Arizona’s Economy: Headed Into Uncharted Waters

2024 Economic Outlook Luncheon Slides in PDF

Even with significant headwinds from reduced housing affordability, elevated interest rates, and tight labor markets, Arizona continues to generate solid economic growth. Job gains are far outpacing national growth in the preliminary data and may be growing even faster than the data suggest. Phoenix inflation has decelerated below the national average, leaving real personal income growth in Arizona above the U.S. Taxable retail plus remote and restaurant and bar sales, however, have slowed significantly in 2024. 

The baseline outlook calls for Arizona, Phoenix, and Tucson to continue growing, and to outpace the U.S., assuming the U.S. economy avoids recession. Risks to the U.S. outlook remain tilted slightly to the downside. A modest U.S. recession would take the wind out of Arizona’s sails, but probably not generate a huge downturn.

This forecast was completed before election day. The results of the election inject significant uncertainty into the outlook. It is unclear as of this writing how the incoming Federal administration will implement policies discussed during the campaign. However, there are significant downside risks to the state and national economies from large and widespread increases in tariffs, as well as mass deportations. Stay tuned to future forecasts as the policy landscape becomes clearer.

Arizona Recent Developments 

Arizona’s seasonally-adjusted unemployment rate ticked up to 3.6% in October, up from 3.5% in September. Arizona’s rate remained below the national average in October (4.1%).

Overall, according to preliminary data, state jobs were up 65,000 over the year in October, which translated into 2.0% growth. That was above the nation at 1.3%. Year to date through October, jobs were up 68,500, or 2.2% (Exhibit 1). Again, Arizona outpaced the U.S. at 1.7%.

Exhibit 1: Arizona Year-to-Date Job Growth, Through October, Percent

Keep in mind that the U.S. Bureau of Labor Statistics has indicated that (based on data through March of 2024) they expect to revise Arizona jobs up with the benchmark revisions to be released in March 2025.

Jobs in the Phoenix MSA were up 45,100 over the year in October, for 1.9% growth. Phoenix accounted for 69.4% of state gains. Year to date, Phoenix jobs were up 52,400. That translated into a 2.2% increase.

As for the state, the U.S. Bureau of Labor Statistics expects to revise Phoenix jobs up with the benchmark revision in March 2025.

Tucson MSA jobs were also up over the year in October, rising by 3,800. However, that translated into relatively slow growth of 0.9%. That was below the state and national averages. Year to date, Tucson jobs were up 3,600 or 0.9%.

The U.S. Bureau of Labor Statistics does not release preliminary benchmark analyses for smaller metropolitan areas, like Tucson and Prescott. 

Prescott MSA jobs were up 1,400 over the year in October, for 2.0% growth. Year to date, Prescott jobs were up 1.5%.

House prices in Phoenix and Tucson continue to rise at modest rates, at least compared to the explosive growth during 2021-2022. The Phoenix median house price rose 3.4% over the year in October 2024, hitting 449,900. Tucson’s median home price was lower, at 352,000, which was down 0.1% over the year. The Phoenix Case-Shiller Index was up 2.1% over the year in August (latest data).

Even so, house prices in the Phoenix MSA were well below their recent peak in 2022, measured either by the median home price or the Case-Shiller index (Exhibit 2). Tucson’s median home price was modestly above 2022 levels.

Exhibit 2: House Prices Continued to Rise in Phoenix and Tucson, Seasonally Adjusted

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The U.S. Bureau of Economic Analysis (BEA) has revised data back to 2019. The latest data put Arizona per capita personal income (before adjustment for inflation) at $62,543 in 2023, using Census population estimates. That was up 6.1% from 2022, outpacing national growth of 5.4%. National per capita personal income was $69,810 last year. Overall, Arizona’s per person income was 89.6% of the national average and ranked 35^th in the nation (including the District of Columbia).

The Phoenix MSA consumer price index for all items rose just 1.6% over the year in October. That was below the national pace of 2.6%. Phoenix MSA inflation now has been below the U.S. average for more than a year (since September 2023).

Core inflation, all items less food and energy, in Phoenix rose 2.7% over the year in October, below the U.S. rate of 3.3%.

Commodities inflation, which includes tangible goods, like gas, food, new and used cars, furniture, apparel, etc., was -2.5% in Phoenix and -1.0% nationally over the year October. That implies that commodities prices, on average, were lower than a year ago. In fact, Phoenix commodities prices have been falling since October 2023.

Services inflation, which includes intangible goods like health care, travel and tourism, educational services, and, most importantly, housing, rose 3.7% over the year in Phoenix in October. That was below the national pace of 4.7%.

Shelter inflation, which includes rent, imputed owner-occupied rent, and short-term rentals, was 2.4% over the year in Phoenix in October and 4.9% nationally.

Even though inflation has moderated significantly in Phoenix and nationally, prices remain elevated. The all-items consumer price index in Phoenix was up 25.5% in October 2024, compared to October 2020. Nationally, the all-items index was up 21.2%. Phoenix prices were driven up faster than the U.S. by the housing market. In particular, the shelter consumer price index was up 39.6% in Phoenix during the past four years, compared to 23.8% nationally.

Arizona taxable retail sales growth (including remote sellers) has decelerated significantly this year, particularly in the third quarter. Statewide taxable retail plus remote sales were down slightly over the year through September 2024, down 0.4% in Phoenix, and down 0.6% in Tucson. Sales were up 1.3% in Prescott. The performance in the retail plus remote category was buoyed by remote sellers, with sales up between 8.8% and 12.4%, across Phoenix, Tucson, Prescott, and the state. In contrast, sales in the narrowly-defined retail sector were down across all four geographies.

Sales at restaurants and bars have also decelerated. Statewide sales at restaurants and bars were up 1.9% over the year through August 2024, up 2.1% in Phoenix, up 1.2% in Tucson, and up 0.6% in Prescott.

Arizona Outlook

The Arizona forecast calls for sustained growth at rates above the U.S. As Exhibit 3 shows, job growth is expected to accelerate to 2.9% in 2024, up from 2.6% in 2023. This is well above current job growth rates in the preliminary nonfarm payroll data, because the U.S. Bureau of Labor Statistics preliminary benchmark suggested that they will revise the Arizona data up significantly next March. In order to accommodate this, the 2024 nonfarm payroll data in the Arizona projections are forecast estimates, not published historical data.

Nonfarm job growth decelerates in 2025 and 2026, reaching 2.0%, as labor force gains slow in response to the aging of the baby boom generation. 

Education and health services drive state job gains during the next decade, followed by professional and business services; financial activities, leisure and hospitality; and trade, transportation, and utilities. These five sectors account for 91.1% of total job gains through 2034. 

While no goods-producing sector is forecast to make the top five in job gains, manufacturing jobs are expected to rise significantly during the next decade, reflecting gains in high-tech manufacturing (semiconductors and related, batteries, etc.).

Personal income rose strongly in 2023, up 7.0%. It is forecast to decelerate to 6.1% in 2024, 6.2% in 2025 and 5.8% in 2026. Income growth slows this year with decelerating wage gains and slower growth in dividends, interest, and rent as interest rates fall.

Nominal taxable retail (plus remote) sales growth decelerates from 3.4% in 2023 to 1.0% in 2024, reflecting slower income growth and decelerating inflation. Growth rebounds in 2025 to 4.1% and again in 2026 to 4.5%.

Population growth slows gradually during the forecast period, reflecting in part demographic pressures related to the aging of the baby boom generation. Natural increase is very low during the next ten years, which makes net migration the main driver of population gains. Net migration slows in the near term as mortgage interest rates remain well above pre-pandemic levels, locking in some homeowners to their current place of residence.

Exhibit 3: Arizona Job Growth Accelerates This Year

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The state unemployment rate is forecast to drop to 3.6% in 2024, down from 3.9% in 2023, reflecting the job growth acceleration. As job growth slows, the unemployment rate trends up to 4.3% by 2026.

Slowing population gains put downward pressure on housing permits during the forecast. Total permits fall from 60,932 in 2024 to 52,175 in 2026.

Risks to the Outlook

The baseline forecasts for Arizona, Phoenix, and Tucson call for continued growth, assuming the U.S. economy avoids recession. The baseline U.S. forecast (produced in October 2024) is assigned a 55% probability. However, it is important to consider alternative scenarios. In October, S&P Global generated a pessimistic scenario for the U.S. economy (assigned 25% probability) that assumed that the U.S. economy falls into a moderate recession in 2025, driven by worsening conflicts in the Middle East and Ukraine. That generates much slower growth in Arizona, but not outright declines in jobs or population.

S&P Global also generated an optimistic scenario for the U.S. (assigned 20% probability), which assumes stronger growth than the baseline. This also generates stronger gains in Arizona.

The results of the election inject significant uncertainty into the national and state outlook. Significant and widespread increases in tariffs and mass deportations would generate supply-chain disruptions and elevate inflation. While it is unclear as of this writing whether and how the incoming Federal administration will implement these policies, there are significant downside economic risks associated with each.

VIEW MOST RECENT FORECAST DATA FOR ARIZONA, PHOENIX, AND TUCSON

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