2017 economic forecast: forging ahead in the Trump economy

Dennis Hoffman, Lee McPheters, and Mark Stapp from ASU’s W. P. Carey School of Business addressed all the big issues and provided the first look at the local and national economy in 2018 at the Annual Economic Luncheon.

How will Arizona fare in the Trump economy?

The question buzzed through this year’s Annual Economic Outlook Luncheon (listen to the podcasts while you follow along with the slides), sponsored by the W. P. Carey School of Business’ Economic Club of Phoenix. The short answer: barring an unforeseen national or global shock, growth should continue at a good clip, echoing the trajectory of the late 2016.

The W. P. Carey School’s Western Blue Chip Economic Forecast, a consensus of economic predictions from leading firms, universities, and government organizations across the West, forecasts a 2.6 percent increase in employment, a 4.9 percent increase in personal income, a 4.4 percent increase in retail sales, and a 14.4 percent increase in single family home permits for the state in 2017.

Early reports show steady economic growth during President Trump’s first 100 days, with 56,200 new jobs added in the first quarter and an unemployment rate of 5 percent. Jobs grew across sectors: health care, financial services, business services, and construction. Perhaps the most surprising sector was food service, which added 15,000 jobs — an all-time quarterly record — despite a recent increase in the minimum wage.

Nationwide, “consumer sentiment is on fire,” said speaker Dennis Hoffman, economics professor and director of the L. William Seidman Research Institute at the W. P. Carey School of Business. But that only helps the economy if it translates into spending, and polls are showing that people prefer to save, Hoffman said.

The president has proposed deregulation, and fewer rules could stimulate business growth. For growth domestic product (GDP) to grow faster, however, productivity would have to exceed the sluggish rate of the past few years. “It’s a serious challenge,” Hoffman said.

Despite these national issues, Arizona’s economic picture looks bright. Here are some specifics on how the new president’s policies will affect the Grand Canyon state.

Defense: Arizona’s trump card

One of the president’s top goals — strengthening national defense — should have a significant positive effect.

“Defense is a particular strong suit of the Arizona economy,” said speaker Lee McPheters, a research professor of economics at the W. P. Carey School and director of the JPMorgan Chase Economic Outlook Center. Defense spending represents 3.4 percent of the state’s GDP, or 13th in the nation. The state consistently ranks somewhere between 10th and 14th, McPheters said.

In addition to providing steady employment, the defense industry also brings geographic diversity. Large defense contractors like Raytheon, Boeing, General Dynamics, Honeywell, and Northrup Grumman are spread throughout the state, creating employment for residents everywhere, not just those in the Phoenix metro area, which provides 85 to 90 percent of the state’s jobs.

Health care: recession-resistant, but watch out for spending cuts

Health care will be another growth driver for the state. Whether Obamacare is repealed or not, people will need care. “In the Great Recession, Arizona health care kept on chugging. It’s an important part of the economy,” McPheters said.

The health care field represented one of every five new jobs created in the state last year, employing twice as many workers as manufacturing and construction.

But there is a caveat. Twenty-five percent of Arizona residents are on Medicaid, and over one-third receive some type of government-funded support. Cuts in spending could have a profound negative effect on citizens and their spending power, McPheters said.

Immigration and international trade: a mixed bag

President Trump also wants to make changes to immigration and international trade, bringing manufacturing and other jobs back home after decades of outsourcing and hiring foreign workers.

Perhaps the first concern for Arizonans is immigration, or “international migration,” as economists call it. Will new restrictions introduce a labor shortage?

The economists don’t think so, even if Trump builds a wall. “We probably won’t feel it. International migration is already pretty slow,” McPheters said. Foreign migration us just half what it was in 2001. It topped out in 2010 and has stayed flat since.

The state’s real growth engine is domestic migration. Though it has slowed since the housing-boom peak, domestic migration to the state remains fourth-highest in the nation, helping to push Arizona to eighth in population growth and seventh in private job growth. The 1.6 percent annual population increase is sustainable, McPheters said.

Trump’s trade policy may have a greater effect than his immigration stance. International trade supports more than 100,000 jobs in the state. Mexico is the top trading partner, followed by Canada, South Korea, China, and the UK. Arizona has more than 6,000 small-to-midsize export companies. “Anything that represents a threat to the vitality of international trade would probably be a negative for Arizona,” McPheters said.

Hoffman had even stronger words about Trump’s protectionist views. “In my opinion, this is perhaps the most damaging rhetoric we’ve heard in decades,” he said. While Hoffman grew up in the Midwest and understands the pain caused by factories shutting down and jobs moving to countries where labor is cheaper, he pointed out that keeping jobs at home has a cost, and it is passed to consumers. “The challenge is higher prices for all imported goods. It hurts all of us,” he said.

Real estate: overcoming obsolescence

Trump wants to dismantle some of the provisions of the Dodd-Frank legislation, which could make it easier for consumers to get home loans.

The president has also said that the homebuilding industry is over-regulated. But most building regulations are local, said Mark Stapp, executive director of the Master of Real Estate Development (MRED) program and Fred E. Taylor Professor of Real Estate at the W. P. Carey School of Business. Arizona has much lower homebuilding regulation costs than other states.

One of the main commercial real estate challenges Arizona faces has nothing to do with Trump: obsolete buildings, particularly offices. Change is needed to reduce vacancy rates of over 20 percent. “The tenant profile has changed to more skilled labor activities,” Stapp said. While it’s difficult and expensive to repurpose old office buildings, doing so is crucial to attract high-wage millennials.

Retail real estate faces a similar challenge. “We have 222 empty big boxes — what do you do with them?” Stapp said. Local economies, which generate revenue from sales tax, are slow to repurpose the buildings, but change is slowly beginning to happen. One encouraging fact is that new retail centers under construction are having no trouble getting pre-leased.

Arizona’s retail woes reflect those of the rest of the country. In an age where shopping can be completed with a click, centers need to attract shoppers with experiences they can’t get online. “It used to be you’d ask, ‘Who’s your anchor?’ Now, it’s ‘What’s your food and beverage lineup?’” Stapp said. Centers that don’t have an anchor store are not outperforming those that do.

Industrial real estate sector remains strong, and apartment building is at an equilibrium, keeping up with demand but not exceeding it. The for-sale housing market is very tight, with two to three months’ supply instead of a healthier four to five, and home building is pushing to the urban periphery as affordable land becomes scarce.

By most measures, including employment growth, population growth, and wages across sectors, Arizona’s economy stacks up well compared to the rest of the country. Unless there is a national or international shock, the state’s advantages should keep it on a course of steady improvement for years to come.

“What drives this economy is the quality of life that brings people here,” Hoffman said.

Test your knowledge

How much do you know about the issues driving the Arizona economy? Guests at the luncheon were given a quiz, and you can try your own hand at it here.