has changed dramatically, resulting in a bit of frenzy once again. Some industry analysts warn that home prices are about to explode by noting the shortage of properties available for sale, multiple offers on newly listed properties, and properties selling above asking prices. The frenzy is reportedly driven (largely) by investors who have sensed that prices have bottomed and that now is the time to jump in with both feet before it’s too late. Likewise for buyers who intend to occupy their newly-purchased home. Real estate investment trusts (REITs) also are reportedly buying properties for renting.
Housing prices are indeed moving upward at a fast clip, but the magnitude depends on the measure used. Realtor data shows the largest gains. In metro Phoenix, the median value of homes sold on the MLS jumped at a 32% annual rate over the past 9 months! The bottom was reached in June of last year. (In metro Tucson, the increase is 15% over the past six months). By contrast, the Standard and Poor’s Case-Shiller index, which measures repeat sales that thereby controls for changing mix of properties sold, shows a much-more modest increase for Phoenix of 9.5% expressed as an annual rate since bottoming 5 months ago. Case-Shiller data is not available for Tucson. Exhibit 3 puts these increases in perspective.
After begin cut in half during the past 5 years, prices remain well below trend and have a lot of catching up to do. But numerous questions cloud the outlook. How sustainable is the price support from investors? Given still-tight credit conditions for mortgages and with heated competition from cash buyers, what is the effective demand from potential homeowners? And when will population mobility and migration flows resume? On the supply side, how much “shadow inventory” will be marketed as prices increase?
In short, housing markets are still far from “normal.” But progress is being made in reducing the inventory of distressed sales, foreclosures are receding, and homeowner equity positions are improving. The upward movement in prices is indeed a welcome development that marks the start of a return to normalcy.
Hispanics Account for the Large Decline in Births
One of the most striking developments during the Great Recession was the unprecedented decline in the number of births in Arizona. After peaking in October 2007, just before the economy began its steep decline, total seasonally-adjusted births fell by 18.1% before bottoming in May 2011. Since then, with data through February, births have increased by almost 1.5%. That’s one more indicator that economic conditions are finally improving.
The bad economy was most certainly a factor as families postponed having children. But the decline was much more pronounced than in prior recessions. Another possibility is that women of child-bearing age left the state. Again, the job losses suffered during the recession were no doubt a factor, along with Arizona’s crackdown on illegal immigration capped by the infamous SB1070.
This is particularly relevant since Hispanic birth rates are much higher than non-Hispanics. Data from the 2010 Census show that Hispanic women give birth to 2.4 babies on average compared to 1.8 for non-Hispanic whites. Add to that the fact that Hispanic women are younger and still in child-bearing ages. During the middle of the past decade, Hispanics accounted for over 44% of total births statewide, although they comprised only 30% of the total population. In 2011, Hispanics’ share of total births fell to 38.1%.
Using annual data, the number of Hispanic births fell 29.2% from 2007 to 2011, while non-Hispanic births fell only 7.7%. All this suggests that many Hispanic families left the state in recent years (Exhibit 4).
Recent news on the U.S. economy has been disappointing and raises the specter of a summer slowdown, much like last year. Employment gains have been weak, consumer confidence has moved lower, the stock market gave up all its gains for the year during May, and Euro zone troubles worsened. These recent developments are in addition to a long list of factors that are restraining growth. The list includes tight credit, ongoing deleveraging, housing market woes, reduced mobility of the population, and the drag from public sector spending.
Our forecasts for Arizona call for continued slow growth for the remainder of this year and next followed by cautious acceleration as migration flows improve and construction begins to move up. Historically, deep recessions have been followed by rapid recoveries. But recessions involving financial meltdowns take much longer. We still expect it to be mid-decade before all the damage from the Great Recession is repaired.
For additional information, please contact the Economic and Business Research Center.