Arizona Third Quarter 2023 Forecast Flash

Aug. 10, 2023

By George W. Hammond, EBRC director and Eller research professor

Arizona’s economy decelerates as national growth slows

This post briefly describes the Arizona third quarter 2023 forecast update, completed in August 2023. Forecast flashes for the Phoenix and Tucson MSAs will be available as they are completed.

The detailed 30-year forecast data for Arizona, Phoenix, and Tucson are available in Eviews and Excel files on the Forecast Databases page.

This forecast incorporates updated national 10-year projections from S&P Global released in July 2023. For the 2034-2053 period, we use the long-term U.S. projections completed in March 2023.

The U.S. baseline forecast assumes a soft landing for the U.S. economy. On a quarterly basis, the forecast calls for real GDP to increase through 2053 (no recession).

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

Overall, the Arizona economy is projected to slow in the near term, as it adjusts to rising interest rates, the end of federal pandemic income support, and slower national growth.

The baseline forecast calls for job growth to drop from 4.2% in 2022 to 2.3% in 2023 and 2.0% in 2024 and 2025.

The forecast calls for population growth to slow from 1.7% in 2022 to 1.5% in 2023 and 1.2% in 2024. Much of that is driven by slowing net migration in response to slowing national growth and reduced housing affordability.

Residential housing permits are forecast to fall from 60,994 in 2022 to 48,288 in 2023, as activity pulls back in response to higher interest rates, slowing growth, and significantly degraded housing affordability. Permits fall again in 2024 to 41,808.

Arizona personal income growth decelerated to 3.3% in 2022, down from 7.5% in 2021 (before adjustment for inflation), reflecting the end of federal income support related to the pandemic. The forecast calls for income growth to accelerate to 6.5% in 2023.

Retail sales (broadly defined to include food, retail, restaurants and bars, and gasoline) growth decelerates to 1.2% in 2023 before adjustment for inflation and declines by 3.1% after adjustment for inflation.

The pessimistic scenario assumes a national downturn in the second half of 2023, driven by tightening lending standards by banks, which restrict consumer and business spending, as well as continued problems arising from the Russian invasion of Ukraine. This generates modest job losses in Arizona in the second half of the year. The optimistic scenario assumes gains faster than expected 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.