Forecast 2017: Arizona’s economy will be 'quite vigorous'

At long last, Arizona’s economy has officially recovered from the Great Recession. According to economist Lee McPheters, who spoke at the 53rd Annual ASU/JPMorgan Chase Economic Forecast Luncheon, strong job growth and population growth will continue in 2017. But longer-term measures of economic security "bear watching.”

This time last year, Lee McPheters, economics professor and director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School, forecasted that 2016 would be the year the Arizona economy finally recovered. He was right. “The Arizona economy continued to post solid growth in 2016, finally replacing all jobs lost during the Great Recession,” McPheters said at the 53rd Annual ASU/JPMorgan Chase Economic Forecast Luncheon (presentation and slides below). Looking to 2017, he sees an Arizona economy that “about all but a handful of other states, will appear quite vigorous.”

Arizona is sixth in job creation — and they’re good jobs

Unemployment rates are still above 5 percent in several western states, including Arizona, where unemployment was 5.2 percent at last count in October 2016. Job growth in Arizona has been strong. The state ranked sixth in the nation for private sector job creation in 2016, adding 76,000 new jobs, the majority (80 percent) in the greater Phoenix area. The forecast for 2017 is even better, at 81,000 new jobs — with the majority still in greater Phoenix.

What is the quality of those jobs? “Contrary to the view sometimes expressed by skeptics, the quality of new jobs being added is quite good,” McPheters said. “There is an emphasis on knowledge jobs requiring advanced education, skills, and training.” Through October 2016, Arizona ranked second nationally in the growth of new financial sector jobs, with an increase of 5.5 percent, and third in the growth of information sector jobs, with an increase of 6.1 percent.

Job growth favoring workers with advanced education is a trend seen across the country. Nationally, since the end of 2007, there have been almost 10 million new jobs created for workers with a bachelor’s degree or higher, and about 2 million jobs for workers with an associate’s degree or some college. Among workers with a high school diploma or less, there has been a loss of about 4 million jobs.

Domestic migration remains strong — relatively

Population growth has long been a key driver of economic growth in Arizona, and it remained relatively strong in 2016. Among 17 states that gained domestic population in 2016, Arizona was fourth. Thirty-three states lost domestic population. About the state’s historical trend, however, population growth is about half what it had been before the Great Recession. On average, Arizona’s population grew 3.2 percent a year between 1977 and 2007; in 2016 population growth was 1.6 percent, and the forecast is the same for 2017.

Long-term measures of prosperity are relatively weak

While job growth and population growth in Arizona are among the strongest in the country, McPheters said that relative weakness in long-term indicators of prosperity bears watching. “Strong ‘headline’ indicators overshadow long-term structural issues in the state economy,” he said. Those long-term issues include measures of economic prosperity that are well below national averages. In 2015 (the most recent data available), Arizona ranked 42nd in per capita income and 43rd on output per worker. McPheters explained, “Factors underlying the gap between Arizona and the nation include wages per job and the ratio of employment to population, both of which are below the national average.”

Single-family housing disappoints — but it’s no 2011

The 2016 forecast was for a 30 percent gain in single-family permits. Actually, permits grew about 10 percent. “Single-family permits rose by more than 30 percent in 2015, and analysts expected more of the same in 2016,” McPheters explained. “However, it now seems permits will barely grow by double digits in 2016, and there is caution about 2017 as interest rates begin to rise.” The forecast for 2017 is a 15 percent rise in single-family permits, relative to 2016. What’s holding back home building? “Some millennials don’t want a house at all,” explained McPheters. Relative to previous generations, fewer 18-to-34-year-olds today are married with kids, and more still live with their parents. Some believe that a house is ‘not a good investment.’ In addition, McPheters said, “look to the three Ls for answers. Labor costs are up, and labor is less available. Land/lot costs are up, and there are more restrictions. And, lending is still tight.” Still, home building in Arizona is improving, with gains every year since 2014. And relative to 2011, single-family permits are forecasted to be nearly three times higher in 2017.

Bottom line

On near-term measures of economic health — including job growth, population growth, and home building — Arizona is poised to continue strong in 2017, driven by a strong labor force, good quality of life, and relatively low-cost structure. What could derail that outlook? Looking to the policies of a new president, McPheters said that on one hand “possible new policies on exports could affect trade” but on the other, “Arizona would benefit from higher defense spending.” Should the national economy stumble, that would affect Arizona as well. “The national business cycle is Arizona’s greatest risk in 2017.”

Quick take

• A strong labor force, good quality of life, and relatively low-cost structure will drive Arizona’s growth in 2017.
• Arizona will continue to be a top 10 state for job creation and population increases.
• On per capita measures of prosperity, Arizona is much weaker than other states.
• The national business cycle is the greatest risk for Arizona’s economy.

Hear Professor of Economics Lee McPheters' presentation at the ASU/JPMorgan Chase Economic Forecast Luncheon on Dec. 5, 2016:

Follow along with McPheters' slides: