Arizona’s Economy Hits Turbulence
Second Quarter 2025 Forecast Update
By George W. Hammond, Ph.D., Director and Research Professor, EBRC
May 2025
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Arizona posted surprisingly slow growth in 2024 and is on course for similar performance in 2025. State job growth was revised down significantly last year, matching the national pace. Even so, the state labor market remained tight, with relatively low unemployment and low labor market churn. Month-over-month job growth so far this year has been solid, but unspectacular. With slow growth in employment compensation, overall income growth slowed last year, as did gains in taxable sales. Housing affordability remains a challenge, both nationally and across Arizona. Housing permit activity started the year very slowly, but did pick up some momentum in the latest data.
The outlook for the nation and Arizona remains clouded by economic policy uncertainty. The federal administration has implemented new policies on tariffs, immigration, and federal spending rapidly and unpredictably. The resulting uncertainty has raised the odds of a national recession this year, but does not guarantee a downturn. If the national economy does fall into a moderate recession this year, growth will slow significantly in Arizona, Phoenix, and Tucson, with net job losses a distinct possibility. However, the baseline (most likely) scenario calls for the state to rebound from subpar growth in 2024 and 2025, with more normal growth returning in 2026.
Arizona Recent Developments
Surprisingly, Arizona job growth in 2024 was revised down significantly, from 2.1% in the preliminary data to 1.3% in the revised (benchmarked, non-seasonally adjusted) estimates. Growth was revised up slightly in 2023 (from 2.6% to 2.8%). According to the revised data, Arizona’s job growth matched the national average last year. As Exhibit 1 shows, job growth was also revised down for the Phoenix, Tucson, and Prescott MSAs. Note that for the Tucson MSA, modest job growth in 2024 was revised down to small job losses.
Exhibit 1: Arizona Job Growth, 2023-2024, Before and After Revision, Percent
Overall, job gains last year were driven by private education and health services; construction; government; and leisure and hospitality. Professional and business services; financial activities; and information posted sizeable job losses. This pattern was fairly consistent across the Phoenix, Tucson, and Prescott MSAs.
It’s been a slow start to the year for Arizona job growth, but that is partly due to the strangely high level of jobs at the beginning of 2024, which gave way to lower employment levels as we went through the spring and summer months. That pattern suggests that we will continue to see positive over-the-year growth rates as we go through the spring and summer months this year. It also suggests that unless that growth is very strong, we will see fairly soft annual average job growth this year.
Arizona housing permits had a slow start to the year, with total permits down 14.4% over the year in the first quarter (seasonally adjusted, EBRC benchmarked data). Single-family permits were down 3.1% and multi-family permits were down 40.5%. The story was similar for the Phoenix MSA, with total permits down 17.0%, but Tucson MSA permits were up 6.5% over the year.
Phoenix and Tucson home prices continued to increase in the first quarter but weakened modestly in April. The Phoenix median sale price fell 1.1% over the year to $445,000 in April while the Phoenix Case-Shiller index rose 2.3% over the year in February (latest data). The Tucson median sale price hit $368,000 in April, down 1.6% over the year.
According to data from the Federal Reserve Bank of Atlanta, housing affordability nationally and in Arizona remains compromised. These data are a cost-of-housing concept, that show the share of local median household income needed to pay a mortgage, based on the median home price. Exhibit 2 shows the results for selected MSAs and the U.S. for January 2025. A household paying more than 30% of income for housing costs is considered housing cost-burdened.
Exhibit 2: Home Ownership Affordability Monitor, Federal Reserve Bank of Atlanta, January 2025, Percent
In January 2025, the median household in the Tucson MSA would have had to pay 45.1% of their income for a mortgage, at the median sales price. The burden was higher nationally (47.0%) and in Phoenix (47.5%). Even so, burdens were far higher in the major metropolitan markets in California, with San Francisco at 69.2%, San Diego at 72.0%, San Jose at 80.4%, and Los Angeles at 87.3%.
Within Arizona, housing cost burdens by this measure varied from 39.8% in the Yuma MSA to 76.1% in Flagstaff. Lake Havasu-Kingman came in at 52.2%, Sierra Vista-Douglas posted 53.2%, and Prescott registered 64.3%.
Over-the-year taxable retail plus remote sales growth slowed in the first quarter of 2025, with Arizona posting a 4.2% increase. That was down from a 5.6% increase in the final quarter of 2024. Phoenix MSA sales rose 4.0%, while Tucson MSA sales increased 3.2%. Growth accelerated in the Prescott MSA from 5.8% in the fourth quarter to 6.3% in the first quarter of this year. Sales in March may have been boosted by consumer purchases in advance of potential tariffs.
Sales growth (over the year) at restaurants and bars was fairly steady in the first quarter for Arizona, at 2.5%. That was similar to the fourth quarter increase of 2.3%. Sales accelerated in the Phoenix MSA to 3.0% over the year, while Tucson MSA sales dropped 0.1%. Growth in the Prescott MSA decelerated slightly to 0.6% over the year in the first quarter.
Consumer price inflation in the Phoenix MSA remained below the national average in April 2025. Consumer prices were up 0.3% over the year in Phoenix, compared to 2.3% nationally. Phoenix inflation has been below the national average since September 2023.
Arizona Outlook
Slowing U.S. growth sets the stage for slow gains in Arizona, Phoenix, and Tucson this year. Exhibit 3 summarizes the state forecast.
Arizona job growth is forecast to decelerate modestly, slowing from 1.2% (seasonally adjusted annual average) in 2024 to 1.0% in 2025. The current seasonally-adjusted estimates produce a slightly different annual average growth rate than the nonseasonally-adjusted data (1.3%). We use seasonally-adjusted quarterly data in the Arizona model. Job growth accelerates to a more normal pace in 2026 and 2027, rising by 1.8% and 1.7%, respectively.
Population growth rises modestly in 2025 then decelerates to 1.3% in 2026 and 2027. Net migration is the main driving force for population gains in Arizona, as natural increase (annual difference between births and deaths) weakens.
Housing permits gradually decline during the next three years, reflecting slow population growth, relatively high interest rates, and continued high housing cost burdens.
Exhibit 3: Arizona Outlook Summary
The story of the state outlook boils down to two years of subpar growth, followed by a return to more normal performance in 2026. The same story applies to Phoenix and Tucson.
Risks to the Outlook
While recession risks are currently elevated, the baseline projections assume that the U.S. economy avoids a downturn. In contrast, the pessimistic scenario assumes deteriorating financial conditions and that the economy responds more negatively to recent developments regarding tariffs and immigration. That generates a two-quarter decline in U.S. real GDP starting in the third quarter of 2025. Under those assumptions, Arizona jobs decline modestly through the end of 2025. Under the optimistic scenario, the U.S. economy proves very resilient to recent policy changes and that generates stronger gains in Arizona as well.
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