(bright music) - Coming up next on this special edition of "Arizona Horizon," it's our annual year end economic Roundtable.

Our panel of experts look back at economic issues and look forward to what's in store for next year.

It's our annual Economist Roundtable, and it's next on "Arizona Horizon".

- [Narrator] This hour of local news is made possible by contributions from the friends of PBS, members of your PBS station.

Thank you.

- Good evening, and welcome to "Arizona Horizon", this special edition of "Arizona Horizon".

I'm Ted Simons.

We end each year with a look back at economic stories of the previous 12 months, and in 2023, there were a lot of stories.

Many were calling for a recession, never recurred.

Indeed, in 2023, economy actually saw output grow, inflation slow, and the job market continue to be robust.

For analysis of what happened in 2023 and what to expect in 2024, we welcome Dennis Hoffman, Director of ASU Seidman Research Center, Mark Stapp, Executive Director of ASU's Fred E. Taylor, W.P.

Carey Master of Real Estate Development Program, and Danny Court, a Partner and Senior Economist with Elliott D. Pollack & Company.

Gentlemen, good to have you all here.

Thank you so much for joining us.

Dennis, we'll start with you.

The Arizona economy, what is the state of the Arizona economy?

- It's pretty good.

It's really pretty good, very resilient.

Some people say we dodged a bullet.

You know, the year has seen job growth toward the end of the year.

It's certainly moderated.

It's not one of these top five in the nation kind of stories for us, but it's really been pretty solid, despite the fact that the housing sector, real estate has really, you know, taken it on the chin, and so for those folks that make their money with houses being transacted or the value of houses being sold, it's certainly been a tough go, and I think, of course, the vast news of all is what's to come with all of the manufacturing announcements that we've had.

- Yeah, and we're gonna dive into certain aspects of job growth and real estate in general, in particular, I should say, but in general, state of the economy, not so bad?

- It is not so bad.

I mean, I would disagree a little bit with Dennis.

I mean, the housing market has certainly been a little bit more difficult than it was in the last previous years, but I think what it's doing is it's simply adjusting back to a more normative rate of growth and rate of price appreciation.

Hasn't died.

We're still short of inventory.

We still have this lock in effect from low interest rate loans from the previous years, which keeps existing home sales inventory very low.

We're depending on home builders to make up the difference.

We're a growth market.

We continue to have demand.

We see the effect of a lot of supply being added in a multifamily the last couple of years.

It's gonna have a moderating effect, but, you know, I don't think it's terrible at all.

- Yeah, Danny, half full, half empty, what's the glass?

- I think the economy's doing very well, especially here in Arizona and greater Phoenix.

I think our rankings sometimes suffer because we had such a fast start after COVID.

We regained all of our jobs very quickly, much more quickly than the US average.

So, now, on a percentage basis, we look a little bit more tepid, but, still, it's a lot of jobs, still number one in population growth, so a lot of good things happening.

- Let's stick with jobs, Danny.

Is there a Goldilocks zone for unemployment for that number?

- I mean, we're at historic lows.

You know, we're in the upper 3% range.

That's still the case.

The nation's adding 200,000 jobs per month.

You know, that's down from the beginning part of 2023, but still beating out expectations.

- Yeah, and what kind of jobs are we talking about here, Dennis?

- In Arizona, fair, pretty diverse set of jobs.

Now, the service sector's now kind of coming back.

It was slower to come back than the rest of the economy.

Healthcare, still ridiculously strong.

Both now and going for the next 10 years, we see the healthcare sector really being pretty strong, and then all of the bright spots around manufacturing suggests that some of these jobs are gonna be, you know, pretty well paid.

- I was gonna ask about income levels for some of these jobs.

First of all, are we seeing that increase, and, secondly, since you're, you know, your specialty is real estate, is that affecting the real estate market?

- Yeah, I mean there's been an increase in salaries, for sure.

You know, we had that spike that occurred in 2021, 2022, which far exceeded the rate of wage growth.

It was so out of whack, but we still have wage growth.

What we have to do is get pricing back to the point where the wages for those jobs that are being created are such that we have more attainable housing.

We're not quite there yet.

I think we're softening to the point where that's helping, but we're not quite there.

- Danny, personal debt, what are we seeing along those lines?

- Households are in a really good shape.

So, you know, previously accumulated debt compared to their disposable income is very low levels compared to what we see historically.

We are seeing elevated credit card usage.

That's probably the most troubling statistic so far, because when those interest rates reset at a higher rate, that's on your remaining balance.

So there's a lot more expensive debt in credit card usage that's affecting lower income households, but, overall, household's still in really good shape.

There's still actually some excess cash from stimulus money from three years ago.

It's still in people's savings account.

- So trending up, but not necessarily crazy up.

- Well, on the credit card usage, it's historically very, very high, and then add in those higher interest rates.

- Yeah.

- That could be troubling if consumers start to feel a pinch because they have to, now, pay that higher monthly payment.

They may start to pull back on spending.

So that's one that we're tracking very carefully.

- Concern for you, Dennis?

- Well, I think it really varies, Ted.

I think you're gonna find families.

I saw data the other day on the 30 to 39-year-olds.

Some of these pressures appear to be manifesting themselves more in that group than in other age groups.

You know, if you're renting, you know, if you have to rent, and unlike, you know, someone like myself, I mean, my housing costs are fixed in terms of mortgage at zero because it's paid off.

So I'm very fortunate.

I'm also very old, but some folks that are renting, you know, looking for homes, commuting across the valley in the spring when gasoline prices go up, or, you know, struggling to get a rental car, or, excuse me, a used car, struggling to get a used car when used car prices went up, and so I think it's a little bit mixed.

The majority of folks, I think, are doing really very well and very well with respect to debt.

I think some, you know, are on the edge.

- Is there, again, I'm talking Goldilocks zone here again, between debt and growth of the economy?

I mean, do you want certain levels to be at certain spots, not too much of here, not too much of there?

- Well, certainly, Ted.

You don't want people to be so burdened that they find themselves in trouble, and some of that has to do with the, the interest rates, right, and as interest rates change and, hopefully, come down, it helps some, but, you know, the use of the debt, just like in corporations, for people is useful.

I mean, otherwise, you don't get a mortgage.

You don't get a car loan.

- That's right.

- You know, those kinds of things, and so the moderate use of that on a consumer basis is important.

It starts to get out of whack when we have people that become overburdened by it, and then it causes other problems for them, right?

So if you're a renter, and, now, you've got this consumer debt or you've got gasoline prices that have gone up, it just exacerbates the stress that you have.

- Let's talk about inflation, Danny, and what we're seeing with inflation.

It seems as though it's easing?

Is it easing?

- It's trending in the right direction.

Yes, it is easing.

So we're done with nine to 10% inflation that we saw at the early part of last year or the late part of last year.

We're in the 3% range.

That's a range that I think is acceptable for most people, most households and consumers.

The Fed still has the target of 2%.

So that remains to be seen whether they're gonna stay the course and hit that 2% rate or not.

- So... - Yeah.

- So Danny, your thought on this, too, is because a big part of the consumer price index is shelter in housing, and that has been the thing that has been very stubborn, and as we get moderation in the rental rates and as interest rates start to come down, don't you think that that's gonna help push that down even further?

- Yeah, and I think that's why, you know, they would call out Phoenix as having higher inflation than the rest of the country during that time, it was because of housing, and, now, we're actually showing a little bit lower.

Phoenix, the last month, showed at 2.9%.

I think it's because housing, and it takes several months to get into the data, and the Fed knows that.

That's I think why they're pausing and waiting for it to catch up, but, yes, rents are coming down.

In Phoenix, we're we're seeing negative rent growth already because of the new supply coming on.

So we're not seeing it in housing because of high interest rates.

- There is a delay, is there not, when the Fed does this?

- There is, and speaking of the Fed, 2%.

You know, this 2% thing, it's as if it's, you know, it's one of the 10, it's the 11th commandment, I don't know.

Is it in the Constitution?

It actually came up in like 2012, '13, and '14 when inflation rates were 1%, and people were worrying about secular stagnation of the economy, and it was talked about being a good thing if we could get prices to grow at 2%.

So let's set a 2% target, and, now, 2% is, somehow, the target we have to shoot for.

You know, the '80s were a pretty good decade.

I think inflation rates averaged four to 5%, and they were much higher early, but they were still very high at by the end of the '80s.

- But is that not a shoot for the stars and land on the moon kind of a thing?

- Well, you know, perhaps.

I'm not suggesting that, you know, inflation is something great to live with, but in my mind, nothing magic about 2%.

Why not two and a half percent?

That's a pretty low inflation rate, and to me, when you look at the numbers, it looks far more attainable in the long run than a 2% does.

- Has the Fed succeeded though with its policy in easing inflation?

- Oh, I think it absolutely has.

- [Dennis] Yeah, with the soft landing so far.

- Absolutely, I think it has done exactly what it was intending to do, and I think, as Dennis says, the the quintessential soft landing, I think we're gonna see that play out in the first quarter of next year and the first half of next year, you know, and I think Phoenix is in such a great, the entire state, but metro Phoenix, in particular, is such a great position from an economic standpoint to take advantage of a number of things that are going on, both nationally and globally, that we're going to see a very healthy continued future.

- Are we going to see a recession in the future?

- No, I don't think so.

- Is that pretty much out of the game?

- Oh, it's never outta the game because there's things that can happen that we aren't able to predict right now, but assuming nothing really unusual, then next year's gonna be an unusual year.

I don't think we have a recession, I dunno.

What do you guys think?

- What do you Danny?

- Well, I'll give you a stat.

47% of blue chip economists say there will be a recession in the next 12 months, which means 53% say there's not going to be.

(people laugh) So it's a coin flip at point.

- [Ted] It's a coin flip of what I ask.

- Yeah.

- That's a tough coin flip.

- Well, the problem is every recession indicator.

says recession.

(laughs) So you look at 10 different recession indicators, historically, once we go below that certain line, money supply or manufacturers orders or leading indicators, it all says once you hit that line, we're gonna have a recession, but we're not in a recession.

- What happened from the start of the year until now that made the recession not such a certainty, and is the same kind of formula in place for next year?

- Resilient labor market.

- Resilient labor market?

- [Dennis] Unbelievably resilient labor market.

- Explain.

- You can't have a recession... Look for a recession where the unemployment rate is below 5%.

I can't find one.

It's below 4% now.

We're a ways away.

Now, it can change.

It can change pretty rapidly, you know, as we saw in the second quarter of 2020, but, you know, there's still nine million jobs, virtually, nine million job openings today still.

- But what are those?

What's that 53% that say or 47% that say it's coming?

What are they seeing that the others- - They're looking at the data.

- It's all these indicators.

- It has to do with the data.

- Yeah.

It's all these indicator inverted, yield curve, a Fed that took the federal funds rate from zero to five plus in a matter of a year and a half.

We've always had tough times in the face of a really tough Fed tightening cycle, and that's what's at play here, and all of this traces back to the chaos coming out of the pandemic.

- Yeah.

- It's a new world.

- You would say the Fed was trying to induce a recession to temper inflation.

- Right.

- But it's really hard to induce a recession when, like Dennis said, you had 12 million job openings and only six million people looking for those jobs, and you had so much money from the federal government in the system.

So turns out, it's a much harder job to slow down an economy when you have those two things at play.

- The other thing here is, I think, let's assume that this begins to look like there may be a recession.

The Fed, now, has a significant tool, once again, in its toolbox to use, which is it's got interest rates, and all you need to do is bring those down a little bit, and you can induce the economy to pick up some steam.

Three years ago, they didn't have a tool.

They had gotten rid of that tool, and they have it back again, and that gives me a little bit of hope that if something bad begins to happen, they have the ability to react now.

- It is very good that rates have or they've more than normalized, they've got rates up over five.

You know, they started this in the fall of '18, 2018.

They tried to normalize interest rates, and, of course, Mr. Trump, at that time, would have nothing of it, and so, you know, the scary thought would be if we get to the end of '24, the battle against inflation is pretty much won, the Fed decides that the new norm for the federal funds rate is on the order of 4%, let's say, which is kind of a long run average, but then we get somebody in the White House that wants it, "No, not at four.

We want at zero again," well, look out.

- Well, look out and look out for inflation once again to- - Oh, my God.

- Oh, yeah.

- I mean that, wouldn't that be the next thing in line?

- It would be unbelievable.

- That was the mistake that happened in the '70s.

They said mission accomplished.

- Right.

- We had 5% of inflation.

- Let's crank it back up.

- Crank it back up, and then we had 10 years of runaway inflation.

We don't want that.

- There's something else that those of us are old enough to remember the '70s, remember?

The phrase, the word stagflation.

- Right.

- I started hearing that a little bit this year.

Is that gone with the wind here?

- First of all, nothing's gone with the wind.

(Ted laughs) All things are possible.

I think that there's a lower probability of that than there is of a recession.

You know, Dennis was talking about the fact that, you know, this 2% target, you need some inflation, You have to have it.

- Right, otherwise... - In order for the economy to continue to be active and fluid, you need that, and so, you know, we want some of this to be occurring, and whether it's two, two and a half, or 3%, I think we're still in pretty healthy shape.

- All right, sticking with you, and we talked a lot about, you've talked a lot about real estate, but let's get down to the nitty gritty here.

What do you expect for next year?

Are things gonna unleash a little bit?

People holding onto their... Are they finally gonna put these things up for the market?

Will the housing shortage continue?

What's gonna happen next year?

- So it's gonna depend on what happens with interest rates, right?

The bigger the delta, the difference between current mortgage rates, you know, you've got 80 some percent of all 30-year more fixed rate mortgages are below 4%.

That delta, when it's at seven, I think it was about 7% today.

- Right.

- Is that delta's too big.

It's too big a trade off for some people, for a lot of people.

It's gonna be hard to shake that loose.

If rates come down a little bit, then that trade off isn't as significant, and people can make life style or life position changes.

It's gonna have to be made up though, Ted, I think, by the home building industry.

I mean, we're gonna continue to have demand, and I think, back to the jobs, the kind of jobs we're getting are jobs that are nothing like we got 20 years ago, 30 years ago.

- That's correct.

- These are really good solid jobs, and the fact that a lot of them are tied to national security, national defense related, issues like semiconductors and the national defense industries we have here and healthcare, is good.

So we're gonna continue to have demand, significant demand.

I don't think we'll get the existing home market loosened up enough to make that up.

It's gotta be the home builders.

- If interest rates, Danny, if interest rates do fall here, I mean, will there be a rebound?

What will that rebound do to prices?

Could that be a big rebound?

- Yeah, I think we are already seeing the recent survey of potential home buyers.

There's more and more that are not willing to wait.

A lot of people are waiting on the market.

So I think their expectations have been reset.

No one's waiting for 3% 30-year fixed mortgage anymore.

So if they're looking at a seven and a half and it goes down to six and a half, you're gonna see a flood of applications, and if it goes lower than that, you'll see another flood of applications.

That will mean in the face of...

There is no new supply.

We are not seeing the glut of new supply.

There's very few listings.

The home builders are not building at the rate.

- No we're not.

That's the problem.

- That they need to be for populations, so that means prices are gonna start to go back up again.

- They'll go back up even with bigger inventory.

- We don't have the inventory.

- We don't have the- - But people people start saying, "It's a little lower.

I think I'll go ahead and move now."

- In the existing home market,.

that's just musical chairs.

(people talks indistinctly) - So if I buy my house, I'm just going to buy another one.

So we do need that new supply.

- But back to something Danny was talking about, you know, that comes down to six and a half percent.

One of the ways that builders have been inducing people to buy new homes is they're buying down their rates.

Right, so, now, the 30-year fixed rate goes to six and a half, and builders still have the ability to buy this down.

It's marketing for 'em.

- Uh-hmm.

- Right now, all of a sudden, you're really looking at some fairly decent rates.

It's gonna have, I think, a profound effect that interest rates come down half a point.

I think it'll have a big effect.

It comes down three quarters of a point, it'll be good, but remember, you can't add supply as fast as demand can be created.

- Yeah.

- You just can't, and you have to have builders who have inventory, builders who have lots, and you have to have the land available.

- And, go ahead.

- So what is the challenge there?

Is it still the memory of the excesses of 2006?

Is that what's holding these guys back?

I mean, why isn't there more forward looking in the single family, let's say, development industry or even with multifamily?

Why?

What's holding them back from building?

- Well, so single family, it's easier to add inventory quickly, right?

You just go pull one permit.

You can build a house.

Multifamily is a little bit different, but, Dennis, I think they're, generally, cautious.

I think that there's an awareness that home buyers are cautious.

So they're more willing to, and first of all, most of these guys are publicly traded, right, and so they take the angst of an analyst, and the analyst is looking at things on a more national basis.

We may have slightly different local conditions, but the business strategy still affects them, but it's hard.

It's also the fact of building lots is gone way up.

Right, so the cost of building these homes is much higher than it was.

Margins start getting squeezed.

They're not willing to take the risk with those squeezed margins sometimes.

- I agree.

They get that realtime feedback of foot traffic within their sales offices, which dropped way off, and no one has solved for the affordability problems.

- [Mark] No.

- We're running out of time, but I did want to get this question in there because I find this fascinating.

Everything that's been said today seems reasonably positive.

We're at glass half fulls opposed to... Why the public malaise?

Why does everyone think the economy's in the dumpster?

What's going on out there?

- I don't know, but the... (laughs) I mean, we're faced with a 24/7 news cycle that, you know, negative news sells better than positive news, I guess.

I think you are seeing... Where economists agree, I think going forward in the next year is that it's gonna be a below average year for growth, so no recession, potentially, but, also, not as good as growth as we've seen historically.

So you're starting to see a slow down.

Again, it's sector dependent.

If you're in the real estate industry, you would say, "We are in recession."

- Yeah, right.

- If you're a real estate agent or any title agency or an appraiser or something like that, you know, so it's sector dependent.

- Or if a young family shot out of a house, you're not happy.

- So there's a- - But is that more unusual than has been in the past?

I mean, again, why the malaise?

- That's not the big piece of the malaise.

- What is the big piece?

- It's politics.

- Yeah.

- Really?

- Yeah, it has nothing to do with how I'm doing economically.

If I don't like policies in D.C., "Oh, the economy's terrible."

- Yeah.

- [Ted] It's just that- - 'Cause everything is terrible.

- [Ted] Yeah, so it's literally that simple.

The political landscape is coloring everything.

- That's my sense.

- I think it is, Ted, and, I mean, I'm watching the news, every time I watch the news, you get newscasters that all are like, "Well, with inflation so high..." So they're continuing to beat on this horse that, I think, no longer exists, but that message, this is lagging as well.

I think you've gotta have enough messaging into the system for people's behaviors to begin to change, and I don't know that you're gonna get it because of this concept.

- Well, and it could be a self-fulfilling prophecy because consumers make up 70% of the economy.

- (laughs) That's right.

- So if we don't feel good, and we stop spending, then we will see... - Yeah.

- We'll see the results of that.

- Do business owners feel the same way?

- Yeah, well, they're seeing a credit crunch.

They're seeing... - Right.

- They're needing to refinance and seeing higher interest rates.

They're seeing banks with tougher lending standards and saying, "Maybe you're not as bankable as you were three years ago."

So businesses are starting to face that as well.

- [Ted] So it's not all sunshine and daffodils out there, huh?

- Oh, certainly not, but I think that over the top, when you say everybody, your lead of the question was, everybody's unhappy.

I don't think everybody's unhappy, and I think a significant piece of the voiced unhappiness has nothing to do with how well that particular respondent is doing economically.

You know, that right after the poll is over, they're ordering off Amazon or they're going out to dinner.

- Yeah, but I didn't mean to say everyone, but I did say a general public malaise.

- Right.

- And I'm asking again, are business owners thinking the same way that the general public is?

- Yeah, generally, I think they are.

I mean, they're...

Listen, business is not as robust as it was.

There's still concerns.

I think that the geopolitical issues that we're faced with and I think our own national political issues also creates a haze in a bit of uncertainty, and then you add to that some things like, "Oh, the prices have gone up."

- Yeah.

- It is troubling for people, and then that translates itself.

I mean, this is classic behavioral economics.

People are gonna respond based upon how they feel.

- Well, we're gonna stop it right there, Mark Stapp.

Thank you so much for joining us, Danny Court.

Thank you as well, Dennis Hoffman, always a pleasure.

Good to have you all here for our year end E. Let's hope things are even better next year.

- Indeed.

- The glass will be even further full.

- Love it.

- Yeah, you never know.

That's it- - Thank you, Ted.

- That's it for now.

I'm Ted Simons.

Thank you so much for joining us.

You have a great evening.

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