Tucson MSA Second Quarter 2023 Forecast Flash

May 9, 2023

By Delaney O’Kray-Murphy, EBRC research economist

Tucson forecast improves in the near term as recession fears fade

This post briefly describes the Tucson MSA Second Quarter 2023 forecast update, completed in May 2023.

The detailed 10-year forecast data are available in Eviews and Excel files on the Forecast Databases page.

This forecast incorporates updated national short-run projections from S&P Global, released in April 2023. The U.S. baseline forecast no longer includes a national downturn. On a quarterly basis, the forecast calls for U.S. real GDP to decline 0.4% in the second quarter of 2023 before posting positive gains through the remainder of the year. The drop in the second quarter reflects the impact of tightening financial conditions (created by recent bank failures) on economic activity.

For the current U.S. and Tucson forecasts, the baseline projections are assigned a 55% probability. The pessimistic scenario has a 25% probability, and the optimistic scenario has a 20% probability.

Tucson MSA growth is projected to slow as the economy adjusts to rising interest rates, the end of federal pandemic income support, and slumping national growth.

According to the updated figures, nonfarm employment growth in Tucson for 2022 has shown a slight increase from initial estimates, with a rise of 12,300 jobs or 3.2%, representing a minimal 0.1% upward revision. Looking ahead, the baseline projection predicts a decline in job growth to 1.7% in 2023 and 1.0% in 2024, before a small recovery to 1.5% in 2025.

Net migration drove population gains last year, with Tucson adding 14,000 residents by July 1, 2022, translating into a 1.3% growth. However, population growth is forecast to decelerate to 0.9% in 2023 and 0.6% in 2024, as the surge in pandemic-driven migration diminishes and job growth slows.

According to the latest data, Tucson housing permits dropped to 5,714 in 2022, similar to the preliminary estimate of 5,769. However, the forecast predicts a significant decline in permits to 4,197 in 2023 due to slowing population growth, higher interest rates, and reduced affordability. Housing permit activity is expected to rebound in 2024, followed by another drop in 2025.

The forecast calls for nominal personal income growth to decelerate to 1.3% in 2022, down from 6.3% in 2021, reflecting the end of federal income support related to the pandemic; nominal personal income growth is then expected to increase 5.6% in 2023. Despite nominal personal income gains, after adjustment for inflation, per capita disposable income is forecast to decrease by 9.5% for Tucson in 2022 and is projected to remain constant in 2023.

Real retail sales (broadly defined to include retail, food, restaurants and bars, and gas) increased by 0.8% in 2022 but are expected to drop by 1.9% in 2023.

The pessimistic scenario assumes a national downturn in mid-2023, driven by tightening lending standards by banks, which restricts consumer and business spending, as well as continued problems arising from the Russian invasion of Ukraine. The optimistic scenario calls for stronger gains than under the baseline.

Exhibit 1 presents a summary of the current annual projections. Exhibit 2 provides a comparison to the prior forecast. Exhibit 3 provides a comparison of the baseline and alternative scenarios for the current forecast.

Exhibit 1: Summary of the Second Quarter 2023 Tucson MSA Forecast, Completed May 2023