Recession in Arizona Economy

Transcription

1 July 1, 215 Economics Group Special Commentary Mark Vitner, Senior Economist (74) Michael T. Wolf, Economist (74) Alex V. Moehring, Economic Analyst (74) Arizona Economic Outlook: July 215 Executive Summary Economic gains in Arizona are picking up, although the state is still working to recover the huge losses endured during the recession. Employment growth has picked up to a 2.4 percent yearover-year pace. As a result, the unemployment rate has come down to just 5.8 percent, much lower than the 6.9 percent rate seen a year earlier. The rapid decline in the unemployment rate comes despite rising labor force participation. The share of adults in the state that are officially a part of the labor force (meaning that they are either employed or actively looking for a job) has increased nearly a full percentage point over the past year. Across the United States by contrast, that same share has held constant over the same period. Employment growth in the state has been broad based across major industry groups with the small exception of manufacturing, where activity has become much more capital intensive. In addition, a diverse mix of companies has recently expanded or announced plans to expand in Arizona. Some of the more prominent expansions to the state have been made in financial services, tech services, distribution centers and customer support facilities. The former two should add relatively high-paying jobs to the state, which are likely to have sizable spillover effects. However, the latter two typically pay below average wages, which indicates that the broader effect of those job gains is likely to be more muted. Figure 1 Figure 2 1 Arizona Gross State Product & U.S. GDP Year-over-Year Percent Change 1 Arizona vs. U.S. Unemployment Rate Seasonally Adjusted A diverse mix of companies has recently expanded or announced plans to expand in Arizona U.S. GDP: 2. Arizona GDP: Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC Growth amid Payroll Declines Unemployment Rate: 5. United States: 5. The factory sector in Arizona is a relatively small one, but several important developments have appeared recently. The first is that manufacturing employment is now lower than a year ago despite seemingly strong gains throughout much of the recovery. The biggest weakness was seen in computer & electronic products manufacturing. That subindustry s payrolls are 6.8 percent lower than a year ago and are more than 5, workers shy of levels seen just three years earlier. This report is available on wellsfargo.com/economics and on Bloomberg WFRE.

2 Arizona Economic Outlook: July 215 July 1, 215 in the state, and throughout the nation, has become increasingly capital intensive. The drop likely reflects long running struggles in the personal computer market. When you exclude this subindustry, however, growth moves back into positive territory on a year-ago basis. Although manufacturing payrolls may be struggling, manufacturing exports are surging ahead. After growing 7.5 percent in 214, manufacturing exports were up 14.4 percent year to date in April relative to a year ago. Somewhat surprising is that exports of computer & electronic products, the industry that is shedding jobs in the state, jumped 11.4 percent year to date through April from a year ago. Although they account for a much smaller share of total exports, there has been huge growth in the value of chemical manufacturing products, fabricated metal products and electrical equipment and components. All three of those groups posted double digit-gains through the first three months of the year over the same period a year ago. Machinery manufacturing, however, has seen exports slide 16.6 percent over the same period. The divergence of manufacturing exports coming from the state and manufacturing employment is another indication of how manufacturing in the state, and throughout the nation, has become increasingly capital intensive. Figure Figure 4 7 Arizona Computer & Electronic Mfg Employment 7 $5, Arizona Exports Millions of Dollars $5, 6 6 $4, $4, 5 5 $, $, 4 4 $2, $2, $1, $1, Computer & Electronic : Year-over-Year Percent Change: 18. Exports: $4,58. $ $ Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC Diversity of Growth Arizona has experienced broad-based gains, and although additional jobs are always welcome in any economy, not all of those jobs bring the same benefit to the state. On the plus side, there has been considerable growth in financial activities, which has seen employment rebound back above its prerecession peak, something we have not seen nationwide despite the comparatively stronger labor market. More growth is to come in the industry as Northern Trust plans to add 1, workers to its office in Tempe over the next three years. There have also been expansions in payment systems capabilities with Revel Systems, which creates platforms for merchants using ipads as their point of sale, expanding in Scottsdale. Other merchant-based technology providers are also expanding in the state, including San Francisco-based Boomtown!, which fixes merchant technology in real time. In addition, General Motors is opening an IT Center in Chandler that should eventually bring 1, jobs to the area. Some of the largest gains recently, however, have come from much lower-paying industries, such as distribution centers and call centers. For example, Comcast has announced that it is creating 1,125 new jobs for a customer support center in Tucson. Business support services in Tucson pay an average annual salary of just $24,, which takes some of the shine off the announcement. Other big announcements have come from Tuesday Morning and REI, which are both opening distribution centers in the Phoenix area that should collectively employ 4 workers. In Phoenix, these positions may pay more than customer support jobs, but pay will still mostly be less than the state median. The distribution businesses in the state have also seen some weakness, with Walgreens closing its center in Flagstaff and Blue Bell closing three of its centers around the state. 2

3 Arizona Economic Outlook: July 215 July 1, 215 The mining sector, which has been under pressure from low commodity prices and sluggish global growth, is also seeing some cutbacks. Asarco laid off 1 workers from three of its copper mines in the state, and natural resources & mining employment statewide is down 2. percent on a yearover-year basis. Unlike the distribution and call center jobs, mining pays high wages, which can amount to more than $8, per year. More layoffs in the industry could be coming down the pipeline as Chinese growth continues to moderate and other major economies are still experiencing sluggish growth. Figure 5 Figure 6 Arizona Employment Growth By Industry Year-over-Year Percent Change, -MMA Total Nonfarm Trade, Trans. & Utilities Government Educ. & Health Services Prof. & Bus. Svcs. More Number of Employees 9% % Arizona Finance Employment Year-over-Year Percent Change Finance & Insurance: 4.1% Real Estate & Leasing: -1. 9% % Leisure and Hospitality Less Financial Activities -% -% Construction - - Other Services Information May % % - Source: U.S. Department of Labor and Wells Fargo Securities, LLC Traditional Industries Forging Ahead Two of the state s industry mainstays, tourism and defense, are looking better. Tourism in Arizona continues to improve, thanks to a stronger economy nationwide and the state s numerous desirable attributes. Direct spending by tourists was estimated to amount to nearly $2 billion last year, well above its prerecession peak. In addition, total passenger traffic through the first three months of the year is up.9 percent from last year. The largest share of those dollars is spent at establishments that fall in the leisure & hospitality industry, which includes restaurants, bars, hotels and recreation. Employment in that industry continues to post strong gains and was up.1 percent in May from a year earlier. Retailers, which nabbed more than $2 billion from tourism, have posted year-over-year employment gains of 1.7 percent. Defense-related industries in Arizona are almost as old as those catering to its numerous tourists. Large federal budget deficits have led to spending cuts and will likely weigh on future defense expenditures in the state. However, federal payrolls in April turned positive on a year-over-year basis, which was the first positive reading since 21. Figure 7 Figure 8 Arizona Leisure & Hospitality Employment 2 Arizona Federal Payrolls Year-over-Year Percent Chnange, -MMA 2 Direct spending by tourists was estimated to amount to nearly $2 billion last year Leisure & Hospitality: Federal Government: Source: U.S. Department of Labor and Wells Fargo Securities, LLC

4 Arizona Economic Outlook: July 215 July 1, 215 Housing Market Gains Ground The housing market in the state is looking considerably better than it had since the recession. In April, home sales were 12. percent higher than a year earlier on a three-month moving average basis. As a result, home prices have accelerated slightly to a 5.7 percent year-over-year rate. At the worst of the housing crisis, the share of mortgage holders in the state who owed more on their home than it was presently worth skyrocketed to more than 5 percent, while it was about half that rate nationwide. In March, that share fell to 16.8 percent in Arizona, just 6.6 percentage points higher than the national average. Somewhat surprising is that the shadow inventory in the state has declined tremendously and is now below the national average. For example, the share of mortgages 9 or more days delinquent is just 1.8 percent in Arizona, but it is.7 percent nationwide. With the population growing at about twice the national rate, demand for housing should continue to improve. Despite the favorable demographic position, residential construction has been slow to gain momentum. The pace of single-family home construction is still consistent with the relatively low pace of construction seen in the early 199s. Figure 9 Figure CoreLogic HPI: AZ vs. U.S. Index, 2=1, Not Seasonally Adjusted United States: 18.9 Arizona: Arizona Housing Permits of Permits, Seasonally Adjusted Annual Rate Single-Family: 25,548 Single-Family, 12-MMA: 19,118 Multifamily, 12-MMA: 8,568 Single-Family Average (1998-2): 52, Arizona s economy continues to make strides. Source: CoreLogic, U.S. Department of Commerce and Wells Fargo Securities, LLC Summary and Outlook Arizona s economy continues to make strides as employment growth has strengthened in the first half of 215. Recent gains have been spread across numerous industries and hiring has also been bolstered by the arrival of several new firms. Tech-related industries are growing and taking advantage of an already sizable presence of tech firms, thanks in part to Intel s large operations in the state. The more traditional industries of tourism and defense have posted stronger gains recently, with the federal government adding to the state s growth for the first time in years. Although mining and manufacturing are still struggling and the dollar is considerably stronger than it was this time last year, goods exports remain strong and are up considerably over the year. In addition, the housing market has improved dramatically with impressive sales numbers fostering further home price appreciation. We expect Arizona to maintain its recent strong momentum. The economy is improving on a broad front and has become less dependent on building activity. Tech-related industries are gaining a critical mass in the state, which should help draw additional firms. Wholesale trade and distribution are also gaining strength, reflecting the improving economy in the West and increased international trade. Arizona s population is growing at about twice the national rate again, reflecting the aging of baby boomers and an influx of younger households from higher cost areas of the country. The growing population will fuel demand for local retail trade and personal services and further the recovery in the region s housing market. Such strong migration into the state should continue as more baby-boomers retire in even greater numbers in coming years and the broader U.S. recovery strengthens further. 4

5 Arizona Economic Outlook: July 215 July 1, 215 Phoenix The Phoenix economy continues to make strides, with employment up a sizable. percent from a year ago on a three-month moving average basis. Growth has been broad based across industries, with only manufacturing falling back into contractionary territory. Although the rate of growth has been strong, Phoenix is still working its way out of the sizable hole that was made during the Great Recession. As a result, nonfarm payrolls are still 1.7 percent lower than their prerecession peak despite the unemployment rate slipping to 5.2 percent, below the national average. The diversity of industries expanding and relocating to the Phoenix metro area is astounding. Financial services, tech-related industries, distribution facilities and a number of other industries are expanding in the area. Northern Trust is expanding in Tempe and expects to add about 1, workers over the next three years. Tech companies such as Revel Systems, Booker and Boomtown!, as well as a General Motors IT Center are all expanding in the greater Phoenix metro area. In addition, distribution centers, such as Tuesday Morning s nearly 6, square foot center in southwest Phoenix and REI s 4, square foot facility in the West Valley, are popping up around the metro area. The housing market in the metro area continues to improve, with home prices rising 5.5 percent from a year ago. Both single- and multifamily home sales have increased on a year-over-year basis. That said, as seen in a number of other areas throughout the United States, singlefamily housing permits have struggled, while condo and townhome permits continue to advance. The outlook for the Phoenix metro area remains a positive one. A strengthening national economy should continue to fuel tourism in the area, while the diversity of industries should help the area weather another downturn. Demographics in the area also look promising, thanks to ample in-migration pushing population gains well above twice the national average. 1 Unemployment Rate: Month Moving Average: 5.7% Trade, Trans. & Utilities Educ. & Health Services Leisure and Hospitality Financial Activities Phoenix MSA Unemployment Rate Total Nonfarm Government Prof. & Bus. Svcs. Information Construction Other Services Seasonally Adjusted Phoenix MSA Employment Growth By Industry Year-over-Year Percent Change, -MMA May 215 More Number of Employees Less Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities, LLC 1 - Phoenix MSA Housing Permits of Permits, Seasonally Adjusted Annual Rate Single-Family: 19,92 Single-Family, 12-MMA: 1,267 Multifamily, 12-MMA: 6,947 Single-Family Average (1998-2): 7,

6 Arizona Economic Outlook: July 215 July 1, 215 Tucson Tucson MSA Unemployment Rate Seasonally Adjusted Tucson s economy has been relatively sluggish throughout the recovery. A sizable concentration of federal government workers and defense contractors that rely on federal funding are holding the metro area back. Total employment in the area is just.8 percent higher than a year ago, with public sector payrolls falling 1.4 percent over the same period. To make matters worse, total payrolls are still a whopping 5. percent away from their prerecession peak. At the current pace of hiring, Tucson employment will not reach that peak for several more years. Not all industries are struggling in Tucson. Education & health services posted a 1.6 percent year-over-year employment gain, while professional & business services are up 2.6 percent over the same period. Customer service centers are expanding in the area. Although they typically do not pay high wages, they are creating numerous jobs. APAC is expected to add 7 workers in Tucson, while Comcast recently announced its own customer service center that should employ about 1,1 workers. The overreliance on the public sector is the largest risk to the metro area. More than one in five workers in Tucson is employed by the government. Nationwide the concentration of government workers is six percentage points lower. In addition, the five largest employers in Tucson are either public sector entities or defense contractors. Federal civilian payrolls were flat over the past year. The housing market in Tucson is still struggling. Home prices are just.1 percent higher than a year ago, while nearly one in five homeowners owes more on their house than it is presently worth. While employment and population growth remaining subdued, the housing market is unlikely to bounce back strongly. As a result, residential construction has been flat for about two years. Tucson will continue to make modest gains, though with new expansions concentrated in lower-paying jobs and little growth from the public sector, the metro area will have a difficult time seeing much stronger growth. 1 Unemployment Rate: Month Moving Average: 5.9% Educ. & Health Services Trade, Trans. & Utilities Leisure and Hospitality Tucson MSA Employment Growth By Industry Total Nonfarm Government Prof. & Bus. Svcs. Financial Activities Construction Other Services Information Year-over-Year Percent Change, -MMA May 215 More Number of Employees Less Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities, LLC % 1% % Tucson MSA Housing Permits of Permits, Seasonally Adjusted Annual Rate Single-Family: Single-Family, 12-MMA: 2,59 Multifamily, 12-MMA: 1,4 Single-Family Average (1998-2): 5,

7 Arizona Economic Outlook: July 215 July 1, 215 Prescott Prescott has settled into a strong pace of economic recovery, with employment.5 percent higher than a year ago on a three-month moving average basis. In addition, every major industry other than information is growing on a year-over-year basis. The trade, transportation and utilities sector is the largest industry in the metro area and has also been one of the strongest. Employment in that industry has reached its prerecession peak and is now 5. percent higher than a year earlier. Professional & business services are also joining the recovery with payrolls climbing a whopping 8.8 percent higher over the year. Although manufacturing is a relatively small industry in the Prescott metro area, it is a fast growing one. The factory sector is gaining in terms of share of total employment. In addition, manufacturing payrolls are now in line with where they were in the early 2s, a clear departure from what we have seen nationwide. American Spirit Firearms is expanding in the metro area, adding more to the burgeoning factory sector there. Economic development professionals in Prescott have largely focused their resources to recruit manufacturers to the area as well as firms related to defense and security and aerospace engineering. Home sales appear to have slipped in the first quarter of this year relative to the same period in 214. In addition, after solid home price appreciation in 214, home prices were flat on a year-over-year basis in April. Despite the weaker home values recently, the share of underwater homes in Prescott is just 1.9 percent, significantly lower than the statewide average of 16.8 percent. More residential construction is coming down the pipeline. Single-family building permits continue to grow, although the pace of homebuilding is still well below historical norms. Prescott is turning its economy around. Population gains, which are running more than twice the national average thanks to positive net migration, should help move home sales and prices back in the right direction. Furthermore, the influx of residents should also boost consumption of local goods and services Trade, Trans. & Utilities Educ. & Health Services Leisure and Hospitality Prescott MSA Nonfarm Employment -Month Moving Averages -Month Annual Rate: -2. Nonfarm: Yr/Yr Pct. Change: Household: Yr/Yr Pct. Change: 5.% Prescott MSA Employment Growth By Industry Total Nonfarm Government Other Services Prof. & Bus. Svcs. Financial Activities Information Year-over-Year Percent Change, -MMA More Number of Employees Less May 215 Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities, LLC Prescott MSA Housing Permits of Permits, Seasonally Adjusted Annual Rate Single-Family: 84 Single-Family, 12-MMA: 896 Multifamily, 12-MMA: 24 Single-Family Average (1998-2): 1,

8 Wells Fargo Securities, LLC Economics Group Diane Schumaker-Krieg Global Head of Research, Economics & Strategy (74) (212) John E. Silvia, Ph.D. Chief Economist (74) Mark Vitner Senior Economist (74) Jay H. Bryson, Ph.D. Global Economist (74) Sam Bullard Senior Economist (74) Nick Bennenbroek Currency Strategist (212) Eugenio J. Alemán, Ph.D. Senior Economist (74) Anika R. Khan Senior Economist (74) Azhar Iqbal Econometrician (74) Tim Quinlan Economist (74) Eric Viloria, CFA Currency Strategist (212) Sarah House Economist (74) Michael A. Brown Economist (74) Michael T. Wolf Economist (74) Erik Nelson Economic Analyst (74) Alex Moehring Economic Analyst (74) Donna LaFleur Executive Assistant (74) Cyndi Burris Senior Admin. Assistant (74) Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company 215 Wells Fargo Securities, LLC. Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 27. The FCA rules made under the Financial Services and Markets Act 2 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE