We've heard since the middle of last year that the recession is over. Why, then, do people still seem so pessimistic? Why are consumers still so restrained? Why is the housing market still weak?
These questions were addressed by two Arizona State University economists at the Annual Economic Outlook Luncheon sponsored by the Economic Club of Phoenix.
In the last two quarters of 2009 the U.S. economy saw what Professor Lee McPheters called solid growth. Gross Domestic Product (GDP), a common measure of economic activity, grew by 2.2 percent in the third quarter of 2009 and a robust 5.6 percent in the fourth quarter. McPheters, director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business, estimates GDP growth will come out at 3 percent for the first quarter of this year.
But GDP growth, he said, isn't the whole story. Nor is it, as far as American consumers are concerned, the most important story.
Job losses continue
Far more important to American consumers are jobs. And on that front, the picture is less rosy. Compared to previous recessions, nationwide job loss since 2007 has been far greater. During the recession in the early 1980s, McPheters said, employment fell to just under 97 percent of its pre-recession peak. Today, national employment levels are at 94 percent of the 2007 peak.
In previous recessions, employment didn't dip as far as it has since 2007. So, both nationally and in Arizona, we have a longer way to go to get employment to pre-bust levels, McPheters said.
Nationally, the recovery that followed the 2001 recession was deemed a jobless one. Job losses were not particularly deep, but it took a long time -- compared to previous recessions -- to recover back to pre-recession employment levels, said Professor Dennis Hoffman, director of the L. William Seidman Research Institute at the W. P. Carey School of Business.
During the eight recessions between 1947 and 1982 it took the job market 20 months on average to fall, hit bottom, then recover to pre-recession levels. In the recession of the early 1990s, it took 32 months for jobs to recover. In 2001, it was 48 months. Now, McPheters said, job recovery could take 65 months.
In addition to being far more protracted, the sheer number of jobs lost in the current recession has been far greater than in previous recessions. And those losses continue. In 24 states, unemployment was higher in March than in February. In 44 states, it was higher in March this year than in March 2009. Last month, Arizona lost jobs faster than all but two other states (Nevada and Wyoming).
Yes, GDP, corporate profits, and some other economic indicators are looking better, and job losses have slowed, but the unemployment rate is still rising, McPheters said. That means, in Arizona at least, that the recession is not over. We're not losing jobs as quickly as four or six months ago, but the economy is still getting weaker, McPheters said. The recession will be over when we stop losing jobs.
Consumer confidence still low
The still-gloomy employment picture, McPheters said, is the primary reason why 73 percent of the American public believes the recession isn't over.
And if people don't feel like the recession is over -- because unemployment is still high, for example -- that restrains consumer spending, which accounts for 70 percent of the nation's economy. It's hard to see a full economic recovery, McPheters said, without the return of consumer confidence.
At the state level, Hoffman said that consumer spending as a share of income is at historic lows. In other words, spending is down more than would be accounted for by income and job losses.
Arizona consumers are now spending 3 percent of their income on cars, where between the early 1990s and 2007 they had been consistently spending about 6 percent. Expenditures on housing had hovered around 10 percent before the boom, but now are at about 7 percent of income. Other retail spending is down, too -- from about 20 or 21 percent of income to 17 percent.
Why? Because of what Hoffman called the wall of worry caused by the massive loss of wealth that Arizonans have experienced over the last year and a half, still-high unemployment, tight credit, and political banter that does not instill consumer and business confidence.
Scaling that wall, Hoffman added, is a pre-condition of economic recovery.
Housing weaker than anticipated
One sector where economists had hoped to find good news was housing, but they've found, instead, an unpleasant surprise.
The housing market in Arizona didn't move much in 2009, so now last year's optimism is transferred to 2010, said McPheters. The Arizona forecast calls for a 40 percent increase in new single-family home construction in 2010, but even that large percentage increase is still a relatively small number of homes (5,055).
Foreclosures, the scourge of Arizona's residential real estate market, are higher so far this year than they were in 2009, and that's probably not going to change, McPheters said. What's the number one driver of foreclosures? It's unemployment, which is high and rising.
The big disappointment for economists, though, has been the continued weakness in new home building. Resales of existing homes are strong, but traditionally in recovery we see new home construction really propel the economy into recovery, McPheters said. It hasn't this time.
McPheters predicts that Arizona's population will grow by 1.5 percent in 2010 (same as in 2009) and 1.8 percent in 2011. But we need 3 percent population growth to get the booming Arizona economy that we're used to. McPheters looks for Arizona's housing market to regain some strength in 2012 or 2013.
But it could have been worse
Yet for all that news -- gloomier than one might have hoped for -- it could have been far worse.
According to Hoffman, it's instructive to compare the nation's economy in 2008 to the economy in 1929. The initial shock to the economy in 2008 was as great, or even greater, than in 1929, he said. Between December 1928 and December 1929, household wealth fell 3 percent. Between December 2007 and December 2008, it fell 17 percent. In both cases, there were massive collapses in consumption -- more so, actually, in 2008 than in 1929.
But that's where the comparison ends, Hoffman said. In 1929, the Fed was passive and didn't act to save the banks. In 1930, the bad banks washed out, creating a contagion that overcame the good banks too.
In 2008, in contrast, the federal government's policy response was far different. In the fall of 2008 policymakers clearly had the dark economic period of the early 1930s in mind, and took action to avoid that kind of outcome. And it worked.
Now, Hoffman said, the question becomes What about all the debt? Historically, spikes in debt as a percentage of GDP are common -- as the government spends on stimulus to combat a recession or to finance a war. But now, Hoffman said, the debt-to-GDP ratio is eclipsed only by the government's financing of World War II.
Nevertheless, Hoffman said that the concern now should be on developing a strategy to rebuild the economy so that GDP grows faster than debt.
Into the Canyon and back
The recession is like a trek down into the Grand Canyon, McPheters told the audience. On the way down, all of the economic indicators -- employment, GDP, corporate profits, retail sales, consumer confidence -- are falling. When you get to the bottom of the canyon, the recession is over -- but you still have a long way to climb to get back to where you came from.
On this trek -- in this recession -- Arizona has fallen farther and deeper into the canyon than ever before, so it will take longer to get back to pre-recession economic activity (circa 2007).
Specifically, McPheters looks for full economic recovery in Arizona in three years if job growth resumes at the 1990-2007 average rate of 3.7 percent. If job growth comes back to a more modest 3 percent annual rate, McPheters looks for the state to return to pre-recession levels of activity in 2014.
That may sound to crisis-weary Arizonans like more gloomy news, but there is light at the end of the tunnel: by 2014 or 2015, McPheters said, Arizona will once again be a leading growth state.
- GDP grew by 2.2 percent in the third quarter of 2009, 5.6 percent in the fourth quarter, and is estimated to have risen 3 percent in the first quarter of 2010.
- Nationally and in Arizona job losses have been deeper and lasted longer than in any previous recession. That means a longer, higher climb to pre-recession employment levels.
- Though the rate of job loss is slowing, losses continue. Unemployment was higher in March than February in 24 states. It was higher in March this year than last in 44 states.
- 73 percent of the American public believes the recession isn't over. It's hard to see a full economic recovery without the return of consumer confidence.
- Both nationally and in Arizona, housing has been an unpleasant surprise. Construction of new single-family homes is depressed and foreclosures are likely to increase until the job market improves.
- The unprecedented level of government spending in the wake of the housing and financial market crises likely prevented a repeat of the Great Depression. Now, the discussion should center on growing the economy faster than the debt.
- The Arizona economy will return back to pre-recession levels of economic activity in three to four years. In four or five years, the state will once again be among the national leaders in growth.