Not so fast: Closer look at the data reveals weaknesses in Arizona economic growth

Arizona's record of economic progress in recent years is well documented. In 2006, the state led the nation in population and job growth and was fifth in growth of personal income. But a close examination of more detailed data reveals important weaknesses in the state's surging economy, according to economist Lee R. McPheters, senior associate dean of the W. P. CareySchool of Business, in a recent speech to the Economic Club of Phoenix. In perhaps the most telling measure of economic well-being — per capita income — Arizona actually is lagging most of the rest of the United States, he said.

Arizona's record of economic progress in recent years is well documented. In 2006, the state led the nation in population and job growth and was fifth in growth of personal income. The year before, Arizona was first in increase in gross state product, and the state was number one in that category in the span from 1997 to 2004.

But a close examination of more detailed data reveals important weaknesses in the state's surging economy, according to economist Lee R. McPheters, senior associate dean of the W. P. Carey School of Business. In perhaps the most telling measure of economic well-being — per capita income — Arizona actually is lagging most of the rest of the United States, he said. "Per capita income has not improved relative to the nation for a couple of decades, in spite of the fact that there has been impressive growth in other measures," McPheters said.

Arizona ranked 39th among the 50 states in per capita income in 2006, down from number 36 in 1995. Per capita income in Arizona is 87 percent of the national average, and Arizona's average wage is 92 percent of national average. And the state's position in wages and income relative to the rest of the country has barely budged over the past decade, despite energetic strategic development initiatives during this period by government and business leaders, McPheters noted.

A business model applied to Arizona

In an address May 9 at the Economic Club of Phoenix, McPheters presented an analysis of Arizona's competitive position in the national economy using the so-called SWOT (Strengths, Weaknesses, Opportunities, Threats) model, developed by Albert Humphrey at Stanford Research Institute and used for many years in business and management schools to evaluate the competitive position of organizations.

While SWOT analysis traditionally is applied to firms, it also can be an effective tool in analyzing U.S. states, according to McPheters. States compete with each other for jobs, businesses, and other economic rewards, in much the same way that firms compete for profits. And there is now a wealth of data — from the National Governors Association and other sources — that reveals the competitive position of states in numerous categories.

Using SWOT analysis, the reasons for Arizona's place in the economic hierarchy of the United States become clearer, according to McPheters. The state's greatest strength — and the main reason for its spot atop the nation in key growth categories — is its attractiveness, he said. "We have a hundred-year history of attracting people and businesses to Arizona. The annual population growth in recent years has been 3 percent. It even puts us ahead of countries we think of as rapidly growing, including Mexico and India," he said.

People drawn to Arizona include job seekers, entrepreneurs, investors, retirees, part-time residents — anyone seeking an improved quality of life. Contrary to popular perception, most of the newcomers are not elderly retirees but younger people who are participants in the labor force or soon will be. Arizona ranks 46th among U.S. states in median age, 22nd in percentage of the population over 65, and 5th in percentage of population under 18.

The youthfulness of the state's population clearly is a strength, according to McPheters. Employers want to be in a place where there is an abundance of young people prepared to work. "Arizona is a young state and a state that attracts people ready to enter the labor force," he said. Examining the data on firms, McPheters concludes that the state attracts employers of all kinds — high-tech companies, startups, franchises, sports teams, major retailers, builders, scientific firms.

The state ranks 15th in the percentage of jobs that are high tech, and 12th in percentage of firms that are fast growing. Construction employment also is strong. In Arizona, 8.7 percent of jobs are in construction, while the national average is 6.3 percent. The percentage of jobs that are heavy construction and civil engineering in Arizona is 1.1 percent vs. 0.6 percent nationwide.

Lower share of high wages

In the weaknesses category, the state's low ranking in per capita income stands out, according to McPheters. He identifies three reasons for the problem. First, the state has a below-average representation in key high-wage industries. In manufacturing, Arizona employment is 64 percent of the U.S. average.

In wholesale trade jobs, Arizona is 87 percent of the national average; in professional and science jobs, 82 percent; and management jobs, 67 percent. "We are underrepresented in some sectors that are high paying," McPheters said. Second, Arizona wages are below the national average for several industries that normally pay high wages. For jobs in management, finance, and information systems, Arizona wages are around three-quarters of the national average.

Construction jobs in the state pay 90 percent of the national average. Third, the state has lower-than-average participation in the work force. Nationally, 59 percent of the population is employed vs. 54 percent in Arizona. This is due to the large numbers of children and retirees in Arizona, and choices by individuals not to work, according to McPheters.

Opportunities for growth

In SWOT analysis, opportunities are typically external to the organization and represent trends in the competitive environment. McPheters identifies several areas in which Arizona is well positioned to capitalize. Arizona is a leader in aerospace and electronics manufacturing — two of the top export categories in the United States. As other nations continue to develop, their demand for these products should increase, and Arizona stands to gain, McPheters said.

The state already ranks 10th nationally in export sales per worker. The continuing expansion of the service sector is another opportunity for Arizona, according to McPheters. The state now is below the national average in percentage of workers in several service categories, suggesting a potential for growth. "This is especially true for health care," McPheters said.

"As our population grows, health care should be a rapidly growing sector." Another larger trend that should present opportunity for Arizona is the rapid advancement in technology. Arizona has a large high-technology manufacturing sector, and software and Internet firms have an increased presence in the state. McPheters also uncovered a statistic that indicates firms in the state are Internet savvy: The state ranks second nationally in domain names registered per firm.

Threats to Arizona's competitive position come from several areas, according to McPheters. In state and local spending per capita, Arizona is last in the nation, and it is 40th in state and local spending as a percentage of personal income, according to the Rockefeller Institute of Government. While the state has a reputation for a high quality of life, threats loom in this area, according to McPheters. He notes areas of concern in physical infrastructure, air quality, crime, and education.

Arizona ranks 35th in the country in percentage of the population with a high school degree and 26th for those with college degrees. This could be a problem for employers looking for skilled labor, according to McPheters. "The way you improve labor typically is through education," he said. "We're certainly not a top ten state there, and we're in the middle of the pack for people with a college or advanced degree."

Bottom Line:

• Arizona is a leading growth state on a number of indicators, including population, employment, gross state product, and personal income. However, on one key indicator of well-being — per capita personal income — Arizona has been 15 points below the national average.
• A SWOT analysis reviews the strengths, weaknesses, opportunities, and threats to an organization. While applied most commonly to firms, it also can be used to assess the competitive position of U.S. states.
• Arizona's most evident strength is its attractiveness to people and businesses. Its main weakness is its relatively lower proportion of high-paying jobs.
• Arizona has opportunities for growth from expanded global markets, expansion of the service sector, increased population, and application of new technology.
• Threats to Arizona come mainly from the quality of physical and social infrastructure. In education, Arizona lags behind other states in percentage of high school graduates and is in the middle of the pack in percentage of the population with college and advanced degrees.