Closing out 2023—and capping one of the more turbulent periods in recent political, economic and cultural history—Elevate AZ sought to take a look at how the state fared economically. With an eye toward post-pandemic recovery, inflation, interest rates, housing affordability and other bellwether factors that dictate a state’s economic health, how does Arizona measure up? How is the state doing on the whole? The answer is that, with a couple of notable sticking points, “not bad at all.” Here are a few summary conclusions about the Arizona economy.
2023: Arizona’s Economic Year in Review
With notable gains in several key areas, the state’s economy is clearly on solid footing for the future.
Arizona’s economy as a whole
As reported in the August forecast of the Arizona Economic & Business Research Center, “…jobs, wages, and sales all increased…and the unemployment rate remained very low. Arizona jobs were essentially back on their pre-pandemic trend. Phoenix inflation, although it remained above the nation, decelerated significantly, thanks to slower gains in house prices and outright price declines in commodities.”
Data for later in the year was as yet unavailable or unmeasured at this writing, but looking to the first quarter of 2023, the state’s overall economic performance was trending quite healthy.
The key measure for gauging an economy is to calculate its real gross domestic product (GDP). In Q1, Arizona’s GDP was $468.6 billion in goods and services per year. It may come as no surprise that the industry leading the state’s GDP is real estate, which in the first quarter of the year (and including rentals and leasing) amounted to $70.3 billion.
Contrastingly—and perhaps surprisingly—at the bottom of the industry GDP scale was agriculture, forestry and fishing, with a total of $3.09 billion. Historically, agriculture was Arizona’s bedrock economic pillar. That said, in Q1, agriculture, forestry and fishing jumped to 13.4 %, the highest growth rate in the state.
Compared with other U.S. states, Arizona ranks 18th in the nation, in terms of the size of its economy.
While one less optimistic statistic reported that housing affordability had dropped significantly from pre-pandemic levels, overall, the outlook calls for the U.S. economy as a whole to achieve a “soft landing” and avoid a recession this year and next, which sets the stage for continued growth in Arizona. One important factor is that the state is expected to far outpace national growth during the next 30 years, especially considering predictions for Phoenix.
That said, according to the report, “…state growth is forecast to decelerate significantly compared to average growth rates during the prior 30 years (1992-2022).”
Tourism rekindled
Behind its banner “Travel Driven-Future Focused,” the Arizona Department of Tourism’s (ADT) 2022 economic impact report offered a fairly solid appraisal of how the state’s tourism market was recovering from the devastation the pandemic visited upon this key industry. And the numbers are very promising indeed.
Thus far in 2023, every one of the indicators the department tracks to assess the health of state tourism has trended upward. Last calculated at the end of the summer, the categories include estimated tourism taxes (up 5.4% year-to-date); airport passenger traffic (up 9.7% year to date); state park visitation (up .1% year to date); national park visitation (up 8.2% year to date); and lodging (up approximately 8% year to date).
Using last year’s tabulations, this continuing tourism-related upswing is mirrored in the state’s dollar amount of direct travel-related spending generated within Arizona, which totaled $28.1 billion. Also impressive, that figure generated nearly $4 billion in local, state and federal taxes.
According to an ADT report: [The state tourism recovery] “…has shown our industry’s vast capacity for adaptability and resilience in the face of great challenges. Our ongoing strategic planning efforts, which serve as the backbone of our approach, help ensure that our daily marketing decisions are as effective as possible.”
Arizona jobs: Back on the beat
Happily for the state and its approximately three-plus million people workforce, jobs in Arizona were back on their pre-pandemic trend in 2023. In fact, according to the Common Sense Institute of Arizona, the state’s labor market outperformed the U.S. as a whole throughout the pandemic years, losing fewer jobs in all but 10 other states, and regaining lost jobs faster than all but four other states.
It’s important to keep in mind that pre-pandemic, the forecast was already calling for state economic growth to decelerate significantly in coming years, largely due to the aging of the labor force, particularly the baby boom generation.
“A slowing national economy means slower economic growth in Arizona, Phoenix and Tucson in the near term,” the forecast predicted.
Realistically, Arizona job growth is forecast to decelerate from 4.2% in 2022 to 2.3% in 2023 and again to 2% in 2024-2025.
“But even with this deceleration,” the forecast continued, “it calls for Arizona to match the U.S. this year and far outpace it in 2024 and 2025. Slowing job growth implies a modest increase in the unemployment rate in the near term.”
Shaping Arizona’s jobs future, the Arizona Commerce Department lists 10 industry niches that represent where Arizonans will find employment in the near- and long-term. They include automated vehicles, renewable energy, freshwater science, personalized medicine, smart materials, telemedicine, education technology and, lastly, “internet of things,” which is defined as “the network of connected smart devices that communicate seamlessly over the Internet.”
Cost of living
One major factor governing a state’s economic health is its cost of living. In this category, Arizona doesn’t perform as well as some of the other measures.
According to MERIC’s 2022 Cost of Living Index, the state ranks 37th compared to other states. MERIC’s calculus looks at a combination of cost-of-living measures, including housing costs, utility costs, groceries and food, transportation, healthcare and childcare, and taxes.
Bankrate, a national website that offers the public state-by-state statistics on cost-of-living and other financial measures, said this about Arizona: “The overall cost of living here is 6% greater than the national average… While the cost of housing is a staggering 20% higher, other costs, such as food, utilities and transportation, are much more on par with national averages.”
Housing market
Housing affordability is another economic measure that remains a sticking point for the state. As reported in a July 2023 article in the Forbes Advisor, “The Arizona housing market was on fire during the pandemic, particularly in Phoenix.”
The statement referred to the median price of homes in the state capital, which hit $475,000 in 2022, 61% increase over the two previous years. Although that median price has cooled a bit since (in May of this year, it was $350,390), affordability is still out-of-reach for a large portion of home buyers throughout the state.
Indeed, the state housing market and its activity over the past several months present a conundrum for the industry. To illustrate, at the end of 2022, the National Association of Realtors predicted a jaw-dropping 15.8% decline in combined sales and prices for the Phoenix-Mesa-Scottsdale market in 2023.
But despite the decline in sales and available listings, home prices are on the rise. At the same time, Goldman Sachs researched and compiled a list of four U.S. housing markets that the report says “…are heading to a crash that rivals 2008.” Phoenix was on that list.
“[Housing] affordability has gone way down, with interest rates going up,” noted Phoenix-area Realtor Holly Gray. Still, she says, she doesn’t see the market falling apart. As the real estate website Zillow notes, “Nearly 60% of homes sold below list price in April 2023.”
What’s next
As ever, predicting what will happen to any state’s economic health over the next several months greatly—and increasingly—depends on the outlook for our national and global economies. Theforecasts for Arizona depend to a great measure on how much volatility the world markets engage.
With that in mind, in September, the University of Arizona’s Eller College of Management noted this: “After increasing by 2.1% in 2022, the baseline forecast calls for U.S. real GDP growth to slow to 1.8% in 2023 and 1.2% in 2024. The U.S. economy is projected to be stronger in 2023 than [in August], reflecting more robust underlying data released recently. Gains are expected to be slightly softer during 2024-2026. On a quarterly basis, the forecast calls for real GDP to increase through 2033, with no recession.”