Arizona Economic Outlook

Fourth Quarter 2025
Arizona Economic Forecast

December 12, 2025

The forecast numbers below are from our fourth quarter 2025 baseline scenario forecast and were produced in November 2025 by the EBRC.

By George W. Hammond, Ph.D. EBRC Research Professor

Arizona’s economy continues to grind along at a slower-than-usual pace. Jobs are rising slowly, with reduced hiring and modestly elevated layoffs weighing on growth. Income is also slowly rising, reflecting the post-pandemic deceleration in employment costs, although taxable sales growth has rebounded. House price increases have slowed, but housing cost burdens remain elevated and housing permit activity is down so far this year. Stabilizing house prices have contributed significantly to reduced consumer price inflation in the Phoenix MSA, which is running well below the U.S.

The baseline forecast calls for Arizona’s economic growth to accelerate next year, reflecting an uptick in U.S. economic activity. Even so, state gains are expected to be modest by historical standards. That reflects in part constraints on growth imposed by federal economic policy uncertainty, demographic aging (combined with immigration restrictions at the national level), and rising costs partly driven by increased tariffs. Even so, there remains significant hope that growth can outpace the baseline, particularly if federal economic policy uncertainty is reduced.

Arizona Recent Developments 

The best way to understand current employment trends in Arizona is to visualize the level of employment since 2019 (Exhibit 1). As the exhibit shows, state jobs have been generally rising, but at a slow pace, and that growth is unusually uneven. 

Exhibit 1: Arizona Nonfarm Payroll jobs, Seasonally Adjusted, Thousands

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Through August 2025, Arizona jobs were up 0.3% over the year. That was well below the national growth rate during the same period of 1.1%. Phoenix MSA jobs were up 0.4%, Tucson jobs were down 0.1%, and Prescott jobs were down 0.8%.

For Arizona, Phoenix, Tucson, and Prescott, job growth so far this year has been driven by private education and health services.

Year to date through the first half of 2025, Arizona personal income was up just 4.5% over the year, slower than the national pace of 5.1%. Net earnings from work in Arizona were up just 4.5% over the year, well below the national average of 5.2%. Overall, personal income started 2025 fairly slow.

According to data from the Federal Reserve Bank of Atlanta, housing affordability has improved modestly during the past year. Housing costs as a share of median household income fell to 46.7% nationally in September 2025, compared to 44.1% a year ago. The share declined to 41.0% in Tucson (down from 42.9% last year) and to 43.9% in Phoenix (down from 44.2% last year). Even so, housing affordability remained significantly impaired compared to pre-pandemic levels.

Housing costs relative to income in Phoenix and Tucson were below the national average in September 2025, and relatively low compared to a selection of western metropolitan areas. Housing costs (relative to income) remained very high in the major metropolitan areas in California, with Los Angeles at 84.1%, San Jose at 79.2%, San Diego at 68.6%, and San Francisco at 67.3%.

Within Arizona, housing costs relative to income ranged from a high of 73.4% in the Flagstaff MSA (August data) to 37.9% in the Yuma MSA in September. Lake Havasu-Kingman came in at 46.2%, while Sierra Vista-Douglas hit 53.6%. The ratio for the Prescott MSA was 60.2% in September.

Housing permit activity statewide has been weak so far in 2025. Due to the federal government shutdown we only have permit data through August 2025. Through the first eight months of 2025, seasonally-adjusted total Arizona housing permits were down 13.1%, compared to the same period last year. Single-family permits were down 8.1% and multi-family permits were down 23.9%. 

For the Phoenix MSA, total permits were down 15.2% during the first eight months of this year, with single-family permits down 8.9% and multi-family permits down 26.6%. Tucson MSA permits were also down, falling 17.9% through August, compared to the same period of 2024. Single-family permits fell 7.9% while multi-family permits dropped 51.8%.

Phoenix MSA consumer price inflation has moderated to well below the national average. Over the year in August (latest data), Phoenix all-items consumer prices were up just 1.4%, compared to 2.9% nationally. Consumer commodities (new and used autos, gas, food, apparel, appliances, etc.) were up 0.2% over the year in Phoenix and up 1.3% nationally. Consumer services (health care, travel and tourism, housing, etc.) prices were up 2.1% in Phoenix and 3.8% nationally in August. In September, the shelter (rent, imputed owner-occupied rent, short-term rentals) consumer price index was down 0.4% in Phoenix, far below the national increase of 3.6%.

Growth in retail sales plus remote sellers has accelerated strongly so far this year (through September) with little growth through the same period last year. Through September, sales so far in 2025 have risen 4.8% statewide, 5.1% in the Phoenix MSA, 2.8% in the Tucson MSA, and 3.9% in the Prescott MSA.

Taxable sales in restaurants and bars have also rebounded statewide (up 3.2%), in the Phoenix MSA (up 3.5%) and in the Prescott MSA (up 2.7%), although the Tucson MSA has posted weaker growth, at 0.9% through September.

Arizona Outlook

If the U.S. economy continues to grow, the baseline forecast calls for Arizona income, job, and population growth to accelerate next year. 

The forecast calls for state job growth to decelerate modestly in 2025, from the already-slow gains of 2024. The picture brightens next year with job gains expected to rise from 0.8% in 2025 to 1.6% in 2026 and 1.5% in 2027 (Exhibit 2). 

With job growth rising modestly, the unemployment rate is expected to increase a bit, rising from 4.1% in 2025 to 4.4% next year and 4.5% in 2027.

Nominal personal income growth slows from 5.9% last year to 4.8% in 2025, before rising again to 5.7% in 2026. That helps to sustain gains in retail plus remote sales, which accelerates from 1.3% in 2024 to 4.6% in 2025 and 3.6% in 2026.

Population growth remains roughly steady during the next couple of years, at 1.3%-1.4% per year. Gains are primarily driven by net migration, as natural increase (annual difference between births and deaths) remains weak and is expected to gradually weaken further.

Slow population gains translate into declines in housing permit activity. Total permits are forecast to drop from 59,616 in 2024 to 52,884 in 2025, and 53,067 in 2026.

Exhibit 2: Arizona Outlook Summary

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The pattern of growth for the Phoenix and Tucson MSAs is similar to the state. Phoenix MSA job growth is forecast to decelerate from 1.6% in 2024 to 0.9% in 2025, then return to 1.6% in 2026. Phoenix population growth is forecast to remain steady at 1.5% per year in the near term, before longer-term demographic pressures push gains down.

For the Tucson MSA, job growth is projected to stabilize (0.1% decline in 2025) after a modest drop in 2024 of 0.5%. Growth rebounds modestly in 2026 to 0.6%. Population growth ticks up to 0.7% in 2025 before falling back to 0.6% in 2026 and 2027. Like the state and Phoenix, demographic pressures eventually pull growth rates down later in the forecast period.

If your business or organization requires more timely and in-depth forecast data and analysis, find out about the benefits of joining EBRC’s Forecasting Project and email EBRC research professor George Hammond at ghammond@arizona.edu.

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