First Quarter 2025 Forecast Update
By George W. Hammond, Ph.D., Director and Research Professor, EBRC
February 2025
Still going strong, the Arizona economy added large numbers of new jobs and residents last year. Nominal taxable retail plus remote sales expanded slowly, while personal income growth decelerated. Single-family permits increased significantly but housing affordability remained low. The labor market remains very tight, with low unemployment, while employment cost growth slowed as job churn lost momentum.
The outlook calls for Arizona, Phoenix, and Tucson to weather significantly increased macroeconomic policy uncertainty in the near term. However, growth is projected to slow as demographic pressures, elevated interest rates, and slowing national growth come to bear. The pessimistic scenario assumes slower growth than under the baseline, but no outright U.S. recession. That is driven by tighter financial conditions caused by tariff-induced inflationary pressures and more restrictions on immigration (additional deportations). The optimistic scenario assumes gains faster than expected under the baseline.
Arizona Recent Developments
Arizona’s population increased by 96,600 residents from July 1, 2023 to July 1, 2024, according to the latest estimates from the Arizona Office of Economic Opportunity (OEO). That translated into an increase of 1.3% and put the state’s population at 7.6 million (Exhibit 1). National population growth was 1.0% last year.
Arizona’s population growth can be disaggregated into two major components: natural increase and net migration. Natural increase is the annual difference between births and deaths. Thus, with 78,100 births during the twelve months from July 1, 2023 to July 1, 2024 and 69,300 deaths, the state posted a small natural increase of 8,900.
Net migration is the difference between those that moved into Arizona minus those that moved out. In the EBRC methodology, net migration is estimated as the residual left over after we subtract natural increase from population change. In 2024, we estimate net migration at 87,400.
Exhibit 1: Population Estimates and Components of Change for Arizona, July 1, 2023 to July 1, 2024, Thousands
Similarly, natural increase was modestly positive for the Phoenix MSA (Maricopa and Pinal counties) last year. Combined with estimated net migration at 63,300, the metropolitan area generated a population increase of 77,700 (1.5%) in 2024.
In contrast, natural increase was negative for both the Tucson MSA and the Prescott MSA in 2024, with more deaths than births. Even so, positive net migration was sufficient to generate net population gains, with Tucson adding 6,300 (0.6%) and Prescott adding 2,900 (1.2%).
Through the first three quarters of 2024, Arizona personal income growth is on pace to decelerate significantly from 7.0% growth in 2023. Year-to-date through the third quarter of 2024, Arizona personal income was up 5.4% over the year, near the national pace of 5.5%. Net earnings were up 6.2%; dividends, interest, and rent were up 5.9%, and transfer receipts were up 2.7%.
Arizona’s year-to-date nominal income growth in 2024 outpaced Phoenix MSA inflation, with real income up 2.9% over the year. U.S. real personal income was up 2.5%.
Arizona’s labor market remained tight in 2024, with the preliminary unemployment rate averaging 3.6% for the year. That was an all-time low, going back to 1976. A tight labor market is not unambiguously good or bad. From the employer side, tight labor markets can present challenges in hiring and retaining workers. From the employee side, tight labor markets can present opportunities for higher pay and new job opportunities.
On average in 2024, Arizona jobs were up 66,800 (2.1%) from 2023, outpacing the U.S. at 1.3%. Keep in mind that employment data for the state and local economies for the last few months of 2023 and all of 2024 are preliminary and will be revised in early March 2025. The national data for 2023 and 2024 have been revised, with job annual job growth at 1.3% (compared to 1.6% in the preliminary data).
As Exhibit 2 shows, private education and health services generated the most jobs from 2023 to 2024, followed by trade, transportation, and utilities; government; and professional and business services. Jobs were down in information, manufacturing, and leisure and hospitality.
Exhibit 2: Arizona Net Job Change (Thous.) and 2023 Annual Wages per Worker
According to preliminary estimates, Phoenix MSA jobs were up 49,900 in 2024, for 2.1% growth. That matched the state. Phoenix accounted for 74.7% of state gains last year. The pattern of job gains across industries was similar to the state.
Tucson MSA jobs were up 3,600 over the year in 2024, which translated into 0.9% growth (preliminary data). Tucson job gains were driven primarily by private education and health services, with smaller contributions from manufacturing; financial activities; construction; trade, transportation, and utilities; other services; and natural resources and mining. Jobs were down in professional and business services; leisure and hospitality; government; and information.
Prescott MSA jobs were up 1,000 over the year in 2024, for 1.4% growth in the preliminary estimates. Job gains were driven by government, with smaller contributions from trade, transportation, and utilities; private education and health services; other services; financial activities; mining and construction; and manufacturing. Jobs were down in leisure and hospitality and professional and business services. Jobs were stable in information.
Housing affordability remained low in the fourth quarter of 2024, according to the latest data from the National Association of Homebuilders-Wells Fargo data. Those data estimated that a mortgage for a median-priced home in Tucson would account for 37.0% of a median family’s income. Anything more than 30.0% is considered a housing cost burden. Phoenix posted 39.0%, which was slightly above the national average for new and existing homes. In contrast, housing cost burdens were much higher for major metropolitan areas in California, with San Francisco and San Diego at 69.0%, and San Jose at 87.0%.
Arizona housing permits fell 0.5% in 2024, according to the preliminary data from the U.S. Census Bureau (seasonally adjusted by EBRC). That put permits at just over 58,000 for the year. Single-family permits were up strongly (21.1%) while multi-family permits fell 31.6%.
The pattern was similar for the Phoenix MSA, with total permits down 2.5% over the year. Single-family permits were up 20.7% and multi-family permits were down 29.9%.
In contrast, total permits were up slightly in the Tucson MSA (0.6%). Again single family permits were up (12.3%) while multi-family permits were down 27.0%.
The U.S. Census Bureau will release revised annual totals for states and counties in May 2025. At that time EBRC will adjust our monthly and quarterly data to match the revised annual estimates.
Arizona retail plus remote taxable sales growth rebounded in the fourth quarter of 2024, rising 5.6% over the year before adjustment for inflation. That was a significant improvement over the 3.1% decline in the third quarter. Sales also were relatively strong in the last quarter of the year in Phoenix (5.3%), Tucson (6.9%), and Prescott (5.8%).
For 2024 as a whole, retail plus remote sales were up 1.4% statewide, 1.1% in Phoenix, 1.4% in Tucson, and 2.5% in Prescott.
Restaurant and bar sales also recovered modestly in the fourth quarter, with state sales up 2.3% over the year. Phoenix sales were also up 2.3%. Tucson sales rose 2.0% and sales in Prescott increased 0.8%.
For 2024 as a whole, restaurant and bar sales rose 2.0% in Arizona. Sales increased 2.2% in Phoenix, 1.4% in Tucson, and 0.7% in Prescott.
Arizona Outlook
The Arizona outlook calls for the state economy to gradually slow in coming years, reflecting demographic pressures, slowing national growth, and substantially increased national macroecnomic policy uncertainty.
Job growth in 2024 is expected to be slightly slower than in 2023, at 2.5%. The pace of growth decelerates to 2.3% in 2025 and 2.1% in 2026 (Exhibit 3). Arizona’s growth is expected to substantially outpace the nation.
Growth in 2024 is forecast to be above job growth rates in the preliminary nonfarm payroll data, because the U.S. Bureau of Labor Statistics preliminary benchmark suggested that they will revise the Arizona data up in March. In order to accommodate this, the 2024 nonfarm payroll data in the Arizona projections are forecast estimates, not published historical data.
Slowing job gains generate modest increases in the unemployment rate, which is projected to rise from 3.6% in 2024 to 4.0% in 2025 and then to 4.4% in 2026.
Personal income growth is expected to outpace inflation in coming years. Growth decelerates in 2024, to 5.3%, reflecting slower wage and asset income gains. The pace rebounds to 5.8% in 2025 and 6.2% in 2026.
Likewise, retail plus remote sales growth decelerates significantly in 2024, before gradually rebounding in 2025 and 2026.
Population growth hit 1.3% in 2024, down from 1.6% in 2023. The forecast calls for net migration to drive gains up modestly in 2025 to 1.4%.
Housing permits were down modestly last year and the forecast calls for them to fall as population gains gradually lose steam.
Exhibit 3: Arizona Outlook Summary
The Phoenix MSA is forecast to continue driving Arizona growth. For instance, job growth hits 2.7% in 2024, 2.2% in 2025, and 2.0% in 2026. That is expected to far outpace U.S. gains. Likewise, Phoenix adds residents at a rapid pace (compared to the nation), in 2025 and 2026, with growth rates of 1.6% and 1.5%, respectively.
The Tucson MSA continues to expand during the forecast, but at a slower pace than Phoenix or the state. Job growth is forecast to be in the 1.0% per year range in the near term, which is faster than the nation, but slower than expected state gains. Tucson’s population continues to expand, solely due to positive net migration, with expected increases of 0.8% in 2025 and 0.7% in 2026.
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