Experts predict gloomy economy for 2008

Prepare to tighten your belts. Next year is shaping up as a weak one for the Arizona and national economies, according to experts who spoke Wednesday at the 44th annual Economic Forecast Luncheon presented by the W.P. Carey School of Business at Arizona State University.

“2008 is likely to be remembered as a year best forgotten,” Lee McPheters, senior associate dean of the business school, told the gathering at the Phoenix Convention Center.

He predicted that Arizona’s economy will continue to grow and avoid a recession, but growth is likely to be slower than in the past few years.

He said Arizona’s job growth rate, which peaked in 2006, is likely to continue downward next year.

“Arizona has dropped out of the top 10 (states) in job growth. As of October we were 13th,” he said.

McPheters said the job market is especially weak in construction and finance but has been holding up in the tourism and services sectors.

He was pessimistic on the outlook for retail sales. Although a consensus among economists was that sales will grow 5.5 percent this year, McPheters said the actual number is likely to be only 2 percent, and 2008 will be even weaker. That will have implications for Arizona’s state budget, which relies heavily on sales taxes, he said.

Another danger sign: Population growth, a critical driver of the state’s economy, may slow down as potential migrants have difficulty selling their homes elsewhere, he said.

Because of the negative trends, McPheters believes the state’s unemployment rate, which stood at a record-low 3.3 percent in September, is likely to rise to the 4 percent to 4.5 percent range next year.

Elliott Pollack, a prominent economist in Scottsdale, was equally gloomy about the housing market, saying it will be characterized next year by declining prices, excess inventories, a continuing slowdown in construction and weak demand.

“Housing is a mess, and it’s not getting better fast,” he said.

The tightening of credit that began in late summer probably reduced the pool of home buyers in the Valley by 20 percent, he said. And a slowdown in population growth may have reduced it by another 20 percent, he said.

A slowdown in construction to about one-third the pace of 2005 could help to balance supply with demand in 2008, but the recovery after that is likely to be anemic, he said.

“This is a three- to five-year deal. There is no quick fix,” Pollack said.

The one bright spot in the real estate market has been commercial construction, which has been booming, he said. But Pollack thinks that will also slow down.

David Wyss, chief economist for Standard and Poor’s, said the economic slowdown is an inevitable response to the series of interest rate increases by the Federal Reserve board. “The economy slowed because the Fed told it to.”

So far the U.S. economy has been saved largely by higher exports driven by stronger economies overseas and the weak dollar, which makes American goods cheaper in foreign markets, he said.

Wyss believes the consumer, who has been squeezed by tighter credit and higher oil prices, will play a key role in determining if the economy slips into a recession, defined as two consecutive quarters of negative growth. He thinks consumers will continue to spend as long as they believe their jobs are secure. But there’s a danger that unemployment will rise and consumers will turn pessimistic next year, he said.

“I think we will avoid a recession, but there’s not a lot of room for things to go wrong,” he said.

James Glassman, senior economist for JPMorgan Chase & Co., said the Federal Reserve is shifting to lower interest rates to boost the economy and avert a recession.

“If the Fed is successful … a year from now the economy will be gradually picking up,” he said.