Next year figures to be the best for the Arizona economy since the recession, but it won’t be as strong as previous recoveries at the same stage of the economic cycle, an Arizona State University economist said.
"It will be 2006 before we can say the economy is operating on all cylinders," predicted Lee McPheters, associate dean and economics professor at the W.P. Carey School of Business at Arizona State University.
McPheters was one of four speakers at the 41st Economic Forecast Luncheon sponsored by ASU and Bank One Wednesday at the Phoenix Civic Plaza. The meeting annually presents economic predictions for the upcoming year by prominent economists.
Also of the meeting, Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, said the Fed’s Open Market Committee is likely to continue to raise interest rates next year as the recovery continues, but the pace will be determined by variables such as the price of oil, corporate investment and the unemployment rate.
If the variables continue to weigh on the economy, the rise will be slower, but if they dissipate, the higher interest rates will come sooner, she said.
Elliott D. Pollack, a Scottsdale economist who closely follows real estate happenings, discounted the possibility a collapse in the state’s housing market any time soon, saying construction of new single family homes will remain strong in Arizona next year while housing will remain affordable.
"If there is a housingmarket bubble, it is way down the road," he said.
Pollack did predict that construction of single-family homes will decline slightly next year as long-term interest rates rise, but he said it will still be a "phenomenal" year.
Arizona’s relentless population growth will underpin the demand for housing and provide one of the biggest boosts to the economy next year, McPheters said. This year Arizona ranked second in the nation in percentage of population growth, and the rapid gains will continue in 2005, he said.
"This year Arizona passed Maryland in size and will likely pass Missouri in 2005 to become the 17th largest state," he said.
The rate of job growth also is expected to accelerate next year for the third consecutive year, he said, driven by strong gains in health care, construction and business services. A panel of 20 Blue Chip Arizona economists is predicting that about 90,000 new jobs will be created in the state next year, up 3.8 percent from this year.
McPheters said businesses are reaching the point where they will have to be more aggressive in their hiring or they will miss out on the expansion. "To this point in the recovery managers have been cautious, but in 2005 I expect to see a crossing of the threshold," he said. "They will see the least risk will be to get on the expansion bandwagon."
Still, he said the expansion will be at a slower pace than previous economic recoveries. Specifically, he said retail sales will not surge as much as normal during expansions because of high oil prices and heavy consumer debt. Also he said job growth in manufacturing and information technology is likely to continue to be sluggish.
Yellen also pointed to danger signs for the economy nationally.
Oil prices, restraint in business investment and the growing trade deficit have all been drags on the economy this year, and next year the low personal saving rate and reduced fiscal stimulus could be added to the mix, she said.
She was not optimistic about business spending, saying the latest data "suggest that we should be cautious about assuming that the heady days of massive IT investment are likely to return any time soon."
Also she sees little hope of a turnaround in the nation’s trade deficit, largely because foreign economies are not strong enough to create strong demand for American goods.
"One economy with strong demand has been China, but even there, concerns about overheating have led to efforts to restrain the economy," she said.
As for fiscal policy, tax cuts are not likely to be a stimulating factor in the economy next year as they have been for the past two years, she said.
Inflation is not yet a serious concern for the Fed, she said, because continuing slack in the labor market will hold down wage increases. "Despite the uncertainties raised by oil prices, inflation — especially core consumer inflation — seems to be relatively wellcontained at present," she said.