Less Uncertainty Now, Stronger Growth Coming
By Dr. George Hammond
EBR Associate Director and Eller Research Professor
March 1, 2013
The Arizona economy accelerated in 2012, with stronger job, population, and housing permit growth than in 2011. Job gains in 2012 were driven, as usual, by service-providing sectors. However, the goods-producing sector contributed to growth was well, with gains in construction, manufacturing, and mining and logging.
Job growth contributed to a decline in the state unemployment rate to 8.2%, down from 9.5% in 2011. However, a declining labor force was also a significant factor in the drop.
Arizona population growth also accelerated in 2012, with just over 60,000 residents added from July 2011 to July 2012. Stronger population growth was driven by renewed net migration into the state.
With the worst of the fiscal cliff either avoided or delayed and a full blown Eurozone financial crisis looking more remote, the U.S. and Arizona economies are expected to pick up some speed as we make our way through 2013. Even faster growth should be in the offing for 2014-2015, as the housing sector rebound gains momentum.
Fiscal Cliff Averted, Mostly
The fiscal cliff deal averted most of the tax increases that were expected to begin in January 2013. The most important exception is the expiration of the payroll tax cut, which will take a significant bite out of income and consumption growth in 2013, perhaps reducing real GDP growth by 0.4 percentage points. In addition, the spending cuts required by the sequester went into effect March 1 and are expected to reduce real GDP growth in 2013 by an additional 0.4 percentage points.
However, some fiscal uncertainty remains. For instance, the debt ceiling issue has been further delayed, until May. Finally, a federal government “shutdown” of nonessential services at the end of March is a possibility, if the continuing resolution that funds government activity is not replaced with appropriations or another continuing resolution. Stay tuned.
U.S. Growth Heads North
The forecast calls for the U.S. economy to gradually pick up steam through 2013 and into 2014, although gains are particularly weak during the first quarter of this year. The January 2013 IHS Global Insight forecasts calls for real GDP growth to be just 1.0% in the first quarter, with faster gains expected for the remainder of the year. On average for 2013, real GDP is expected rise just 1.7%, another disappointing result. In 2014, growth accelerates to 2.7% and then gains momentum, hitting 3.4% in 2015.
Arizona Job Growth 2012: Better and Balanced
Arizona added 50,500 jobs in 2012, which translated into an annual growth rate of 2.1%, according to the latest estimates. That was faster than growth in 2011, of 1.0%, and also exceeded the national rate of growth of 1.7%. As Exhibit 1 shows, job growth was fairly well balanced across industries, with just two sectors posting job losses during the year: information (down 400 jobs) and other services (down 1,800 jobs).
Adding the most jobs in 2012 were professional and business services; education and health care (primarily health care); trade, transportation, and utilities (primarily trade, especially clothing and general merchandise retailers); and leisure and hospitality (primarily food services and drinking places).
The service-providing sectors accounted for 83.0% of net job gains in Arizona last year, but the goods-producing sectors contributed as well. Construction jobs bounced back strongly in 2012, adding nearly 7,000 jobs. This is a welcome change from the 128,800 jobs lost during the 2006-2010 period. Even manufacturing contributed to job growth last year, adding 1,600 jobs from 2011, with roughly equal gains in durable and nondurable goods production. Mining and logging employment was up slightly last year.
Exhibit 1: Professional and Business Services Led Arizona Job Growth in 2012
Job growth also accelerated in the Phoenix MSA in 2012, with job growth rising from 1.4% in 2011 to 2.5% in 2012. Thus, Phoenix job growth last year beat both the state and the nation. Job growth was slower in the Tucson MSA last year, with employment rising by just 0.6%. Even so, that was a marked improvement over results for 2011, when the metropolitan area posted just 0.1% job growth.
The state unemployment rate hit 8.2% in 2012, according to preliminary estimates, which left the state very close to the national rate and well below the state rate in 2011 (9.5%). This news is not as good as we would hope because the state posted labor force declines during the period. The Phoenix MSA rate was 7.2% in 2012, down from 2011 and well below the state rate. The Tucson MSA unemployment rate also fell in 2012 to 7.3%. The metropolitan areas also experienced labor force declines in 2012, according to the preliminary estimates.
Housing Continues to Rebound
House prices in Arizona rose strongly in the third quarter of 2012, measured by the FHFA house price index. The purchase-only index for the state rose by 20.1%, with most of that gain driven by activity in the Phoenix MSA. The all-transaction index, which includes refinance activity, also showed strong appreciation in Arizona, again with most of the strength in the Phoenix MSA.
House price appreciation looks set to continue in the fourth quarter. The Case-Shiller house price index for the Phoenix MSA was up by 21.7% in October and 22.8% in November, over year ago levels. Median house prices in both the Phoenix and Tucson MSAs also continued to increase strongly during October and November.
Job gains in construction reflect in part a rebound in housing construction in Arizona. According to preliminary data from the Census Bureau, total housing permits reached 21,519 in 2012, a substantial increase from 13,386 units in 2011. Most of the increase arose in the single family sector, with permits rising from 10,637 in 2011 to 16,023 in 2012. Multi-family activity also increased, roughly doubling from 2011 to hit 5,496 units. Total permit activity rose strongly in both the Phoenix MSA (up by 63.2%) and the Tucson MSA (up by 48.9%) in 2012.
Household formation remains a key concern for housing activity going forward. According to the Census Bureau, homeowner vacancy rates were 2.5% in the fourth quarter of 2012, down from 3.2% in the last quarter of 2011. Rental vacancy rates, at 10.8% in the fourth quarter, were also below year ago levels. Overall, vacancy rates appear to be down from recent highs, but still remain well above pre-crisis levels.
Arizona Population Growth Accelerated in 2012
The Arizona Office of Employment and Population Statistics has released mid-year population estimates for the state, shown in Exhibit 2. The estimates suggest that Arizona’s population expanded by 60,400 (0.9%) in 2012 to nearly 6.5 million residents. That was stronger growth than the state generated in 2011, at 0.6%. Natural increase was positive in 2012, at 37,200, but a bit slower than in 2011. Net migration is estimated to have increased strongly in 2012, to 23,200, far exceeding the small decline in 2011.
Exhibit 2: Arizona Mid-Year Population Estimates and Components of Change (000s)
Both the Phoenix and Tucson MSAs added residents in 2012, with population rising by 1.1% in Phoenix, which was a significant acceleration over the 2011 growth rate of 0.6%. Population growth in Tucson was 0.4% in 2012, slightly slower than the 0.5% rate posted in 2011.
Income and Sales
Arizona personal income rose by 4.2% in the third quarter of 2012, compared to the same quarter of 2011. The third quarter is the most recent quarter for which data is available. Arizona’s personal income growth was 1.0 percentage points above the national average. Arizona generated solid gains in all income components.
The Bureau of Economic Analysis recently released new personal income estimates for local areas for 2011 and revised data back to 2009. The revision significantly reduced estimated personal income for the Phoenix and Tucson MSAs. Indeed, total personal income for the Phoenix MSA was reduced by 1.1% in 2009, 1.7% in 2010. The downward revisions were even larger for the Tucson MSA, with personal income revised down by 1.4% in 2009, 3.2% in 2010. For both MSAs, all of the downward revision originated in dividends, interest, and rental income. Revisions to this component were large, reaching 11.3% in 2010 for the Phoenix MSA and 14.3% for the Tucson MSA.
The latest personal income estimates for the Phoenix MSA suggest that growth hit 5.3% in 2011, up from 2.0% in 2010. Similarly, personal income growth accelerated in 2011 to 4.0%, well above growth in 2010 of 0.9%. Arizona retail sales have continued to increase in 2012, although growth has moderated from the rapid pace set in 2011, as shown in Exhibit 3. The trend toward slower growth last year was also evident in the Phoenix and Tucson MSAs. Overall, sales growth is returning to levels commensurate with income gains.
Exhibit 3: Aggregate Retail Sales Growth: Year-over-Year Percent Change
Arizona is on track to generate faster growth, assuming the U.S. economy continues to expand. For most major indicators, growth accelerates in 2013 and again in 2014, as population growth and the housing market gain momentum. Overall, Arizona is forecast to grow during the next two years and to grow faster than the nation.
Exhibit 4: Arizona Outlook 2012-2014: Growth Rates in Percent