Arizona’s poor economic performance – relying on an outdated economic plan

The Washington Post has an intriguing headline: Many of the nation’s worst run states were the hardest hit by the housing crash.

Guess who made the list of “worst run states”? Ah, no fair, you peeked!

The list, compiled by 24/7 Wall Street, used a number of factors including unemployment, debt per capita, credit rating, and median household income to determine the ranking. Home values fell by at least 10 percent in five of the 10 bottom states: Arizona, Georgia, Illinois, New Jersey, and Rhode Island.

Here is what 24/7 had to say about Arizona:

45. Arizona
> Debt per capita: $2,140 (11th lowest)
> Credit Rating (S&P/Moody’s): AA-/Aa3
> 2013 unemployment rate: 8.0% (12th highest)
> Median household income: $48,510 (21st lowest)
> Poverty rate: 18.6% (9th highest)

Few states received lower credit ratings than Arizona from the two largest rating agencies, S&P and Moody’s. S&P awarded the state a rating of AA-, while Moody’s rates Arizona an Aa3 on its scale, both worse than most states. However, Moody’s recently upgraded the state’s outlook on improved fund balances, as well as low debt and net pension liabilities. Additionally, as with Florida, Arizona is in the midst of a housing market recovery after a brutal downturn during the recession. Last year, home values in the state rose 9.2% from the year before, better than all states except for Nevada. Despite this, the median home value was still down by nearly 12% between 2009 and 2013, by comparison, the U.S. median home value fell 6% in that time.

It appears that 24/7 Wall Street suffers from “irrational exuberance” and is being overly optimistic after the economic forecast for Arizona last week. The Arizona Capitol Times (subscription required) reported last week, Forecast: Arizona 2015 job growth unspectacular:

Arizona will likely see lackluster economic growth in the coming year as the hangover from the housing bust continues to dampen the economic recovery, economists presenting at an annual forecast meeting said Wednesday.

The lack of a rebound in the construction industry is one of the major reasons the state continues to see lower-than-normal job growth, according to presentations at the Arizona State University business school’s annual forecast luncheon in Phoenix.

The forecast calls for about 68,000 new jobs next year, meaning it will take another 18 months for Arizona to finish replacing all 312,000 jobs lost in the Great Recession that ended in June 2009, ASU economist Lee McPheeters said.

“It looks like we have a very slow-growth economy,” McPheeters said. “Partly that is because the numbers are in fact non-spectacular, but it’s also due to the fact that we have a tendency to look back at previous economic performance.”

Arizona’s projected job growth should be about 2.5 percent in 2015 compared with about 2 percent this year. That’s still less than the 3 to 5 percent growth the state often sees.

Private economist Elliott Pollack blames much of the slow recovery on the lack of a rebound in construction.

“Probably 80 percent of the difference in this recovery … has been due to the lack of construction,” Pollack said. “We gained about 8 percent of the construction jobs we lost — normally by this time we’d have gotten back about half the construction jobs we lost. So if you’re looking for a reason for the mediocre growth in Arizona, it is solely at the feet of construction, or lack thereof.”

The good news for the housing industry is that the economy is accelerating, mortgage rates remain low, homes are still affordable and foreclosures and delinquencies are down, Pollack said. And there are signs the construction industry is ticking up, especially in apartments and office buildings, he said.

But there is plenty of bad new still left: People still aren’t moving into Arizona at historic levels, Pollack said. The state remains at 8th for new residents, down from 2nd place. Arizona is still feeling the effects of SB1070, which sent a message to people that Arizona isn’t welcoming, he said.

A series of other issues are dragging down the state’s housing market, like higher-than-average unemployment, people with little equity or who have a foreclosure on their credit reports, and young people putting off starting a family or still living at home.

One problem I have with all of these economic forecasts is that they are based upon continuing with the same post-war economic model for Arizona: rapid population growth led by the construction industry. This was true from 1945-2006. It is no longer true today.

Arizona’s population growth is relatively flat since the housing bubble burst in 2006. This slow growth in population may be the new normal. Relying on rapid population growth to paper over other economic ills is no longer a viable economic plan.

Arizona needs to learn how to build a modern and sustainable economy for a relatively stable population, just as the Rust Belt states had to do in the wake of the post-industrial era (many of these states suffered a population decline).

Another problem I have with economic forecasts is that they do not take into consideration environmental factors. Arizona is in the midst of a mega drought, and water shortages are looming. We may have already achieved — if not surpassed — our maximum sustainable growth.

If Arizona has to go to water emergency measures, what is your property worth then? Without an assured water supply, your property is worth virtually nothing. And no one is going to be moving to a state without an assured water supply.

Which is why this report is far more important than any economic forecast. States expected to reduce water taken from Lake Mead:

Arizona and various water agencies in Nevada and California are expected to approve an agreement this month that would reduce the amount of water taken from Lake Mead.

The measure is considered a significant step toward protecting one of the main reservoirs of Colorado River water.

The lake is at historically low levels because of a 14-year drought.

Water levels have dropped to 1,085 feet above sea level, the lowest since the lake was first filled more than 75 years ago. That’s only 10 feet above the level that would trigger cuts in water deliveries by the federal government to Arizona and Nevada. Farms would be affected before cities.

Officials say if nothing is done, the cuts could happen as early as 2016 if precipitation levels fall below normal.

“All of this is an effort to keep the elevation of Lake Mead above the level at which a shortage would be declared,” said David Modeer, general manager of the Central Arizona Project.

CAP officials said in a statement that “if Lake Mead’s elevation continues to decline at its current pace, the water supply for more than 40 million people and 4 million acres of farmland … face increased jeopardy.”

* * *

Modeer said a tremendous amount of planning has gone into trying to stem the effects of a water shortage in Arizona. Lots of water is stored underground. But if the drought continues and water levels continue to decline, “there are conditions in nature that are going to obviate all the planning we’ve done if we don’t take extraordinary action,” he said.

Got that? Water emergency measures may be triggered as early as 2016, a little more than a year from now. That should make your butt pucker if you are a homeowner. Put this in the economic forecasts for the future if you want to account for the economic impact that a water shortage and water emergency measures are going to have on Arizona’s economy.

Arizona needs to build a modern and sustainable economy for a relatively stable population that is not reliant on the construction industry for residential housing. It’s a brave new world, we had better figure it out.