Arizona job growth faces risks amid market slowdown, economist says

If the U.S. does fall into a recession, one metro Phoenix economist said Arizona is poised to fare well.

A resilient economy has kept the nation from moving into a major downturn even as inflation has spiked, the government has continued spending and the Federal Reserve has kept interest rates high.

Recession predictions for the past two years have come and gone but it could still happen in the second half of 2024 or most likely following the presidential election.

Ultimately the federal government has a large influence on whether or not we'll go into a recession, said Jim Rounds, president of Tempe-based Rounds Consulting Group Inc.

"It's challenging because we're not following normal economic conditions right now," said Rounds at a May economic forecast event hosted in Phoenix by Tacoma, Washington-based Umpqua Bank.

National debt went up by $8 trillion in a "very short period of time" while the Federal Reserve board had near-zero rates for longer than they needed to, Rounds said.

"Because of that, we have a lot of extra economic activity, and that's why even mismanaged states had budget surplus," he added. "At some point, we're going to have to hit the reset button."

If the U.S. monthly job growth slows to below 200,000 for several months in a row, this could signal problems, Rounds said. The U.S. added only 175,000 jobs in April 2024, the slowest gain in six months.

How Arizona could be impacted by a recession

Arizona was one of the first states to recover all of its jobs lost from the Covid-19 pandemic, but growth started to slow down in 2023 as other states caught up.

However, Arizona has had strong population gains and has seen an increase in jobs with higher wages. Major economic development wins like Taiwan Semiconductor Manufacturing Co. will also bring more jobs down the road.

If a recession hits, job losses in Arizona are expected to be minimal, but the growth of new jobs could slow down even further.

"In Arizona, it's going to be a little bit more of a jobs-posting recession, rather than a typical recession," Rounds said.

That means businesses won't necessarily lay off workers but also will not add new jobs.

"We're not losing anything in our base tax collections," Rounds said. " We're losing what somebody was hoping was coming from the future."

Historically, Arizona has outperformed the U.S. in jobs during a recession with an exception during the housing crash of 2008. The next economic downtown experienced in Arizona could be the first that doesn't experience a net decrease in jobs as a result, he added.

That's because over the past decade, state leaders have deliberately made Arizona's economy more diverse and less reliant on housing growth.

To grow the economy and create more resiliency, Rounds said a market should have a balance of competitive tax rates, economic development programs, a strong workforce, transportation infrastructure and more.

"We're not quite there yet," Rounds said. "Our current story is that we do have a fairly resilient economy compared to before."

Housing affordability still a major concern

In addition to focusing on adding more higher-wage jobs to Arizona, Rounds said housing affordability is also a key piece of economic growth.

"Housing affordability has been a problem. It's going to continue to be a problem," Rounds said, adding that the financial model for housing "doesn't work anymore."

Both developers and cities will have to adjust and improve, he said.

"At any one time, we have at least two projects we're working on where one of the cities is denying an apartment developer a project for reasons that aren't economic because they don't understand things," Rounds said.

Housing affordability has become one of the most prominent topics at the state Legislature.

Gov. Katie Hobbs has signed multiple housing bills, such as one that allows more accessory dwelling units to be built and another that encourages a diversity of housing to be built like townhomes. Another passed bill will also encourage developers to demolish or reuse obsolete commercial buildings for housing.

In 2022, Arizona households on average spent 34.3% of their annual expenditures on housing compared to 33.6% in 2010 and 30% in 2005, according to Bureau of Labor Statistics data.

"That doesn't seem like a huge increase, but what if you're making less than $50,000? You're spending a lot more," Rounds said.