Posts Tagged ‘manufacturing’

Back of the Pack – HERE

 It’s no secret – Arizona’s economy has stumbled. Even so, it mist still be a shining star of the Southwest, right? Well, no. Two leading Arizona economists have  rather unflattering comments about Arizona’s economy as it stacks up against other Southwestern states.

“Arizona is not only one of the weaker states in the Southwest, it is one of the weaker states in the country right now,” says Lee McPheters, economics professor at the W.P. Carey School of Business at Arizona State University.

According to Marshall Vest, an economist at the University of Arizona’s Eller College of Management, Arizona has the dubious distinction of leading the nation into recession.

“Normally, the Arizona economy lags behind,” Vest says. “The national economy enters recession and then a few months later, the Arizona economy also tops out. But this time around, it looks like the nation’s economy peaked in December of last year while Arizona peaked in August. We are leading.”

But Arizona may not be alone. Vest says it’s possible Nevada’s economy crested a couple months before Arizona. Thus, two Southwestern states likely are marching the U.S. into recession, he says. In comparison, other states in the Southwest — such as Colorado, New Mexico and Utah — are doing relatively better. Texas is doing quite well, the economists say.

McPheters and Vest blame the weak Arizona and Nevada economies on housing.

“The states that have suffered the most were the states where the housing bubble got inflated the most,” Vest says. “The run-up in housing prices started in California and then moved east to Las Vegas, then Phoenix, then Tucson and it kept going east.”

In Nevada and Arizona, the construction sector and other related industries were dragged down after housing popped, Vest says. However, Colorado and Utah were not as affected by the depressed housing market, and Texas had no housing bubble at all, he notes.

According to the U.S. Department of Commerce’s Bureau of Economic Analysis, Arizona ranked 51st among all states and the District of Columbia for per capita income growth in 2007. Nevada was 48th, Colorado 46th, New Mexico 25th, Texas 16th and Utah seventh.

The Western Blue Chip Economic Forecast, published by ASU’s school of business, tracks economic activity in 12 Western states. According to the May edition, Nevada ranked 11th for wage-and-salary employment growth in 2007. Arizona was 10th, New Mexico ninth, Colorado seventh, Texas third and Utah first.

And it gets worse.

“Arizona retail sales have been very surprisingly weak. That’s all you can say about it,” McPheters says.

Retail sales were significantly stronger in 2007 in Colorado, Utah and Texas. However, Nevada, Arizona and Utah led Southwestern states in population growth last year.

According to contributing writers for the Blue Chip, Colorado is in better shape than it was in the last recession, and Texas may be better positioned than any other state to weather the current economic downturn.

Economic development experts are more upbeat about Arizona’s economic standings in the Southwest, and they praise the efforts of various organizations to stimulate business growth.

“I think Arizona stacks up pretty well,” says Barry Broome, president of the Greater Phoenix Economic Council. “We have dramatically improved our competitive position the last two to three years. California is the technology giant. Utah and Colorado have built technology corridors. But if you look at momentum, Arizona is stronger than the other Southwestern states.”

Broome commends Arizona’s commitment to public infrastructure, but he says it needs to attract more capital and diversify beyond its dependency on construction.

Arizona’s economy is more volatile and cyclical than other Southwestern states because it is driven by population growth, housing and construction, says Laura Shaw, senior vice president of corporate and community affairs for Tucson Regional Economic Opportunities (TREO). However, she says Southern Arizona is growing its bioscience sector along with Phoenix, and TREO has a long-term economic development strategy that focuses on educational excellence, livable communities, collaboration between public and private sectors, high-skill and high-wage jobs, and urban development.

Bruce Coomer, executive director of the Arizona Association for Economic Development, says economic development will play a critical role in Arizona’s eventual recovery. With that in mind, he worries about how the state Legislature is addressing Arizona’s budget deficit.

“To solve that, they are cutting programs here, there and everywhere, and some of them being considered are economic development programs,” Coomer says. “Those are the programs that could be a vehicle to help Arizona end the downturn early, because the engine to bringing back a solid, thriving economy is high-wage jobs.”

According to Coomer, the Arizona Department of Commerce’s business attraction group may be dissolved, and some legislators want to eliminate the department entirely.

“(The department does) an excellent job, but they are underfunded and understaffed,” he says. “Doing away with the department would be a huge mistake.”

www.aaed.com
ebr.eller.arizona.edu
www.gpec.org
www.treoaz.org
wpcarey.asu.edu

I covered the fact that Arizona and Tucson in particular has relied too heavily on growth for our economic prosperity. Read the posts HERE and HERE.  An email that came a cross my desk this weekend exemplifies the problem we are having even clearer. Byron Schlomack, Ph.D from the Goldwater Institute noted that:

A few weeks ago, I pointed out that Arizona’s economy has been disproportionately fueled by the construction industry. In 2006, the proportion of Arizona’s total economic output from construction stood at 7.4 percent, 50 percent higher than the U.S. proportion of 4.8 percent. I attributed this to the relatively high commercial property taxes assessed at a rate twice as high as that of residential property.
 
Interestingly, manufacturing contributed more to Arizona’s total economic output, 8.1 percent, in 2006 than construction did. But at 11.8 percent, the share of U.S. output from manufacturing is almost 50 percent higher than Arizona’s.

Arizona’s property tax structure contributes to this volatility. Residential property taxes are assessed at half the rate of commercial property taxes. As a result, commercial property, which constitutes less than a third of total property value in the state, pays nearly half of all property taxes according to the Arizona Tax Research Association.

To create a fully diversified economy, Arizona policymakers should pay close attention to what they tax. They’ve rolled out the welcome mat to the volatile construction industry, which is fine, but they need to do the same for other industries. If we want people in all those homes, we have to welcome other businesses too, and that means lowering taxes on commercial property.

We’ve established that construction is a major engine on our state. The goal in any economy is for NEW MONEY to enter the system. Construction fueled by people moving to our state is new money. Foriegn firms investing in our state is new money. Manufacturing and exporting goods out of the state or country is new money into our system.  From 2001 to 2005 Arizona’s value-added from manufacturing decreased, in fact we dropped more than anyone in the U.S.

While most of our regional competitors (Colorado, New Mexico, Utah, Nevada, Idaho) were increasing their manufacturing sectors, New Mexico by 200 percent, Arizona’s decreased 16 percent. This is all the more evidence that our tax structure is determining our fate.

 Scholmach points to our states need to equalize the income tax system:

If we choose to get government spending at all levels under control and then rationalize our tax system by making it more lucrative to open a business, we can avoid becoming the biggest bedroom community in the nation. It’s worth rising to the challenge.