Tucson is Expected to Regain Momentum Next Year

Tucson’s economy will regain momentum next year after a somewhat sluggish performance this year. That was one of the key takeaways from today’s University of Arizona Eller College of Management annual Economic Outlook Luncheon at the Westin La Paloma Resort in Tucson. More than 500 people packed the room to hear presenters George W. Hammond, director and research professor at Eller’s Economic and Business Research Center, and Anthony Chan, Chase chief economist, share their predictions regarding job growth, the housing sector, the stock market, interest rates and more.

Hammond shared that while the buzz about the Tucson economy has been strong this year, the official data has not reflected the same optimism.

“According to preliminary estimates, employment in the Tucson MSA, Pima County, was flat from the third quarter of 2016 to the same quarter this year. That was much slower than the national rate of 1.4 percent and slower than Tucson’s over-the-year growth rate in the third quarter of 2016, of 1.6 percent,” Hammond said. “However, more reliable job estimates have begun to trickle out and they show stronger gains through the first three months of the year.” 

In particular, the preliminary data show a large drop in professional and business services employment during the past four quarters. The decline in this formerly-fast-growing sector was puzzling and it now looks like this drop will be revised away.

“All this likely means that we’ll see a large upward revision to Tucson’s job growth in 2017, which should help reconcile differences between the job data and the buzz around town,” he said. 

Hammond then addressed housing permit activity, which accelerated in Tucson this year. According to preliminary Census data, total permits in Tucson were up 13.6 percent through the first nine months of the year, compared to the same period in 2016.

“Those gains were driven both by single-family activity, up 6.3 percent, and multi-family activity, which quadrupled from a suspiciously low number in 2016,” he said.

Data from the Federal Housing Finance Agency revealed that single-family home prices in Tucson rose 7.6 percent over the year in the third quarter of 2017. That was above the national rate of 6.4 percent, but below the rate of increase statewide of 8.5 percent and in Phoenix of 9.1 percent.

Addressing a decline in export growth, Hammond shared that so far in 2017, Arizona’s merchandise exports to the world have fallen by 10 percent from their peak in 2015, comparing the data through the first nine months of the year.

“Arizona’s merchandise exports to Mexico, our largest export destination, have fallen by 19.4 percent, driving the bulk of the decline. Exports to Canada, our second largest destination, are down 11.9 percent,” he said.

Meanwhile, the U.S. dollar remains elevated against most major currencies, with the trade-weighted value up 16 percent since mid-2014. The dollar remains strong against the Mexican peso as well, up 44.9 percent since mid-2014.

Many in the audience wanted to hear about job growth and personal income. Hammond said the forecast calls for job growth in Tucson to decelerate from 1.3 percent last year to 0.8 percent in 2017. 

“Gains accelerate modestly in 2018 and 2019, with 1.2 percent and 1.4 percent, respectively,” Hammond said. “That puts Tucson’s job growth in the neighborhood of national growth, or slightly above, during the period. However, it leaves the metropolitan area well short of long-run average gains.” 

Personal income growth is expected to accelerate from 2.4 percent in 2016 to 3.2 percent this year, reflecting the state’s rising minimum wage and tightening labor market. Gains continue to accelerate in 2018 and 2019, at 3.8 percent and 4.8 percent, respectively. Rising income growth drives faster sales growth, which rises from 1.4 percent in 2016 to 2.4 percent by 2019.

“Net migration rises modestly in the near term, which boosts population growth from 0.4 percent last year to 0.7 percent by 2019. That puts Tucson’s population growth at the national rate in two years,” he said.

Anthony Chan spoke to the audience about the global economy and financial markets, stating that there’s good reason for optimism.

“We are thrilled that our bullish 2017 growth forecast for the United States and the rest of the world came to fruition, and we believe that 2018 should register 2.3 percent growth within the United States,” Chan said. “Although the U.S. economic expansion is clearly maturing – we do not see any immediate negative catalysts on the immediate horizon suggesting elevated recession risks for 2018.”

Chan explained that the synchronized global economic expansion has generated healthy growth in most parts of the world. 

“Since Europe, Japan and emerging markets began their current economic expansions after the United States, we expect that economic growth and equity market gains outside the United States are likely to be more favorable on a relative basis during 2018,” he said. 

On the inflation front, Chan sees inflation gradually normalizing in the United States and in China. 

“Although this process is proceeding more slowly in Europe and Japan, we do expect that the avalanche of quantitative easing among central banks around the world is likely to slow sharply in 2018 from its pace between the 2008-2017 pace followed by a small contraction of central bank asset holdings in 2019,” he said.

Hammond finished the presentation by thanking event sponsor JP Morgan Chase & Co., and summarizing his predictions for next year.  

“The forecast calls for continued gains in the Tucson economy, but growth comes at a slow pace, relative to the state, the nation, and to Tucson’s own history,” he said. 

For more information or to view Dr. Hammond’s slide presentation, visit Eller’s Economic and Business Research website.