(upbeat music) - Coming up next on "Arizona Horizon", it's our annual year end economic round table where our panel of economists look back at the economy of 2022.

And look ahead what the new year might bring.

Our economic round table is next on "Arizona Horizon".

Good evening and welcome to "Arizona Horizon".

I'm Ted Simons.

Tonight, it's our annual year-end economic round table in which our panel of local economists look at things like inflation, interest rates, housing, and supply chain issues of 2022, and try to make economic sense of it all in looking ahead to 2023.

Joining us, Dennis Hoffman, director of ASU Semen Research Institute at Jim Rounds, president of Rounds Consulting Group, and Mark Stapp director of ASU Center for Real Estate Theory and practice.

Gentlemen, good to have you all here.

I always look forward to this because we get such good information and good conversation.

Dennis, we're gonna start with you.

Big word for 2022.

Inflation?

- No.

- No?

- Oh, wait, wait, the big word?

I'm sorry I anticipated the question.

I was already into '23.

Certainly the big word for '22 was inflation.

Millions of inflation interviews Ted.

The key is why, you know, what's at the root of inflation?

It's a demand issue.

It's a supply issue.

We worry about the Federal Reserve.

They're trying to get rid of demand.

They're trying to destroy demand by making money dearer or the cost of money higher.

But I think we really need to focus more on supply.

How do we get more workers?

How do we get more products to market?

How do we unclog these supply chains?

You know, there's frictions out there that didn't drag us into an inflationary environment five to 10 years ago, but they did in 2021 and 2022.

So yes, indeed, to go back 2022, inflation was the big word.

- Jim.

The impact of inflation on the national economy.

The impact on Arizona, considering Phoenix of major metro areas we're number one.

- Yeah, well, it's a big deal.

And part of that has to do with housing, and we'll cover that in more depth later, but Dennis is spot on.

We have to start working towards the things that we can fix.

So one of the reasons that we got to where we are is we had the federal government after COVID spending a lot of money, and then we had the Federal Reserve putting a lot of money into the economy and saying, "It's basically free."

Now, they're pulling back, we're probably looking at a recession next year, but we have these inflation pressures that impacted the housing market.

Now it's impacting mortgage rates.

Housing is not as affordable, it's gonna impact economic development.

So inflation is one of those like core items that you have to talk about, but it touches four or five different things that are important for our growth.

- Yeah, it touches a lot of things, Mark, but the CPI isn't that, doesn't housing weigh heavily on the CPI?

- Yeah, well, it has a significant effect on CPI, and that's one of the reasons why it has increased so much is because rents and in the imputed rent, which is what they're using to calculate what homeowners pay, have gone up substantially because of the interest rate increases that occurred so rapidly.

And that's a hard one to get under control, and it also lags really significantly.

So if we're making an adjustment now, because interest rates start to to come down somewhat, we're not gonna see some of those effects for several months.

So it's not like gasoline where you may see it month over month.

This is gonna take a while for that component of CPI to find a place where it's normative.

It's not a problem anymore.

But because of what Dennis was talking about, what Jim was talking about, supply becomes a huge issue.

It's a big issue because we're a magnet for people in this state, and we're continuing to attract both employees because we have employment growth and we're continuing to attract retirees.

And people are coming here for vacations, second homes, all of that affects us.

If we can add more inventory, it's not gonna allow us to bring that affordability down.

- Makes sense to you, Dennis?

- Absolutely, it does.

And bit wonky and won't go into great detail.

But this imputed rent issue essentially means that the CPI is picking up a cost of shelter and essentially saying it applies to all of us, but it doesn't really apply to all of us.

If you own your own home or if you're on a fixed mortgage, it doesn't.

So the CPI will come down slower than the actual pain that we're all feeling.

Now, renters, if you're a commuter and a renter, you're feeling a lot of pain.

And that's what they're trying to reflect in the CPI.

But for many of us, the pain of shelter inflation isn't anywhere near the number that's in the CPI.

- And with that in mind, does CPI consumer price?

Is the pain being felt enough across the board to what justifies what the Fed is doing as far as interest rates are concerned?

- Well, the Fed should have started raising rates maybe a year earlier than they did.

And so now they're playing catch up and they're gonna stall the economy.

And we've experienced that before back in the early eighties.

But the impact of the CPI, it does impact different households in different ways.

But back to affordability, we talk about affordable rents and average rents and how it's so much higher.

The affordability issue really is at the lower income household.

It's not so much of the higher income household.

The thing that was different about this downturn in the housing issue versus the great recession is then a lot of people that really shouldn't have gotten mortgages got mortgages.

And we had all these extra homes on the market when they were foreclosed upon.

Now we had incentives going to people that were barely nicked during the COVID recession 'cause it was a lower income recession.

And those households were able to get a $700,000 home instead of a $400,000 home because the mortgage rate was so much lower and they were making extra money and they were able to upgrade their cars.

So when we look at averages right now, it doesn't tell the whole story.

And that's why the affordability issue is a little bit of a bigger issue than what the data suggests.

- Interesting.

Mark, here's two more big words for 2022, and they've been referenced already, supply chain.

What the heck happened with that?

- Well, it was COVID.

I mean, it happened globally.

And first of all, it takes a long time to add new supply into the marketplace for real estate.

It's not like it happens overnight.

And when you are also dependent upon a supply chain that's been significantly interrupted because we're getting doors and windows and appliances from around the country and around the globe, you don't have the labor, you have supply chain issues.

You can have a house that's ready to deliver to someone, but you can't get the garage door or you can't get the stove.

And it sits there month after month after month.

and that causes big problems, but it also affects the cost of construction and take interest rate increases these additional cost of construction, which have not gone completely away at all.

And it's almost impossible to build new units that are affordable to that lower end of the economy that Jim is talking about.

And for us to continue to grow as a really viable economic place, we need to have that housing for those people at the lower end of this equation.

We really do.

And I'm talking about nurses, I'm talking about teachers, I'm talking about firemen, I'm talking about paramedical professionals.

These are restaurant workers.

These are critical and it's really putting a lot of pressure on them that's not going away.

- And with that in mind, Dennis, again, supply chain issues.

Obviously with housing concerned you get, but you talk about, you know, a garage door or something for a new house.

You can't sell your house if your garage door isn't working either or you need to replace this, that, and the other.

And it's so difficult and it's still, should we have seen this coming?

- Well, I think so because I agree with Mark to some degree the COVID in the pandemic was the big catalyst here.

But some of this I think we've done to ourselves.

I think we've engaged in a war on globalization starting about six years ago.

Especially when we walked away from, by the way, both Mrs. Clinton and Mr. Trump when they ran for president in '16, walked away from the Trans-Pacific Partnership that was nearly finished.

So we started engaging in this protectionist, anti globalist rhetoric that was the underpinning for an efficient system of supply chains.

And then to kind of double down on it, we've depended in various shapes and forms from foreign workers, right.

Documented and undocumented.

All of the rhetoric is about undocumented workers from our policy makers.

What about our legal immigration system?

They've turned their back on it.

The pathway to legal work status through legal means is just clogged up.

It's almost impossible to get through.

And this began during the Trump administration and it's really not been repaired.

There's lots of rhetoric around the border, lots of rhetoric around undocumented.

I'm talking about legal means to gain the ability to work in this country.

And it's just, the door has just been shut on thousands and thousands of people.

- And this is important not only for Arizona, it's important for the whole country because we have a declining population.

If we said, listen, we're gonna let anybody else into this country, we're losing population.

In order for us to fill a lot of these jobs that we know are critical, we have to have immigration.

It's impossible for us to continue economic expansion without it.

And that policy debate is not helping solve that problem at all.

- Yeah.

And and we can pivot now to another big word.

And that's jobs, that's always a big word as far as this program is concerned.

What kind of jobs are we attracting?

Dennis obviously says there's a, and there's been, we've done so many programs on this, the need for workers every help wanted signs are in front of almost every business.

Why did that happen this year?

When do those help wanted signs come out of the windows?

- Well, we've been doing a really good job marketing the state.

We have a lot of balance in terms of where we're competitive.

We have to make some improvements, though my opinion, it's workforce.

We bring in a lot of businesses, you've done a lot of shows on those higher value added businesses, semiconductors.

But we sometimes have to send our workers outta the state or outta the country to get trained.

We need to be supplying those from within.

And if all we did was recruit the workers, our population growth would've to be about four times what it is now, just to keep up with our recent economic development growth.

So we're not gonna keep this growth going without that investment.

But I think we can get there because every time we've done any kind of an analysis on what are the gains, if we invest in higher ed, what if we invest in certain things that help us with our infrastructure, we're always showing a positive ROI, which means a taxpayers spending a buck, but they're getting a buck 50 back later.

So if we continue to think about these business principles, we'll be okay.

But we cannot get behind 'cause it takes too long to catch up.

- It's interesting you can't get behind.

Dennis, it sounds like jobs, all jobs lost at the recession.

A job at least law since 2020 at that recession all returned here in Arizona, Phoenix area.

- Well think got back to the level where we were, job growth is on a trend.

It's on the upward.

So you can't stop in 2019, go way down and then celebrate when you get in 2022 back to where you were in 2019.

You're still way down.

- [Ted] But you've recovered the jobs at least.

- You've recovered some of those.

The mix is different.

You've recovered some jobs.

And look, Arizona has done really well in comparison to a lot of other states.

And I think that's a testament to our economic development efforts.

The folks at the ACA, leadership from the governor's office this manufacturing job growth has really been spectacular.

I looked the other day, we created 15,000 manufacturing jobs in in 2022.

You gotta go back.

- Virtually forever to find numbers close to that.

And you haven't even started with the big massive plant up there at the 303.

- Exactly.

- They haven't even opened.

- And we forget that Intel's building a massive plant in addition to TSMC.

I mean we've added already this year, close to 22 million square feet of new industrial space.

I think there's like 5.7, almost 6 million square feet in third quarter.

- That sounds like a lot.

Is it a lot?

- It is a lot is a lot.

It's historic for us.

And it's all being absorbed and that's reflective of the growth that Dennis is talking about.

You have to house those activities someplace and that's been really good for us.

But then you need construction workers and you need materials.

And that gets back to these other issues that about supply chain and labor, right?

So this is a system, right?

These are not standalone activities.

We have to build a system.

And in TED housing, as one of 'em, back to that, very glad that governor elect Hobbs came right out and made a statement about a policy on housing from the state level.

It's a state issue, it's certainly a regional issue and we haven't had that.

- Can it be more of a state issue?

I mean we haven't had that.

I just heard that comment there.

Are we gonna get that?

- Yes.

There's lots of different groups working on not only the job issue but also in affordable housing.

But think about one of the ways that you make housing more affordable is you increase the incomes of the people that are coming here.

So it's not just adding job count, which we're always top five in.

We have to add quality.

And there's some statistics that economists look at where it measures the quality and we were declining and declining for decades.

Now we're starting to curve up just a little bit.

And the question is, are we gonna put in the right policies to keep that going up?

On affordability, it's like what we were discussing earlier.

There are certain types of homes that will never get built under normal market conditions.

Those are the homes for the poorest of poor.

And then you have the workforce housing.

Those will get built.

But we have to work on, we have to do some improvements at the city level of course, but we also have to implement some intelligent public policy items.

Because one of my concerns is that we're gonna say this is such a big issue, even though a lot of it has to do with outside of our state.

It has to do with these national issues that we talked about.

But it's such a big issue.

We're gonna put hundreds of millions of dollars towards it that might not give us the best return on our investment on using that money.

There are some things that people are looking at, but I'm encouraged because all of a sudden all these reports are coming out and even though they're government type reports, they list ideas.

So we can go through and cherry pick the best ideas and let's implement something during the next session.

- So to think about the people magnetism comment from Mark.

And Jim's comments about what we need to attract.

We've done some work on young and innovate the young adult migration component.

Everybody knows we win on people.

People want to come here.

But we do have to be concerned about are we winning the battle of the young and innovator?

And actually we are, but when you dig into the data, we don't do as well with people from middle to high income families as we do from middle to low income families.

And so we have to be concerned, everybody celebrates when we get the Californians.

Hey, young Californians are coming here, that's great.

If they're innovative, if they're productive, if it's gonna work out well, if they're coming to Arizona because they can't make it in California, I think that's a problem.

- A whole different ballgame.

Another big word, maybe not so big in 2022, but could be in 2023.

Recession.

Is it just a matter of how much?

What do you expect next year?

- Yeah, I think it's inevitable.

We have one, this is certainly not 2005 six, seven, the housing market's not crashing.

We will still continue to add units.

The the issue is the pressure induced recession as a result of the interest rate increases.

That's a big problem for housing.

But we continue to grow and I think it's an adjustment.

We went up with just crazy inflation in prices and it had to adjust.

And I see what we're going to do is we're gonna adjust, it's probably gonna come down a little bit next year and then be flat probably in '24.

But it's not gonna crash.

Not even close.

- Yeah, the phrase pressure induced for those of us who aren't economists, we look at that and go, why are you inducing this by pressure?

It just sounds like you're forcing things to be bad in order to what make 'em be good again.

But that's kind of how it works, isn't it?

- It is.

You have to choose between one bad thing and another.

And in this case, stalling the economy some is what's gonna bring inflation under control.

But keep in mind we still have the federal government spending money if they cut things off at the same time, the Fed went ahead and pulled all the money out of the economy, which they still haven't done.

We're just talking about interest rates now.

There's still a lot of money they have to pull out.

If everything was done at once, we would've been recession already.

What I think is gonna happen is it's gonna be a little bit more gradual and I think it's gonna be better for Arizona.

But what's gonna be fascinating is, I don't think we're gonna see it as much on the job numbers because instead of that person getting laid off at the restaurant, the restaurant owner's gonna be taking the help wanted sign out of the window.

So it's not gonna be a job loss, it's gonna be taking care of that labor shortage a little bit.

And we may wind up with a downturn that's completely different than after the last one where it's a little bit more white collarish rather than blue collar.

- Interesting.

- We'll just have to see.

It's gonna be different because what got us here has been different.

- So I got the year right this time.

Now we're in the 2023.

- Yes, right.

- So inflation won't be the big deal in in the coming year, Ted, it will be this, can we dodge, can we make this the soft landing that people talk about?

Can we dodge the pain of a severe recession?

The last time in history when we had something similar was 1982 and we were not able to dodge the pain of a severe recession.

I think that there's more hope this time because of the dynamics of the situation.

Because the labor market is so strong that we're gonna be able to retain a lot of the jobs.

But the key I think is our real estate sector.

How much of this pullback that we've seen in the last three or four months is, as Mark said, a temporary adjustment?

Or is does it portend another leg down?

- Let's concentrate on the real estate market.

Touching on it all throughout the program.

It's so important to Arizona.

Prices are coming down.

It seems like they're coming down.

Will they continue?

I've seen, you know, as much as maybe 20% next year.

Is that possible?

- Yeah, it's possible.

They're not plummeting, right?

So you have to put it in context.

And this is relative.

Yeah, they're coming down, but they had to come down because they had been pushed up so high.

It was a crazy rates of increase.

So yes, we're gonna continue to see that.

We're gonna continue to see moderation, but it is adjustment.

And I think it really depends on what happens in capital markets to support additional units that are necessary for us to supporting continued employment growth.

If the capital markets look at us the same way they look at the rest of the country and say, "We're just not lending."

And in the investment markets take the capital off the table for a while.

It takes two years or plus to add new apartments in a complex.

So you know that, that might be a difficulty.

But I think that people are gonna pause.

They're gonna realize that we're gonna continue to grow.

We're gonna see a little bit of moderation and we're gonna keep going.

- So it sounds to me again from this chair that if the prices come down and continue to come down, that would impact inflation.

It would ease it prices inflation overall, true?

- It will.

But we may be going through that at the same time where we could have some downward pressure from the recession and people are never, the majority of the people are never better off during a recession.

So we're gonna go through that period where it's gonna be tough on some folks, even though it's not gonna be the same type of recession that we had for the employees after COVID.

But I think what we're gonna see is there's no one public policy that's gonna make things better.

Now on housing.

There's not just one thing.

A lot of people are saying, "Well we just need the cities to change their policies".

Well most of the issue, like I mentioned, has to do with national policies that caused all these other pressures.

We have a lot of investors coming in, but there are some things that the cities can do, but we also have to ask some good public policy at the state level.

We have to try to encourage some redevelopment projects.

We're not gonna build the homes that we need at that volume at the proper income level that we're talking about unless we start stacking these ideas up.

So what I'm really hoping for is we don't just have one housing bill at the capitol.

I'm hoping we have several and I'm hoping we wind up with a pancake stack of some good policy to help some folks out in the next year or two.

- Everything Jim talks about there though, how much is this a waiting game as far as interest rates are concerned?

- Well, I think it is to some degree Ted, but okay, we're getting close to prediction time, so I'll venture into that.

- Please do.

Barring Ukraine, Russia kind of shock that we got last spring, that really I think was the catalyst for continuing this issue.

I think the war on inflation is largely been won.

It's not over yet.

I think the Fed is 50 basis points is probably behind us now.

I think we're probably headed for no more three quarter, no more 50.

I think we're headed for a quarter of a point and then probably level off.

But the issue I think going forward is not going to be inflation.

And goodness knows, I'm so tired of inflation interviews and the phone call from the media around inflation.

I think it is gonna be about can we weather the employment storm?

How severe will a recession be?

Will this be just a be a minor touch for us or will it be more severe?

So I think the key for 2023 is not inflation as the key word.

It's going to be, can we sustain jobs?

Can we sustain the real estate sector?

Can we bounce off from this downturn?

- Yeah okay, Mark, Let's do a little prediction here.

Big word for 2023.

- I think it's adjustment moderation and it really does depend on what happens.

I mean, real estate is symptomatic, right?

It really follows what happens in the rest of the economy.

And real estate provides the supply for the demand.

And as long as the demand continues to stay strong and it appears that it's likely to, at least here in in Arizona.

I think we're gonna continue to see a fairly healthy but somewhat moderated growth in almost all of the sectors.

- Okay.

Jim give us the prediction and give us, we've got about a minute and a half minute somewhere along those lines.

So don't get too wordy on me here, but gimme a big word and where we're going.

- I think it's potential because we continue to grow.

We're doing well and we don't have our pedal all the way down in the car.

We still have a ways to go.

We have to work on quality, we have to work on workforce, we have to deal with some of the affordable housing issues.

But I'm seeing a solution to a lot of the problems that are in front of us where we can control if we have the right policy makers making the right policy and they're listening to advice that people that are wonky and do numbers on calculators provide.

I feel like we could have less of a severe recession than we otherwise would, but the opportunities are limitless.

More opportunities with business development across the board are bringing businesses from overseas back over here.

The list goes on and on.

But we need that commitment.

We need to continue that approach towards being pro economic development, but responsible public policy.

- Real quickly do we have the leaders now?

We just had an election.

Do we have the leaders?

- I think we do.

And they'll have to be molded just a little bit.

They'll have to be educated on some of the finer points on some of the policy topics 'cause they can't be experts in everything, but they can go to people that are experts in them.

So I'm more optimistic right now than I've been for a little while.

- Gentlemen will end on a note of optimism.

Thank you all for joining us.

Great conversation.

Always enjoying this.

That is it for now.

I'm Ted Simons.

Thank you so much for joining us.

You have a great evening.

(upbeat music) That was fun.

- Yeah great, thank you.

- It's all downturn.