I will have no reservation about kissing the year 2009 goodbye and greeting 2010 when that ball drops in New York City on New Year’s Eve.  This year has been one for the record books.  First the awful climax of the financial crises followed by an equally historic meteoric rebound in world equity markets once investors were secure that the second Great Depression would be averted.

As the end of year closes in, I’ve been thinking about where we might go from here in 2010?  For a change, I thought that it might be refreshing to start with some positive notes.  These are not predictions, per se, but rather visions of how I think the year will unfold.  We’ll revisit this piece at the end of next year.

1) First, I fully expect that 2010 will “feel” better than 2009.  I know that may not seem to be much of a revelation, but nonetheless it is a positive.  After a few years of manic volatility in the financial and equity markets, it looks as if the environment is stabilizing.  That’s not to say there won’t be a few scares but the year, as a whole, may actually seem boring and slow in comparison to the last few.  That would be a plus!

2)  While the local (Arizona) economy will continue to contract, fueled by job losses, it will do so at a slower pace.  In fact, if lucky, the job loss picture may finally find a bottom at the end of the year.  Is less worse equal to good?  I’ll let you be the judge of that.

3)  The housing market inventory will continue to slowly rebalance.  Unfortunately, there are still tens of thousand of vacant homes in Arizona that must be absorbed into the system.  Until a significant portion of these homes are sold off, it will make it hard to sell new construction.  Oops, this is a positive only section….no place for negatives.

4)  If you currently have a job, chances are increasingly likely that you will retain it.  As the job loss risks shrink, those employed will not only remain so, but be asked to wear the hats of those lost.

5)  Consumers will continue to pay down debt, always a good thing.

6)  With frugality now in, the consumer will spend increasing time at home, bolstering in home entertainment while bringing family and friends closer.

7)  Consumers will start to adjust to the “new” economic paradigm, one based upon frugality and lower expectations rather than excess.

8)  Dining out will continue to be affordable, with local restaurants offering incentives in order to maintain customer loyalty.  Those that do so, or offer a unique style of cuisine, may actually grow.

9)  Those of us fortunate enough to have retained our homes, jobs and health during this historic interval will open ourselves to those less fortunate.  Philanthropy will slowly grow once again.  Remember, it could have been US.

Having closed the year on a “positive”, what could disrupt the good feelings? 

1)  A stubbornly high unemployment rate is a definite negative.  As I stated above, while unemployment is slowing, that doesn’t translate into job gains.  The national unemployment rate will surely hit 10% and locally perhaps 11-12% (and that’s just the declared rate.  Include those having given up looking for employment and the rates could approach 15% or higher).  If companies don’t begin to hire, we could remain stuck with a huge unemployed sector.

2)  Lack of progress in removing homes from the “vacancy” list would keep us in the doldrums.  The residential real estate market is still very depressed with tens of thousands of vacant homes still on the local market, exerting downward pressure on home prices.  If this tremendous imbalance does not improve, we will be left with a very depressed housing market along with mounting job loss in the construction sector.

3) The commercial real estate market is just entering it’s darkest hour and may not emerge for a couple of years.

4)  With loss of healthcare coverage, hundreds if not thousands of locals may be financially threatened as savings is exhausted.

5)  If the consumer feels that his or her financial life is not improving, this will damage consumer confidence and promote further retrenching, threatening the survival of local businesses.  The importance of consumer psychology cannot be overemphasized!

6)  Local businesses will continue to find it nearly impossible to secure loans from smaller local banks as Federal restrictions hamper that process.

7) With Arizona falling behind in the economic recovery as reported by the Eller College of Management January 2010 report (http://ebr.eller.arizona.edu/azeconomyissues/AEwinter10.pdf), additional Tucson based business struggle to survive.  For those interested in learning more details on the national, Arizona and Tucson economy, this is a must read.

Fed language in their meetings will begin to suggest that subtle inflationary pressures are building, frightening the markets that interest rates are about to rise.

9) Energy prices escalate, sapping badly needed consumer spending that could fuel the recovery.
 
10)Federal and state income taxes will rise in order to address the massive fiscal deficits.  Arizona has a large deficit that likely cannot be resolved without a rise in taxes and may warrant an increase in other taxes, as well.

While U.S. government figures indicate that the U.S. recession came to an end around mid year, improved GDP was bolstered by the massive and unheralded Federal stimulus package.  Later this year, as the stimulus wanes, we likely will be left with a very fragile national economy, possibly for years to come. 

Recent figures supplied by the Eller College of Management January, 2010 update (see link above) reveals that Arizona was only one of 18 states that suffered more than a 1% decline in the Federal Reserve Bank of Philadelphia’s State Coincident Index for the three month period ending in September of ’09.  This is an index that includes non-farm employment figures and salaries.  From September of 2007 until September of 2009, Arizona lost 10.3% of the labor force, dwarfing the prior record of 4.7% in the4 1974-75 recession.

Local (Arizona) economists project that recovery will not initiate in earnest until 2011 with losses not recovered until 2013.  To be honest, I question whether this projection is a bit optimistic.  With so much damage done fiscally and psychologically, I believe it’s unlikely that local companies will begin to rehire in mass, an act that is critical to a recovery, until they have increased confidence in their future.  Likewise, consumers will continue to be very tight with their money, still uncertain about jobs.  The result here is an environment in which local businesses will have to be highly creative in order to sustain or even grow their customer base. 

Meanwhile, we are all in this together.  It is to our benefit, as Tucsonans, to support local businesses whenever and wherever possible.  It’s also to our benefit to assist those less fortunate than us.  What you give to others may make a lifetime worth of difference.  Here’s to a 2010 that feels better than its predecessor…Happy New Year to all and thank you for your continued support of the Wine Inquirer.  This publication is for you.  Without you, there would be no Inquirer.