With each New Year comes the usual array of pundits who forecast the future course of economic activity. What do we make of the soothsayers’ predictions this year? Perhaps this is the most uncertain time in recent economic history. The year finished with a reasonably robust equity market and a Fed seemingly poised to “rescue” the economy from the jaws of the “credit crunch.” At the same time many forecasters pointed to storm clouds such as looming trade and domestic deficits, a beleaguered consumer, buffeted by high gas prices and skidding household equity, and the continuing threat of adverse geo-political shocks. So what do we make of all of this?

To date I have been riding the optimistic wagon, suggesting that the national economy would avoid recession -- perhaps by a just a whisker. It is time to face the music. Wall Street has begun the year with a thud, the December jobs report is abysmal with the unemployment rate actually popping to 5 percent, and the real estate sector seems poised for another leg down on housing prices. There is still reason to hope that the downturn will be relatively short lived and that the latter half of 2008 will bring modest economic growth, but for now the economy has stalled. Is this a recession? Well if it walks like a duck and quacks like a duck, why not call it a duck? The NBER will probably make the official call in a few months. Let’s go with a recession that began in October 2007 and ends in late spring, with a little sign of life in real estate come mid summer. I said little, not anywhere near a return to boom times of 2005. All of this presumes that we don’t get caught watching too much election coverage this summer and forget to shop -- in which case the slowdown could linger. Here’s wishing you a prosperous new year! Now hunker down for the next 9-12 months!!

The four states where investors contributed the most to housing price increases during the housing boom were California, Nevada, Florida and Arizona. As a result, these states had some of the highest rates of housing price increase during the boom. They are also expected to suffer more than other states as a result of the current wave of housing price declines.

Is it possible to measure the relative impact of the housing bust on a state versus the nation as a whole?

Economic theory says that one of the first areas to suffer as the economy weakens is spending on durable goods. 'Durable goods' are goods that last a long time -- think big ticket items like autos, where the purchase represents a significant commitment of finances. When the economy weakens, durable good purchases are expected to react first, because they are more expensive and they are easier to delay due to their longer life.

One of the ways economists track durable goods is to watch auto sales, because sales data for autos is available nationally and by state. The volume of auto sales is estimated nationally based on a survey of retailers. But these surveys are not conducted on a state level. In states like Arizona, information on auto sales is collected as a result of the state sales tax. Even though these two measures are not precisely comparable, taken together they do illustrate broad trends.

In Arizona auto sales have been flat or negative since December 2006. Year to date through September 2007 sales were down 6.2 percent compared to the same period last year. In contrast, national auto sales are actually doing better than last year -- up 2.6 percent for the year through September.

When auto sales are subtracted from total retail sales, Arizona shows an increase of 3.6 percent year to date, a period when retail minus auto nationally showed a 4.0 percent increase. Retail sales growth in Arizona typically outpaces sales activity for the nation as a whole by a significant margin, due to our greater population growth. This past year, however, while Arizona absorbed the shock of the housing downturn, auto sales are fared much worse than the national average, while non auto sales simply slowed to the national average.

The housing bust hit incomes because people can no longer refinance their homes. People working in real estate and real estate related areas saw their earnings drop, and investors watched income from real estate related investments evaporate. The sign on the street that people are in pain is fewer new cars. It appears that the impact of the housing bust on Arizona is greater than the national average, particularly with regard to durables like autos.


Retail Auto Sales Growth
AZ US
2003 6.90% 2.60%
2004 7.00% 2.80%
2005 10.10% 2.70%
2006 2.50% 1.40%
2007 through September -6.20% 2.60%