Ariz.'s choice: Lead or fall behind; Lack of urgency to reinvent economy has Phoenix trailing other cities, losing quality of life

The Valley's economy is expected to push through the current real-estate downturn the same way it always has: growth.

At least 100,000 new residents moved in just last year, a growth rate double the national average.

A population that has grown more than 20-fold since World War II has made Phoenix the nation's fifth-largest city.

But after a remarkable 60-year run, that economic engine shows signs of strain.

According to an Arizona Republic analysis of key indicators, metropolitan Phoenix has settled into a trajectory of rising costs and reduced opportunity, riding an economy singularly dependent on the ability to build and sell homes.

At risk is the region's ability to compete in the global economy, which in turn threatens the quality of life that drives growth.

This article is the first in a three-part series that will examine where the Phoenix economy falls short and ways other cities have found to build new economies.

Housing accounts for at least $1 in every $3 that is generated in metropolitan Phoenix. If real estate begins to pick up as predicted by mid-to-late next year, the Valley's future may again appear secure.

But in the larger world economy, Phoenix is essentially running in place, falling behind cities such as San Diego; Austin, Texas; and Philadelphia.

These cities have reinvented their economies by moving beyond older manufacturing industries.

Metropolitan Austin, the 39th largest in the country, has become a world center in high-tech manufacturing through sustained investment and marketing.

These cities built "knowledge economies" around research and technology, with the ability to quickly turn new ideas into products and services. Their success attracts more investment, more talented workers and more leading companies, all critical in global competition. And that success also boosts wages and opportunities across the entire economy.

The Valley has bits and pieces of a knowledge economy. But economists say Phoenix needs to do much more before it can replace housing, manufacturing and tourism as its economic foundation, just as they replaced cattle, farming and copper mining.

Ioanna Morfessis, founding president of the Greater Phoenix Economic Council, has spent 25 years as an economic development expert. She now operates her own consulting firm.

Although progress is being made, she said the question facing Arizona is how to "diversify and create a resilient and competitive economy and make itself less dependent on growth." "Detroit was the fastest growing city in America in 1954, and look at Detroit now."

Part of the answer is to attract more engineers, designers, and scientists whose innovations can drive the economy. Another is to develop a sense of urgency among politicians and business leaders that leads to action.

Warnings about the region's economic base are not new. But the amount of time left to make significant change is running out as the world economy replaces the U.S. economy in determining where Americans work, how much they make and the quality of their lives.

Grady Gammage Jr., a longtime Phoenix attorney and development expert, wrote a book in 1999, Phoenix in Perspective, that warned of relying too heavily on growth.

Growth always had been the familiar and reliable solution, Gammage wrote, so there was little incentive to change.

Gammage sees the same mind-set today. "In Phoenix we talk about it, we worry about it, but you know what? Why bother to think about creating a knowledge economy when we can just crank up the machine and sell 30,000 houses each year?"

Danger signals

In a yearlong project with Arizona State University, The Republic examined the factors that shape a knowledge economy and, considering those factors, how metropolitan Phoenix compares with nine similar U.S. cities.

Reporters and economists examined decades of data from state and federal sources, universities and businesses. Key indicators were identified for the comparison. Dozens of interviews with economists, business leaders and government officials followed to discuss the findings.

What the analysis found is that Phoenix is slipping. Phoenix is losing ground to other cities in the global economy and experiencing a deteriorating quality of life at home. As the world economy becomes more dominant, Phoenix risks falling further behind.

Two key indicators reflect how much people in Phoenix basically benefit from the current economy.

* Wages: Maricopa County ranks last in average weekly wages compared against the nine other most populous counties in the country, according to the Bureau of Labor Statistics. In the first quarter of 2007, the most recent numbers available, workers here made an average $857 per week compared with $944 in the Austin area, $1,038 in the Philadelphia area and $1,258 in the Atlanta area.

* Income: Phoenix's per capita income was $25,818 last year. That compares to Philadelphia ($28,436) San Diego ($28,763) and Denver ($29,363), according to the U.S. Census Bureau.

Other indicators reflect how well the current economy is doing and the potential for success as a knowledge economy. These indicators reflect both past performance and prospects for the future.

* Educational attainment: One key indicator of a region's economic potential is the number of people with college degrees. About one quarter of Valley workers over the age of 25 hold at least a bachelor's degree, compared with 33 percent of Atlanta and 33 percent in San Diego.

Experts say Phoenix is not producing or attracting enough educated workers to compete.

* Affordable housing: Inexpensive housing has long been Phoenix's key to steady growth. But the median home price soared from $169,400 in 2004 to $268,200 in 2006. Even with the current housing crunch, experts tend to agree that the median price won't fall back to the level of three years ago.

* Venture capital: Venture capital refers to public or private money invested in new ideas, products or companies. The amount of venture capital a region generates or receives reflects both its current level of innovative activity and potential for future success. In 2005, Arizona businesses received $165 million in venture capital, compared with California's $10 billion, Washington's $791 million and Colorado's $652 million.

* Patents: Patents granted in a region are considered a reliable indicator of innovation. Between 1996 and 2006, Arizona inventors were granted 16,212 patents. Texas, in comparison, was granted 62,186. Pennsylvania had 34,461.

* Opportunity: Want to apply for a job at one of the 500 fastest-growing companies in the U.S.? Arizona had one, JLT Mobile Computers of Chandler, but it was bought earlier this year by a Florida-based company. Compare that with Texas' 45, Pennsylvania's 23 and Washington's 14.

Fast-growing companies tend to be those that rely on innovation and attract educated workers. They are a strong indicator of both a region's accomplishments and future potential.

When it comes to established Fortune 500 companies, Arizona has just four: Avnet Inc., Phelps Dodge (now known as Freeport-McMoran Cooper & Gold Inc.), U.S. Airways and Allied Waste Industries Inc.

Job creation is often cited as an Arizona success story. Arizona has impressive numbers. But there is a difference between quantity and quality of jobs.

From 2005-2006, for example, Arizona added nearly 135,000 jobs for a growth rate of more than 5 percent, compared with about 2 percent nationally.

But the largest segment of the state's workforce -- nearly 20 percent (or 526,600 people) -- work in trade, transportation and utilities, according to the Arizona Department of Economic Security, jobs largely outside the category of "knowledge workers" needed to transform the economy.

Many new jobs are service jobs to meet the daily needs of all the people moving to the region. Construction, the industry most affected by growth, increased its number of jobs from 219,500 in 2005 to 245,500 in 2006.

But the real-estate slump will lower that number to 231,000 by 2008, according to the Arizona Department of Economic Security.

Data on wages, investment and career opportunity show an economy that is turning but not gaining traction.

Growth works

Cities that have transformed their economies did so with a sense of urgency. Something bad happened. Someone put forth a compelling vision. Change seemed the only option.

There is little sense of urgency in Phoenix, longtime analysts say, because growth has always worked.

Infusions of federal money helped secure the water needed for a desert city to grow, from dams along the Salt River to the canals carrying Colorado River water for the Central Arizona Project. And military bases built from Kingman to Yuma during World War II brought more money and people.

Phoenix took off after World War II with the introduction of residential air-conditioning and a housing industry that mastered economies of scale in an area with vast expanses of cheap land.

Developer John F. Long devised a construction system back in the 1950s that cut costs and allowed him to complete 25 homes a day. Long's assembly-line style of building laid the foundation for the Valley home industry and the Phoenix economy.

From 1940 to 1970, the population of Phoenix soared from 65,414 to 581,562.

By the 1970s, along with a booming housing industry, the region had landed a number of corporate divisions of such companies as Motorola Corp. to headquarters like Greyhound Corp. They helped expand the Valley's role as a low-cost business center and brought more families as well as retirees to the area.

From 1970 to 2000, Phoenix grew from 581,562 to 1.3 million people.

Even when the economy stalled during the savings-and-loan crisis and real-estate crash of the late 1980s, growth quickly brought investors and buyers back. Through the 1990s, the Valley's population soared as housing developments pushed farther out into the county.

In 2005, metropolitan Phoenix passed Atlanta as the largest home-building market in the U.S. Phoenix's population rose to 1,469,794, pushing past Philadelphia as the fifth-largest U.S. city.

That year, Robert McLeod of Newland Communities expressed what many developers felt about a possible housing bubble.

"Phoenix is unique. The growth won't stop," he said at the time. "Will it slow a little? Will we see a little dip? Will some prices go down 5 percent maybe? Sure. But it has nothing to do with the continuing growth in this Valley in residential real estate."

Optimism

Growth was such a powerful economic force it was hard to see the downside.

Longtime Phoenix attorney Bill Stephens served as majority leader in the Legislature in 1961 and 1962. Business leaders and politicians "were not foresighted," he said. "They did not see what was coming. They didn't recognize the need for a high-performing educational system. They didn't recognize the need for a road system."

But by the mid-1980s, some leaders did begin to worry how long it could last. Air pollution was worse. Traffic was a mess. Growth in the suburbs was eroding the city's retail sales tax base. And for all the region's success, Phoenix still wasn't able to attract a good number of high-paying white-collar jobs.

When the Valley's population topped the 1.5 million mark, there was no comprehensive growth plan looking toward the future. Freeway construction did not begin until 1985.

Concerns about relying on growth spawned committees and reports in the years since. A few examples:

1986: Phoenix Economic Growth Corp., the first private-public partnership for economic development in the state, released "Phoenix: A Blueprint For Growth," calling for a diversification of the economic base with new kinds of industries.

1988: In the wake of the real-estate crisis, a negative article in Barron's wondered if boomtown Phoenix had gone bust. Then-mayor Terry Goddard held an "emergency summit," which determined that "increasing economic development competition at all geographic levels means that Phoenix can no longer take continued rapid growth ... for granted." The summit led to a call for a unified economic development effort.

1990: Arizona remained one of only seven states without an overall economic development plan. Public and private groups kicked off a volunteer effort called Arizona Strategic Planning for Economic Development (ASPED) to grow new kinds of companies.

1991: An ASPED report determined that "competing in the new world economy simply on the basis of cost -- low cost labor, low taxes and low land costs -- will not be successful in the long run." The report recommended that Arizona develop economic "clusters" of interdependent companies across several industries.

1992: ASPED launched an "Arizona's Economy Is Everyone's Business" campaign and held Town Hall meetings and numerous public forums across Arizona and then disbanded. Gov. Fife Symington formed the Governor's Strategic Partnership for Economic Development (GSPED) committee to attract companies.

1999: Gov. Jane Hull formed the Arizona Partnership for the New Economy to assess Arizona's economy.

2001: Hull signed a bill allocating $3 million to strengthen Arizona's infrastructure and give the state a leadership role in the New Economy.

"Phoenix has a history of having great plans," said Naaman Nickell, a former longtime Arizona Republic business columnist. "There were all kinds of studies and calls to action that were pretty soundly based, but there was never the leadership to actually move them from planning to action."

Recently there has been some action.

ASU, the University of Arizona and the Translational Genomics Research Institute anchor downtown Phoenix's biomedical campus. And earlier this month the new Science Foundation Arizona secured $25 million in state money through a matching donation from philanthropist Jerry Bisgrove.

Supporters say these are examples of how to combine public and private funds to help build a research-based economy. But they are small steps compared with what is happening in many other cities.

"This is Arizona playing catch-up to the rest of the world," said Barry Broome, president and CEO of the Greater Phoenix Economic Council. Broome credits ASU President Michael Crow for pushing state leaders to think globally, but he added that it is still hard in Arizona "to get people to think and operate differently."

Uncertain future

Phoenix, like the rest of the country, has become permanently entwined with the global economy. Cities around the world are connected through outsourced jobs, international investment, immigration and the rise of China. All of it affects life in Phoenix.

Phoenix's economy will rise or fall, experts say, based on its connection to the world economy.

Don Reynolds is an internationally known economist who founded 21st Century Forecasting, a Texas research company focused on long-term economic trends. He said that during the next five years developing markets like China and India will average a 7.5 percent growth rate compared with a 2 percent growth rate for developed markets like the U.S. and Europe.

In addition, "the GDP of the emerging markets is going to be approximately 30 percent of the global economy, and the United States is going to be 28 percent," he said. "This is the first time that the emerging markets are now a larger part of the global economy than the U.S."

For the Valley to compete in this changing environment, it must move beyond the housing industry as the basis of the economy and develop the pool of people and companies required for a knowledge economy. The effects of running in place economically are beginning to show in metropolitan Phoenix's economic trends and quality of life measures. Income levels are at best running in place according to the Bureau of Economic Analysis.

In 1980, Arizona's per capita income was 94 percent of the national average and 28th in the country. By 1990, per capita income was 87 percent of the national average, 35th in the country. In 2000, it was 86 percent of the national average, 37th in the country.

In 2005, it was 88 percent of the national average and ranked 38th in the country.

If that trend continues, parents may not be able to anticipate a better life for their children for the first time in the state's 95-year history.

Jack August, director of the Arizona Historical Foundation at ASU, said: "Maybe we need to have some balanced, healthy, apolitical debate about 'what does this mean?' Why are we this huge city, but when you scratch the surface, we're poor in a lot of ways?"

Without a solid economic core, other parts of the community lose footing.

"You're not going to have great museums, you're not going to have great medical research, you're not going to have a great highway system," said Bill Harris, president and CEO of Science Foundation Arizona. The larger, long-term value of innovative companies at the heart of a knowledge economy, Harris said, is that they require other layers of small businesses to support them. Incubate those companies "and you've got a real ecosystem."

Nurturing those kinds of companies raises wages and incomes across the economy.

And it will take time. Some experts predict it could take at least two decades to transform the economy.

"It all comes down to leadership and your ability to execute," said Joe Snell, president and CEO of Tucson Regional Economic Opportunities Inc.

"We have got some challenges, and realistically we can't accomplish all of them at the same time. We're going to have to prioritize who does what and do a much better job at leveraging our money. With that said, it all does come down to rolling up your sleeves and just implementing."

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The Valley has bits and pieces of a knowledge economy.

But economists say Phoenix needs to do much more before it can replace housing, manufacturing and tourism as its economic foundation.

Fast-growing companies create jobs and indicate a region's accomplishments, as well as its potential.

COMPANIES RATED AMONG THE 500 FASTEST-GROWING IN THE U.S.

45 TEXAS

23 PENNSYLVANIA

14 WASHINGTON

0 ARIZONA

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Top-tier companies provide attractive jobs with good benefits.

FORTUNE 500 COMPANIES

56 TEXAS

52 CALIFORNIA

25 PENNSYLVANIA

4 ARIZONA

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Affordable housing makes it easier to attract desirable new employers.

MEDIAN HOME PRICE IN THE VALLEY

$169,400 IN 2004

$268,200 IN 2006

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A changing economy

Farming, military activity and housing all have provided fuel for Arizona's economic machine.

1926: TRANSIT

The Southern Pacific railroad's second line across Arizona brought passengers to Phoenix and spurred growth.

1930s: CITRUS

The Valley's climate, irrigation water and land drove an agricultural economy built on cotton and citrus. (Here, Hermosa Vista Citrus Ranch.)

1941: MILITARY

Astring of airfields and military sites brought many trainees to Phoenix during World War II. (Here, pilots in training at Luke Air Force Base.)

1960: REAL ESTATE

Land development led to booming growth and an economy based on real estate. (Here, opening day at Sun City.)

1990s: COLLAPSE

Tax law changes and the savings-and-loan scandal led to a real estate collapse. Charles H. Keating Jr., head of a Phoenix-based S & L, went to prison for fraud in 1992. Growth gradually brought the economy back.

2000s: HIGH TECHNOLOGY

TGen marks an early effort in the knowledge economy.

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Where Phoenix stands on key indicators

Phoenix is compared with eight other cities, selected because they are in the Sun Belt, compete well in the global economy or are facing similar challenges. These five economic indicators are crucial measurements of the health and growth of a knowledge economy. Information is for each city's metropolitan area or state. Dotted lines represent the Phoenix metropolitan area or Arizona.

WAGES (Bureau of Labor Statistics)

The average annual pay workers earn from their job, by city.

PER CAPITA INCOME (U.S. Census Bureau)

Total personal income divided by the number of people in the city. Adjusted for inflation.

EDUCATION (U.S. Census Bureau)

Percentage of a city's population that is 25 and older and holds a bachelor's or post-graduate degree.

VENTURE CAPITAL (PriceWaterhouseCoopers)

The venture capital per 1,000 residents invested in a state's businesses.

PATENTS (U.S. Patent and Trademark Office)

The number of U.S. patents granted per 10,000 residents by state.

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(2006 American Community Survey)

PHOENIX

* Population: 4,039,182

* Median age: 33.7

ATLANTA

* Population: 5,134,871

* Median age: 34.6

AUSTIN, TEXAS

* Population: 1,506,425

* Median age: 32.4

DENVER

* Population: 2,408,622

* Median age: 35.5

PHILADELPHIA

* Population: 5,826,742

* Median age: 37.8

PORTLAND, ORE.

* Population: 2,137,599

* Median age: 36.3

SALT LAKE CITY

* Population: 1,067,190

* Median age: 30.4

SAN DIEGO

* Population: 2,941,454

* Median age: 34.0

SEATTLE

* Population: 3,263,497

* Median age: 37.1

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About this series

Arizona Indicators is a collaboration between The Arizona Republic and Arizona State University. For more than a year, reporters and researchers compiled and sifted through data with one purpose in mind: Identify the factors that are driving the economies of more-prosperous metropolitan regions and determine what steps the Phoenix area needs to take to make itself globally competitive.

The result was twofold:

* A series of stories that debuts today in The Arizona Republic. The series shows that the Valley's ability to compete economically against peer cities is at risk because of our reliance on building and selling homes as an economic foundation.

* A compendium of economic data from ASU that will measure, on an ongoing basis, the performance of metropolitan Phoenix's economy and how it compares with peer cities. It can be found at www.asu.edu/indicators.

TODAY

Signs of strain

For years, urban growth has kept Phoenix's economy in motion. Today, The Republic looks at the phenomenal growth of the past and the indicators that show why growth may not be enough to improve the Valley's standard of living in the long term.

COMING WEDNESDAY

Talent needed

In the second of three parts, The Republic examines the "knowledge workers" who drive new economies. We show how a knowledge economy helps create opportunity for everyone, why Phoenix needs more knowledge workers and how we can attract them.

COMING NEXT SUNDAY

How to get there

In the last of three parts, The Republic highlights three cities that have successfully transformed their economies and looks at the possible lessons those cities can offer Phoenix.

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Reach the reporter at chad.graham@arizonarepublic.com or (602) 444-8577.