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Will we see a recession?

September 20, 2022

ASU economist explains how experts crunch the numbers, make the call

Arizona State University economist Dennis Hoffman is fascinated by weather. In a different life, he’s an oceanographer, focused on running simulation models to predict weather patterns or events.

Instead, Hoffman’s reality is grounded in numbers, although forecasting is a major part of his career. As an economist, Hoffman runs business cycle models to predict the state of the economy.

So, what’s the economic forecast?

“Storm clouds on the horizon, but it’s not completely definitive that they’ll come our way,” says Hoffman, ironically in a studio space on the Tempe campus that could be used by a TV meteorologist.

Over the course of the pandemic, there have been many predictions or estimates about the health of the economy. Right now, the biggest question is: Are we in a recession? Or, are we headed there? But then, who makes the call?

It’s not the media, or everyday people, although there is no shortage of opinions. The job falls on the National Bureau of Economic Research, a nonpartisan, nonprofit research organization tasked with looking at the most accurate economic reporting tools to make the decision.

On a daily basis, economists also use some of those tools, like an economic index, to forecast the health of the economy. Take for example, the U.S. Bureau of Labor Statistics’ Consumer Price Index, which measures the average price of consumer goods and services and how those prices change over time.

But there are also nontraditional indices, like the buttered popcorn index or the coupon redemption index, although Hoffman warns, any indices or economic indicators that are tied to consumer sentiment, while fun, are generally not the most accurate ways to estimate the health of the economy, or if the “R” word is looming. Indices are sort of like barometers. They provide an indication of pressure points that are changing but need not be perfect predictors of recession.

With this in mind, ASU News asked Dennis Hoffman, the director of the Office of the University Economist at ASU, about the history of the economic index, why inflation seems to be affecting people differently and whether the economy looks like it’s headed for a recession.

, ASU economist

Dennis Hoffman

Question: What is an economic index and how do economists use them?

Answer: For centuries, businesses have been trying to get a read of economic conditions, or the health of the economy, so they can plan, hire, order products; so they can try to make sales. That exercise became more sophisticated approximately 100 years ago, say post-World War I, especially in the (19)20s, when we had the postwar expansion; people started to track the health of the economy. We came out of some pretty tough economic times: take the war, take the Spanish flu, which hit the global economy hard. We came out of that in the (19)20s, and people began to see this economic vibrance and they tried to measure how fast it would grow, how long it’ll last and what are some of the warning signs in the economy that may signal an impending downturn.

The Purchasing Managers’ Index is a very good index. It’s a survey of purchasing manufacturers. These are the people who order inputs, products, basic components of production. And these are the people on the front line making these orders. If they’re ordering more, they’re seeing good times ahead, and we want to measure those increases in orders. If they’re ordering less, they’re cautious, and maybe it’s a change in “barometric” pressure that’s signaling headwinds ahead, storm clouds ahead or a downturn coming. We also have non-manufacturing purchasing managers indices today to kind of get a gauge of what’s going on in the service side of the economy. I prefer indices that tell me what businesses are buying. I think they’re far better than consumer confidence indices that can often reflect the latest story they heard on cable news.

Q: What type of indexes should we be looking at in Arizona, to measure the economic health of the state?

A: Try as we may to diversify our economy, Arizona is a people magnet. People flock to the state of Arizona, and as a result, our real estate industry is really robust. In fact, a lot of the movers and shakers in Arizona made a significant amount of money in investing and developing real estate in the state. Unfortunately, that’s a cyclical business. Any kind of an index of real estate would be very useful in predicting economic activity in the state of Arizona, despite the fact that we’re pretty diverse today in terms of our industrial base. As goes the real estate cycle in Arizona, so goes the health of the economy. We’ve seen a robust recovery in Arizona, and along with that, a robust real estate movement over the last 12 months in the state. Question is: What does the future hold for us?

Q: Are we in a recession?

A: Well, that’s the big debate among economists right now. Let me tell you what the recession hawks are basing their argument on. We have had, over the last, let’s say eight to 12 months now, unanticipated inflation that has put federal reserve board members back on their heels, and they’re a bit surprised by this. These people are in control of the nation’s monetary policy, and they’re trying to keep prices stable, while maintaining near full employment. They’ve done a great job on both in recent years, except for the last year. And what they’re doing is rapidly tightening money and credit, which will dampen the demand for goods and services.

The last time we had a situation like this, where the federal reserve stepped in and rapidly tightened money and credit, was in the early '80s, and we had a moderate to severe recession in 1982. Many economists point to that particular episode, saying it’s going to be virtually impossible for the federal reserve to slow the economy and wring out inflation without triggering a recession.

If you’re saying that we’re not going to have a recession, what you’re pointing to is the fact that the consumer is unbelievably healthy. The job creation is off the charts. We get 500,000 new jobs plus most months for the last 18 months. This is unprecedented. So we really have, in many ways and shapes, a very healthy economy, solid balance sheets, a lot of pent up savings, a lot of new jobs being created. That’s not necessarily a recipe for a recession.

So, you’ve got the hawks on one side and the hopefuls on the other. And if the root cause of inflation is shortages of goods, increased production that increases supply will be an even better remedy that dampening demand with a Fed tightening cycle.

Q: If we enter a recession, what’s the contributing factor? Is there more than one?

A: The causal factors for this particular episode, I think, are going to be investigated for decades. Picture PhD thesis after PhD thesis written on this particular subject. There’s a little episode in the late '40s, actually, that I think should be investigated because I think it’s quite similar. Coming out of World War II, people were breathing a sigh of relief because we were coming out of dark times. The '30s were a disaster; couple that with a war, people wanted to live, buy products, move on. But supply chains were disrupted, and we had a bout of inflation. We had interruptions in production, kind of like we had the last two quarters, where GDP fell but we continued to create a lot of jobs. So that was not defined as a recessionary period, but it was a period of duress.

People don’t like to hear this because we're sick and tired of COVID, we’re sick and tired of the pandemic, but this left an indelible mark on the economy. It is without precedent in history to shut down the U.S. economy and the better part of the world economy. And some of those shutdowns were prolonged throughout the world, especially in Asia. Reopening was always going to be a challenge because immediately after we shut down, guess what? Folks sat at home and ordered products off online suppliers since they weren’t able to travel or consume services.

Initially, during the shutdown, manufacturers and good suppliers decided to slow down production, but quickly received signals to ramp up. But they had to ramp up at a time when Asia was still shut down. You can’t build cars today without semiconductors. You have manufacturing facilities that were established over the last 15 to 20 years with unbelievably efficient, “just-in-time” inventory control, sourcing products from around the planet, and overnight, and then we blew that system up. Now people are upset because they can’t get goods. And of course, the federal government got worried whether people had enough cash, so they dumped a whole bunch more (in the form of stimulus checks) in both spring of 2020 and spring of 2021, which both political parties supported. So you have an incredible amount of money chasing a shortage of goods, which is a recipe for inflation.

The cure: slow down demand and/or get those supply chains back in order. 

Q: Why does it seem like inflation is impacting people differently?

A: The problem with a recession, the problem with inflation is that it doesn’t hit everybody the same way. Folks that work from home, own their own vehicles, own their home, have a secure job, don’t have to commute anymore, have steady paychecks, haven’t had severe disruptions from the pandemic — they’re doing well. In contrast, picture individuals in Phoenix that are working on the east side of the Valley, because that’s where the preponderance of jobs are in Phoenix metro, but they’re living in the West Valley because that’s where they can afford to live; and they’re paying rent in the West Valley and commuting across town. So, their rental costs are way up. Gasoline prices are high. They had to spend way too much to get a used car because their old used car gave out on them. Those folks are in tough straits, even as job demand for their services is fairly healthy. So, picture a situation where we slip into recession. Let’s suppose they’re tied to the construction or real estate industry and real estate really slows; they might be laid off. So now you’ve got higher rents, higher commuting costs, a higher cost for your car and your job is threatened. That’s a challenging situation. So you’ve got a group that is prospering and a group that is not.

Top photo courtesy iStock

Jimena Garrison

Media Relations Officer , Media Relations and Strategic Communications

Running out of river, running out of time

September 20, 2022

3-part series to examine the 100th anniversary of the Colorado Water Compact

Editor's note: This is the first in a three-part series examining water in the Southwest in recognition of the 100th anniversary of the Colorado River Compact. Look for the next installment in October and the third in time for the compact's anniversary near the end of November.

Let’s be clear about this: It’s not just about water.

Every time you lift a glass of water to your lips, enjoy a hot shower or fill up your swimming pool, there’s a certain amount of fraught history coming out of the faucet.

From personal health and food production to recreation, business, politics and even culture, water touches almost every aspect of life in Arizona. It is essential. Despite this fact, over the past century, not much has changed in terms of how we get it, how we use it and our attitudes toward its encroaching scarcity. But those in the know understand we’re getting to a tipping point that will force us all to adjust our attitudes and change our consumption habits.

And change we must.

The Colorado River provides water for millions of acres of irrigation and some 40 million people in tribes and cities in Arizona, Nevada, New Mexico, Colorado, California, Wyoming, Utah and Mexico. But the literal wellspring of the Southwest region’s vitality is drying up, and fast.

We’re already in the second year of allocation cuts, which directs how much states can draw from the Colorado River, and deeper cuts are on the way. A “Tier 1 shortage” has already been declared, but the feds have recently indicated that a Tier 2 shortage may be declared by the end of this year, mandating larger cuts, especially to Arizona.

The Bureau of Reclamation has already asked basin states and tribes to give them suggestions for how to cut 2 million to 4 million more acre-feet of water consumption per year to keep the river’s largest storage reservoirs, Lake Mead and Lake Powell, from falling to dead poolDead-pool status is reached when the water level is so low in a reservoir that water can no longer flow downstream from a dam. and becoming unusable.

Lake Powell Reservoir

A view of the Lake Powell reservoir in 1995. Photo courtesy of Wikimedia Commons

Scientists, researchers and academics who have been ringing the alarm bell for years are now getting more attention thanks to recent photos of bones and sunken boats in Lake Mead, bathtub rings at the Hoover Dam or the stark satellite images of these shrinking bodies of water.

Clark County, Nevada, recently voted to cap the size of all new swimming pools to save water. The town of Las Vegas, New Mexico, announced in late August that it had less than 30 days of drinking water. And on Sept. 19, a top Colorado official warned that Western reservoirs could run dry in three to four years if strict conservation methods aren't adhered to.

It's not as if this is coming out of the blue. The public has been concerned about this issue for some time, but many feel that policymakers and water managers have failed to act or act quickly enough to meet the spiraling challenges.

It’s also a concern to several experts at Arizona State University, who have been using their knowledge and skills to gauge the severity of this phenomenon and have been charged to come up with possible solutions to this existential threat to the Southwest.

What follows is the first in a three-part series by ASU News on the 100th anniversary of the Colorado River Compact, its history, how we got here and where we are headed.

Body of water

A view of the Colorado River in 2015. Photo courtesy of Wikimedia Commons

A dubious start

Agreements, pacts and contracts are usually done in good faith. But that really doesn’t apply to the Colorado River Compact, which will recognize its centennial in November. According to one Arizona State University professor, every participant went into the deal with suspicion, self-interests and hostility toward other participants in the negotiations.

“There’s an old phraseThis quote has often attributed to American writer, humorist and lecturer Mark Twain. used in the West: ‘Whiskey is for drinking and water is for fighting,’” said Taylor Weiss, assistant professor in ASU’s Environmental and Resource Management Program. “Even when these agreements were made — and let’s call these forward-thinking individuals who were very creative — they were thinking about how they were going to subvert those agreements from the onset. … Essentially, everybody thought everyone else was padding their numbers.”

Historic black and white photo of the Colorado River

Photo of the Colorado River from 1913. Photo courtesy of the Library of Congress

Weiss is referring to the original Colorado River Compact of 1922, which took seven states and the federal government almost a year to hammer out. Their goal was to fairly allocate the river’s water among the seven basin states so each would know how much water they could remove from the river to promote future development.

Their task sounded simple enough: reduce floods and put the river’s water to work supporting agriculture, industry, urban growth and hydroelectric power generation. They also hoped the compact would reduce conflict and litigation between the Colorado River Basin states.

But the framers of the compact could not anticipate the future water needs of the Southwest with its explosive growth after World War II. Demand for water quickly exceeded supply, and “water politics” remained ever contentious.

California was the 800-pound gorilla in the compact negotiations because it had an advantage over the other basin states.

“The doctrine of prior appropriation guides all Western water law. … (It) essentially states that whoever first diverts water from a stream or river and puts it to beneficial use can claim priority rights to that water,” said Paul Hirt, an emeritus professor of environmental history at ASU. “California had the population, industry and money to build their own diversions, dams, canals and pumps. They were already diverting a quarter of the water and the other six states were starting to panic, trying to figure out how they could equitably divide up the river before California got everything.”

Adding fuel to the fire was the fact that California contributed the least amount of runoff to the river. 

It took years of haggling to get something solid on paper. Finally, representatives from the seven basin states assembled on Nov. 9, 1922, in Santa Fe, New Mexico, with then-U.S. Commerce Secretary Herbert Hoover for a series of meetings to finalize the compact. Their core mission was to apportion the flow of the river among the seven basin states and Mexico.

The government had measured the river’s flow at Lees Ferry, Arizona, for several years and believed that 17 million acre-feet of river water flowed through the basin in an average year. They allocated 7.5 million acre-feet to the Upper Basin states and 7.5 million acre-feet to the Lower Basin states, with 1.5 million acre-feet allocated to Mexico. The remaining half-million acre-feet would serve as a buffer for droughts and evaporation.

Unfortunately, the decade prior to 1922 was an unusually wet period so the government substantially overestimated the amount of annual river flow. This would have been trouble enough, but climate change and the recent decades-long drought have exacerbated this deficit.

Today, the river is a shell of its former self, and the compact is more a liability than an asset, Hirt said.

“The states fight tooth and nail to retain their historic allocations, even though they are unworkable and, in many ways, inequitable,” Hirt said. “Originally designed as a solution, the 1922 compact now stymies our ability to adapt quickly to climate change and correct historical injustices.”

After almost three dozen meetings over a two-week period, the compact was finally signed on Nov. 24, 1922.The 1922 compact between Colorado River Basin states allocated to Arizona 2.8 million acre-feet of the 7.5 million acre-feet to be shared among the Lower Basin states of Arizona, California and Nevada. Hoping to secure a larger entitlement, Arizona refused to ratify the compact until 1944, leaving its Colorado River allotment in legal limbo during the 1920s and 1930s. Mexico would not receive its allocation of 1.5 million acre-feet annually until 1944.

While California had the population and resources to invest in large water infrastructure after 1922, Arizona in contrast could never afford the cost to bring water from the Colorado River hundreds of miles to its main urban and agricultural regions of greater Phoenix and Tucson. So, after decades of lobbying, Arizona finally convinced Congress in 1968 to fund and build the Central Arizona Project (CAP), a system of canals and pumps that lifts water more than 3,000 vertical feet and sends it more than 300 miles from the California border to the state’s thirstiest farms and metropolises. CAP was finished in 1993.

Waterwise, Arizona had finally arrived.

Early into the millennium, the Southwest entered an exceptional era of persistent drought.

And now we’re about to enter a new era — the era of the unknown.

Timeline of Arizona water over the last 100 years
Download full-size timeline

The boomerang effect

The Colorado River Compact was made by a few select men and impacted millions of people. But they never included a major group: Native American tribes.

This wasn’t a mere oversight or an act of shortsightedness but quite deliberate, according to one ASU expert.

“I think their exclusion was foolish in the extreme, and our current river management is evidence of that foolishness,” said Rhett Larsen, the Richard Morrison Professor of Water Law at ASU’s Sandra Day O’ Connor College of Law. “We must call it what it is — racism, regardless of if it was active racism or the passive racism of thoughtlessness. Important voices who understood the river well, who had important ideas and strongly protected rights were left out of the conversation and should have been involved from the very beginning.”

ASU Law Professor Robert J. Miller (Eastern Shawnee) believes tribes were left out of the conversation for a much more sinister reason — that America was following its path of Manifest Destiny, an explicitly white nationalist ideology that intentionally marginalized people of color in the developing nation.

“It was definitely ethnic cleansing and perhaps even genocide underway,” said Miller, who is the Willard H. Pedrick Distinguished Research Scholar and the faculty director of the Rosette LLP American Indian Economic Development Program at ASU. “Federal Indian policies were all about assimilating Native Americans and just getting them out of the way.”

When the compact was approved in 1922, Native American tribes were in bad shape. The American government’s aim was to isolate them on reservations or to assimilate them into cities and destroy their traditional way of life. Disease, malnutrition, re-education programs, racial discrimination, economic marginalization and a diminishing land base left tribes with few options or recourse. They were on the ropes for the next several decades as Colorado River water was divvied up among the seven basin states with nothing allocated to tribes.

In 1963, Indigenous people were thrown a legal lifeline when the Supreme Court decided to look at the compact again after a suit brought forward from nearly a decade before, Arizona v. California. The court concluded that five Indian reservationsFort Mojave, Fort Yuma, Chemehuevi, Colorado River and Cocopah had reserved water rights and reservation lands that were capable of growing crops that were entitled to water allocations.

The next few decades saw a long period of water rights settlement involving Congressional legislation and water boomeranging back to some of the tribes after these rulings.

“Many of Arizona’s tribes have excellent representation, and they have very innovative and forward-thinking leadership in terms of water,” Larson said. “And because of that, they know how to assert those rights.”

Some are entering leasing agreements to sell their excess water to several cities and municipalities throughout the state. That could be potentially lucrative for some Arizona tribes — like those with high-priority water rights to mainstem Colorado River supplies, such as the Colorado River Indian Tribes, and those who have the legal authorization and means to convey their water to entities who want to buy it.

Not all tribes are in that situation, though, and many must continue to litigate and hope for settlements that will clarify their water rights and provide for the delivery of at least some of their water.

“Some are dealing with underinvestment in infrastructure and reliance on funding that was based on assumptions about future water supplies that haven’t held up,” Larson said. “Other tribes still remain in limbo, waiting for the outcome of litigation while the boomerang just sort of spins out in the distance.”

As of 2022, 14 of the 22 federally recognized Arizona tribes have settled water rights. A few — like the Hopi, Hualapai and Navajo — have not. And many tribes still largely hold what is known as “paper water” — a water right on paper — but little actual wet water.

“Wet water is when you pump it out of the river to use it,” Miller said. “(Paper water) is when the river flows by your land and you’re not allowed to use it. Most tribal water stays in the river.”

Melissa K. Nelson, a professor of Indigenous sustainability in the School of Sustainability and a member of the Turtle Mountain Band of Chippewa Indians, said, “The Native peoples of Arizona have faced egregious and unjust treatment by these water compacts, and a legacy of racism and erasure by Manifest Destiny.

“They, and all people of Arizona, face an uncertain future. Yet it will be the first peoples who have lived in this desert landscape for thousands of years who will be resilient and persevere through this drought transition, as they always have.”

Next in our series

  • October: What individuals can do in the face of growing shortages.
  • November: The future of water in the Southwest.

Graphics by Alex Cabrera/ASU Media Relations.