“These types of things set the recovery back,” said Jim Rounds, an economist with Elliott D. Pollack & Company. “I feel comfortable saying that what happened set the recovery back three to four months.”
It’s been a tumultuous couple of weeks, with a dramatic unveiling of a debt ceiling compromise, the downgrading of the U.S. credit rating, and a subsequent market mini-crash this week as the Dow plunged, rebounded, plunged again and then bounced back.
STATE INVESTMENT ROLLERCOASTER
So far, the only concrete blow has been delivered to the state’s investments in the stock market, although it has regained most of the loss.
On Aug. 8, the net loss was $117 million, according to Arizona State Treasurer Doug Ducey. It rebounded the next day with a gain of $80 million, followed by another loss on Aug. 10 of $69 million.
An $81 million gain on Thursday, brought the week’s net loss to $25 million.
On Aug. 8, the net loss was $117 million, according to Arizona State Treasurer Doug Ducey. Although it rebounded the next day with a gain of $80 million, there was another loss on Aug. 10 of $69 million.
But Ducey said that the change was to be expected, adding that a loss isn’t really a loss until one sells and he expected the market would stabilize quickly.
“The value in the Permit Land Endowment Trust will change day to day depending on if the market goes up or down,” he said. “And certainly, it’s experienced that volatility in the market.”
But Ducey said the state’s portfolio is “very safe and well-diversified” and insisted that the state’s investments were still sound.
Money invested by the state comes from the interest on the $3.2 billion Permanent Land Endowment Fund, which is funded by the sale of state trust land.
Last week, Standard and Poor’s downgraded the U.S. credit rating from AAA, the highest rating, to AA+, citing a lack of a sufficient long-term debt reduction plan from the federal government and a political system that was “less stable, less effective and less predictable.”
On Aug. 8, the Dow plunged 634 points, but rebounded Aug. 9, rising 429 points. On Aug. 10, stocks dropped 519 points, and on Aug. 11 the market regained most of that loss.
Ducey said he doesn’t expect that the downgrade will have any other short-term effects on the state. The concern was always that the downgrade would drive up interest rates for consumers.
But since money continued to flock to the Treasury despite the downgrade, interest rates remained low, which will keep the pain from being passed on to consumers and businesses.
“At this point, we’ve seen interest rates go lower, and that’s what the market sees,” Ducey said. “The market still sees U.S. government-issued debt as a sound value.”
Rounds echoed Ducey’s comments, saying that his sense was that the market turmoil was “only a blip” and that the market would recover quickly — that is, so long as Congress and the president come up with a plan to reduce the debt.
The bigger significance of the Dow dip, he said, was psychological. Economic studies have shown that largely, the economy is still in recovery, albeit slowly.
However, that psych-out indicates a drop in investor and consumer confidence, he said, which are two key factors in economic activity.
“One of the things that’s holding the economy back right now is that consumers are still worried about spending because they don’t feel comfortable in their employment status,” he said. “And businesses are worried about adding new employees because they don’t think there’s enough consumer demand out there.”
Rounds admits he’s among those losing confidence.
“I don’t have any faith in (Washington politicians),” he said. “If they can’t do the simple thing right, how can I have faith that they can do the hard thing, come up with a comprehensive debt-reduction plan, and do that right?”
And just as the seemingly broken political system in Washington caused S&P to question its effectiveness, so are business owners and consumers.
FED CUTS AFFECT STATE
Meanwhile, the recently-passed debt ceiling deal may bring more economic hardship to Arizona.
Glenn Hamer, president and CEO of the Arizona Chamber of Commerce and Industry, said the cuts that came with the deal will likely cause some short-term pain in the state but will lead to a long-term stabilizing of the country’s finances.
The defense cuts in the current deal, which reduce the Department of Defense’s budget by $330 billion over 10 years, will likely hit the aerospace and defense industry in Arizona, which provides for 21 percent of all manufacturing jobs in Arizona according to a report by the Arizona Chamber of Commerce and Industry.
The health care industry may be on shaky ground, as well. Medicaid and Medicare were spared in the initial agreement and will remain untouched if the “supercommittee” does not come to an agreement. But if the 12-member group determines such cuts are necessary as a solution, the programs may be trimmed.
But Hamer said the cuts were necessary.
“The cuts will have some sort of impact on the economy, but it has to be weighed that the country cannot continue to borrow forever,” he said. “On a macro level, the far more dangerous path to go down is if the country puts itself in a situation at some point in the future where it can’t pay its bills.”
Rep. John Kavanagh, R-Fountain Hills and chair of the House Appropriations Committee, agreed that the downgrade will probably stall the recovery, which will hurt the state. But otherwise, he said as long as the federal government holds the line financially and continues to make cuts, the effect on the state will be minimal.
In the meantime, Hamer said that businesses that rely largely or in part on federal funds should steel themselves for some pain.
“The markets are in some way going to demand some kind of austerity, and there will be some pain in industries that depend on federal resources,” he said. “If you have a business model that depends on those resources, I’d reconsider it.”