Arizona Third Quarter 2026 Forecast Flash

This post briefly describes the Arizona Third Quarter 2026 forecast update, completed in August 2026. Forecast flashes for the Phoenix MSA and the Tucson MSA are also available.

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 projections from S&P Global, released in July 2026. The U.S. baseline forecast assumes that the U.S. economy continues to expand at growth rate near its long-run trend of around 2%. Thus, on a quarterly basis, the forecast calls for real GDP to increase through 2035 (no near-term recession). For the current U.S. and Arizona forecasts, the baseline projections are assigned a 50% probability. The pessimistic scenario has a 25% probability, and the optimistic scenario has a 25% probability. 

Overall, the Arizona economy is projected to accelerate modestly this year, after unusually slow growth during 2025.¹ The baseline forecast calls for state job growth to accelerate modestly in 2026, to 0.7%, and again next year to 1.0%. These growth rates are slow by the state’s historical standards, comparable to the pace of the slow recovery from the Great Recession.

The forecast calls for population growth to decelerate in 2026 and 2027, with the rate falling from 1.3% in 2025 to 1.2% in 2026 and 1.1% in 2027. This reflects slowing natural increase due to lower birth rates and moderate net migration.

Residential housing permits (seasonally adjusted) are forecast to fall from 51,532 in 2025 to 47,218 (-8.4%) in 2026 and again to 47,075 (-0.3%) in 2027, as permit activity responds to higher mortgage rates and slowing population gains.

Arizona personal income growth is forecast to accelerate from 4.3% in 2025 to a more normal pace of 4.9% in 2026, as growth in earnings from work recovers, with additional support from transfer payments and capital gains.

Retail sales (broadly defined to include food, retail, restaurants and bars, and gasoline) growth is forecast to pick up in 2026, rising by 4.6% before adjustment for inflation, driven by higher inflation overall, higher gas prices, and resilience in consumer spending. Nominal growth moderates to 3.8% next year as gas prices fall.

^ ¹ According to the current revised (benchmarked) estimates, Arizona nonfarm jobs rose by just 0.1% in 2025 (non-seasonally adjusted). Despite the U.S. Bureau of Labor Statistics (BLS) taking the unusual step of also revising the 2024 data, which significantly increased job growth during that year, the particularly slow job growth for 2025 remains somewhat puzzling to us. We will continue to pay attention to occasional revisions to the Arizona job data going forward. 

Exhibit 1 presents a summary of the current annual projections. Exhibit 2 provides a comparison with the prior forecast.

Exhibit 1: Summary of the Third Quarter 2026 Arizona Forecast, Completed August 2026

Exhibit 2: Comparison of the Third Quarter 2026 (Current) and Second Quarter 2026 (Prior) Forecasts for Arizona, Percent Change

Exhibit 3 provides a comparison of the baseline and alternative scenarios for the current forecast.

The pessimistic scenario assumes slower growth in the U.S. economy in the near term (compared to the baseline), but no recession. Slower growth is driven by higher energy prices as the conflict in Iran continues to push energy prices higher and depress consumer demand, as well as lower stock valuations due to geopolitical uncertainties. This generates slower growth in Arizona as well, with small annual average job losses in 2026 and 2027. 

The optimistic scenario assumes the war in Iran to come to definitive end, leading to stronger consumer demand and a slightly amelioration in financial conditions nationally and, in turn, faster Arizona job and income gains than under the baseline.

Exhibit 3: Summary of the Third Quarter 2026 Arizona Forecast, Baseline and Alternative Scenarios, Percent Change