UA Forecast 2015: After a Stumble, Stronger Gains
Experts agree, Arizona’s economy continues to struggle based on the 31st Annual Forecast Luncheon held on December 12th co-sponsored by University of Arizona’s Eller College of Management and JPMorgan Chase.
George W Hammond, Ph.D., Director of the Economic and Business Research Center presented the following economic forecast:
After an awful start to the year, the U.S. economy is back on track and growing again. However, the economy remains well below potential, which leaves a large segment of the population without adequate employment opportunities. This is putting downward pressure on wage and income growth. In contrast, the stock market posted strong results in 2013 and is still rising.
Tucson continues to grow, with rising jobs, income, and population. But that growth has been disappointing.
The missing link in the state’s recovery has been construction, which continues to battle headwinds. Without a serious rebound in this sector, it is unlikely that state growth will accelerate appreciably. Such a rebound in the next year seems unlikely at this point, which means that Arizona is headed for another year of modest growth.
Arizona job growth rebounded in the third quarter of 2014, after a dismal showing during the previous three months. The state added 51,600 jobs in the third quarter on a year-over-year basis, which translated into a growth rate of 2.0%. That was slightly faster than the national job growth rate of 1.9%.
Most of the job growth was concentrated in leisure and hospitality (especially jobs in food services and drinking places); education and health services; professional and business services; and trade, transportation, and utilities (especially retail trade). These sectors together accounted for 81.2% of job growth over the year. Government jobs rose modestly during the period, reflecting gains in state and local education, as well as slower job losses in the federal sector. Manufacturing jobs were up over the year, driven by gains in other manufacturing and non-durable goods. Aerospace and computer and electronic products both posted job losses.
Construction employment continued its string of disappointing results, dropping 5,700 jobs over the year in the second quarter. This primarily reflects sluggish activity in the construction of buildings, both residential and nonresidential.
Natural resources and mining also posted job losses over the year, but these seem to be related to an administrative reallocation of jobs across sectors by the U.S. Bureau of Labor Statistics.
Job growth in the Phoenix MSA has outpaced gains statewide and growth in the Tucson MSA. Indeed, the Phoenix MSA added 38,400 jobs over the year in the third quarter, which translated into a growth rate of 2.1%. Phoenix job growth also accounted for 74.4% of state growth. The Tucson MSA added 4,200 jobs over the year, for a 1.2% growth rate, and accounted for 8.1% of state job growth.
One reason that Arizona’s recovery has been tepid is the slow rebound of the housing sector.
House prices have followed a somewhat similar pattern, with strong increases beginning in 2011, which have gradually decelerated during 2013 and into 2014. According to data from Case-Shiller, house price appreciation in the Phoenix MSA peaked at 23.2% (year over year) in January 2013. The latest data, for August 2014, show year-over-year growth of just 4.3%. That general pattern holds for Tucson as well, with strong gains in 2012, followed by slower growth.
Overall, Arizona residential activity remains stuck in a low gear, held back by slow population and household growth, still-tight mortgage credit conditions, and modest supply constraints related to the availability of affordably priced lots in desirable areas.
According to Hammond, Arizona is in good position to continue expanding in the future, assuming the national economy avoids recession. However, that growth is likely to remain slow in the near term.
Most of the job gains expected during the next three years will be in the service-providing sectors, particularly trade, transportation, and utilities; professional and business services; leisure and hospitality; and education and health services. Together, these four industries account for 71.4% of net job growth through 2016.
Personal income is expected to rise at a faster pace in 2014 than in 2013. Keep in mind, however, that gains in 2013 were depressed by the federal fiscal cliff. Personal income growth of 3.4% in 2014 and 3.5% in 2015 is not rapid. Slow increases in personal income during the next two years reflect modest improvement in earnings from work, which are likely to be restrained as the state takes time to absorb slack in the labor market.
The Phoenix and Tucson MSAs are both expected to add jobs, residents, and income in the near term, although growth remains slow. As Exhibit 4 shows, employment is forecast to rise at a faster pace in Phoenix than Tucson. Tucson continues to battle the headwinds created tight federal spending (including the sequester), since federal government activities (both civilian and military) are a large part of the local economy.
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