UA News

UA economists Marshall J. Vest and Gerald J. Swanson told local business leaders that signs of a recovery may start later this year, but will take some time to adjust.

There's light at the end of the economic recession tunnel, but two University of Arizona economists say it is likely to be a long journey to get there.

Marshall J. Vest, director of Economic and Business Research in the Eller College of Management, and Gerald J. Swanson, the Thomas Brown Professor of Economics, offered their annual mid-year economic forecast Thursday morning to about 250 local and state business and university leaders.

"People are feeling better about the economy, even though we haven't bottomed out yet," said Vest.

"The economy is falling less rapidly, and that's good," he continued. "We're in a transition period and eventually we'll hit bottom and the stage will be set for us to gain altitude once again."

Vest cited indicators that money is beginning to move in the credit markets and banks, and investors are regaining their appetite for risk, as evidenced by the stock market, which is up 40 percent since March. 

Vest said his forecast calls for the nation to hit economic bottom by the third quarter this year, and possibly by summer, followed by a weak recovery. Data for Arizona's second quarter lags behind, so much of the numbers he presented were for the first quarter when the economy was still in free fall. 

Still, Arizona and Tucson will trail the rest of the country largely because of the collapse of a red-hot housing market. Robust growth won't likely begin until 2011 and the state won't recover fully until about 2013. 

Housing, Vest said, is still a drag on the economy, but looking better with investors coming in and buying properties that haven't been as affordable since 2003-04 before prices shot upward.

He cited anecdotal evidence of 3,000 square-foot houses with granite countertops going for $80,000 in Phoenix. Banks, however, are catching on and starting to raise their prices and interest rates. He asks: "How can you not buy that house?"

Unemployment is still high and moving higher. By the end of the year it could reach 10 percent in Arizona, and take another two years to fully recover.

"The American dream used to be keeping up with the Jones," Vest said. "Now it's keeping up with the mortgage, auto loan and credit card bills. This economy will affect consumer behavior for some time to come."

A key reason the economy will have trouble recovering, Swanson said, is that more than a third of manufacturing capacity is sitting idle. 

"So even if we do start to see an uptick in the economy, we won't be building any new plants. We may build some but we have a lot to bring back on board," Swanson said. 

The current numbers also don't include layoffs in the auto industry.

Swanson also is concerned about the level of debt the country is taking on in order to stimulate a recovery.

"I think the way in which we have decided to accumulate deficits in our national budget is a threat to the economy," Swanson said, adding that the initial deficit projection in 2008 was for $305 billion, and instead was $450 billion. "They only missed by 50 percent."

Deficits like these "would have us on the watch list of the International Monetary Fund and the World Bank with them telling to cut spending," Swanson said, adding that most of the world's largest economies are running deficits as well.

"This recession is going to take an awful long time to come out of because there are a lot of people in bed with us, and they're not moving," Swanson said.

But there are glimmers of hope, he added, in the form of "green shoots" and cautious optimism by way of consumers who are opening their wallets a little bit more. 

"Maybe it's going to get better," Swanson said. "The rate of decline has started to decline. Inventories are lean. Some parts of the housing market are stabilizing. Consumers are Bank balance sheets are improving and investors are out of their panic mode."

He noted that, in reality, the federal stimulus must take hold. 

"You can't spend hundreds of billions of dollars and not have something happen in this economy," he said.

"The last two recessions were so fast we didn't know we were in a recession until they were over," Swanson added. "A real recovery depends on government demand, being supplemented by sources of private spending. That is why this transition is going to take a long time."