The Arizona economy hummed along through the first half of 2023 and is expected to post solid gains this year and next if the U.S. economy avoids a recession as expected, University of Arizona economists say.
But although Tucson has regained all of the jobs it lost during the height of COVID-19, the Old Pueblo is still off its pre-pandemic job growth trend, according to the latest economic outlook from the UA’s Economic and Business Research Center.
And while Arizona’s employment is back to pre-pandemic levels and inflation is easing, housing affordability remains a big concern, said George Hammond, UA research professor and director of the economic research center.
In the short term, a slowing national economy means slower economic growth in Arizona, Phoenix and Tucson, Hammond said.
“I think Tucson basically follows suit, the odds favor continued, solid growth in Tucson,” he said. “If the national economy falls into recession, I think that will slow Tucson’s growth but probably not produce significant job losses.”
The hope is that the Federal Reserve will guide the economy to a “soft landing” from its efforts to cool the economy and control inflation and thereby avoid a nationwide recession, Hammond said, and most economists think the Fed is likely to succeed.
The UA outlook cites a baseline forecast by S&P Global that the U.S. will avoid a recession this year and next, which was given a 55% probability.
After increasing by 2.1% in 2022, the baseline forecast calls for U.S. real gross domestic product (GDP) growth, a key measure of economic output, to slow to 1.8% in 2023 and 1.2% in 2024, he noted.
Arizona’s real GDP rose 2.5% in 2022 and the state was on pace for a 2.7% annual increase in the first quarter of this year, according to the U.S. Commerce Department.
While some analysts define recessions as at least two consecutive quarters of negative real GDP growth, Hammond notes that most U.S. economists rely on recessions identified by the National Bureau of Economic Research, a private, nonpartisan organization that takes into account a number of indicators including personal income, jobs, consumer spending, and industrial production and sales, as well as GDP.
Here’s a closer look at the latest UA economic forecast, by economic indicator.
Jobs, jobs, jobs
Arizona non-farm job growth is projected to fall from 4.2% in 2022 to 2.3% this year, and 2% each year in 2024 and 2025.
But Tucson job growth looks a little weaker, falling from 3.2% last year to 1.9% this year, and 1.6% annually in 2024 and 2025.
The statewide unemployment rate is expected to fall slightly this year to 3.7%, then rise to 4.3% in 2024 and 4.6% in 2025.
Hammond said Tucson jobs remained far below their pre-pandemic trend mainly due to sub-par performance in private education and health services and professional and business services.
While it’s unclear exactly why, Hammond said some of it may have to do with the way workers are counted by the place of their “establishment.”
For example, he said, more workers in the call-center industry — which employs thousands of workers in the Tucson area — may now work remotely in the wake of the pandemic and not be counted as local employees.
“Those people could still be in in Tucson but they may be measured as having a job someplace else, since a lot of the call centers were moved to working from home,” Hammond said.
Personal income
Personal income statewide is expected to jump 6.5% this year and continue to rise about 6% annually in the next two years. Tucson follows a similar trend, with income growth of 5.9% this year rising to 6% in 2024 and 2025.
Some of those income gains have been eaten up by high inflation.
“It’s not eating up all the gains this year, but still inflation remains elevated and that’s a problem that we hope will be resolved over the next year,” Hammond said.
The UA report notes that inflation has eased particularly in the Phoenix area, which had among the highest metro inflation rates in the nation in 2022 and into early 2023.
The all-items Consumer Price Index for All Urban Consumers in the Phoenix metro area decelerated in June to 4.4% over the year, down from a peak of 13% in August 2022 but still above the nation at 3%.
Retail sales
Arizona retail sales, including remote sales, are forecast to grow just 1.6% this year after jumping more than 8% in 2022. Sales growth is expected to top 3% in 2024 and reach 5.5% in 2025.
In the Tucson metro area, retail sales growth is forecast to cool from 8.9% last year to 3.1% this year but reach 5% by 2025.
Tucson’s taxable sales, on which the retail sales are based, held up a little better than they have statewide, Hammond said, adding that it’s not exactly clear why.
Price inflation also has helped push up the dollar value of retail sales, he noted.
Population
Statewide population growth is expected to slow to 1.5% this year from 1.7% in 2022 and fall to 1.2% next year.
Tucson’s population growth is expected to slide even lower, dipping to 0.9% this year and 0.7% for each of the next three years.
Much of that is due to a nationwide trend of falling birth rates and more deaths as the Baby Boomer population ages, Hammond said.
“Arizona, Phoenix and Tucson, over the next 30 years, I think are going to see population growth significantly slow compared to what it was during the prior 30 years,” he said.
Housing
Statewide housing permits are forecast to drop about 20% this year, to just over 48,000 units, and another 13% in 2024 before rising again in 2025.
The Tucson area saw housing permits fall more than 9% last year and the UA outlook calls for a drop of nearly 15% this year to about 4,900 units. Permits are expected to fall another 14% in 2024 before rebounding more than 6% in 2025.
Meanwhile, high home prices and elevated mortgage interest rates have greatly reduced housing affordability.
Across Arizona’s metro areas, single-family housing affordability based on income and housing costs fell in the second quarter of 2023 after improving modestly to start the year, thanks to stabilizing home prices and mortgage rates.
According to data from the National Association of Home Builders and Wells Fargo, the share of homes sold in the Phoenix metro area in the second quarter of 2023 that were affordable to a family making the median income was 30.1%, down from 34.3% in the first quarter but up from 18.3% in the last quarter of 2022.
Tucson-area housing affordability also declined in the second quarter of 2023, falling from 46.8% in the first quarter to 38.6% in the second, after Tucson hit a low of 35% in the last quarter of 2022.
Meanwhile, U.S. housing affordability dropped in the second quarter to 40.5%, down from 45.6% in the first quarter but just above 38.1% in the fourth quarter of last year.
“Compared to our peers, we’re still fairly affordable,” Hammond said. “But overall, housing is much less affordable than it was before the pandemic.”
Long-term look
A pessimistic economic scenario for Arizona assumes a national downturn in the second half of 2023, driven by tightening lending standards by banks, which restrict consumer and business spending, as well as continued problems arising from the Russian invasion of Ukraine.
Amid rapid increases in interest rates by the Federal Reserve, some banks have taken significant unrealized losses in their long-term bond investment portfolios.
Silicon Valley Bank failed in March after huge bond losses spooked depositors, and many banks are still working to deal with their unrealized bond losses.
“While we haven’t heard much about bank stress over the summer, the fear is that it’s just been percolating under the surface and may, kind of surprise everybody and become a major problem going forward,” Hammond said.
