Economists lower expectations for 2009

The Arizona and national economies are going through a painful readjustment that will take awhile to complete, according to economists who spoke Wednesday at an economic outlook forum sponsored by the Greater Phoenix Chamber of Commerce.

Consumers are squeezed and will have to balance their books, supply and demand are out of balance in the housing market and will need to adjust, and the economy will have to adsorb higher energy prices. All of that will take time, but the long-term outlook is still favorable.

That was the forecast attendees heard at the “Doing More For Arizona — Economic Outlook 2009” meeting held at the Arizona Biltmore Resort.

“It’s time to lower expectations,” said Elliott Pollack, an influential Scottsdale-based economist and chief executive of Elliott D. Pollack & Co. “The outlook is mediocre next year.”

Anne Randolph, a Colorado-based publisher and real estate consultant, was a little more optimistic, saying 2009 could be the start of an economic turnaround — even in real estate markets.

She emphasized that the number of foreclosures in the housing market is relatively small when measured as a percentage of total U.S. households.

“Out of 100 households, we will lose one to foreclosure,” she said, although she admitted the absolute number is high.

She sees the current market as an adjustment to a period when the increase in sales and prices reached unsustainable levels and are now dropping back to historic norms.

Also the housing weakness is focused in states such as Arizona, Nevada and Florida that were the most overbuilt during the boom. Other parts of the country are not is such bad shape, she said.

“There are a lot of small markets that are doing well,” she said. “People need facts, not fear mongering.”

But Pollack sees plenty of reasons for worry. One of the principal strengths of the economy – exports — are in jeopardy because overseas markets are slowing, he said. That could negate the advantages of a weaker dollar, which makes U.S. products more price-competitive overseas, he said.

And the consumer is feeling pressure from tight credit and lower stock and home values on one hand and higher prices — particularly for food and fuel — on the other. The result is consumers are cutting back on purchases such as autos, which is hurting the economy, he said.

“It will take awhile, maybe a couple of years, for consumers to restructure their finances,” he said.

The future of the economy will depend a lot on whether banks will be willing to lend, he said. Tight credit is a sure sign that a recession is coming, he said.

The bailout of the financial industry proposed by the Bush administration is designed to prevent that from happening, but Pollack expressed reservations about its wisdom in the long run. As proposed by Treasury Secretary Henry Paulson, it will aid financial institutions that made mistakes by loaning money to unqualified borrowers. And Congress is adding provisions to protect the borrowers who are unable to repay those loans, he said. Thus responsible taxpayers who pay their bills on time are being asked to subsidize those who were irresponsible, he said.

“This will change America as we know it,” Pollack predicted. “It used to be that you would take a risk, and if you win, you win, and if you lose, you lose. Not any more.”

Pollack was optimistic about one problem that might seem to be a surprise — energy. The high price of gasoline is causing consumers to switch to fuel-conserving vehicles, which could reduce demand for foreign oil, he said.

“People will be more efficient in their use of oil,” he said, adding that “in three years from now there will be 94 varieties of hybrid vehicles on the market.”