Economists Address Caucus of House and Senate
Joint Meeting Kicks-Off Budget Study
From the Majority Memo, published by House of Representatives staff, 1/18/08

A caucus of both the House and Senate was held on Tuesday, January 15, to hear from JLBC and two of the leading economists in Arizona regarding the current economic outlook for the state. Richard Stavneak introduced the presentations by noting, “The situation appears to be getting worse, not better.” Stavneak reported that state corporate income tax collections are down 15.8 percent, individual income taxes are off 0.8 percent, and sales tax receipts are down 0.3 percent. He added that the General Fund is $440 million below forecast right now and projected the total shortfall for the current fiscal year at $970 million. The JLBC staffer predicted the 2009 budget would be $1.7 million below forecast, “if none of the ‘08 solutions are on-going.”. His presentation reflected a predicted Revenue growth of 8.4 percent, while actual growth is 1.5 percent. He stated, “Our average economy grows 7 percent, so even the best projections for 2009 will not meet the average growth for our state.” He pointed out, “The 9-11 downturn was deep, but it was rather quick. The current decline is not as quickly turning.” Stavneak said, “The housing over-supply plus mortgage finance problems is like a perfect storm to our economy,” before introducing Elliott Pollock and Marshall Vest. Pollock and Vest have over 60 years of combined experience in forecasting economic conditions. Pollock has his own research fi rm in Scottsdale after a long career with the former Valley National Bank and Vest is the Director of the Arizona Economic and Research Center at the University of Arizona.

Elliott Pollock referred to the national economic outlook as a “sub-prime year.” He predicted the chance for a national recession as a “toss-up.” He said those economists who expect a recession believe the housing market will worsen, the credit crunch will spread, consumers will cut back, and business expansion will stall. “Any way you look at it, it won’t feel good,” Pollocknoted. “The economy is no longer running on eight cylnders - probably three or four, but still moving forward,” he added. He reported that this coming recession is different “due to the psychological impact of the loss of housing value and the real impact of housing.” He predicted that housing values would decline 12 percent this year and another 10 percent next.Pollock responded to questions by noting, “14,000 homes are in the foreclosure process,” in Arizona. He said there are 24,000 vacant homes for sale, as he predicted further slides in home values and a worsening credit crunch. “This will be a year you will want to forget,” he concluded.

Marshall Vest predicted, “The surge in foreclosures this year and next will continue.” While a normal backlog of MLS listings is a  4-5 month supply of homes, the Phoenix market presently has a 16-month supply of homes for sale. Tucson has a 12-month supply. “Foreclosures will grow inventories and drop prices even more.”  He continued, “There has been a nine percent drop in home price In the last 12 months. A 20 percent decline, or more, is not out of the question.” He predicted, “The bottom won’t be reached until late 2008.” He added, “This foecast is likely too optimistic.” Vest stated, “Initial unemployment claims are increasing. The unemployment rate is headed upward.” He added, “Job growth is going down.” Vest reported that job growth is normally 6 percent, but now stands at about 1 percent. The Tucson economist projected the loss of 12,000 jobs in 2008.  “Consumer confidence is in retreat,” he said, “the days of easy money are over.” His prediction is for spending growth to be less than the growth in income.  Vest declared, “Arizona is likely already in recession.”His forecast included: (1) foreclosures and bankruptcies will soar, (2) consumer spending, income growth, and job growth will stall, and (3) population growth will slow.  The U0fA economist said, “The fl oor under Arizona’s economy is growth. Growth is predicted to be in the low 2 percent range. As a consequence, he predicted, “The public sector will struggle to balance budgets.”