- Author: Craig Outhier
- Category: Hot Topics
- Issue: Jan 2014
Four years into the economic recovery, Arizona's unemployment rate has stalled at an uncomfortably high level. Is 8 percent our "new normal"?
If everything goes according to plan, Bob Satnan won't have a free Saturday afternoon until late 2015.
Last spring, the former East Valley Tribune opinion page editor bid adieu to a 26-year career in newspapers and began working at Sedalia School District 200 in Sedalia, Mo., where he teaches high school journalism and finance classes. As part of his retraining, Satnan must complete several online graduate courses in education and classroom assessment. Ergo, the booked Saturdays.
Leaving journalism wasn't a decision the 50-year-old took lightly. It was based on a widely held belief that stable newspaper jobs swallowed by the global economic downturn – including the gig he lost at the Tribune in a round of mass layoffs in 2008 – wouldn't be returning anytime soon. Or ever, most likely.
"Honestly, if I thought there was a floor to stand on, I'd still be [in journalism]," says Satnan, who left Arizona to edit the Sedalia Democrat for a few years before leaving the field. "Afterward, I looked for the first opportunity that would pay me a decent wage, and let me use my existing skills and develop new skills."
But it's not just journalists suffering the stalled "recovery." All of the roughly 318,000 Arizonans who lost work during the downturn – be they journalists, car salesmen or granite-counter installers – also had to take stock. Ultimately, about half of them did find work – some, like Satnan, by following jobs elsewhere. But two years into Arizona's halting economic recovery, state unemployment remains stagnant at about 8.3 percent – a full point higher than the national average and about double what it was during Arizona's pre-bubble employment heyday in the mid-2000s.
Times have changed since the mid-2000s. Industry has changed. Many of the old-economy jobs shed during the downturn aren't coming back, and there's no guarantee Arizona's post-bubble economy will be equipped to accommodate the many thousands of unemployed people who want work – regardless of how much training or retraining they undergo. "Full employment," a theoretical plateau that modern economists typically peg at about 5 percent unemployment, seems like a pipe dream, given the slow recovery of key Arizona industries and our ever-expanding pool of willing workers. Should Arizonans expect better? Or is 8.3 percent our new normal?
Just as the recession torched some parts of America more than others, the national economic recovery has been selective. South Dakota, for example, has enjoyed spectacular growth and job gains over the past three years. The state currently boasts a miniscule unemployment rate of 3 percent – largely the result of its booming oil shale industry. By November 2013, 16 states had recovered all the jobs they lost during the recession.
However, most states have settled for more modest progress, with annual economic growth between 1 and 2 percent and job figures still well below their pre-bubble peaks. Arizona – which ranks 44th nationally in replacing its recessionary job losses, according to a report by the Arizona Department of Administration (ADOA) – is one of them.
From a recession high of 10.8 percent unemployment in June 2010, Arizona rode the recovery to 7.8 percent last May, before an uptick last summer brought the figure back up to 8.3. According to the ADOA, Arizona is still about 165,000 jobs short of the peak employment numbers the state enjoyed in 2007.
"The problem for Arizona is we have nothing that allows us to break away from the national business cycle," says Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W.P. Carey School of Business at Arizona State University. "We're not North Dakota or South Dakota. We don't have a thriving oil industry. Construction and real estate used to have that buoyant effect for Arizona, but it hasn't happened yet."
According to McPheters, health care and wholesale trade are among the "four or five sectors adding the most jobs" in Arizona -– which is to say, the sectors most responsible for the roughly 123,000 jobs the state has recovered since the bottom of the downturn. Construction is "still growing when you look at the data," but not at levels commensurate with its importance to the state.
"Typically, construction is much stronger than what we're seeing right now," he says. "That comeback trail is not a huge source of employment for Arizona. Even if [construction] adds eight or nine thousand jobs a year, you still have displaced workers adding to unemployment rolls."
Another critical job sector falling short in Arizona is retail – the men and women whose cars, clothes and consumer goods you're not buying, at least not like you did before the downturn. "It's surprising that retail has not come back," McPheters says. "Arizona retail has lagged behind the national rate of growth for two years now, and the reason is because income in Arizona has not come back as strongly as it has nationally. The high-wage jobs aren't there. So I would say [higher-than-average unemployment in Arizona] is a combination of things: slow national growth, traditionally strong sectors not performing well in Arizona, and the low-paying character of the jobs we do have."
Further clouding the employment outlook is the sobering fact that the percentage of jobless Arizonans is actually much higher than the official rate. When calculating its "U3" measure – the unemployment percentage commonly cited in media reports – the U.S. Department of Labor considers only unemployed workers who have "actively sought work in the last four weeks." It excludes so-called "discouraged workers," persons who want employment but haven't looked for work in the last four weeks, specifically because they believe such work isn't available; and "marginally attached workers," who fit the same definition as discouraged workers but can cite any reason for failing to seek work.
Factoring in those two groups, the effective unemployment rate in Arizona is 10.2 percent, according to the Department of Labor.
The presence of discouraged and marginally attached workers also provides one explanation for the unexpected bump in Arizona unemployment last June after 12 consecutive quarters of steady gains, according to Mark Darmer, Deputy Assistant Director for the Employment and Rehabilitative Services at the Arizona Department of Economic Security. "We're probably starting to see extended-period unemployed workers starting to actively seek employment," Darmer says. "Just after the recession ends, you might start to see a slight uptick in unemployment, because disenfranchised workers – those people who stopped looking for work – will start looking again. And they'll be counted."
Like debt hidden by a wily accountant, Arizona's discouraged and marginally attached workers will inevitably resurface, sustaining the state's high unemployment rate. At least until job creation begins on a large scale.
Most economists agree that the recovery – both in Arizona and the greater United States – is sluggish but substantive. McPheters, who presciently cautioned Arizonans against celebrating the end of the recession in spring 2010 – several months before home prices and employment numbers actually bottomed out – predicts that "2014 will be better" for job creation than 2013, with Arizona adding "about 50,000 jobs." Still, he says, Arizona's economic growth will be "way below historic averages," when the state added 100,000 to 150,000 jobs a year.
Other forecasters paint a somewhat rosier picture. In its annual employment report issued last November, the ADOA estimated the state would add 59,000 jobs in 2014 – a figure that would lower the state unemployment rate to around 7 percent, if current workforce numbers hold.
In the report, Aruna Murthy, the ADOA director of economic analysis, pegged construction as one of Arizona's most dynamic sectors, growing by 8,800 jobs – or a 7.1 percent increase. The service sector would add 18,100 jobs. That's healthy economic growth by most standards – particularly in a state that has chugged along on 1 to 2 percent growth over the past three years.
However, economists admonish Arizonans to take nothing for granted. Several factors could yet tap the brakes on the state's fragile recovery, particularly in the beleaguered construction industry. One such factor is a skilled labor shortage – a somewhat counterintuitive idea in the midst of massive unemployment. But experts say that thousands of capable Arizona trades workers – both legally documented and otherwise – decamped for more economically robust states during the recession, a factor that may dampen new home builds, also known as home-starts, perhaps the most critical economic bellwether in the real estate and construction sectors.
"It's impossible to measure who has left, but if you talk to people in construction, they say labor markets are tight," McPheters says. "It's pretty obvious that as construction slumped [during the recession], a lot of mobile workers were not averse to moving to greener pastures. We lost a lot to Texas, which is a magnet for labor... and construction managers would confirm that a lot of people left the state... and might not return."
Valley contractor James Wagner, owner of James Wagner Construction and Home Improvement, agrees that post-recession "attrition" is a problem for the Arizona building trades. "The best drywall crew I knew moved to South Dakota [during the recession]," he says. "And also a framer. I used him for years. But there's a lot more money [in the Dakotas] and the cost of living is a lot less. Then again, it's 40 below zero right now, so they're getting theirs."
However, Wagner sees more behind the exodus than simple supply and demand, or even SB 1070, the pro-enforcement law many observers credited with chasing cheap, undocumented labor out of the state. He believes home-starts have also been suppressed by high gas prices, which may make property in the Valley's outskirts – where large subdivision projects are most common – less appealing to homebuyers. He also believes younger people entering the work force are less likely to choose the building trades as a career. "It's a tough way to live," he admits.
Even more damaging to the construction labor pool, by Wagner's reckoning, is onerous government regulation. "I can't tell you how many agencies are out there doing computer audits," he says. "They're hammering the business community with what they call 'compliance.' People are getting very upset. It's getting tougher and tougher to build [in Arizona]. People are spending so much time settling [tax] disputes."
Finally, Arizona's recovery in 2014 could be waylaid by another budget stalemate in Washington. According to the ADOA's Murthy, the 2013 budget sequestration and subsequent government shutdown in October cost the state 10,000 to 15,000 jobs. And Darmer of the DES says the sequester was poison to Arizona's real estate market. "It really hit a speed bump with the sequester, which affected FHA loan process. You saw a really strong spurt [in home buying] there for eight or 10 months, but some hesitancy afterwards."
The shutdown was temporarily resolved with the passage of an interim appropriations bill that suspended the federal government's debt limit. The bill expires on February 7.
THE NEW "FULL"
Let's put doomsday scenarios aside for the moment and assume Arizona does continue adding jobs at its current pace. By late 2016, the state will have somewhere in the range of 2,673,000 jobs – matching the plateau reached in 2007. Unfortunately, even at that jobs number, the unemployment rate will be higher than it was in 2007, because Arizona's workforce will have grown in kind. Even with the recession, Arizona remains a magnet for out-of-state migration. In 2012, its population grew by 1.33 percent. Greater supply, but greater demand.
And therein lies the difficulty of pegging "full employment" to the 4 percent jobless lows enjoyed by Arizona a decade ago. According to Murthy, Arizona may not see numbers that low again – or the superheated, speculation-driven construction sector that facilitated them.
At the ADOA's annual press conference last November, Murthy suggested that Arizona's "new normal" for full employment could be in the 6 percent range. That seems reasonable to ASU's McPheters, who cautions against using Arizona's pre-bubble heyday – or even current unemployment numbers in other states – as a yardstick going forward. Still, he thinks the 5 percent figure that has traditionally defined "full employment" isn't necessarily a thing of the past.
"Individual states will have unemployment rates below 4.5 percent... but nationally we expect the unemployment rate to be above 5 percent five years from now," he says. "However, assuming economic growth returns to long-term trends, the continuing retirement of the baby boomers will likely be consistent with unemployment rates slightly below 5 percent in 2020. We don't project an unemployment rate nationally as low as 4.5 percent, but I think it's still reasonable to treat 5 percent as full employment – but there are, of course, a host of assumptions in selecting any specific number."
For individual Arizonans who work in fluid, market-driven industries like construction, technology and media, the challenge going forward is to prepare themselves for inevitable changes – and avoid being on the wrong side of the employment ledger.
"That's one thing we stress with our students," ex-newspaperman Satnan says. "You now have to be a lifelong learner. You have to train and retrain yourself over a lifetime, and if you're not comfortable with that level of change, you're gonna have problems.
"Everything is changing, not just the dying business I was in."