December 2, 2015

Recession is over, economy proceeds with slow, steady growth

W. P. Carey School/JPMorgan Chase Event Delivers 2016 Forecasts

Say good-bye to the recession and keep an eye on slow, steady growth for the state and nation in 2016. That’s what experts said today at the 52nd annual Economic Forecast Luncheon co-sponsored by Arizona State University’s W. P. Carey School of Business and JPMorgan Chase.

Four experts delivered a comprehensive overview of what’s happening in the state and national economies, as well as the stock market and housing market before 750 guests at the Phoenix Convention Center today. One key take-away: a variety of indicators point to a pretty solid and improving Arizona economy.

“The gains we experienced in 2015 are setting the stage for continued advances in the year ahead,” said Research Professor Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business. “Relative to the majority of other states in the nation, Arizona’s economy will appear quite solid. But compared to long term historical growth during past decades, the gains will be somewhat below average.”

Personal income in 2016 is projected to exceed 5.0 percent growth for the first time since 2011 as wages, employment, and population all continue to increase. Arizona’s non-farm employment is expected to grow 2.6 percent. In fact, in 2016, Arizona will be on track to finally replace all jobs lost during the recession. However, the mix of employment in 2016 will be different with knowledge jobs (professional and business services, health care and finance) accounting for nearly one of half the new jobs, while manufacturing and government barely grow.

“Though the 2.6 percent rate is below the long-term average of 4.2 percent, Arizona will likely emerge as one of the top 10 fastest for job creation in 2016,” said McPheters.

McPheters also estimated that population growth could go up from an anticipated 1.6 percent in 2015 to 1.7 percent next year. Though this is only half of the historical average for the state, the rate compares favorably with the nation and neighboring states.

The fundamentals of the US economy are also sound according to Charles Plosser, former President and CEO of the Federal Reserve Bank of Philadelphia. Despite low inflation and international uncertainties, the medium term outlook remains positive he believes.

“I anticipate the economy will continue to expand at around 2.5 percent. Inflation will gradually move back towards 2 percent and the labor market will continue to strengthen,” said Plosser. “Though the worst of the economic crisis is now passed, the Fed must now face the challenges of normalizing policy.”

Plosser notes the economy is on a firm foundation with consumer finances in much better shape than they have been in a long time. Strong consumer spending has contributed to solid growth for the last two years, growing above 3 percent in every quarter but two of the last eight quarters. He sees this and other fundamentals in place for continued economic expansion.

The labor market continues to make steady gains in many dimensions such as 2.8 million workers added to non-farm payrolls over the last year and the unemployment rate falling to 5.0 percent to 5.7 percent a year ago and 7.2 percent two years ago.

He expects for real business investment to continue to remain soft relative to historical experience due to uncertainty, and policy uncertainly in particular.

“Monetary policy is arguably more accommodative today than it was at the height of the financial crisis or deepest point of the recession. Fortunately, the US economy is no longer in crisis and it has come a long way from the depths of the recession,” said Plosser. “ It is time to ‘get on with moving policy from crisis levels. The US economy is well-positioned to withstand a modest increase in rates, which is consistent with the historical record of Fed policymaking and with the rules that have been found to provide good policy outcomes across a wide range of theoretical models.”

James Glassman, managing director and senior economist for JPMorgan Chase & Co., who offered comments on the financial markets, agrees that the seven-year span of near-zero short-term interest rates likely is coming to an end as the Federal Reserve prepares to normalize its federal funds rate target gradually over the next several years. He expects financial markets are unlikely to be disrupted with changes from the Fed being made gradually.

“Financial markets will face bigger challenges down the road when central banks contemplate selling the assets that they accumulated as a result of large-scale asset purchases,” said Glassman. “That day may come sooner than many anticipate as the global recovery strengthens and may throw a few curve balls into the evolution of the interest rate yield curve.”

Though the stock market was prompt in anticipating a normal economic recovery and valuations are back to normal relative to current earnings, Glassman notes that the market momentum may now shift onto a slower trajectory as the focus shifts to the longer-term fundamentals, which remain promising.

He also notes:

  • Corporate credit rates: The state of business credit is exceptionally good. Credit spreads have narrowed with business default rates very low and financial stress light.
  • Equities: The seven-year run-up in the equity market may be in the process of downshifting onto a slower trajectory.
  • Commodities: The extraordinary strength of commodity prices in the past decade appears to be a reflection of the unique nature of China’s economic development. But with China’s economy now gradually slowing, commodity prices likely are merely reverting to historically more normal levels that were seen in the decades prior to 2001

Elliott D. Pollack, chief executive officer of Scottsdale-based economic consulting firm Elliott D. Pollack and Company, discussed the Arizona real estate market. Although the state continues to experience a dramatic slowdown in the number of people moving into it, the real estate markets, with few exceptions, are experiencing healthy growth.

“Make no mistake about it, this has been a mediocre recovery nationally, in the state and in the Greater Phoenix area relative to history. That being said, we are having a dramatic recovery in new single-family housing based on what is normal for this cycle,” explained Pollack. “This will be the best year for single-family housing since 2007 and the outlook for 2016 is more positive.”

The apartment market also is very strong. The demographics for apartments, including millennials who will stay in apartments longer, have probably never been stronger. Vacancy rates are as low as any time since 1999 and are likely to stay low despite the fact that the number of units in the pipeline will be increasing over the next couple of years.

Currently, office vacancy rates are 20.1 percent. However, this is deceiving with certain markets within Greater Phoenix, including downtown Scottsdale and downtown Tempe, short of space. Rents in these markets are rising rapidly. There is also a problem in terms of certain types of space such as collaborative space with high parking requirements.

Industrial vacancy rates continue to decline, but the market is both bifurcated and fickle. Big box has done well, but the small entrepreneurial or construction-related user has been slow to return to the market en masse. Thus, the multi-tenant market has yet to recover. As for retail, absorption continues to be strong relative to the post-2007 world.

More details and analysis from the event, including the presentation slides, are available from the business school’s “Research and Ideas” website at