December 1, 2010

Both the Arizona & U.S. Economies Will Improve in 2011

Mostly Good News from Experts at W. P. Carey School/JPMorgan Chase Event

TEMPE, Ariz. — Both the Arizona and U.S. economies are on upward trends, and we’ll finally start seeing some significant improvement in 2011. That’s the consensus from top economic experts who spoke today at the 47th Annual Economic Forecast Luncheon, co-sponsored by Arizona State University’s W. P. Carey School of Business and JPMorgan Chase. More than 1,000 people attended the popular event at the Phoenix Convention Center.

“Every Arizona indicator should show improvement next year,” said Research Professor Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business. “The state’s economy ‘bumped along the bottom’ for most of 2010, but the Arizona outlook for 2011 is brighter than we’ve seen since the national recession began in December 2007.”

McPheters explained the state finally started seeing year-over-year job increases in August, after 30 straight months of declines. In 2011, Arizona is expected to add about 48,000 jobs, and Arizona and Texas are projected to see the highest employment percentage gains among all of the Western states. However, Arizona unemployment is expected to remain above or close to 9 percent, which will continue to undermine consumer confidence and spending for a while.

“Retail sales for the year are expected to be up by a very modest 1 percent when all of the 2010 data are compiled,” says McPheters, who is also editor of the prestigious Arizona and Western Blue Chip Economic Forecast publications. “With job growth improving and personal incomes rising, though, retail sales are forecast to increase by 6 percent in 2011.”

With retail sales -- and therefore, incoming tax revenues – still relatively weak, state budget problems are expected to continue in 2011. Also, population growth, which has helped Arizona pull out of previous tough economic times, may be limited to less than 2 percent because people won’t sell their homes and relocate here.

On the national front, we may be in for much better growth than most people are forecasting, according to Joel L. Naroff, president of Naroff Economic Advisors, winner of the 2008 Lawrence R. Klein Award for economic-forecasting accuracy and Bloomberg Business News’ 2008 forecaster of the year. He says the main problem is that people wanted a hare in the race to economic recovery, and instead, we’re getting a tortoise. However, it’s still forward momentum.

“The economy has grown for five consecutive quarters,” explains Naroff. “The private sector has added jobs every month this year for a total of more than 1.1 million new positions. Manufacturing output is up 6 percent since last October. We have seen major gains across almost all sectors of the economy.”

Naroff agrees the slow recovery has taken a toll on household psychology and spending, but he expects to see enough jobs being created per month by summertime that the unemployment rate will really start to decline. He believes that should be significant enough to improve confidence and spending.

“I would not be surprised if we see GDP growth between 4 and 5 percent during the second half of 2011,” says Naroff. “Until then, though, the recovery is likely to remain in the sluggish 2- to 2.5-percent range. As I look into 2011 and 2012, the possibility of strong and then more normal growth seems to be realistic.”

In the financial sector, James Glassman, managing director and senior economist for JPMorgan Chase & Co., agrees the 2011 outlook appears favorable. Glassman previously served in various research divisions at the Federal Reserve Board in Washington. He expects the U.S. economy to accelerate over the four quarters of 2011.

“Corporate profits are spectacular, and there have been hints that Congress will extend for a short period, some, if not all, of the tax cuts that were scheduled to expire at the end of 2010,” Glassman says. “Equity investors have rejected the possibility of a double-dip scenario. The stock market has recovered most of the late spring losses, and virtually every country’s economy is on the rise. Still, the level of real GDP is about 10 percent below potential, so that means substantial opportunity ahead in the recovery.”

Glassman says the banking system has plenty of capital now, and he expects a period of strong demand from “pent-up” spending, since many households have been postponing large purchases. In addition, he says a significant rebound in businesses investing in equipment and software has been widely interpreted as a hopeful sign of recovery. He expects “a classic story of cyclical recovery” to unfold over the coming decade.

In the most negative presentation of the event, Elliott D. Pollack, chief executive officer of Scottsdale-based firm Elliott D. Pollack and Company, discussed the real estate and construction sector. He says things are only a little better than last year.

“We are in the fourth year of a bear market in housing, and we could face several more years of stress,” Pollack said. “Underwriting standards on mortgages are tough. About 51 percent of the homes in Arizona have negative equity. Foreclosures remain high, and previous loan modifications are, for the most part, failures.”

Pollack estimates 50,000 to 70,000 excess single-family housing units still exist in Greater Phoenix alone. He believes the balance between supply and demand in Arizona’s housing market won’t be fully achieved until 2014.

He adds, “As for the commercial markets, while the worst is over, the near-term outlook remains grim with the exception of apartments. There are currently no multi-tenant office buildings under construction, and we believe it will be 2014 or 2015 before commercial construction markets return to normal.”

More details and analysis, including the presentation slides, are available at

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