More semiconductor production, a continued strong housing market and employment numbers that are better than most other metro areas will help stir the East Valley’s sluggish economy, company leaders and a local economist predict.
While the area’s economy has been in a period of recovery for three years, it has been anemic, experts said. But indicators show that slow, steady improvement is beginning, most say.
"What we’re looking at now is a recovery that’s going to start to pick up steam, but it won’t be anywhere as strong as the recovery in the ’90s," said Elliott Pollack, a Scottsdale economist.
Pollack will be the featured speaker Thursday, when East Valley Partnership holds its 10th annual forum on the area’s economic outlook.
Even with large economic growth in the third quarter of this year caused mostly by federal tax rebates, the economy remains pale, he said. Housing and automobiles, two areas that normally take off when the economy begins to rumble, haven’t improved because they weren’t strongly affected by the downturn, Pollack said.
"In addition, the recession was short, and there’s a lot of excess capacity," Pollack said. "One of the things that’s obviously occurred is employment has been very slow as well. Although the unemployment rate is relatively low for a recovery, it hasn’t come down. Unemployment has been low because productivity has been so strong, which is basically good in the long run. Employment will start to pick up, although it’s still going to be slower than normal."
Employment numbers have been better here than in most places. Out of the 29 major employment markets in the country that have more than 1 million jobs, the Valley ranks fourth and gained almost 20,000 jobs this year compared with a year ago, Pollack said.
"Only 20 states in the whole country are experiencing increases in employment right now," he said. "Arizona is eighth out of 20 as of September."
In the East Valley, the semiconductor industry will see better times shortly thanks to an increase in production capacity, Pollack said.
"Ultimately, a lot of those jobs are going overseas," he said. "In the near term, however, I think you’ll see a pickup in employment in semiconductors, which is going to be good for the Valley."
Forty-one percent of all the manufacturing jobs in the Valley are high-tech, Pollack said; 26 percent are in semiconductors and 12 percent are in aerospace, he said.
"What we produce primarily are jet engines and parts," he said. "You don’t need a lot of those when not a lot of people are flying. Tourism should pick up, and that should help a little."
Because computer chips are used in so many durable goods, such as electronics, Pollack expects the demand for them will increase as the economy rises.
With that in mind, Intel plans to spend $2 billion to build its FAB 12 plant in Chandler so it employs the most advanced chip-manufacturing technology.
"We see continuing commitment in capacity for chip manufacturing," said company spokeswoman Jeanne Forbis. The company had hoped to start construction at the end of the year, but will wait until early 2004 to build because it doesn’t want to limit supplies during the conversion, she said. The expansion is expected to be complete by the end of 2005.
While much of the recovery so far has resulted in servicerelated jobs, Pollack expects that to shift early next year.
"The biggest increases in jobs has been in health services," he said. "Health services produces jobs that are above average in terms of pay, so that’s good news."
In Gilbert, two companies have plans to build hospitals across the street from each other, and a heart hospital is planned in the town as well.
Catholic Healthcare West’s Gilbert Medical Campus is to built on 100 acres on the southeast corner of Val Vista Drive and the future Loop 202. The $140 million hospital will feature 120 beds and create an estimated 1,000 new jobs. It is expected to open by December 2005.
Banner Gilbert Medical Center will be built on 40 acres on the southwest corner of Val Vista and Loop 202. The $110 million project will also feature 120 beds and create 500 permanent jobs and 1,500 construction jobs. The hospital is projected to open in early 2006.
Sun Medical Management recently announced plans to build a 72-bed heart hospital at Gilbert and Baseline roads. It would be the Valley’s third heart hospital.
Pollack predicted the East Valley’s housing market will remain strong, driven entirely by low interest rates.
"Interest rates are way lower than you would expect 22 months into a typical recovery," he said. "That’s going to keep the housing market going. That, combined with real incomes increasing, suggest that housing will continue to do well for a while. While interest rates are likely to increase, they’re not likely to increase enough to have a major impact on the housing market."
Jay Butler, director of the Arizona Real Estate Center at the W.P. Carey School of Business at Arizona State University, isn’t as bullish about the future.
"It’s nice to say the numbers are going to go up, but I think there’s a lot of issues out there that still need to be handled," he said. "There is going to be some slowdown in the market, especially because the prices are getting up there. Even with low interest rates, the monthly payments are getting pretty stiff. That, coupled with homeowners association fees and everything else, you’re looking at a pretty stiff amount of money."
The take-home pay of buyers has gone down thanks, in part, to increased health care costs, and expected pay rises haven’t materialized, Butler said. Many companies where home buyers held second jobs continue to lay off workers, he said.
"In order to buy a home in the East Valley, you need two incomes," he said.
Providing interest rates stay down, Tempe-based homebuilder Fulton Homes expects its good times to continue, especially in the far south East Valley.
"I’d hate to see interest rates go up a couple of clicks, because it will definitely bring it to a screeching halt. But as far as all the indicators we’ve seen at this point, housing is going to remain strong," said Doug Fulton, company sales president.
"As long as it stays down, people are going refinance the house they’re in, they’re going to move out of it, rent it to somebody else and buy a new home. Look at the amount of ‘for rent’ signs you see around. They’re not necessarily selling their homes because they don’t have to because they’ve got so much equity in it, they’re able to hold onto the house, rent it and buy another one."
Fulton said he has heard that as many as 20,000 home lots are expected in northern Pinal County.
"Development has gone down the Hunt Highway into the Coolidge area," he said. "We see it basically heading east and then south all the way to Florence."
Fulton said he hopes leaders build a freeway heading south from Florence Junction.
"The thing that will slow down the East Valley, if anything, will be the transportation corridors," he said, envisioning a highway that would begin at Ironwood Drive in Pinal County and connect Florence and Coolidge before wrapping around to Casa Grande and Maricopa.
"Being from Southern California, I just look at this as starting to be Moreno Valley and Riverside County," Fulton said of the south East Valley. "I’m just seeing the entire growth spurt basically happening all over again, just 12 or 14 years later, in a different state."
Fulton will build 1,400 homes this year, the same as in 2002, he said. Next year, the number will be closer to 2,000 because several of the company’s communities currently in the review process will be ready to build, Fulton said.
Butler and Pollack agree office and industrial construction will dip. Retail real estate will continue to remain strong, they say.
"We are way overbuilt in apartments, we are way overbuilt in office and industrial space," Pollack said, adding that low interest rates have caused vacancy rates to go up. "For apartments, it will probably be 2008 or 2009 until occupancy rates get up to their 10-year average. For office, it’s probably going be 2007 or 2008."
Pollack issued one warning for the future.
"One of the things the Valley does have to do is hopefully diversify its manufacturing base, or its job base," he said. "You’ve seen that with biotechnology, and you’ll probably see it more with software."