By George W. Hammond, Ph.D.
Director and Research Professor, EBRC


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Everyone knows that an individual’s education is highly correlated with income. This is also true for states, cities, and even neighborhoods. The latest data from the Census Bureau (for 2015) lets us explore the correlation between four-year college attainment rates and income levels for Arizona’s neighborhoods (Census tracts). As you might expect, neighborhoods with more highly educated residents also tend to have higher income levels. For metropolitan statistical areas (MSAs), these correlations reflect not just the fact that highly educated individuals get paid more, but also the fact that cities with more highly educated residents are more productive, innovative, and competitive.

EBRC research economist Alan Hoogasian has built a new interactive map which allows you to explore this relationship in your community. Be sure to interact with the map! Choose the data you are interested in exploring, then click on the map and it will pop up a box with the underlying data. You can also zoom in on Phoenix, Tucson, or any county in the state. Use the map tools to view results for custom combinations of Census tracts.

Want to know more about Arizona’s trends in income and education? Check out Ranking Arizona: Income and the Quality of Life, Losing Ground: Arizona’s Long-Run Per Capita Personal Income Trends, and Troubling Trends in Arizona’s College Attainment Rate.

 

Ranking Arizona: Income and the Quality of Life

By George W. Hammond, Ph.D.
Director and Research Professor, EBRC


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While Arizona is a rapidly growing state, it does not fare so well in terms of monetary measures of its standard of living. As Exhibit 1 shows, the state’s per capita personal income, after adjustment for inflation and the cost of living, ranked 47th in the nation in 2015. That was 14.5% below the U.S. average. It was also well below most western states, with the exceptions of Utah and New Mexico. This analysis uses the Arizona Office of Economic Opportunity population estimate for Arizona, in contrast to the Census population estimate used by the U.S. Bureau of Economic Analysis (BEA), which publishes the data.

Arizona’s per capita income ranked low in large part because wages tend to be low in Arizona. It was also related to the state’s relatively low employment-population ratio (driven by demographics), income from dividends, interest, and rent, and transfer income.

Exhibit 1: Arizona Per Person Income Ranked Low In 2015
U.S. State Per Capita Personal Income, Adjusted for Inflation and the Cost of Living
Exhibit 1: Arizona Per Person Income Ranked Low In 2015 U.S. State Per Capita Personal Income, Adjusted for Inflation and the Cost of Living

The cost of living, as estimated by the BEA, covers all the main costs faced by households: housing, food, transportation, as well as many other goods and services. The 2015 data are the latest available from the BEA, because there are long data lags in the estimation of housing costs. Exhibit 2 shows that Arizona’s cost of living was roughly in the middle of the pack, ranking 26th in the nation at 3.8% below the national average. The state’s cost of living was well below that of most western states, particularly California. It was slightly above the levels estimated for New Mexico and Idaho, and very close to Texas.

Exhibit 2: Arizona’s Cost of Living Was in the Middle of the Pack
Percentage Difference Between U.S. and State Cost of Living in 2015
Exhibit 2: Arizona’s Cost of Living Was in the Middle of the Pack Percentage Difference Between U.S. and State Cost of Living in 2015

While Arizona ranks low on pecuniary measures of the standard of living, it is important to remember that money is just one dimension of a state’s quality of life. Other measures might include climate, crime, pollution, and myriad other factors. The problem for economists boils down to how to combine all of these dimensions into one indicator or ranking. One method that has been proposed in the economic literature is a “voting with your feet” ranking, which exploits domestic migration flows across states. The idea is that the number of people moving to/from a state tells us something important about the overall standard of living available to residents of that state. I use PUMS ACS Five-Year (2011-2015) domestic migration estimates from the Census Bureau.

The method is based on competition: each state is pitted against the other in the competition for migrants. If state A attracts more residents from state B than it loses to state B, then state A wins and we put a +1 in state A’s win/loss column. If state A loses more residents to state B than it attracts, then state A loses and we put a -1 in its win/loss column. Then we sum the wins/losses for state A, which gives us state A’s win/loss record. We do this for all states versus all states and then rank states by their win/loss records.

Exhibit 3 shows the results from one such analysis. States that rank high are shaded darker rank higher than states shaded lighter. Note that states in the Southeast, South, and West tended to rank highest. States in the Northeast and Midwest tended to rank lowest. Arizona ranked in the top 10, which is quite a contrast with its per capita income rank. This reflects the fact that Arizona’s climate is a powerful draw and a significant part of its attractive standard of living.

One issue to keep in mind, however, is that the analysis so far reflects the decisions of all migrants, including retirees. If we restrict the analysis to migrants under the age of 65, then Arizona drops out of the top 10 and into the middle quintile. Thus, while Arizona is an attractive migration destination, it is not quite as attractive to those individuals most likely to move to improve their economic prospects.

Exhibit 3: Arizona’s Standard of Living Ranked in the Top 10
Ranking Based on Domestic Migration Data from PUMS ACS 2011-2015
Exhibit 3: Arizona’s Standard of Living Ranked in the Top 10 Ranking Based on Domestic Migration Data from PUMS ACS 2011-2015

During the past 40 years, Arizona has gradually fallen further and further behind the nation in per capita income, with slow wage growth contributing to the divergence. One key factor driving this has been the trend in Arizona’s four-year college attainment, which has drifted from well above the national average in the 1940s to significantly below average today. If Arizona’s college attainment rate continues to lag behind the national average, it will be very difficult to close the income gap in the future.

By George W. Hammond, Ph.D.
Director and Research Professor, EBRC


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Arizona continues to add jobs, income, and residents at a faster pace than the nation. However, gains are coming at a slow pace compared to the state’s own history. Demographics (aging of the baby boom generation) is likely playing a role here, and this will continue to be an issue in the long run.

The 30-year forecast calls for Arizona to outpace the national rate of growth. However, that is not likely to be true for the state’s growth in per capita income. This is expected to remain positive and outpace inflation, but the state is not expected to beat the national rate. That means Arizona is forecast to lose ground to the nation on a key measure of prosperity.

During the past 40 years, Arizona has gradually fallen further and further behind the nation in per capita income, with slow wage growth contributing to the divergence. One key factor driving this has been the trend in four year college attainment, which has drifted from well above the national average in the 1940s to significantly below average today. If Arizona’s college attainment rate continues to lag behind the national average, it will be very difficult to close the income gap.

Arizona Recent Developments

Arizona’s job growth continued at a moderate pace in the second quarter of 2017. Over the year, the state added 54,200 jobs, which translated into 2.0% growth. That was slightly slower than the 2.1% rate posted in the first quarter, but above the national rate of 1.5%. The Phoenix metropolitan statistical area (MSA) added 50,300 jobs over the year in the second quarter, for 2.6% growth. The Tucson MSA added just 700 jobs over the year, for 0.2% growth.

While job growth performance has not been particularly rapid so far this year, the buzz related to employment change has been unusually strong. The Economic and Business Research Center has been tracking firm announcements related to employment change since 1999. Exhibit 1 shows monthly announcements by firms related to both employment increase and employment decrease. This particular dataset tracks the number of announcements, not the number of jobs associated with the announcements. These announcements appeared in the major news outlets around the state, including the Arizona Republic, the Arizona Daily Star, among many others. Most of the announcements related to future expected employment changes at firms.

Exhibit 1: The Buzz About Arizona Employment Is Strong
Monthly Number of Firm Announcements Related to Job Increase or Decrease (Twelve Month Centered Moving Average)

Monthly Number of Firm Announcements Related to Job Increase or Decrease (Twelve Month Centered Moving Average)

While these announcements are related to future changes in published job data, the connection is loose. Nonetheless, our analysis of suggests that there is currently a lot more buzz about employment increase so far this year than in the past. For more on the characteristics of these data and for analysis of the trends for Phoenix and Tucson, see the Forecasting Project Directors Blog online at forecast.eller.arizona.edu.

According to preliminary data, Arizona’s personal income rose by 3.8% over the year in the first quarter of 2017, a bit above national growth of 3.1%. Gains in the first quarter reflected increases in net earnings from work (up 3.9%); dividends, interest, and rent (up 3.8%); and transfers (up 3.3%). The increase in net earnings from work was a bit disappointing, given that the state’s minimum wage increased substantially in January. Indeed, average wages per worker (calculated as total wage and salary disbursements divided by total nonfarm jobs) rose just 1.8% over the year. Keep in mind, however, that the preliminary wage and salary data are estimated based on nonfarm job growth and an econometrically-estimated “scale factor.” The revised data, available in September, will provide a better indication of the impact of the minimum wage increase on income, since wage and salary disbursements in that release will be based primarily on the Quarterly Census of Employment and Wages.

Arizona Outlook in the Long Run

Exhibit 2 shows the long-run history and forecast for Arizona and U.S. job growth. The forecast calls for Arizona to add 1.6 million jobs during the 2017 to 2047 period, which translates into annual growth of 1.5% per year. That is well below the state’s average growth rate during the 30 years before the Great Recession and below the state’s average growth rate during the previous 30 years (1986-2016) of 2.4% per year. However, as the exhibit shows, Arizona is forecast to far outpace the national average rate of 0.7% per year. Slower growth for both Arizona and the U.S. is driven by a major demographic transition, as baby boomers retire in large numbers.

Exhibit 2: Job Growth Slows in the Long-Run for Both Arizona and the U.S.
Annual Growth Rates

job growth Tucson, Phoenix, Arizona

Service-providing sectors account for most of Arizona’s job growth during the forecast. Indeed, education and health services; trade, transportation, and utilities; and professional and business services together account for 60.7% of total job gains during the next 30 years. The remaining service-providing industries together account for 35.3% of state job growth. Which leaves 4.0% for the goods-producing industries (mining, construction, manufacturing).

With solid, but slowing job growth during the next 30 years, Arizona’s population is projected to increase as well. The state is forecast to add 3.2 million new residents during the 2017-2047 period, for annual growth of 1.3% per year. That is a bit more than double the national rate of 0.6% per year. That growth is increasingly driven by net migration, as natural increase (the annual difference between births and deaths) decelerates due to the aging of the population.

Steady job gains translate into continued income growth, which is forecast to average 2.6% per year during the next 30 years, after adjustment for inflation. That outpaces the U.S., which is forecast to generate income growth averaging 2.0% per year after adjustment for inflation. Arizona’s income growth reflects gains across all three major sources: net earnings from work; dividends, interest, and rent; and transfers.

Both the Phoenix and Tucson MSAs are forecast to add jobs, population, residents, and income during the forecast. However, growth is expected to be much more rapid in Phoenix than in Tucson. Exhibit 3 shows population growth for Phoenix and Tucson during the next thirty years. Phoenix is expected to add 2.6 million new residents during the period, which translates into 1.5% growth per year. Tucson is forecast to add 227,000 residents, which translates into growth of 0.7% per year on average. Thus, growth in Phoenix is just over double the national pace, while Tucson’s growth is just slightly above the nation.

Exhibit 3: Population Growth in Phoenix Outpaces Tucson
Annual Growth Rates

population growth Tucson, Phoenix, Arizona

Risks to the Outlook

In the long-run, the risks to the outlook revolve around the major drivers of economic development: labor force growth, productivity and innovation, investment in the physical capital stock, and human capital development.

Slowing labor force growth, driven by retirement of baby boomers, is already built into the baseline forecast. If growth turns out to be even slower, that will reduce state growth as well.

The national baseline forecast assumes that productivity growth rebounds from the weak performance of recent years. If that fails to materialize, look for slower than expected gains nationally and in Arizona.

Investment in the private physical capital stock is expected to slow during the forecast, but if growth turns out to slow more than expected, it will reduce overall economic performance. In addition, remember that infrastructure (highways, roads, water, sewer, airports, border ports, rail, telecommunications) matters as well.

Human capital (typically measured by educational attainment) will continue to matter. For Arizona, this is particularly important, because the state already lags well behind the nation. If Arizona’s education gap rises during the next 30 years, it will set the stage for ever larger income gaps with the U.S.

Finally, water remains a concern for the long run. Shortages in the West have the potential to drive up residential and business costs and restrict growth.

Forecast data for Arizona, Phoenix MSA, and Tucson MSA.

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This Week June 5, 2015

by Valorie H. Rice
Senior Specialist, Business Information


Employment increased in 299 of the 346 largest counties in the United States between March 2016 and March 2017 according to the first quarter 2017 County Employment and Wages (QCEW) release from the Bureau of Labor Statistics. Maricopa County had one the largest numerical increases in employment, adding 48,500 workers, which translated into an increase of 2.6%. Pima County had an increase of 1.5% for the same period, in line with the U.S. figure of 1.6%. Wages improved in the first quarter compared to last year (they had decreased year-over-year in the fourth quarter 2016). Average weekly wage increased 6.6% in the U.S., 8.1% in Maricopa and 7.1% in Pima between the first quarter 2016 and first quarter 2017.

Bankruptcy filings in Arizona were up 14.1% over the year in August, with 1,523 compared to 1,335 in August of last year.  Both the Phoenix and Tucson offices had higher number of filings, while the Yuma office (La Paz, Mohave, and Yuma counties) had fewer over the year.

The U.S. trade deficit notched up a tad in July to $43.7 billion, a change of $0.1 billion over the month prior. Both exports and imports were down for the month; however, exports at $194.4 billion were down $0.6 billion compared to imports at $238.1 billion which were down $0.4 billion. Year-to-date, the deficit in trade was 9.6% higher than the same period a year ago.

There was an increase of 156,000 total nonfarm jobs in the U.S. during August according to the September 1 Bureau of Labor Statistics (BLS) release. Industries gaining jobs were manufacturing, construction, professional and technical services, health care, and mining. The August unemployment rate was 4.4%, which has oscillated between 4.3% and 4.4% since April. Both June and July jobs numbers were revised down, with employment gains averaging 185,000 per month for the last three months after revisions.

The second estimate for second quarter 2017 real GDP was 3.0% according to the August 30 Bureau of Economic Analysis release. The earlier estimate for the quarter had been 2.6%. Increases in personal consumption expenditures and nonresidential fixed investment were larger than previously estimated, bringing the current estimate higher. A third estimate for the quarter will be released September 28. Real GDP was 1.2% in the first quarter 2017. 

Phoenix home prices increased 5.8% over the year in June, the same rate as the U.S., according to the August 29 S&P CoreLogic Case-Shiller Home Price Indices release. Seattle continued to have the highest year-over-year gain in home prices at 13.4%, while Cleveland had the smallest change at 2.9% for June. The national house price index level is now higher than at the 2006 peak.

Hands and calculator photo courtesy Shutterstock.

Measuring Economic Performance: Growth, Prosperity, and Inclusion

by George W. Hammond, Ph. D.
Director and Research Professor


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Benchmarking economic performance across metropolitan areas requires us to think about activities across many different dimensions. Certainly, overall job, population, and income growth matters, but growth rates alone do not tell us much about prosperity. On that dimension, economists generally resort to measures like per capita income, per worker Gross Domestic Product (an indicator of productivity), and per worker wages. However, these standard measures of prosperity also have limitations. In particular, they do not tell us anything about how equally income is shared across a metropolitan area’s residents. To address this dimension of economic performance, we need indicators of economic inclusion. The Brookings Institution recently constructed rankings of economic inclusion for the 100 largest metropolitan areas in the U.S. How do Arizona’s two largest metro areas stack-up?

Brookings provides rankings for three overlapping timeframes: 2005-2015 covering the Great Recession; 2010-2015, the post-recessionary recovery period; and 2014-2015, the latest year for which there are data to calculate these measures, Figure 1. 

economic inclusion US large  metro areas

Making Action Possible for Southern Arizona DashboardTo continue reading and for a summary of recent research on economic inclusion and a discussion of these rankings visit EBRC’s MAP Dashboard.

 

This Week June 5, 2015

by Valorie H. Rice
Senior Specialist, Business Information


House prices continued to increase in nearly all states according to the Federal Housing Finance Agency second quarter 2017 House Price Index (HPI). House prices appreciated 8.4% over the year in Arizona on a seasonally adjusted basis for the second quarter 2017, a bit above the U.S. at 6.6%. Prices in Washington rose the highest at 12.4%, while both Alaska and West Virginia had decreased home prices. The release provides home price data for metropolitan areas using the All-transactions HPI, which includes both purchase and refinance mortgages. The one-year change in home prices for Arizona metros for the second quarter was: 8.0% in Flagstaff, 7.1% in Lake Havasu City-Kingman, 9.1% in Phoenix-Mesa-Scottsdale, 9.3% in Prescott, -0.9% in Sierra Vista-Douglas, 7.6% in Tucson, and 6.0% in Yuma. 

Arizona job growth of 1.7% over the year in July was higher than the U.S. figure of 1.5%. The Arizona unemployment rate was stable at 5.1% for the third month in a row according to the Arizona Office of Economic Opportunity report released on August 17. Leisure and hospitality was once again the sector with the most year over year growth, followed by education and health services. Natural resources & mining, information and other services all lost jobs. Over the year employment changes in Arizona metro areas for July were: Flagstaff 1.7%, Lake Havasu City-Kingman 1.5%, Phoenix 2.2%, Prescott 0.8%, Sierra Vista -2.4%, Tucson 0.6%, and Yuma 3.9%.  

The Consumer Price Index rose 0.1% in July on a seasonally adjusted basis, after having no change in June. The Bureau of Labor Statistics August 11 release indicated that the index for all items less food and energy rose 0.1% for the fourth month in a row. Prices for medical care, food and shelter all rose while energy prices declined. The annual inflation rate was 1.7% in July.

Producer prices decreased in July by 0.1%, seasonally adjusted. The drop in producer prices was mostly attributable to the decline of 0.2% in final demand services. Final demand goods were also lower by 0.1% for the month. Over the year, the final demand index rose 1.9% on an unadjusted basis in July according to the August 10 Bureau of Labor Statistics release. 

Housing affordability was a bit lower in the second quarter not only for the U.S. but most Arizona metropolitan areas as well, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index. The August 10 release indicated that rising house prices was a factor in lowering affordability. Sierra Vista-Douglas, at 83.8%, had the highest share of homes in Arizona were the median sales price of homes was affordable to families earning the median income for that area (down from 86.6% in the first quarter). Yuma at 76.1% was second highest followed by Tucson at 72.3%, Lake Havasu City-Kingman at 67.5%, Phoenix at 66.0%, Flagstaff at 53.8% and Prescott at 51.3%. Prescott was the only Arizona metro area to post a higher share for the second quarter, moving up from 49.2% in the first quarter, but was still the least affordable in the state. Nationally, 59.4% new and existing homes sold in the second quarter were affordable for median-income earners – only Flagstaff and Prescott were less affordable than the nation.

Hands and calculator photo courtesy Shutterstock.

Arizona, Mexico, NAFTA: Long Courtship, Marriage of Convenience, but Now the Kids are in College... Arizona, Mexico, NAFTA: Long Courtship, Marriage of Convenience, but Now a Looming Separation?

By Vera Pavlakovich-Kochi, Ph.D.
Senior Regional Scientist and Associate Professor of Geography


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Life in the U.S.-Mexico borderlands has traditionally been, in words of the University of Arizona historian Oscar Martinez, one of conflict and accommodation [1]. It has always been influenced by decisions, or lack of them, in the respective capitals, Washington and Mexico City. In the early days a major complaint of “borderlanders” was that national decision-makers were not only far away, but more importantly, disinterested in the region’s remoteness, above-average poverty, and other obstacles that the international boundary presented to residents of the border region. In the absence of national-level interest, borderlanders developed their own coping strategies to deal with scarcities of goods, uneven distribution of job opportunities, and long established familial ties on both sides of the border. One of the geographically most pronounced expressions of regionally specific developments was the emergence of border twin cities, which in more or less informal ways established crossborder exchanges of goods and people, and over time wove a deep interdependence into their economic and social fabrics.

Beginnings of a Formal Framework 

One of the first national-level “interventions” in the economies of the border region was the Bracero program. Faced with a shortage of agricultural labor during WWII, the U.S. government enacted a guest worker program allowing temporary immigration of Mexican residents to work in fields in California, Arizona, Texas, and about twenty other states. As the need for migrant labor diminished over time, the program was abolished in 1964 leaving a large number of Mexicans in, mostly border states, without jobs. The resulting high unemployment in Mexican border states was one, although not the main reason for the next bi-national economic intervention known as the Maquiladora program introduced in 1965.

The Maquiladora program was specifically “Mexican” in name only, but otherwise known as “production-sharing” or “off-shore production,” a wide-spread practice of (mostly) U.S. manufacturing companies, through which low cost labor in less developed countries was used for assembly procedures contributing to overall lower production costs of final products. Taiwan, South Korea, and Singapore were among first to allow foreign capital investments into assembly plants for the purpose of exporting the assembled products back to the parent company in a foreign country. In a simplified production-sharing model, the parent company was a clear beneficiary; the low-wage regions praised the new way of globalizing production-sharing practices for job creation, whereas the more or less gradual loss of manufacturing production jobs in the U.S. was assumed to be offset by new jobs in more skill demanding final manufacturing processes, including design, marketing, and logistics of delivering final products to markets.

In the early Maquiladora program, the Mexican government allowed U.S. companies to invest in the establishment of assembly plants in a narrow border zone with specific provisions under which U.S. components were imported duty free, but after being assembled had to be exported back to the U.S. Aside from the initial investment, the parent company was obliged to pay only for value added in Mexico, which basically consisted of wages, utilities, and other operation-related services. On the U.S. side, the arrangement was matched by specific provisions in the Harmonized Tariff System allowing for duty free re-import of U.S. manufactured components assembled in Mexico.

During three decades from the time the first maquila plants were opened up in Nogales, Sonora, and Ciudad Juarez, Chihuahua, in 1965 to the signing of NAFTA at the end of 1993, the maquiladora sector in Mexico not only mushroomed in all border states, but eventually spread across the entire country. Measured in number of manufacturing jobs the employment in maquiladora plants contributed significantly to the industrialization of Mexico’s economy, especially in border states. Increases in U.S.-Mexico trade in electronics, electric appliances, transportation and medical products was largely attributed to a growing crossborder integration in North American manufacturing sector within the maquiladora framework.

The Dawn of NAFTA

Writing at the dawn of the North American Free Trade Agreement (NAFTA) with deepest understanding of economic, political, and cultural complexities of U.S.-Mexico relationships, economist and foreign service officer Sidney Weintruab concluded that a free trade agreement was not only imminent, but at the time, the best of available solutions. In his seminal book, Marriage of Convenience, he presented the intellectual foundations for NAFTA arguing that the economies of the U.S. and Mexico were already highly integrated and that a policy of “managed integration” would allow each nation to extract maximum advantages from the integration[2].

As a trade agreement, NAFTA was designed to manage all aspects of doing business within North America involving crossborder exchanges of goods, money, and services, but not people.  The six basic rules included elimination of tariffs on manufactured and agricultural products, removal of non-tariff barriers, safeguards for crossborder investments, intellectual property provisions, rules of origin, and government procurement. Under NAFTA the benefits enjoyed by the maquiladora establishments would eventually be granted to all export-oriented manufacturers in Mexico, including export-oriented services[3]. Unlike early maquiladoras, the production-sharing operations under NAFTA were granted considerable access to the Mexican market. Outside of the maquiladora framework, the removal of import tariffs especially benefited U.S. manufacturers of heavy equipment and exporters of agricultural products to Mexican markets. 

Early on, the implementation of NAFTA coincided with a forty percent devaluation of Mexican peso, thus making Mexican labor even cheaper, which many economists, such as Jesus Cañas and Roberto Coronado of the Federal Reserve Bank of Dallas, considered the main reason for a big boost in maquiladora employment through the 1990s[4]. As a border state, and with an economy based on less traditional manufacturing than the “rust belt,” Arizona benefited from the expansion of maquiladora sector, and approached NAFTA with positive expectations. After all, NAFTA appeared to basically sanction economic relationships that the State already developed with Mexico, and especially with the neighboring Mexican state of Sonora. Arizona was already home to a number of parent companies with maquiladoras south of the border but did not suffer from “job exportation” to Mexico as did for example manufacturing industries in Ohio, Pennsylvania, or Michigan. Aside from increased exports to Mexico, Arizona anticipated additional benefits from marketing its proximity to Mexico to companies interested in establishing or suppling maquila plants across the border.

Moreover, Arizona and Sonora already had in place a formal institution — sister organizations Arizona-Mexico Commission and Comisión Sonora-Arizona —  with binational committees that met twice a year to formally discuss matters of trade, manufacturing and maquiladoras, agribusiness, finance, border ports infrastructure, tourism, education, and cultural cooperation. Under the auspices of the two Commissions and in partnership with Arizona universities and the (then) Thunderbird School of Management, for the first time in history a series of truly binational reports was produced examining existing state of crossborder economic integration with recommendations for further improvements within the NAFTA framework.  A prevailing atmosphere in Arizona in favor of NAFTA was based on long traditional economic relationships, and was also vividly influenced by ideas about borderless economies advocated by popular Japanese organizational theorist Kenichi Ohmae[5].

Major Challenges to the NAFTA Framework

Not fully a decade in place, the NAFTA framework  was challenged by two major events: China’s entrance into World Trade Organization (WTO) and the 9/11 terrorist attacks on the U.S. soil in 2001. The first caused shock waves which hit the maquiladora sector in Mexico hard almost eliminating the textile sector and seriously affecting all other manufacturing sectors by offering even lower labor costs. The maquiladora sector eventually recovered partially due to Mexico’s decisive shift towards building higher labor skills in its workforce through a multitude of government-supported technological institutes that focused on technical and engineering degrees, commonly in collaboration with industry representatives to match specific maquiladora needs. At the same time, many U.S. companies re-evaluated the importance of physical proximity of Mexico’s locations versus trans-Pacific ones. The concept of “near-shoring” encompasses return of Mexico as the most favorable location inciting some companies to relocate their Asia-based operations back to Mexico. As efforts to safeguard national borders became a national priority in the post-9/11 era, it became clear that not only the vision of economic borderlessness was killed, but that crossborder trade flows were profoundly affected by new and more stringent border crossing regulations. It was soon realized that the more complex border crossing procedures and increased wait times encouraged maquiladora suppliers, for whom just-in-time delivery was crucial, to locate in Mexico in proximity of maquiladoras thus creating multilayer supply chain complexes surrounding the maquiladoras.

With increasing availability of technical and engineering skills in Mexico, comparable manufacturing jobs in Arizona’s parent companies for the first time have faced direct competition from Mexico. Yet the trade data show Arizona’s growing exports to Mexico suggesting that eventual losses in some segments are being compensated in gains in other areas. One of such bright spots is the automotive industry; although Arizona lies outside the North American “auto-alley,” exports in automotive parts to Mexico have significantly increased in last several years, thanks mainly to the Ford Company in Sonora.

Arizona and Sonora as a Transborder Mega-Region Concept Revivified

Numerous studies, including university prepared background reports for several Arizona Town Halls, emphasized the importance of Arizona’s trade with Mexico, and especially the high degree of economic interdependence between the economies of Arizona and Sonora[6]. The newly revivified concept of Arizona and Sonora as a transborder mega-region is based on the realization that both states benefit through collaboration in sharing physical assets, production, and labor skills[7]. So far, evidence suggests that Weintraub’s idea of “a marriage of convenience” has worked well for Arizona.  However, as internal and external circumstances change, continuous adjustments are necessary to make the system more efficient and more beneficial for both sides. It is also true that since NAFTA was first implemented myriad of developments, some dramatic, have transformed the border region. Yet, it is also clear that in a highly complex and interdependent economic relationship any drastic change on either side would certainly cause significant shocks and disruption throughout the entire system.  A sudden divorce proposed (again) by a faraway power center, and based on unsubstantiated allegations of betrayal and unfairness, should sensibly be out of question even if there may not be much love in the relationship.

References:

[1] Martinez, Oscar J., Troublesome Border. University of Arizona Press, 2006. (Revised Edition)

[2] Weintraub, Sidney, A Marriage of Convenience: Relations between Mexico and the United States. A Twentieth Century Fund Report. Oxford University Press, 1990.

[3] In 2006, maquiladora industry was combined with car assembly plants and other export-oriented manufacturers and services in the IMMEX Program (Industria Manufacturera, Maquiladora  y Servicios de Exportación).

[4] Cañas, Jesus and Roberto Coronado, “Maquiladora industry: past, present and future,” Business Frontier, Federal Reserve Bank of Dallas, 2002.  

[5] Ohmae, Kenichi, The Borderless World: Power and Strategy in the International Economy. Harper Business, 1990.

[6] “Arizona and Mexico,” 2016; “Arizona as a Border State: Competing in the Global Economy,” 2005. Arizona Town Hall.

[7] Gibson, Lay J. et al. ”Sun Corridor’ as a Transborder Mega-Region: Revivifying Economic Development in the Arizona-Sonora Region,” Studies in Regional Science, Vol.46, No.1, 2016.

This Week June 5, 2015

by Valorie H. Rice
Senior Specialist, Business Information


Real gross domestic product (GDP) by state increased at a seasonally-adjusted annual rate of 0.9% in Arizona for the first quarter 2017. The July 26 Bureau of Economic Analysis release ranked Texas as the state with the largest percent change with 3.9% while Nebraska with a decrease of 4.0% was last.

Real GDP grew at an annual rate of 2.6% in the second quarter based on the advance estimate from the Bureau of Economic Analysis. The July 28 release included the annual update of the national income and product accounts (NIPAs) covering 2014 through first quarter 2017. First quarter 2017 real GDP was revised slightly downward, at 1.2% (from 1.4%). Real GDP for 2016 was 1.5%, roughly the same as before the update, but 2014 and 2015 were revised upward to 2.6% and 2.9%, respectively.

The U.S. trade deficit was smaller in June at $43.6 billion compared to the revised May figure of $46.4 billion, according to the joint Bureau of Economic Analysis/Census Bureau report released August 4. Exports were $194.4 billion in June, $2.4 billion higher than May, while June imports were $0.4 billion less than the month before. Year-to-date, the deficit of goods and services was 10.7% larger than the same period last year. 

Total nonfarm employment in the U.S. increased by 209,000 in July according to the August 4 Bureau of Labor Statistics release. Job increases have averaged 195,000 per month over the past three months. Industries gaining the most jobs in July were food services and drinking places, professional and business services, and health care. The unemployment rate was 4.3%.

The Arizona bankruptcy diet has reached a plateau. Filings had steadily been lower on a year-over-year basis each month for the last several years. This year, however, that has not always been the case. There were 1,286 bankruptcies filed in Arizona during July, a slight increase (2.7%) over the same time last year. The Phoenix office (Apache, Coconino, Gila, Maricopa, Navajo, and Yavapai) had 947 filings, the Tucson office (Cochise, Graham, Greenlee, Pima, Pinal, and Santa Cruz) had 282 and the Yuma office (La Paz, Mohave, and Yuma) was at 57. Year-to-date bankruptcies for the state are 0.8% more than the same period last year.

Phoenix home prices increased 5.7% over the year in May, slightly above the U.S. figure of 5.6%, according to the July 25 S&P CoreLogic Case-Shiller Home Price Indices release. Seattle continued to have the highest year-over-year gain in home prices. At 13.3%, it was the only metro area with a double-digit increase.

Arizona job growth was 2.4% in June year-over-year. This was higher than the national growth of 1.5% for the month. The unemployment rate was unchanged at 5.1% according to the June employment report released by the Arizona Office of Economic Opportunity on July 20. Leisure and hospitality was the sector with the most over-the-year growth, followed by education and health services. Natural resources & mining, information and other services all lost jobs over the year. Over-the-year job growth was positive in all Arizona metro areas for June: Flagstaff 0.9%, Lake Havasu City-Kingman 1.7%, Phoenix 3.0%, Prescott 2.1%, Sierra Vista 1.5%, Tucson 0.5%, and Yuma 4.6%.  

Hands and calculator photo courtesy Shutterstock.

This Week June 5, 2015

by Valorie H. Rice
Senior Specialist, Business Information


Real GDP grew at an annual rate of 1.4% in the first quarter 2017, according to the most recent estimate released by the Bureau of Economic Analysis (BEA) on June 29. This was an upward revision from earlier estimates, with personal consumption expenditures and exports increasing more than previously estimated. Real GDP increased 2.1% in the fourth quarter 2106. The BEA will release the annual update of the national income and product accounts on July 28, which will include revised GDP figures for first quarter 2014 to first quarter 2017. 

Phoenix home prices moved above the U.S. in April after placing just below the nation for several months. The June 27 S&P CoreLogic Case-Shiller Home Price Indices release reported the annual gain in home prices in Phoenix was 5.7% and 5.5% for the nation in April. Seattle and Portland continue to have the highest year-over-year gains in home prices, with 12.9%, and 9.3%, respectively for April. Denver had the third highest home price gain in March, while Dallas took the third position in April.  

State personal income in Arizona grew at 1.0% in the first quarter of 2017, the same rate as the average for the nation, according to the Bureau of Economic Analysis June 27 release. Personal income grew fastest in Idaho at 1.6% while Nebraska had a 0.1% decline in personal income. 

The Census Bureau released 2016 population estimates by age, sex, race and Hispanic origin for states and counties on June 22. Every state had either the same or an increased median age compared to the year before. Arizona’s median age in 2016 was 37.6, which was just below that of the nation at 37.9. Maine had the highest median age at 44.6 while at 30.8, Utah had the lowest. The Census Bureau cites the baby boomer generation for the increase in the median age, with the prediction that it will continue to increase in the years to come. Median age in Arizona counties ranged from 31 in Coconino to 55.9 in La Paz. In fact, three counties had median age above 50 – La Paz, Yavapai at 53.3 and 51.1 for Mohave.

Prices for goods and services in Arizona were lower than that of the U.S. in 2015 according the June 22 Bureau of Economic Analysis Real Personal Income for State and Metropolitan Areas release, which includes regional price parity data. With the U.S. equaling 100, the regional price parity data demonstrate the costs of goods and services in the states and metro areas compared to the nation. Arizona was 96.2 for all items, placing it 3.8% below the nation for the cost of living.  Arizona metropolitan areas were generally less expensive to live in compared to the nation: Flagstaff 98.6, Lake Havasu City-Kingman 93.0, Phoenix 97.2, Prescott 95.2, Sierra Vista-Douglas 89.7, Tucson 97.0, and Yuma 92.9.

Arizona job growth was 1.8% in May year-over-year. This was higher than the national growth of 1.5% for May. The unemployment rate ticked up slightly to 5.1% for the month. The May employment report released by the Arizona Office of Economic Opportunity on June 15 listed leisure and hospitality as the sector with the most over the year growth, adding 17,100 jobs followed by education and health services with a 11,200 gain. Natural resources & mining and other services were the only two sectors to lose jobs over the year. May job growth varied in Arizona metro areas: Flagstaff 1.1%, Lake Havasu City-Kingman 1.7%, Phoenix 2.4%, Prescott 1.9%, Sierra Vista -0.3%, Tucson -0.1%, and Yuma 3.4%.  

The Consumer Price Index decreased 0.1% in May on a seasonally adjusted basis according to the June 14 Bureau of Labor Statistics release. A deceleration of energy prices was a factor in the lower index for the month. The food index rose, as did the index for all items, less food and energy. The annual inflation rate was 1.9% for May.

Per student spending increased in every state during 2015, except for Arizona, which declined 0.5%. The U.S. Census Bureau Public Education Finances 2015 report was released June 14, reported that per student spending in fiscal year 2015 was $11,392 nationally, a 3.5% increase over FY2014. Arizona’s per pupil spending in fiscal year 2015 was $7,489. This wasn’t the lowest in the U.S. – that was Utah at $6,575, while the highest was New York at $21,206.

Producer prices were unchanged in May, seasonally adjusted, according to the June 13 Bureau of Labor Statistics release. Final demand goods had a 0.5 decrease over the month while final demand services increased 0.3%. The unadjusted 12-month change in producer prices for May was 2.4%.

Employment increased in 280 of the 344 largest counties in the United States between December 2015 and December 2016 according to the fourth quarter 2016 County Employment and Wages (QCEW) release from BLS. While employment increased during this time, wages decreased. The U.S. average weekly wage declined 1.5% over the year in 2016. Both Maricopa and Pima counties followed the national trend – increasing 2.4% and 1.3% respectively in employment, and decreasing 2.3% and 3.4% respectively in wages. 

The U.S. trade deficit increased in April to $47.6 billion according to the joint Bureau of Economic Analysis/Census Bureau report released June 2.  The March figure has been revised upwards to $45.3 billion.  Exports slipped down to $191.0 billion in April ($0.5 billion less than March) while imports were $1.9 billion higher than the month previous. Year-to-date, the deficit of goods and services was 13.4% larger than the same period last year. 

Total nonfarm employment in the U.S. increased by 138,000 in May according to the Bureau of Labor Statistics release on June 2. Sectors with the most jobs gains were education and health services (particularly health care) and professional and business services. The unemployment rate dropped slightly to 4.3%.

Buckeye, Arizona was one of the fastest-growing cities in the U.S. for 2016, according to the Census Bureau. It had the seventh largest percent growth in the nation for the July 1, 2016 population estimates for cities and towns, released on May 25. Texas towns claimed four of the top five spots of cites with the largest population growth between 2015 and 2016. Phoenix traded places with Philadelphia, moving up to the 5th populous city in the nation on July 1, 2016 compared to 6th on July 1, 2015.

Arizona home prices rose 6.7% for the first quarter of 2017 compared to the same period in 2016 according to the Federal Housing Financial Agency Home Price Index May 24 release. Prices rose 6.0% nationally. Metropolitan area home price data are available in the FHFA release using the all-transactions index, which includes both purchase and refinancing mortgages.  One-year price changes for Arizona metros for the first quarter 2017 were: 8.9% for Flagstaff, 5.7% for Lake Havasu City-Kingman, 8.0% for Phoenix, 8.9% for Prescott, 5.4% for Sierra Vista-Douglas, also 5.4% for Tucson, and 2.1% for Yuma.

There were 1,360 bankruptcies filed in Arizona during May, down 3.4% from the same time last year. The Phoenix office (Apache, Coconino, Gila, Maricopa, Navajo, and Yavapai) had 952 filings, the Tucson office (Cochise, Graham, Greenlee, Pima, Pinal, and Santa Cruz) had 341 and the Yuma office (La Paz, Mohave, and Yuma) was at 67. Year-to-date bankruptcies for the state are down 1.4% compared to last year.

Hands and calculator photo courtesy Shutterstock.

Arizona’s Economy Finding a Second Wind? Second Quarter 2017 Economic Forecast Update

By George W. Hammond, Ph.D.
Director and Research Professor, EBRC


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The Arizona economy coasted into 2017, with modest forward momentum. State job gains decelerated late last year and slower growth has persisted into early 2017. Nonetheless, the state continues to outpace the nation in job creation. In better news, the state’s unemployment rate declined again last year, and is now back to a level last seen just before the Great Recession. Tightening labor markets are translating into faster wage and income growth and that should eventually boost retail sales. Overall, the outlook calls for the state to accelerate modestly in the near term, before growth slows as demographic forces (baby boom retirements) take hold.

 Arizona Recent Developments

Official benchmark employment data for 2016 have been released by the U.S. Bureau of Labor Statistics (BLS). The data show that Arizona posted another year of solid gains, adding 68,300 net new jobs. That translated into 2.6% growth, close to the state’s 2.5% growth rate in 2015, but well above the national rate of 1.7%. The Phoenix metropolitan statistical area (MSA) added 60,200 jobs last year, which generated 3.1% growth. That was slightly slower than the 3.2% pace in 2015. In contrast, job growth in the Tucson MSA accelerated significantly last year, from 0.8% in 2015 to 1.3% in 2016. Most of the job gains in Arizona were in Phoenix, which accounted for 88.1% of the state total. Tucson added 4,700 jobs, which accounted for 6.9%.

Statewide, job gains last year were concentrated in professional and business services; education and health services; leisure and hospitality; trade, transportation, and utilities; and financial activities (Exhibit 1). These five sectors together accounted for 84.5% of state job growth. The only sector to lose jobs last year was natural resources and mining. This was caused by declines in copper production driven by low prices.

exhibit 1: Nearly All Sectors in Arizona Added Jobs Last Year: Job Gains From 2015 to 2016 and Wages by Industry

As Exhibit 1 shows, the state added 6,600 construction jobs last year and employment in this sector has increased by 23,500 since hitting bottom in 2011 (annual basis). Nonetheless, construction employment remained more than 100,000 jobs below its pre-recession peak in 2006. Recent gains in construction jobs have been driven in part by increased residential construction activity. Arizona housing permits increased by 23.1% in 2016, with single-family permits up 11.4% and multi-family permits up 62.5%. Activity increased in the Phoenix MSA last year, with total permits rising 27.6%. That was fueled by both single-family (up 10.9%) and multi-family (up 75.6%) permits. Housing permits in the Tucson MSA rose by 1.6% last year, with single-family activity up 8.7% and multi-family activity down 77.2%.

According to the latest data from the U.S. Bureau of Economic Analysis (BEA), state personal income increased by 4.3% last year. With 1.1% population growth, as measured by the Arizona Office of Economic Opportunity, that translated into an increase in per capita income of 3.1%. Arizona’s rate of increase last year was slightly above the national pace of 2.9%, but well above the national rate of inflation of 1.3%, measured by the national CPIU. That indicates a rising standard of living in Arizona.

Nonetheless, Arizona’s per capita income remained well below the national average. Indeed, the percentage gap in 2016 was 17.7%, down slightly from 17.9% in 2015, but well above the gap 10 years ago of 10.1%.

Arizona’s merchandise exports to Mexico continued to fall in early 2017, with the value of exports down 8.3% over the year in the first quarter. Pedestrian and personal vehicle passenger border crossings from Mexico to the U.S. through Arizona border ports rose last year, but at a slow pace. These trends were likely impacted in important ways by the major appreciation in the U.S. dollar versus the peso since mid-2014.

Arizona Outlook

The state outlook depends in part on future national economic performance. The national baseline forecast calls for the U.S. economy to continue to expand during the next decade. It also calls for a modest acceleration in the near term, with real GDP, our broadest measure of economic activity, expected to speed up from 1.6% growth last year to 2.6% growth by 2018. As Exhibit 2 shows, growth slows thereafter to the 2.0% per year range, as demographic forces (baby boomer retirement) weigh on the labor force.

exhibit 2: U.S. Real GDP Growth Accelerates in the Near Term While the Labor Market Tightens - Real GDP & the Unemployment Rate IHS Markit, April 2017

Continued steady improvement in the U.S. economy lays a solid foundation for gains in Arizona during the forecast. However, while Arizona is forecast to continue to outpace the nation in job, population, and income growth, it is not likely to return to growth rates that were common during the 30 years before the Great Recession. Exhibit 3 summarizes the current forecast for the state. Arizona’s job growth is expected to decelerate modestly this year, with the rate falling from 2.6% last year to 2.4% in 2017. Job gains accelerate in 2018, with faster U.S. growth, before gradually declining to the 2.0% per year range during the remainder of the forecast.

exhibit 3: Arizona economic outlook summary 2016-2019

Sustained job growth means faster population gains, as Arizona draws migrants from other states. Overall, population growth is forecast to rise from 1.1% last year to 1.7% by 2018.

Income gains accelerate in the near term, with growth rising from 4.3% last year to 5.7% in 2017 and 6.1% in 2018. The large increase in 2017 is driven in part by the increase in the state minimum wage from $8.05/hour to $10.00/hour in 2017 and by tighter labor market conditions more generally. Note that the forecast calls for Arizona’s unemployment rate to fall from 5.2% in 2016 to 4.2% by 2019. Stronger income growth is forecast to eventually translate into faster sales growth.

Forecast data for Arizona, Phoenix MSA, and Tucson MSA.

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