GREATER PHOENIX BLUE CHIP • THIRD QUARTER 2007

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PAGE 1

THIRD QUARTER 2007 Volume 19, Number 3

Direct incentives or laissez faire?
Expecting the nature of an economy to
change dramatically is generally no more
than wishful thinking. Especially in a
large economy such as Greater Phoenix,
economic developers can really work
only around the edges. They can stress
the positives, make the place as business
friendly as the government will allow and
act as a great information source. They
can also point a community in a direction. That aspect of economic development is both important and sometimes
underemphasized.
It is difficult to significantly change
the nature of an economy and its relative
level of income in anything but the long
term. This is simply because of the way
economies are structured. There are base
jobs, also known as export-related jobs.
These jobs could be elsewhere because
the demand for the product is not local,
but regional, national, or international.
They include manufacturing, regional

Multiplier Analysis
Addition of 100 Jobs to Industry
Maricopa County 2007
Industry

Indirect Induced Total
Jobs
Jobs
Jobs

Examples of Export-Based Industries:
Chemical Manufacturing ........................ 188
Computer and Other Electronics ............. 139
Internet and Data Process Services ......... 105
Machinery Manufacturing ...................... 79
Examples of Domestic-Sector Industries:
Banks........................................................
Hospitals ..................................................
Hotels and Motels ....................................
Retailers ...................................................
Restaurants and Bars ................................

43
32
24
10
12

153
151
84
84

441
390
289
262

58
55
34
25
18

201
187
158
134
130

Source: Implan

Local economy slowing, national recession a possibility
It is clear that both the national and
local economies are slowing down,
largely as a result of what is happening
in the housing and mortgage lending
markets. The magnitude and duration of
the slowdown are not clear, particularly
in light of the 50 basis point cut in the
federal funds rate. The rate cut calmed
the markets but real impacts from rate
changes take six to nine months to show
up, and the economy is slowing now.
We might dodge the bullet; however, the
signs from some of the best indicators are
not that encouraging.
Last year we introduced a recession

probability graph based on the interest
rate spread between the 10-year and 1year treasury notes. The yield spread has
had only one false signal since the '60s
and most economists watch it in some
form or other. The probability was at 99
percent and climbing last year, and as you
can see from the graph on the last page, it
has peaked and is on the way down.
The other graph on the last page is
the number of initial or first claims for
Arizona unemployment insurance. There
is a clear uptick in claims – a pattern
which is often, although not always,
associated with recessions and economic

slowdowns. It is somewhat disturbing to
note that the national claims data has yet
to show a similar rise.
The last indicator is Category 17
retail sales data collected by the Arizona
Department of Revenue. The retail sales
forecast by the panel is a combination of
Cat 17 and restaurant/bar sales. For the
state as a whole, year-to-date through
July, Cat 17 is up 2.1 percent, while at
this same point last year it was up 10.6
percent. The slowdown has happened in
the last three months, with May and June
negative and July flat.
— Tracy Clark

PAGE 2

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GREATER PHOENIX BLUE CHIP • THIRD QUARTER 2007

GREATER PHOENIX ECONOMIC FORECAST FOR 2007
ANNUAL PERCENT CHANGE 2007 FROM 2006

SOURCE
Arizona Department of Commerce
Arizona Public Service
ASU - Economic Outlook Center
Department of Economic Security
ECON-LINC
EconLit LLC
Elliott D. Pollack and Co.
H.C. Reardon Economics
Joint Legislative Budget Committee
The Maguire Company
Southwest Growth Partners
Salt River Project
U of A - Eller College
VisionEcon
Consensus

Population
3.0
3.4 H
3.0
3.0
3.1
3.0
3.2
3.0
3.1
3.1
3.0
3.0
3.3
2.9 L
3.1

Personal
Income
6.9
7.5
7.2
7.1
7.0
7.2
7.0
7.0
7.2
7.6
6.8
7.7
8.2 H
6.7 L
7.2

Retail
Sales
6.1
9.0 H
1.5 L
6.2
6.2
6.8
4.0
6.5
6.3
7.4
5.8
7.0
4.6
6.3
6.0

Wage &
Salary
Empl.
3.5
4.1 H
2.7 L
2.7 L
3.0
3.7
3.7
3.6
3.5
4.0
3.2
3.1
3.4
3.1
3.4

Manufacturing
Empl.
0.1
0.5
-0.1
-0.8
-2.5 L
1.2
-1.2
0.5
1.0
2.5 H
0.8
1.0
1.5
1.6
0.4

AVERAGE RATE FOR 2007

Construction
Empl.
-10.0 L
6.0 H
-7.0
-0.9
-3.2
-5.0
0.0
0.0
-5.0
0.0
-8.0
-3.0
-5.7
4.0
-2.7

Services
Empl.
4.1
4.5
3.6
3.5 L
3.5 L
4.8
4.5
4.6
4.5
5.0
4.4
4.2
5.4 H
4.5
4.4

National
CPI
3.1
2.8
2.6
3.1
2.6
2.8
3.0
2.2
2.7
3.2 H
3.0
2.1
1.6 L
2.7
2.7

Unemployment
Rate
4.3
4.2
4.0
3.7
3.4 L
4.2
4.0
4.6 H
4.3
4.1
4.4
4.0
4.5
4.1

GREATER PHOENIX ECONOMIC FORECAST FOR 2008
ANNUAL PERCENT CHANGE 2008 FROM 2007

SOURCE
Arizona Department of Commerce
Arizona Public Service
ASU - Economic Outlook Center
Department of Economic Security
ECON-LINC
EconLit LLC
Elliott D. Pollack and Co.
H.C. Reardon Economics
Joint Legislative Budget Committee
The Maguire Company
Southwest Growth Partners
Salt River Project
U of A - Eller College
VisionEcon
Consensus

Population

Personal
Income

Retail
Sales

Wage &
Salary
Empl.

Manufacturing
Empl.

3.0
3.2 H
2.8
2.9
3.0
3.0
2.7 L
3.0
3.0
3.2 H
2.9
3.0
2.8
2.7 L
2.9

6.8
7.5 H
6.5
6.7
6.8
7.5 H
5.5
7.0
7.0
7.5 H
6.2
7.3
5.0 L
6.3
6.7

6.4
8.5 H
0.8 L
6.5
6.0
7.0
3.0
6.5
6.0
7.5
5.5
6.8
2.5
6.7
5.7

3.3
4.4 H
3.3
3.3
3.2
3.7
3.0
3.7
3.4
4.0
2.8
3.0
0.7 L
2.2
3.1

-0.5
0.0
-0.5
-0.1
1.0
1.1
-2.0 L
0.5
1.0
2.0 H
0.5
1.0
-0.6
1.0
0.3

AVERAGE RATE FOR 2008

Construction
Empl.
-5.0
5.0 H
-5.0
-4.9
-2.0
0.0
-10.0
0.5
0.0
0.0
-6.0
-1.0
-15.4 L
0.0
-3.1

Services
Empl.

National
CPI

4.0
5.0 H
3.0
2.9 L
4.2
4.6
3.0
4.9
4.0
5.0 H
4.0
4.2
3.3
4.0
4.0

2.9
2.4
2.4
3.0
2.8
2.8
3.0
2.0 L
2.5
3.3 H
2.8
2.1
2.3
2.7
2.6

Unemployment
Rate
4.4
3.7 L
4.2
4.1
4.0
4.3
4.4
4.6 H
4.2
4.2
4.6 H
4.0
4.6 H
4.3

Data sources for Maricopa County (Greater Phoenix area): population, U.S. Census Bureau; personal income, Bureau of Economic Analysis; retail sales, Arizona Department of
Revenue; wage and salary employment, manufacturing employment, construction employment, service employment and unemployment rate, DES.

GREATER PHOENIX HISTORICAL DATA

2006
2005
2004
* Estimate

Population
(thousands)
3,764
3.5%
3,636
3.9%
3,499
3.2%

Personal
Income
(millions)
131,729*
8.4%
121,521*
9.4%
111,104
8.6%

Retail
Sales
(millions)
43,821*
8.2%
40,500
14.2%
35,466
9.6%

Wage &
Salary
Empl.
(thousands)
1,827.0*
4.8%
1,743.1
6.2%
1,641.2
4.2%

Manufacturing
Empl.
(thousands)
134.0*
1.4%
132.2
2.5%
129.0
0.5%

Construction
Empl.
(thousands)
174.2*
6.8%
163.1
15.8%
140.9
9.3%

Services
Empl.
(thousands)
744.8*
5.5%
706.0
6.7%
661.6
5.6%

National
CPI
201.6
3.2%
195.3
3.4%
188.9
2.7%

Unemployment
Rate
4.0*
4.1
4.4

GREATER PHOENIX BLUE CHIP • THIRD QUARTER 2007

services and other companies that serve
a regional and national market and could
serve that market just as easily from a
different location outside of the Greater
Phoenix area. They are the reason for an
urban area’s existence. If one examines
the ghost towns of the Old West, they
will see that these areas become ghost
towns because their reasons for existence
ceased to be. The mine petered out. There
was a drought and agriculture went away.
The railhead moved. The thing that
caused the community to exist was no
longer there.
On the other end of the scale are the
domestic sector jobs that make up the
bulk of the jobs in a community. They
are there because of the money bouncing
around that was generated by the exportrelated jobs. For example, someone
who works at Intel buys a house with
a realtor, buys his car at the local auto
mall, his suits at Macy’s, his groceries
at Safeway and stops at Seven-Eleven to
buy a Slurpee on his way to a ball game.
All these transactions create economic
activity that causes domestic sector jobs
to exist. Unless money comes in from the
outside, there would be no need for the
domestic sector.
The relationship between base jobs and
a number of jobs created because of the
economic activity from those base jobs
is known as the “multiplier effect” (see
table, page 1).
ECONOMIC MULTIPLIERS
The very basic idea of how economic
multipliers impact the economy is a core
component of economic development
planning. The multiplier statistics tell us
that it is important to attract higher wage
employment opportunities because the
wages of these persons bounce around
the local economy thus creating even
more jobs.
For example, examining Implan
multipliers for Maricopa County, if we
attract 100 jobs in the high-tech field of
electrical equipment, another 60 jobs will
be created in industries that support the
company’s operations such as janitorial
services, landscaping, copy services,
etc. These are called indirect economic
impacts. Furthermore, the multipliers tell
us that the spending of the 100 high-tech
workers and 60 indirect workers will

...............................................................................

lead to the creation of another 66 jobs
in industries that support the workers of
real estate agencies, auto malls, Macy’s,
Seven-Eleven, Safeway, daycare, etc.
These are called induced economic
impacts.
It is important to note that the very
premise of higher paying jobs supporting
lower paying indirect and induced jobs is
one of the issues that makes it difficult to
raise wages in a particular area.

Higher paying
jobs create more
economic activity
because they bring
more dollars to ripple
through the local
economy. This is
essentially the fuel
for the region’s
economic engine.
DO THE MATH
According to the Department of Economic Security, there were about 1.8
million workers in Maricopa County in
2006. The average wage of these workers
was about $37,200. To provide perspective into how difficult it is to raise average wages in an area, we calculated how
many additional high paying jobs must
be added to the local economy to raise
overall wages by $1,000.
If government officials and economic
development professionals want to
induce enough manufacturing and supporting employment growth to raise average Maricopa County wages by $1,000,
they would need to be directly responsible for the creation of 145,000 new
jobs with average wages of $50,600 (this
includes direct, indirect, and induced
employment). This also includes the creation of over 68,000 direct miscellaneous
manufacturing jobs.
The fact that 1) the local economy is
large, and 2) the creation of high wage
employment adds partially offsetting
lower to moderate wage employment,
makes it very difficult to significantly

PAGE 3

raise average wages for the region as a
whole.
AN EFFICIENT PLAN
Even though the above example
illustrates that significantly raising local
wages may be asking a lot from our
economic development professionals, it
does not detract from the importance of
their efforts. Incentives indeed matter.
After all, the creation of high paying jobs
through incentive programs does create
job opportunities for many others. Furthermore, higher paying jobs create more
economic activity because they bring
more dollars to ripple through the local
economy. This is essentially the fuel for
the region’s economic engine.
However, we must also be cautious in
the extent to which we use subsidies to
lure a small number of jobs to the state,
even if the jobs are higher paying ones.
We may find ourselves spending millions
to attract a couple hundred new jobs,
but losing thousands of jobs through the
taxation of businesses to cover the costs
of the incentives.
We must also maintain realistic expectations in terms of the government’s
ability to impact wages through incentive
programs. Wage growth is not something
that happens overnight. In the end, a
simple plan that reduces taxes and regulation, encourages education, and promotes
a culture that makes us attractive to base
industries (allows them to make a reasonable return on their investment with a
minimum of red tape), may be the most
cost-effective approach to promote.
— Elliott D. Pollack

Housing Market
The outlook for the housing market
has turned downright bleak. A
reduced buyer pool and sizeable
excess supply suggests that a full
recovery is years away. This will
put downward pressure on housing
prices and dampen a weakening
but still growing economy. We will
grow our way out of this, but it will
take time. More details in the next
Greater Phoenix Blue Chip.

PAGE 4

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GREATER PHOENIX BLUE CHIP • THIRD QUARTER 2007

Unemployment Insurance Initial Claims
(3-Month Moving Average, 1970 to 2007, Seasonally Adjusted)
24,000
22,000
20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
1970

1980

1975

1985

1990

Source: Arizona Department of Economic Security (last data point August 2007 = 17,014)

1995

2000

2005

Bars indicate recessions

Probability of National Recession Based on the Yield Curve
(Neftci formula applied to 10 year – 1 year spread)

Percent
100
90
80
70
60
50
40
30
20
10
0
1960

1965

1970

1975

1980

1985

Source: JPMorgan Chase Outlook Center calculations (last data point August 2007 = 94%)

1990

1995

2000

2005

Bars indicate recessions

ECONOMIC FORECAST PANEL
Arizona Department of Economic Security
Donald Wehbey

ECON-LINC
John Lucking

Elliott D. Pollack and Co.
Elliott Pollack

Arizona Public Service Co.
Pete Ewen

EconLit LLC
Dwight Duncan

Salt River Project
Arlyn Herrera, Rebecca Holmes and Karen Wolfe

Arizona State University
JPMorgan Chase Economic Outlook Center
Tracy Clark
Arizona Department of Commerce
Kent Ennis

JPMorgan Chase
Economic
Outlook Center
Tracy L. Clark, Economics Editor
Elliott Pollack, Topics Editor
Jim Dodson, Editorial Coordinator

H. C. Reardon Economics
Hank Reardon
Joint Legislative Budget Committee
Staff
The Maguire Co.
Alan Maguire
GREATER PHOENIX BLUE CHIP (ISSN 1042-6825) is published four
times a year by the JPMorgan Chase Economic Outlook Center, an
affiliate of the L. William Seidman Research Institute in the W. P. Carey
School of Business at Arizona State University. E-mail subscriptions
(PDF) are available for $39 for one year (4 issues). For information,
call the Economic Outlook Center at (480) 965–5543.
©2007 Arizona Board of Regents for Arizona State University. Reprint
permission required from the JPMorgan Chase Economic Outlook
Center.
Arizona State University vigorously pursues affirmative action and equal
opportunity in its employment, activities and programs.

University of Arizona
Eller College
Marshall Vest
Vision Econ
Debra J. Roubik