Arizona and Tucson will continue to see economic growth over the next decade, buoyed by an ongoing U.S. recovery and increased exports to Mexico, economists said.
But an expanding income gap, tied to decreasing educational attainment rates, threaten the state’s future, according to an economic-forecast update Wednesday by the UA Eller College of Management’s Economic and Business Research Center.
A previous deterrent to growth, “fiscal drag” caused by reduced federal government spending, will continue to affect the state, but the worst seems to have passed, said Eller research center director George Hammond.
Federal procurement spending in Arizona dropped from about $15 billion in 2012 to about $10 billion in 2013 because of budget sequestration. Last year, federal spending decreased only slightly below that.
“What passes for good news on this topic is what happened in 2014, as the pace of the decline has decelerated significantly or stopped entirely,” said Hammond. “Federal government spending is not boosting activity but at least it’s not driving us further down.”
Speaking at a forecast breakfast at the Westin La Paloma Resort & Spa, Hammond said that overall the center is reporting slow but steady growth in the region.
The Tucson metro area added 11,000 new residents last year, for a growth rate of 1.1 percent, above the national average of 0.7 percent and slightly lower than the Phoenix metro area with a 1.5 percent population growth rate.
Population growth will increase as the national economy improves and people recover their ability to move around the country, Hammond said.
“Arizona is still a very attractive migration destination. It is going to pick up its share of those migrants and so will Tucson,” he said.
An increase in population will also lead to improvement in the housing market but both will be cases of modest growth, far from the boom of previous years.
Housing permits in Tucson went from a high of 12,000 for 2007 to a low point of about 2,000 after the Great Recession. Last year, housing permits were just over 3,000.
“We’ve seen a little bit of a bounce back, but we’re still seeing housing activity perceived at a very low level,” Hammond said. “In fact, you have to go back to the early 1990s to find overall housing permits running at that slow a pace.”
Housing prices are also rising slowly.
The median home price in Tucson was $175,800 in 2014, below the national average of $208,900, and almost $70,000 less than the median price in 2006.
Over-the-year job growth in Tucson stands at 1.1 percent, about half the national rate, but it is expected to pick up over the next few years, surpassing the national average by about 2017, Hammond said.
Trade is also an important part of Arizona’s improved economic outlook, especially its increased dealings with Mexico, the state’s largest trading partner.
Arizona’s total exports increased from $19.4 billion in 2013 to $21.1 billion in 2014, representing about 7 percent of the state’s gross domestic product.
More than 40 percent of Arizona’s exports went to Mexico last year, for a total of $8.6 billion.
“From a growth perspective, Arizona has done extremely well,” said Roberto Coronado, assistant vice president and senior economist at the Federal Reserve Bank of Dallas’ El Paso branch.
“When you look at the growth of Arizona’s exports to Mexico, they have outpaced Texas and California for a number of years,” he said.
Coronado spoke during the forecast about the challenges Mexico faces and the integration between the U.S. and Mexican economies.
“To the extent that Arizona can be a part of the North American manufacturing process by providing intermediate goods to Mexico’s manufacturing activity, I think that can be very beneficial for the state,” Coronado said.
Challenges ahead
Although the state economy is improving, slow wage growth and an increasing income gap will affect quality of life.
Low wages in the state seem to be tied to the unemployment rate, Hammond said.
The rate in Arizona last year was 6.9 percent, above the national average and three full percentage points higher than it was before the Great Recession began.
But Hammond said that it goes beyond the official numbers and should also take into account the people who have given up looking for a job or are involuntary part-time workers.
Adding those two groups, unemployment more than doubles to 14.7 percent for 2014, Hammond said.
“It might be what’s really holding down wage growth,” he said. “We won’t really see that wage growth pick up until that slack gets reduced.”
Per capita personal income is also down in Arizona, with the state ranked 42nd in the nation last year.
The income gap between the national average and the state average has been increasing since the recession began, Hammond said.
Current per capita income is about 18 percent lower in Tucson than the national average. At the state level it is about 17 percent lower, the highest gap since the 1970s.
For Hammond, the income gap is related to the educational attainment gap.
Four-year college attainment rates in 2013 for Arizona were lower than the national numbers for almost all age groups. Of Arizonans age 25 and over, 27.2 percent have a bachelor’s degree or higher, compared with 29.1 percent nationally.
“In 1990, Arizona had the same college attainment rate as the nation,” Hammond said. “We’re not headed in the right direction there. That’s really going to matter as we think about what’s going to happen over the next 20 to 30 years.”
