We are fortunate to live and work in a state that continually exhibits strong foundational economic growth in employment, wages and investment. Ranked fifth in the nation in terms of growth, Arizona will likely see continued job growth, but challenges do exist—a historic national recession. A recession will negatively influence job growth in Arizona, impacting potential total employment announcements at many new employers in the state.
Inflation
Inflation is a genuine concern not only for businesses experiencing margin compression from wages and the cost of raw materials, but for consumers as it impacts the price of housing, food and basic utility staples (energy, medical, recreation, etc.).
We’ve been talking about wage inflation and its impact on margins for over two years with our customers. Because inflation was not addressed in a timely manner by the Federal Reserve System, the recent and expected additional rate increases will likely push the Fed discount rate (the rate banks and the Fed charge each other for overnight obligations) to 4.6% or something slightly over 5%.
The 75-year historical average Fed discount rate is 4.65%, so while this is much higher than the past 15 years at near 0%, it is not outside the normal range. We do not expect inflation to be a long-term problem, subsiding within three years, provided the Fed maintains its aggressive hawkish posture on rates.
From a near-term perspective, this will impact corporate earnings and move investment return expectations further north. This will undoubtedly hamper real values across the board on a nominal to slightly larger basis in terms of investment opportunities.
Housing
We expect to see housing values diminish by 20% from peak levels of 2022. Homebuilders are seeing significant increases in their cancellation rates from near 0% to 25%. Although 20% to 25% has been an historical average, recent cancellation rates are rising above those levels in many cases, along with interest rates for mortgages.
There is an old adage that buyers delay buying decision when interest rates are declining or increasing, and this cycle has not been the exception. We have been advising clients to utilize adjustable terms up to 10 years to take advantage of the current lower rate differential to a 30-year fixed rate, mainly in anticipation of them cooling over the next three-to-five-year period.
Jobs
The overall job outlook for Arizona has been strong, but is cooling. Many businesses are still having difficulty filling open positions with nearly all industries experiencing significant wage growth expectations from the labor pool.
Arizona State University economists predict the state will continue to add jobs in 2023, with approximately 24,500 net jobs in Arizona. That rate of growth would account for a meager .8% gain, but it’s still positive and beats what many of our neighboring states may experience. Additionally, the 30-year outlook forecasts close to 1.4 million jobs added through 2052, which is robust.
While there isn’t a lot of cheer in the near-term forecast, the expectation is for reasonable and sustainable growth. We anticipate opportunities for contrarian investors to be available between now and the next 18 to 24 months.
Opportunities for investors who prefer confirmed data points and trend lines are not likely to emerge until after that time. We are in pretty good shape relative to core economic fundamentals here in Arizona, and benefit from a highly competitive economy relative to many of our neighboring states.
Stay positive and find ways to benefit your community through active engagement both professionally and philanthropically with local organizations.
Mark Young
President and CEO
National Bank of Arizona