The economic recession is altering Arizona’s economy in ways that could become permanent, according to leading economy watchers.
In the future, the state might have to rely less on population growth as an economic engine, consumer spending might not be as big a part of the economy and a higher value is likely to be placed on new ideas, they say.
Technology will be more important than ever as all Arizona industries — whether they be old standbys like mining or agriculture or high-fliers like aerospace — will need innovations to compete, said Nancy Welch, associate director of the Morrison Institute for Public Policy at Arizona State University and co-author of a new report on lessons from Arizona’s economic history.
“I think the recovery will be slow, but … there will be a recovery,” she said. “Arizonans are by nature optimists. The innovation and creativity we need to get the economy going in the direction of more quality jobs — Arizonans are very capable of creating that economy.”
ECONOMIC PILLARS CHANGING
For much of the 20th century Arizona’s economy was dominated by the five C’s — copper, cotton, cattle, citrus and climate. Of that group, only climate remains a major player in the 21st century. Among the new pillars are construction, retailing and technology industries such as computer chips and aerospace.
Coming out of the recession, more adjustments might be coming. Construction and retail might not be as important while new sectors like solar energy and bioscience might emerge, say economists.
“It may be more normal to look where construction will account for 6 to 8 percent of total employment, where in the past the normal range was over 8 percent,” said Lee McPheters, associate dean of the W.P. Carey School of Business at Arizona State.
Also, consumers will not be able to finance their spending out of home equity loans as readily as in the past, he said. That means consumer spending as a percentage of the overall economy will not be as great, he said.
But McPheters sees real prospects for the state’s biotech industry, saying that institutions such as the Mayo Clinic, TGen, Barrow Neurological Institute and the University of Arizona give the state “excellent” capabilities.
“The university system here has stepped up and brought in really good researchers and some of the leading people in that area,” he said. “In particular, Phoenix has a growing reputation as a leading medical center.”
He is less certain about the state’s prospects for becoming a major solar-energy hub despite much talk about the logic of centering the industry in a place where the sun shines so brightly. The problem is solar remains more expensive than other forms of energy and depends on subsidies, he said.
“There’s always the potential for something with an international impact like terrorism or war in the Middle East,” McPheters said. “If something shocks oil prices, that would change the equation, but right now the energy alternatives are those that are already competitive.”
Others see a greater potential for solar energy, figuring it will drop in price while fossil-fuel prices will rise. “With all the sun we have, I would say we need to figure out how to be the solar leader,” said Michael Hayes, owner of a Phoenix-based employment recruiter. “We have a short memory. The oil problem isn’t going away. … It won’t ever be back to 30 bucks a barrel.”
He also thinks the Valley will become a larger warehousing hub, providing relief for congested ports in California.
Technology manufacturing will continue to play a prominent role, predicts Steve Sanghi, chief executive of Microchip Technology, the Chandler-based semiconductor company.
He said the chip industry is making a faster comeback than other sectors because of consumer interest in new-generation computers, cell phones and other products that use semiconductors.
“Also when you look at the national and international mood, there is a focus on 'green’ stuff,” he said. “There’s a demand for metering to measure energy use, smart appliances, electric and hybrid cars, solar energy, higher efficiency in all sorts of stuff. Our chips make that happen.”
Bolstering the rebound scenario, Intel Corp. last week announced a third-quarter profit of $1.9 billion, far higher than the market expected. The report set off a rally in tech stocks.
Investors also took heart from Intel’s projections for fourth-quarter sales and earnings, which beat analysts’ expectations.
SLOWER GROWTH EXPECTED
State Treasurer Dean Martin believes Arizona’s long-term prospects for population growth remain strong because the intrinsic attractions of the state haven’t changed.
But he thinks the pace of population growth will remain below the housing bubble years of 2005-06, and as a result the state’s economic growth rate will also be slow for the next five years or more — in the low single digits, excluding inflation.
“Our economy will return to the old normal (of) … slow, steady growth,” he said.
The one major structural change he sees is a revival of the copper industry — driven by recent ore discoveries and technology developments that are increasing demand for the metal.
“All the 'green’ energy initiatives — they all take copper,” Martin said. “A hybrid car has five to 10 times more copper than a conventional car.”
SEEKING BETTER JOBS
The major challenge for policymakers in the next few years will be to grow the number of high-paying jobs, Martin said.
The state’s unemployment rate has been stuck at 9.1 percent for two months in a row, according to a state Department of Commerce report issued this week, with only education employment showing an increase in the number of jobs over the previous month. Construction, retail trade and tourism employment all continued to drop.
To attract major employers to Arizona, the state first needs to improve its image, which Martin believes has taken a hit because of battles over the state budget, and to reduce the commercial property tax, which he said is one of the highest in the nation.
That tax structure makes it difficult to attract capital-intensive industries that could diversify the economy, he said.
Companies like Intel, which has built multibillion-dollar chip manufacturing plants in Chandler, can do it only with help from special laws that reduce their tax burden, he said.
“We won’t diversify into capital-intensive areas until we address that problem.”