Gannett News Service

Gannett News Service

WASHINGTON – The Treasury Department is scrambling to scoop up the toxic assets that have frozen credit markets and the economy and sent stocks into a dizzying plunge.

But the job is daunting, the clock is ticking and the work has only just begun.

“There are probably 12 steps to recovery from any addiction,” said Simon Johnson, a professor of entrepreneurship at the Massachusetts Institute of Technology. “I think the U.S. is probably on step two or step three.”

Just Friday, Treasury Secretary Henry Paulson announced the government soon would start buying stock in ailing banks to try to bolster them and their ability to lend.

Already, the Treasury Department has named one of its own senior officials, Neel Kashkari, to engineer the federal government’s $700 billion rescue plan, which Congress recently approved and President Bush promptly signed.

Kashkari, 35, worked as a NASA satellite engineer and Wall Street banker before moving to the Treasury Department two years ago. His keen mathematical mind should serve him well in dealing with the highly complex financial instruments the Treasury Department will weigh in the coming weeks and months.

But he’ll need outside help.

The Treasury Department is scouring the financial community for experts – some from Wall Street – who will have to make the tough decisions on which banks to shore up, which damaged assets to buy and how much to pay for them.

And they will have to do all this on the fly.

Treasury officials have said they expect to begin hiring the necessary staff as early as this week.

On Tuesday, they announced they will start buying what’s known as “commercial paper,” the short-term debt large companies float, usually to expand or buy equipment.

Without these credit lines, large companies could stagnate, shrink or close, laying off thousands of workers.

On Wednesday, the Federal Reserve cut its target for short-term interest rates to 1.5 percent – the lowest level in four years.

But experts predict that, despite the calls for strict congressional oversight, the initial rescue plan will have to be executed so quickly that serious supervision will be almost impossible.

“Mainly what’s going to happen is Treasury is going to do it, and they’ll report back to the public now and then,” said William Gale, director of economic studies at the Brookings Institution. “I just don’t see a strong role for oversight in all this, despite what people say.”

But he added, “The risk of under-reacting here is much bigger than the risk of overreacting.”

Citizen Staff Writer

ALAN FISCHER

afischer@tucsoncitizen.com

The continuing economic crisis could see the development of lifesaving drugs and therapies delayed.

Biotech researchers, already stung by funding cutbacks, fear the $700 billion bailout will further crimp their efforts to bring new drugs to market.

While it is too early to gauge exactly what the most recent financial upheavals will mean, researchers say they are already hurting.

“The bulk of research dollars at the University of Arizona come from the federal government,” said Vicki Chandler, director of UA’s BIO5 Institute. “I think we’re in for a slowing of research.”

Federal budget problems, fueled by the bailout, hurricane relief and the war in Iraq, mean less money for bioscience efforts, Chandler said.

The timing is poor.

“We’ve collected massive amounts of data were poised to really take advantage of,” she said. “To do that, it takes money, people and facilities.”

Local researchers are struggling, she said.

Three to four years ago, 20 percent to 25 percent of biotech grant requests made to the National Institutes of Health were funded. That has dropped to a funding success rate between 8 and 10 percent, Chandler said.

The National Science Foundation, another leading federal provider of science research funding, has seen a similar decline, she said.

“That’s already hit UA in a big way,” said Elaine Jacobson, UA professor of pharmacology and co-founder of Niadyne Inc., which develops and markets niacin-based products and therapeutics.

Some researchers have not received funding approval and have reduced their staffs and scientific efforts, she said.

The $700 billion bailout, which some analysts believe will cost closer to $2 trillion, will make things worse for researchers working to bring drugs to market.

“You just can’t create grant money out of thin air, and there is a cash shortage,” Jacobson said. “That’s really going to hurt.”

Niadyne next week will begin seeking private funding to move new therapeutics toward federal approval for use by humans.

A year ago, it would have been much easier to secure funding, Jacobson said. But with the Dow Jones industrial average dropping from the 12,000s to the 9,000s since then, all bets are off.

Venture funds will do fewer investments and reserve more cash per investment for capital-intensive biotech projects, said Shaun A. Kirkpatrick, president and CEO of Research Corporation Technologies, a Tucson-based venture capital operation.

He sees a decrease in funding available for life sciences projects, and believes small funds may leave the biotech arena because of the large amount of money needed.

On the bright side, investors hammered by the stock market may see biotech firms as good opportunities and invest, Chandler said.

And foreign investors may be drawn to biotech because of the weakness of the dollar, she said.

Drug development takes many years, and a pipeline of near-ready new products exists for the short term, she said.

But if the economic problems continue for a long time, that pipeline could be reduced to a trickle.

Citizen Staff Writer
OUR OPINION

Arizona’s impending budget deficit may be as “small” as $320 million. Or it may be $800 million. Or $1 billion. Or possibly even more.

And while there may be room to argue about the shade of the red ink – whether it is ruby or downright scarlet – there is no doubt Arizona is facing a serious deficit that most agree will grow by at least $1 million per day through the rest of this fiscal year.

With about a month to go before the election, there is insufficient time to craft a solution and call legislators to Phoenix for a special session. But it is incumbent upon legislative leaders to start talking about this problem and work to forge consensus on the outline of a solution.

That would allow a lame-duck special session to be held between the Nov. 4 election and the opening of the legislative session in January. Making a dent in the projected deficit sooner rather than later would offer more flexibility in considering possible solutions.

Gov. Janet Napolitano and Republican leaders in the Legislature this week held dueling events to stress the severity of the budget problem.

It was barely three months ago – in late June – that lawmakers reached agreement on a budget for fiscal 2009. But already, that spending plan is out of whack as revenues continue falling far short of projections.

Because of different ways of projecting future revenues, the governor’s budget experts and the Joint Legislative Budget Committee differ on the size of the problem. Napolitano says fiscal 2009 will end up between $320 million and $800 million in the red. The JLBC says it could be $1 billion, with some lawmakers predicting a $1.5 billion deficit.

To her credit, Napolitano has taken some steps designed to stanch the red ink. She has instituted a partial hiring freeze that has saved $31 million so far. She also has ordered agencies to restrict travel, defer equipment purchases and eliminate any expenses that are not “mission critical and absolutely critical.”

That’s a start, but not much more. Looking at gloomy economic forecasts for the state, there will have to be substantial spending cuts imposed – possibly up to $3.5 billion – through fiscal 2010.

Construction – especially housing – is responsible for much of the problem. It was housing that drove Arizona’s boom and, when that collapsed, it drove the state’s budget straight into the ground.

That has caused employment growth to tank, as shown in the graph to the left. For 13 of the past 15 years, Arizona’s annual job growth has been among the top five states. In the past two years, it has plunged to 22nd and now 46th.

Virtually every other economic indicator is down as well, providing a grim budget forecast.

Napolitano has started the repair process and outlined her priorities. Legislative leaders must start meeting among themselves and with other members to come up with their own plan.

That should lay the groundwork for a special session soon after the general election. Further dithering will only worsen the problem and narrow the range of possible solutions.

• For links to economic forecasts given to the Legislature and budget reports from the governor, see this story at www.tucsoncitizen.com/opinion.

Citizen Staff Writer

BLAKE MORLOCK

bmorlock@tucsoncitizen.com

One more “aye” vote for the federal bailout/rescue of U.S. credit markets emerged from southern Arizona Thursday.

U.S. Rep. Gabrielle Giffords, D-Ariz., has decided to switch her vote and support the $700 billion plan even if it costs her seat in Congress, she said.

The House rejected the measure Monday but the U.S. Senate approved an expanded version Wednesday and the House will take the bill up again Friday.

“I don’t like this vote,” she said. “But I’m not going to stand by and let the current crisis undermine the economy.”

The Democratic freshman is in a tough re-election battle against state Senate President Tim Bee. Giffords said her office has heard little but opposition from her constituents.

She voted against the bill Monday.

“I felt the bill was not ready,” she said. “We have a better bill. It’s not a good bill and no one wants to vote for it.”

It does include an extension of the solar power tax credit, which will continue to make Arizona a mecca for solar energy projects, Giffords said.

She has been one of the top supporters on Capitol Hill of the solar power tax credit.

“It’s critical to reduce our future dependence on foreign oil, it’s critical for innovation and it’s critical to get a handle on energy costs,” she said.

The new bill also includes provisions increasing the limit on federally insured bank accounts from $100,000 to $250,000, and tax relief for the middle classes that should help many residents of Arizona’s 8th Congressional District, which includes southeastern Arizona.

U.S. Rep. Raúl Grijalva, a Democrat representing southwestern Arizona, also cast a “no” vote Monday but has yet to decide how he’ll vote when the revised package comes up Friday, his spokeswoman, Natalie Luna, said.

Grijalva represents a safe Democratic district. In Giffords’ district, Republicans outnumber Democrats.

The Bee campaign could not be reached for comment.

None of the Arizona delegation voted for the bill on Monday, but Giffords joins Republican Arizona Congressman John Shadegg in indicating a likely change to a “yes” vote. U.S. Rep. Harry Mitchell, another freshman Democrat, has spoken favorably of the new plan, suggesting Arizona may provide a quarter of the necessary new votes to get the bailout passed.

Citizen Staff Writer

GARRY DUFFY

gduffy@tucsoncitizen.com

Pima County Treasurer Beth Ford hopes for long-term solutions to the nation’s economic troubles, not only immediate attempts at fixes such as those in Congress.

“I hope it will free up credit a little and put more liquidity into the market,” Ford said Wednesday.

The county stands to lose $2 million in interest from the recent meltdown of Lehman Brothers, money from the state Local Government Investment Pool 5.

But the county’s investments for the year – including that write-off – are at a $4.6 million profit, Ford noted.

The county has about $1 billion in investments in several types of funds and securities.

“If you look at the portfolio overall, we haven’t lost any money,” Ford said.

Continuing market uncertainty is affecting the Treasurer’s Office by leaving fewer investment opportunities.

“I have a hard time finding places to put the county’s money because the market is frozen,” Ford said.

Traditional safe havens like Treasury bonds are unattractive because the short-term notes offer almost no profit, she said.

Places formerly considered conservative investments either are no longer safe or no longer exist, she said.

“I went to bed Friday night and Wachovia held an A rating,” Ford said. “I got up Monday and it was gone.”

The Arizona Republic

The Arizona Republic

The U.S. financial panic gripping the country, which has its roots in the mortgage meltdown, is a prime example of why Arizona needs to diversify its housing-based economy, Gov. Janet Napolitano said Monday before about 350 business, civic and education leaders.

Speaking to the Phoenix Committee on Foreign Relations, Napolitano said long-term economic growth in Arizona could be achieved by furthering trade opportunities abroad and continuing to invest in education at home.

“The economic downturn in the United States was precipitated by the downturn in housing,” Napolitano said during her annual International State of the State address at the Arizona Biltmore Resort. “This was a housing-generated economic crisis.

“And since we were at the cusp of the housing bubble, what goes up, came down. Unfortunately for us, Sir Isaac Newton was correct.”

Napolitano, a Democrat, said the state needs to work with Arizona businesses and foreign governments to boost exports, which total more than $19 billion a year and can be a source of new jobs and revenue.

While Mexico continues to be the largest recipient of Arizona exports, she said, the state has seen significant growth in trade with Canada, Germany and Taiwan in the past year.

In the second quarter of 2008, Arizona exports are up 8 percent over the same period last year.

“Even in this very challenging economy, we are seeing positive trend lines,” Napolitano said, adding that few states have tapped into the enormous trading potential of South America.

In the current economic climate, significant “belt-tightening” at the state level is inevitable, Napolitano said, but she warned that it should not come at the expense of Arizona’s students.

Sounding a familiar refrain, Napolitano said providing the “capacity, accessibility and affordability” of higher education must remain Arizona’s top priority.

“We have to have the work force to sustain a new kind of economy,” she said, “and we won’t without increasing rigor in our schools and increasing resources for our students.”

The governor said she envisioned Arizona as a provider of new, innovative goods and services. She said that includes water and environmental cleanup technologies as well as health sciences.

At a global biotechnology convention this year in San Diego, Arizona showcased a project among Northern Arizona University and Australia and Asian partners to create an eco-friendly product to control crop-eating rat populations.

Napolitano touted Arizona as a leader in the aerospace and optics fields.

But the governor said the state needed to do a better job of securing capital investments for solar and other renewable energies.

“There is no reason Arizona should not be the Persian Gulf of solar energy,” Napolitano said.

Rick Stephenson, one of several foreign diplomats who attended the luncheon, said Arizona is playing catch-up in the race to turn solar rays into revenue.

“I questioned right off the bat, why is this not a center for excellence in solar energy?” said Stephenson, Canada’s consul and senior trade commissioner in Phoenix.

“I mean you have all the perfect conditions here in the world. Germany and Japan, even Canada, and these other places have greater advances in solar energy than you have here.”

The Arizona Republic

The Arizona Republic

PHOENIX – Airline flight cuts and higher airfares this fall will bring fewer visitors to Arizona, delivering a punishing one-two punch to the state’s limping economy.

In Phoenix, more than 1 of 10 flights are gone from a year ago. Nearly 70 daily departures have disappeared from Sky Harbor International Airport’s schedule, the equivalent of losing service from almost every major airline except US Airways and Southwest.

Fewer seats for sale means airlines can charge more. Tickets for Phoenix flights departing in October are up an average 28 percent from a year ago, according to Farecast.live.com. Flights to Boston and Chicago are each up 50 percent. In a tourism hotbed where the majority of visitors arrive by plane, fewer flights and higher fares mean fewer customers for hotels, restaurants, spas and golf courses.

At risk is a substantial slice of $19 billion in annual visitor spending in Arizona.

This comes after months of reduced numbers in hotel occupancy and airport traffic as people struggle with a plunging stock market, the housing meltdown and other economic woes.

“We know we’re in for a period of some rough times,” said Steve Moore, chief executive officer of the Greater Phoenix Convention and Visitors Bureau.

Airlines are trying to find their footing against soaring fuel prices. When oil was near its peak of $147 a barrel this summer, US Airways said its fuel bill was running $2 billion a year higher.

The flight cutbacks, which began after Labor Day, are designed to cut airlines costs and force fares higher. The size of the cuts vary by airline and airport, with a handful of carriers slashing 10 percent or more of their U.S. seats this fall.

US Airways CEO Doug Parker said these flight reductions are permanent as the industry adjusts to the likely reality of permanently higher oil prices. Prices have retreated below $100 since summer, but the airline’s fuel bill is still running $1.6 billion higher than a year ago.

The fallout for Phoenix, where US Airways is the busiest carrier is 11 percent fewer seats overall, slightly above the national average for airports.

The bulk of the cuts are in the frequency of flights between cities. It will still be possible to fly to most places, but with fewer choices and higher fares.

US Airways dropped six daily flights to Las Vegas, four to San Diego and three to Tucson. Southwest, whose cutbacks are about half the norm in Phoenix, also trimmed flights to Las Vegas and other cities in addition to dropping Birmingham, Ala., and Little Rock, Ark.

Sky Harbor traffic, already down each month this year but one, is projected to sink.

By the end of 2009, airport officials see passenger totals down 10 to 15 percent from last year’s peak of 21 million round-trip passengers.

The impact of fewer visitors, or visitors who stay for shorter periods, can cascade across the economy. Grand Canyon attractions, resorts and restaurants, and those who do business with them all would feel a pinch.

Tucson has lost about one-fifth of its airline seats, ranking it 11th nationally in terms of percentage of flights dropped, according to an analysis by consulting firm LECG. The city has gone from a peak of 89 daily departures last year to 66 and is left without nonstop service to the East Coast beyond Atlanta.

Citizen Staff Writer

TEYA VITU

tvitu@tucsoncitizen.com

The Tucson metro area’s economic growth ranked in the top 20 percent in the nation in 2006.

Today, the picture is likely not as rosy, according to University of Arizona economist Marshall Vest.

“The stage for today was being set in 2005 and 2006,” Vest said. “If we had numbers for 2008, we’d probably be in the bottom quintile (20 percent).”

All the metropolitan areas in Arizona and Las Vegas were in that top 20 percent in 2006, according to statistics released Thursday by the U.S. Bureau of Economic Analysis.

Tucson’s gross domestic product two years ago was measured at $29.9 billion, an 8.6 percent increase over 2005. The national GDP grew 3.2 percent in 2006, according to the statistics.

Vest noted the GDP increase for 2005 was 10.1 percent, giving Tucson a two-year excess in homebuilding mortgage lending.

Tucson’s GDP growth ranked No. 46 out of 363 metropolitan statistical areas in 2006. Tucson had the 66th-highest GDP, which is about the same rank the Tucson metro has in population.

Gross domestic product is the total value of all goods and services.

“Relative to the nation, real growth was strong for metropolitan areas in the Southwest and Far West,” the BEA said in a news release. “The real estate industry was the driving force behind growth in many metropolitan areas in 2006.”

The BEA also found that banking activities were even more important to economic growth in 41 cities.

Real estate and banking were key players in Tucson as well. The real estate sector increased from $3 billion to $3.2 billion in 2006 and finance and insurance rose from $1.5 billion to $1.65 billion, according to BEA statistics, but since then Tucson-based First Magnus Financial Corp. collapsed.

Vest noted real estate increases of 9.0 percent in 2005 and 9.4 percent in 2006, with financial services rising 16.4 percent and 12.3 percent in those two years.

“I would say the growth we had was not healthy growth,” Vest said. “Texas cities didn’t have the boom and their economies are quite healthy today. Their economy during the past five years has been more stable and healthy than what we’ve had.”

Metropolitan areas in Arizona and Texas dominated the GDP leader board in 2006. Texas relied more on manufacturing increases and less on real estate.

Vest did notice a rebound in manufacturing in Tucson, which had slumped from $4.1 billion in 2001 to $2.8 billion in 2004. Manufacturing increased to $3.2 billion in 2005 and $3.48 billion in 2006.

Tucson Citizen and The Arizona Republic
IN BRIEF

Tucson Citizen and The Arizona Republic

Consumer financial stresses aren’t showing signs of abating as Tucson-area bankruptcy filings in August climbed 34 percent above the number filed a year ago.

The U.S. Bankruptcy Court in Tucson recorded 352 filings in August as consumers struggled with housing woes, job losses and other problems.

U.S. filings rose 29 percent in August to 96,413, hitting the highest total in nearly three years, the American Bankruptcy Institute and National Bankruptcy Research Center reported.

Tucson’s job-growth engine has slipped into reverse. The local economy had 6,000 fewer jobs last month than in July 2007, according to latest figures from the Department of Economic Security.

Also, housing prices here are weak.

The median price of resale homes in Tucson dipped in June, to $188,726 from $195,000 in May, and foreclosure sales accounted for 17 percent of all resales in June, according the Southern Arizona Housing Market Letter,

“You’re seeing this domino effect,” Phoenix bankruptcy attorney Diane L. Drain said.

The list, she said, now includes subcontractors hurt by the housing slump, the upper echelon stretched too thin and homeowners caught by a surprise freeze in their home-equity lines of credit.

“Unemployment, medical problems and divorces still drive many bankruptcies, as before,” Drain said. “But, now, you’re seeing problems with real-estate people, investors and others.”

Three-quarters of Tucson-area filings are Chapter 7s, which offer a fresh start to people who qualify.

Most of the rest are Chapter 13 procedures built around debt-repayment plans.

The Tucson bankruptcy court includes filings from Pima, Pinal, Santa Cruz, Cochise, Graham and Greenlee counties. Nearly 90 percent of all Arizona filings are in Pima and Pinal counties.

The Associated Press
IN BRIEF

WASHINGTON – Jobless claims rose unexpectedly last week, the
government said Thursday, while companies responded to the slowing
economy by producing more with fewer workers.

The Labor Department reported that new applications for unemployment
insurance rose to a seasonally adjusted 444,000, up 15,000 from the
previous week. Economists had expected claims to drop to 420,000.

Meanwhile, productivity, or the amount of output for every hour of
work, rose at a 4.3 percent annual rate in the April-June quarter, a
full percentage point higher than economists expected.

The Associated Press

Comcast appeals FCC ruling on Web blocking

WASHINGTON – Comcast Corp. is appealing an FCC ruling that the
company is improperly blocking customers’ Web traffic, triggering a
legal battle that could determine the extent of the government’s
authority to regulate the Internet.

In a precedent-setting move, a divided Federal Communications
Commission last month determined that the company is violating a
federal policy that guarantees unfettered access to the Internet.

Comcast challenged the FCC decision Thursday in the U.S. District Court of Appeals in Washington.

The Associated Press

Get more business news online at tucsonbusinessedge.com.

The Associated Press
IN BRIEF

DETROIT – Nearly every major automaker saw U.S. sales drop in
August, but many saw signs that the worst slump in recent history may
have bottomed out.

Most upbeat were executives from General Motors Corp., which posted
a 20.3 percent sales decline from a year ago but a 31 percent
improvement over July’s dismal totals.

Chrysler LLC said its U.S. sales fell more than 34 percent in
August. Ford Motor Co. reported a 26.5 percent decline. Toyota Motor
Corp.’s sales dipped 9.4 percent, and Honda Motor Co. saw a 7.3 percent
slide.

Nissan Motor Co. saw August sales climb 13.6 percent from a year ago.

The Associated Press

The Associated Press

The Associated Press

PHOENIX – State government is beginning its fiscal year with sobering fiscal results carrying over from the year that ended June 30 and gloominess among economists.

Legislative budget analysts reported Friday that revenue was down from the same month in the prior year for the 10th straight month.

The Joint Legislative Budget Committee staff’s monthly report said July’s tax collections of $639 million were 7 percent below July 2007 and $89 million below the amount expected last month.

Because of the revenue slump, Arizona had to significantly scale back its budget for the fiscal year that ended June 30 and lawmakers struggled for months to come up with a new, smaller budget for the year that began July 1.

The analysts said they would need several months of results in the new fiscal year before they would try to revise revenue forecasts.

Private and government economists surveyed by Arizona State University’s W.P. Carey School of Business scaled back their projections for 2008.

“Although there are scattered signs that the economy may be close to bottoming out, there is little optimism about an actual upturn in key Arizona indicators during the second half of this year,” Associate Dean Lee McPheters wrote in an Arizona Blue Chip Economic Forecast released Friday.

Sales tax revenue is the single biggest revenue source and the budget staff report said it was down by 9.3 percent from July 2007 due to factors that included high gasoline prices and the housing market’s collapse.

“While gas prices have slowly begun to decrease, the relatively high price levels may continue to impact retail sales negatively,” legislative budget analyst Hans Olafsson said.

Corporate income tax, the smallest of the three major revenue sources, was down 31 percent from July 2007. Individual income tax was down 1 percent from a year earlier.

Citizen Staff Writer

TERESA TRUELSEN

ttrueslsen@tucsoncitizen.com

The Tucson metro area lost another 6,100 jobs in July over the previous month, raising the area’s seasonally adjusted unemployment rate to 4.9 percent from 4.7 percent in June.

Arizona’s seasonally adjusted nonfarm unemployment rate for July also rose, three-tenths of a percent to 5.1 percent.

The rise follows national trends as the economy continued to slow. Nationally, the seasonally adjusted unemployment rate increased to 5.7 percent in July from 5.5 percent in June.

The job losses were seasonally anticipated, according to the Arizona Department of Commerce report, with unemployment numbers typically higher in July when schools are out of session.

In the Tucson area, which includes all of Pima County, jobs were lost in all sectors except Natural Resources and Mining and Information, which remained steady.

The majority of jobs lost came in the Service-Providing industry, which dropped 5,200 jobs, the bulk of those in the trade, transportation and utilities category, which lost 900 jobs over the previous month.

Construction jobs continue to drop, with a loss of 500 from June to July. That brings the year over year loss to 3,300 since July of last year.

Statewide, nonfarm jobs in Arizona lost 37,500 jobs in July.

The goods-producing industries posted a loss – 3,000 jobs – for the 11th consecutive month, as did the construction industry, also losing 3,000 jobs.

Arizona has lost 128,000 nonfarm jobs since employment levels peaked in December 2006.

The Arizona Republic
ROBB COLUMN

A few weeks ago, Richard Stavneak, the director of the Joint Legislative Budget Committee, told lawmakers that “Arizona has one of the nation’s worst economies at this point.”

Now, Stavneak is my perennial choice for MVP of state government. His knowledge of state finances is encyclopedic. He is universally respected and appreciated for being a dispassionate and objective arbiter of the numbers.

But is Stavneak correct? Does Arizona have one of the worst economies in the country?

From Stavneak’s perspective, it certainly must seem that way. State revenues are down 7 percent this year, and the trend just keeps getting worse.

According to the Rockefeller Institute, at least 14 states are experiencing declines in revenues. Arizona’s figure includes the effects of an income tax cut. But even without that, the state would rank toward the bottom in terms of revenue production.

And Stavneak is hardly alone. According to Moody’s, Arizona is one of nine states currently in a recession.

Over the past year, personal income growth in Arizona ranked 42nd among the states. Customarily, Arizona is near the top.

So, certainly a case can be made that Arizona has one of the worst economies in the country at present. But closer examination reveals a more complex picture.

Arizona has certainly been hit harder by the housing bubble burst. Housing prices hit a peak in the Phoenix metro area in June 2006, as did construction employment for both the Valley of the Sun and the state.

Since then, housing prices in the Phoenix area have declined 29 percent, according to the Case-Shiller Index. That’s the largest drop of any of the 20 major metro areas included in the index and well above the index average of 18 percent.

According to the latest report from the Mortgage Bankers Association, the mortgage delinquency rate in Arizona is 20th highest among the states and the foreclosure rate is 10th.

Still, the percentage of Arizona’s mortgages in serious trouble (at least three months delinquent) is not far off the national average. And 92 percent of Arizona mortgages are current, right at the national average.

Overall, Arizona’s job creation has been sluggish. Since the housing and construction peak, Arizona has produced only 16,500 new jobs.

The common view is that housing and construction are what drive the other sectors of the Arizona economy. The data, however, suggest that contention is exaggerated.

Since the peak, Arizona has lost 42,100 construction jobs. That means Arizona has actually produced 58,600 nonconstruction jobs during the post-peak period.

That’s considerably less than the 198,000 nonconstruction jobs created in a comparable period leading up to the peak. But it does suggest that the other sectors of the Arizona economy have been churning forward despite the housing woes.

The view becomes even more complicated based upon a regional analysis.

During the post-peak period, the Phoenix metro area has produced 77,000 nonconstruction jobs, while the Tucson area created 15,000.

That means that the nonurban areas of the state have lost around 35,000 nonconstruction jobs during this period.

These sharp regional differences also appear in the unemployment rate. As of April, the Phoenix metro area and the Tucson area had unemployment rates decisively below the national average. The rest of the state, however, had an unemployment rate of 6.7 percent, considerably above the national average.

Critics say Arizona’s economy is too dependent on housing. No critic, however, has quite explained how an area can have more people moving in than other areas without having an economy more devoted to building homes for them.

Housing is, unquestionably, a big part of Arizona’s economy. And it’s in a deep fall right now.

The rest of the economy, however, appears to be churning ahead, particularly in the two urban areas. Broad-spread economic distress appears to be concentrated in the nonurban areas.

So, Arizona certainly does not currently have one of the country’s most robust economies, as it has had for so many years. But if you look beyond housing and construction, Arizona also does not seem to have one of the worst performing economies, either.

Of course, that’s a lot to look beyond, particularly for folks whose job it is to cope with the bottom falling out of state revenues.

Robert Robb is an Arizona Republic columnist. E-mail him at robert.robb@arizonarepublic.com.

Citizen Staff Writer

TEYA VITU

tvitu@tucsoncitizen.com

Crappy economy? Get used to it. You can even call it a recession, with the blessing of University of Arizona economist Marshall Vest.

Vest, well known for finding optimism when others see gloom, went right to the R word Wednesday morning when he and fellow UA economist Gerald Swanson gave the summer version of their twice yearly economic forecast to 400 local business leaders.

“Let’s start with the economy has slipped into recession,” Vest said at the Doubletree Hotel at Reid Park. “It’s a full-blown recession.”

Vest said Arizona is one of nine states in recession. The others: California, Nevada, Florida, Minnesota, Wisconsin, Tennessee, Ohio and Rhode Island.

“Housing is the biggest challenge for us,” Vest said. “We’re in the biggest decline since World War II.”

When will the declines end?

“There’s no sign of a bottom yet,” Vest said. “We will work through it. By some accounts, the credit crunch is still building. We may be halfway through. I don’t know how you can tell that.”

Beyond soaring fuel and food prices plus sinking home values and foreclosures, Swanson looks to the low value of the dollar as the top reason for why the price of oil has risen 44 percent since December.

“This is most assuredly lowering our standard of living, period,” Swanson said about the dollar.

Swanson said Americans can look forward to unemployment and inflation going up this year. He doesn’t see light at the end of the tunnel yet.

“We know something is wrong,” Swanson said. “We’re just not sure how to get out of it.”

There is good news, however. Employment in health care is growing.

“It’s a booming industry and the boomers are getting older,” Swanson said. “This is not an even recession yet. It has hit pockets and hit pockets hard.”

There have been substantial local job losses in construction, the leisure sector, professional and business services, the finance sector and manufacturing, but data shows higher levels of education are leading to better job security.

Swanson said the unemployment rate for high school dropouts is 21 percent, while for high school graduates it’s 12.9 percent, for those with some college it’s 6.9 percent and for those with bachelor’s degrees or higher it’s 3.1 percent.

Still, consumer spending is down across the board.

“We have a rather strange economy,” Swanson said. “The new mantra is ‘Honey, what’s for dinner?’ ‘Whatever is on sale.’ ”

Vest said the crux of the recession is based on the longest span of consumer liabilities growing faster than assets. People have outspent their assets every year since 1998, a longer span than similar periods during the Depression, World War II and the late 1940s.

“Consumers have been running a deficit for the past decade, spending more than they earn and selling off assets,” Vest said. “The recent string of dissaving is really unprecedented.”

Swanson’s take: “Think of it as a correction of our excesses.”

Tip No. 1: Pay off your credit cards.

“Get your house in order,” Swanson said. “We have to start the correction.”

Recession by the numbers

Foreclosures

• Arizona: No. 4 behind Nevada, California and Florida

• Filings statewide in March: 9,199, up 106 percent from March 2007

• Tucson homes in foreclosure: 4,400

Good news:

• Despite the drop in housing values, they still are 65 percent to 80 percent higher than five years ago.

Jobs/economy

• Tucson jobs lost in past 12 months: 5,300, 1.2 percent of work force

• Financial services: 2,100 jobs lost (many from First Magnus)

• Construction: 2,000 jobs lost

• Leisure (hotels and tourism): 800 jobs lost

Good news:

• Raytheon Missile Systems: 1,300 jobs added, up to 12,500 employees

• Government: 700 jobs added

• Educational and health services: 400 jobs added

• Mining: 300 jobs added

Back to bad news:

• Retail sales: down 6.5 percent in past year

• Auto sales: down 20 percent in past year

• Restaurants and bars: down 5 percent in past year

What does a weak dollar mean?

• December 2002: $1 = 1 Euro

• Barrel of oil: $25

• Now: 1 Euro = $1.54

• Barrel of oil: $122

Sources: UA economists Marshall Vest and Gerald Swanson