Here’s Why the Arizona Economy Remains Buoyant Heading Into 2023

Heading into 2024, the Arizona economy continues to churn out solid job, income, and sales gains. The state labor market remains tight, but there are modest signs of softening in the unemployment rate, quit and hire rates, and labor compensation. Inflation in Phoenix has decelerated to the national pace but prices remain well above pre-pandemic levels. Housing permits are on pace to decline this year for both single-family and multi-family activity, driven by higher interest rates and significantly reduced housing affordability.

The baseline outlook calls for Arizona job growth to slow as past interest rate increases reduce national gains. Population growth also slows as net migration returns to more normal levels after a pandemic-driven surge. Sales growth declines as consumers react to slowing job growth and increased interest rates. Overall, Arizona is well positioned to grow next year but at a reduced pace.

Arizona Recent Developments

Arizona lost 1,200 seasonally-adjusted jobs over the month in October, its first monthly drop since July. The state added a revised 4,700 jobs in September, down from the preliminary estimate of 8,200.

Over the month in October, professional and business services dropped 3,200 jobs, followed by financial activities (down 2,600), leisure and hospitality (down 2,000), other services (down 800), manufacturing (down 300), information (down 300), and construction (down 100).

Partially offsetting those declines were gains in private education and health services (up 4,400), trade, transportation, and utilities (up 2,500), government (up 1,100), and natural resources and mining (up 100).

Over the year, Arizona jobs were up 51,100, which translated into a 1.6% increase (Exhibit 1). That was below the U.S. pace of 1.9%. Phoenix MSA jobs were up 1.7% in October and Tucson jobs were up 1.1%.

Exhibit 1: Arizona and U.S. Over-the-Year Job Growth, Nonseasonally Adjusted, Percent

Arizona’s seasonally-adjusted unemployment rate ticked up to 4.2% in October, up from 4.0% in September and up from 3.4% in April and May. The state rate was modestly above the U.S. at 3.9%.

Arizona personal income growth decelerated modestly in the second quarter of 2023, with over-the-year growth decelerating to 6.6%, down from 7.3% in the first quarter. That outpaced the U.S. at 4.8% and the Phoenix MSA rate of inflation of 5.8%.

Growth in the second quarter was driven by net earnings from work, which includes wages and salaries, proprietor’s income, and fringe benefits, less contributions for social insurance and adjusted for commuting. Arizona net earnings rose 6.1% in the second quarter, up from 5.6% in the first quarter.

Dividends, interest, and rent rose 9.2% over the year in the second quarter, down from 12.6% in the first quarter. Transfer income, which includes Social Security, Medicare, Medicaid, welfare payments, and other non-market income, rose 5.7% over the year, down from 7.1% in the first quarter.

Phoenix house prices have risen modestly this year. The median house price in Phoenix was $468,000 in October, up 0.6% over the year. Even so, the Phoenix median price was down 8.2% from its recent peak of $510,000 in May 2022. The Phoenix Case-Shiller Index (a measure of repeat sales of single-family homes) shows that Phoenix home prices were down 3.9% over the year in August and down 6.1% from their peak in June 2022.

Tucson home prices have remained firm this year. The median home price in Tucson was $379,500 in October, down from $381,000 in May but up 5.4% over the year. In contrast to Phoenix, the median home price in Tucson has increased from mid-2022.

Like home prices, rent skyrocketed during the pandemic. Nationally, median new-lease rent (from Apartment List) rose by 21.2% from February 2020 to October 2023. Rent rose faster in Phoenix and Tucson, with increases of 27.1% and 42.0%, respectively. As Exhibit 2 shows, the rent acceleration was particularly noticeable during 2021 and rent growth has softened since. Over the year in October, rent was up 2.0% in Tucson, reaching $1,359. At $1,354, rent was down 1.2% nationally and Phoenix rent was down 4.3% to $1,547.

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