How Long Will Arizona's Growing Economy Last?

By Steve Goldstein
Published: Thursday, May 30, 2019 - 12:06pm
Updated: Monday, June 3, 2019 - 12:35pm
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Supported by Beach Fleischman

STEVE GOLDSTEIN: The overall U.S. economy continues to be in a strong place, with seemingly healthy job growth and unemployment numbers. Arizona is one of the states leading the pack when it comes to a continuing expansion of positive economic news. How healthy is Arizona's economy? How long could the good times last? With me to talk about that is George Hammond, director of the Economic and Business Research Center at the UA. Earlier today, he hosted breakfast with the economists in Tucson. George, what's your overall view of the Arizona economy? Is it strong and getting stronger, strong but trending in the other direction?

GEORGE HAMMOND: Arizona is doing really well. We're generating strong job growth. Our population is rising, income is rising. The unemployment rate is down substantially from where it was just after the Great Recession. So we've made a lot of progress in driving the unemployment rate down, but it has been stubbornly above the national average and it's even begun to tick up a bit over the past six months or so. What's driving that is actually the fact that Arizona's labor market, our job performance has been so dynamic. I think what that's doing is it's attracting more residents to the state, and it's pulling discouraged workers off the sidelines and back into the labor market. And when that happens, when people move back move into a state, or they restart their job search, they tend to go through a spell of unemployment. So I think that's what's happening in Arizona. I expect the unemployment rate will start to trend down again soon.

GOLDSTEIN: And how much of the state is benefiting from all of this? Because we usually see the economy take off, so the Maricopa County benefits from that.

HAMMOND: Well certainly the fastest growing area of the state has tended to be the Phoenix metro area, particularly Maricopa, but Pinal has been growing as well. Tucson is also continuing to add jobs but at a somewhat slower pace. You know Tucson added about 4,300 jobs last year for 1.2% growth. And the Phoenix metro area generated 3.3% job growth during the same period. So you know most of the state is growing but you know the real engine of growth in Arizona is is the Phoenix metro area and Maricopa County in particular.

GOLDSTEIN: How much longer do you think growth can be relatively strong? And does it necessarily mean that with some clouds on the horizon, that 2020 will not be good or just maybe not as good as we've been seeing?

HAMMOND: Overall, I think what's going on is that and what the, you know, our forecasts suggest is that the national economy is going to make a transition from above trend growth to growth that is a bit below trend over the next couple of years. And that means that we will likely see slower growth in Arizona, Phoenix and Tucson once we get into 2020 and 2021. When you see that kind of growth pattern that transition from above trend growth to a bit below trend growth for the national economy, that implies that recession risks are elevated. Now the, you know, the most likely outcome at this point still is continued growth over the next couple of years, but those recession risks are elevated, and it's something we're going to want to keep an eye on as we go through the rest of this year.

GOLDSTEIN: How closely are you watching trade agreements, the relationship the U.S. and Arizona have with Mexico, for example?

HAMMOND: Yeah, that matters. And you know the ... tariffs that have been instituted and the trade tensions, I think have had an impact on growth nationally and ... here in Arizona. So certainly it will be nice to see those those disagreements get sorted out. Trade, particularly trade with Mexico, is really important. Mexico is by far our largest and most important trading partner.  So getting the USMCA done will certainly help smooth our path forward.

GOLDSTEIN: So let me ask a sort of the follow up on the potential slowing down question: are there specific things that would indicate to you whether or not we're bound to stay in a strong place? Or because I think for some people trade tariffs a concern them in terms of whether the growth will be slowed, even in part because consumers may not be able to spend as much?

HAMMOND: What I'm going to be watching closely over the next year is what's happening with initial claims for unemployment insurance. That's an early indicator of labor market performance that reflects layoffs. Those initial claims are currently trending down, but we'll be looking for them you know if they were to start trending up in a significant way, that would be a warning sign. Also be keeping a close eye on what's going on with construction activity, particularly residential construction. So tracking indicators like housing permits will be key. And housing permit activity is ... volatile, but it does look like it has taken a bit of a pause in recent months. So that'll be an important thing to track nationally. Keeping an eye on what's going on with the interest rate spreads, say in the 10-year and the three-month rate, or the 10-year and the two-year bond rates, will be important indicators to track going forward. That tells us a lot about what financial markets are thinking about future growth. So, those kind of three are three key indicators they still are ... indicating continued growth, at least in the near term, but they'll be three to watch going forward.

GOLDSTEIN: And during the midst of the Great Recession, there was talk here in Arizona that by diversifying economy. Do you think over the past decade or so the state has moved in a better direction as far as diversifying the economy?

HAMMOND: Well I think that the economy is is more diversified than it was say in 2006 when we when we headed into the Great Recession. But, you know, we still have work to do on that score. And in particular, you know focusing on education educational attainment really across all levels is key. You know as we look forward in coming decades, you know, demographics are going to matter. But what's going on with technology and automation is also going to be important. And, you know, the states and them and the metro areas that have higher concentrations of highly educated individuals are going to be much more able to capitalize on new technology trends, and they're going to be much more resistant to job losses that are being spurred by increased automation.

GOLDSTEIN: George Hammond is director of the Economic and Business Research Center at the University of Arizona.

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