Economics Group
Executive Summary
Economic gains in Arizona are picking up, although the state is still working to recover the huge losses endured during the recession. Employment growth has picked up to a 2.4 percent year-over-year pace. As a result, the unemployment rate has come down to just 5.8 percent, much lower than the 6.9 percent rate seen a year earlier. The rapid decline in the unemployment rate comes despite rising labor force participation. The share of adults in the state that are officially a part of the labor force (meaning that they are either employed or actively looking for a job) has increased nearly a full percentage point over the past year. Across the United States by contrast, that same share has held constant over the same period.
Employment growth in the state has been broad based across major industry groups with the small exception of manufacturing, where activity has become much more capital intensive. In addition, a diverse mix of companies has recently expanded or announced plans to expand in Arizona. Some of the more prominent expansions to the state have been made in financial services, tech services, distribution centers and customer support facilities. The former two should add relatively high-paying jobs to the state, which are likely to have sizable spillover effects. However, the latter two typically pay below average wages, which indicates that the broader effect of those job gains is likely to be more muted.
Figure 1 Figure 2
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC
Manufacturing Growth amid Payroll Declines
The factory sector in Arizona is a relatively small one, but several important developments have appeared recently. The first is that manufacturing employment is now lower than a year ago despite seemingly strong gains throughout much of the recovery. The biggest weakness was seen in computer & electronic products manufacturing. That subindustry’s payrolls are 6.8 percent lower than a year ago and are more than 5,000 workers shy of levels seen just three years earlier.
-10% -5% 0% 5% 10% 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 -10% -5% 0% 5% 10%
Arizona Gross State Product & U.S. GDP
Year-over-Year Percent Change
U.S. GDP: 2014 @ 2.2% Arizona GDP: 2014 @ 1.4% 0% 2% 4% 6% 8% 10% 12% 0% 2% 4% 6% 8% 10% 12% 90 92 94 96 98 00 02 04 06 08 10 12 14
Arizona vs. U.S. Unemployment Rate
Seasonally Adjusted
Unemployment Rate: May @ 5.8% United States: May @ 5.5%
Special Commentary
Mark Vitner, Senior Economist mark.vitner@wellsfargo.com ● (704) 410-3277
Michael T. Wolf, Economist michael.t.wolf@wellsfargo.com ● (704) 410-3286
Alex V. Moehring, Economic Analyst alex.v.moehring@wellsfargo.com ● (704) 410-3247
Arizona Economic Outlook: July 2015
A diverse mix of companies has recently expanded or announced plans to expand in Arizona.
The drop likely reflects long running struggles in the personal computer market. When you exclude this subindustry, however, growth moves back into positive territory on a year-ago basis. Although manufacturing payrolls may be struggling, manufacturing exports are surging ahead. After growing 7.5 percent in 2014, manufacturing exports were up 14.4 percent year to date in April relative to a year ago. Somewhat surprising is that exports of computer & electronic products, the industry that is shedding jobs in the state, jumped 11.4 percent year to date through April from a year ago. Although they account for a much smaller share of total exports, there has been huge growth in the value of chemical manufacturing products, fabricated metal products and electrical equipment and components. All three of those groups posted double digit-gains through the first three months of the year over the same period a year ago. Machinery manufacturing, however, has seen exports slide 16.6 percent over the same period. The divergence of manufacturing exports coming from the state and manufacturing employment is another indication of how manufacturing in the state, and throughout the nation, has become increasingly capital intensive.
Figure 3 Figure 4
Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC
Diversity of Growth
Arizona has experienced broad-based gains, and although additional jobs are always welcome in any economy, not all of those jobs bring the same benefit to the state. On the plus side, there has been considerable growth in financial activities, which has seen employment rebound back above its prerecession peak, something we have not seen nationwide despite the comparatively stronger labor market. More growth is to come in the industry as Northern Trust plans to add 1,000 workers to its office in Tempe over the next three years. There have also been expansions in payment systems capabilities with Revel Systems, which creates platforms for merchants using iPads as their point of sale, expanding in Scottsdale. Other merchant-based technology providers are also expanding in the state, including San Francisco-based Boomtown!, which fixes merchant technology in real time. In addition, General Motors is opening an IT Center in Chandler that should eventually bring 1,000 jobs to the area.
Some of the largest gains recently, however, have come from much lower-paying industries, such as distribution centers and call centers. For example, Comcast has announced that it is creating 1,125 new jobs for a customer support center in Tucson. Business support services in Tucson pay an average annual salary of just $24,000, which takes some of the shine off the announcement. Other big announcements have come from Tuesday Morning and REI, which are both opening distribution centers in the Phoenix area that should collectively employ 400 workers. In Phoenix, these positions may pay more than customer support jobs, but pay will still mostly be less than the state median. The distribution businesses in the state have also seen some weakness, with Walgreens closing its center in Flagstaff and Blue Bell closing three of its centers around the state.
20 30 40 50 60 70 20 30 40 50 60 70 90 92 94 96 98 00 02 04 06 08 10 12 14
Arizona Computer & Electronic Mfg Employment
Thousands
Computer & Electronic Manufacturing: May @ 32.8
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $0 $1,000 $2,000 $3,000 $4,000 $5,000 98 00 02 04 06 08 10 12 14
Arizona Manufacturing Exports
Millions of Dollars
Year-over-Year Percent Change: Q1 @ 18.2% Manufacturing Exports: Q1 @ $4,508.0
Manufacturing in the state, and throughout the nation, has become increasingly capital intensive.
The mining sector, which has been under pressure from low commodity prices and sluggish global growth, is also seeing some cutbacks. Asarco laid off 130 workers from three of its copper mines in the state, and natural resources & mining employment statewide is down 2.3 percent on a year-over-year basis. Unlike the distribution and call center jobs, mining pays high wages, which can amount to more than $80,000 per year. More layoffs in the industry could be coming down the pipeline as Chinese growth continues to moderate and other major economies are still experiencing sluggish growth.
Figure 5 Figure 6
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
Traditional Industries Forging Ahead
Two of the state’s industry mainstays, tourism and defense, are looking better. Tourism in Arizona continues to improve, thanks to a stronger economy nationwide and the state’s numerous desirable attributes. Direct spending by tourists was estimated to amount to nearly $20 billion last year, well above its prerecession peak. In addition, total passenger traffic through the first three months of the year is up 3.9 percent from last year. The largest share of those dollars is spent at establishments that fall in the leisure & hospitality industry, which includes restaurants, bars, hotels and recreation. Employment in that industry continues to post strong gains and was up 3.1 percent in May from a year earlier. Retailers, which nabbed more than $2 billion from tourism, have posted year-over-year employment gains of 1.7 percent. Defense-related industries in Arizona are almost as old as those catering to its numerous tourists. Large federal budget deficits have led to spending cuts and will likely weigh on future defense expenditures in the state. However, federal payrolls in April turned positive on a year-over-year basis, which was the first positive reading since 2010.
Figure 7 Figure 8
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
May 2015 -2% 0% 2% 4% 6% 8% Information Other Services Construction Manufacturing Financial Activities Leisure and Hospitality Prof. & Bus. Svcs. Educ. & Health Services Government Trade, Trans. & Utilities Total Nonfarm
Arizona Employment Growth By Industry
Year-over-Year Percent Change, 3-MMA
Number of Employees Less More -12% -9% -6% -3% 0% 3% 6% 9% 12% -12% -9% -6% -3% 0% 3% 6% 9% 12% 00 02 04 06 08 10 12 14
Arizona Finance Employment
Year-over-Year Percent Change
Finance & Insurance: May @ 4.1% Real Estate & Leasing: May @ -1.5%
100 150 200 250 300 100 150 200 250 300 90 92 94 96 98 00 02 04 06 08 10 12 14
Arizona Leisure & Hospitality Employment
Thousands
Leisure & Hospitality: May @ 293.7
-15% -10% -5% 0% 5% 10% 15% 20% -15% -10% -5% 0% 5% 10% 15% 20% 91 93 95 97 99 01 03 05 07 09 11 13 15
Arizona Federal Payrolls
Year-over-Year Percent Chnange, 3-MMA
Federal Government: May @ 0.9%
Direct spending by tourists was estimated to amount to nearly $20 billion last year.
Housing Market Gains Ground
The housing market in the state is looking considerably better than it had since the recession. In April, home sales were 12.0 percent higher than a year earlier on a three-month moving average basis. As a result, home prices have accelerated slightly to a 5.7 percent year-over-year rate. At the worst of the housing crisis, the share of mortgage holders in the state who owed more on their home than it was presently worth skyrocketed to more than 50 percent, while it was about half that rate nationwide. In March, that share fell to 16.8 percent in Arizona, just 6.6 percentage points higher than the national average. Somewhat surprising is that the shadow inventory in the state has declined tremendously and is now below the national average. For example, the share of mortgages 90 or more days delinquent is just 1.8 percent in Arizona, but it is 3.7 percent nationwide. With the population growing at about twice the national rate, demand for housing should continue to improve. Despite the favorable demographic position, residential construction has been slow to gain momentum. The pace of single-family home construction is still consistent with the relatively low pace of construction seen in the early 1990s.
Figure 9 Figure 10
Source: CoreLogic, U.S. Department of Commerce and Wells Fargo Securities, LLC
Summary and Outlook
Arizona’s economy continues to make strides as employment growth has strengthened in the first half of 2015. Recent gains have been spread across numerous industries and hiring has also been bolstered by the arrival of several new firms. Tech-related industries are growing and taking advantage of an already sizable presence of tech firms, thanks in part to Intel’s large operations in the state. The more traditional industries of tourism and defense have posted stronger gains recently, with the federal government adding to the state’s growth for the first time in years. Although mining and manufacturing are still struggling and the dollar is considerably stronger than it was this time last year, goods exports remain strong and are up considerably over the year. In addition, the housing market has improved dramatically with impressive sales numbers fostering further home price appreciation.
We expect Arizona to maintain its recent strong momentum. The economy is improving on a broad front and has become less dependent on building activity. Tech-related industries are gaining a critical mass in the state, which should help draw additional firms. Wholesale trade and distribution are also gaining strength, reflecting the improving economy in the West and increased international trade. Arizona’s population is growing at about twice the national rate again, reflecting the aging of baby boomers and an influx of younger households from higher cost areas of the country. The growing population will fuel demand for local retail trade and personal services and further the recovery in the region’s housing market. Such strong migration into the state should continue as more baby-boomers retire in even greater numbers in coming years and the broader U.S. recovery strengthens further.
60 80 100 120 140 160 180 200 220 240 60 80 100 120 140 160 180 200 220 240 90 92 94 96 98 00 02 04 06 08 10 12 14
CoreLogic HPI: AZ vs. U.S.
Index, 2000=100, Not Seasonally Adjusted
United States: Apr @ 180.9 Arizona: Apr @ 166.1 0 25 50 75 100 125 0 25 50 75 100 125 90 92 94 96 98 00 02 04 06 08 10 12 14 Th o u san d s Th o u san d s
Arizona Housing Permits
Thousands of Permits, Seasonally Adjusted Annual Rate Single-Family: May @ 25,548
Single-Family, 12-MMA: May @ 19,118 Multifamily, 12-MMA: May @ 8,568 Single-Family Average (1998-2003): 52,436
Arizona’s economy continues to make strides.
Phoenix
The Phoenix economy continues to makestrides, with employment up a sizable 3.0 percent from a year ago on a three-month moving average basis. Growth has been broad
based across industries, with only
manufacturing falling back into contractionary territory. Although the rate of growth has been strong, Phoenix is still working its way out of the sizable hole that was made during the Great Recession. As a result, nonfarm payrolls are still 1.7 percent lower than their prerecession peak despite the unemployment rate slipping to 5.2 percent, below the national average.
The diversity of industries expanding andrelocating to the Phoenix metro area is astounding. Financial services, tech-related industries, distribution facilities and a number of other industries are expanding in the area. Northern Trust is expanding in Tempe and expects to add about 1,000 workers over the next three years. Tech companies such as Revel Systems, Booker and Boomtown!, as well as a General Motors’ IT Center are all expanding in the greater Phoenix metro area. In addition, distribution centers, such as Tuesday Morning’s nearly 600,000 square foot center in southwest Phoenix and REI’s 400,000 square foot facility in the West Valley, are popping up around the metro area.
The housing market in the metro area continuesto improve, with home prices rising 5.5 percent from a year ago. Both single- and multifamily home sales have increased on a year-over-year basis. That said, as seen in a number of other areas throughout the United States, single-family housing permits have struggled, while condo and townhome permits continue to advance.
The outlook for the Phoenix metro area remainsa positive one. A strengthening national economy should continue to fuel tourism in the area, while the diversity of industries should help the area weather another downturn. Demographics in the area also look promising,
thanks to ample in-migration pushing
population gains well above twice the national average.
Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities, LLC
0% 2% 4% 6% 8% 10% 12% 0% 2% 4% 6% 8% 10% 12% 91 93 95 97 99 01 03 05 07 09 11 13 15
Phoenix MSA Unemployment Rate
Unemployment Rate: Apr @ 5.2% 12-Month Moving Average: Apr @ 5.7%
Seasonally Adjusted -2% 0% 2% 4% 6% 8% Other Services Construction Information Financial Activities Leisure and Hospitality Manufacturing Educ. & Health Services Prof. & Bus. Svcs. Government Trade, Trans. & Utilities Total Nonfarm
Phoenix MSA Employment Growth By Industry
Number of Employees
Less More Year-over-Year Percent Change, 3-MMA
May 2015 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 90 92 94 96 98 00 02 04 06 08 10 12 14 Th o u san d s Th o u san d s
Phoenix MSA Housing Permits
Single-Family: May @ 19,092 Single-Family, 12-MMA: May @ 13,267 Multifamily, 12-MMA: May @ 6,947
Single-Family Average (1998-2003): 37,941
Tucson
Tucson’s economy has been relatively sluggishthroughout the recovery. A sizable
concentration of federal government workers and defense contractors that rely on federal funding are holding the metro area back. Total employment in the area is just 0.8 percent higher than a year ago, with public sector payrolls falling 1.4 percent over the same period. To make matters worse, total payrolls are still a whopping 5.3 percent away from their prerecession peak. At the current pace of hiring, Tucson employment will not reach that peak for several more years.
Not all industries are struggling in Tucson.Education & health services posted a 1.6 percent
year-over-year employment gain, while
professional & business services are up 2.6 percent over the same period. Customer service centers are expanding in the area. Although they typically do not pay high wages, they are creating numerous jobs. APAC is expected to add 700 workers in Tucson, while Comcast recently announced its own customer service center that should employ about 1,100 workers.
The overreliance on the public sector is the largest risk to the metro area. More than one in five workers in Tucson is employed by the government. Nationwide the concentration of government workers is six percentage points lower. In addition, the five largest employers in Tucson are either public sector entities or defense contractors. Federal civilian payrolls were flat over the past year.
The housing market in Tucson is still struggling.Home prices are just 3.1 percent higher than a year ago, while nearly one in five homeowners owes more on their house than it is presently worth. While employment and population growth remaining subdued, the housing market is unlikely to bounce back strongly. As a result, residential construction has been flat for about two years.
Tucson will continue to make modest gains,though with new expansions concentrated in lower-paying jobs and little growth from the public sector, the metro area will have a difficult
time seeing much stronger growth. Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities, LLC
0% 2% 4% 6% 8% 10% 12% 0% 2% 4% 6% 8% 10% 12% 91 93 95 97 99 01 03 05 07 09 11 13 15
Tucson MSA Unemployment Rate
Unemployment Rate: Apr @ 5.6% 12-Month Moving Average: Apr @ 5.9%
Seasonally Adjusted -2% -1% 0% 1% 2% 3% 4% Information Other Services Construction Financial Activities Manufacturing Leisure and Hospitality Prof. & Bus. Svcs. Trade, Trans. & Utilities Educ. & Health Services Government Total Nonfarm
Tucson MSA Employment Growth By Industry
Number of Employees
Less More Year-over-Year Percent Change, 3-MMA
May 2015 0 3 6 9 12 15 18 0 3 6 9 12 15 18 90 92 94 96 98 00 02 04 06 08 10 12 14 Th o u san d s Th o u san d s
Tucson MSA Housing Permits
Single-Family: May @ 3,192 Single-Family, 12-MMA: May @ 2,590 Multifamily, 12-MMA: May @ 1,004
Single-Family Average (1998-2003): 5,686
Prescott
Prescott has settled into a strong pace ofeconomic recovery, with employment
3.5 percent higher than a year ago on a three-month moving average basis. In addition, every major industry other than information is growing on a year-over-year basis. The trade, transportation and utilities sector is the largest industry in the metro area and has also been one of the strongest. Employment in that industry has reached its prerecession peak and is now 5.0 percent higher than a year earlier. Professional & business services are also joining the recovery with payrolls climbing a whopping 8.8 percent higher over the year.
Although manufacturing is a relatively smallindustry in the Prescott metro area, it is a fast growing one. The factory sector is gaining in terms of share of total employment. In addition, manufacturing payrolls are now in line with where they were in the early 2000s, a clear departure from what we have seen nationwide. American Spirit Firearms is expanding in the metro area, adding more to the burgeoning factory sector there. Economic development professionals in Prescott have largely focused their resources to recruit manufacturers to the area as well as firms related to defense and security and aerospace engineering.
Home sales appear to have slipped in the first quarter of this year relative to the same period in 2014. In addition, after solid home price appreciation in 2014, home prices were flat on a year-over-year basis in April. Despite the weaker home values recently, the share of underwater homes in Prescott is just 10.9 percent, significantly lower than the statewide average of 16.8 percent. More residential construction is coming down thepipeline. Single-family building permits
continue to grow, although the pace of homebuilding is still well below historical norms.
Prescott is turning its economy around.Population gains, which are running more than twice the national average thanks to positive net migration, should help move home sales and prices back in the right direction. Furthermore, the influx of residents should also boost
consumption of local goods and services. Source: U.S. Dept. of Labor, U.S. Dept. of Commerce and Wells Fargo Securities, LLC
-15% -10% -5% 0% 5% 10% 15% 20% 25% -15% -10% -5% 0% 5% 10% 15% 20% 25% 90 92 94 96 98 00 02 04 06 08 10 12 14
Prescott MSA Nonfarm Employment
3-Month Annual Rate: May @ -2.2% Nonfarm: Yr/Yr Pct. Change: May @ 3.5% Household: Yr/Yr Pct. Change: May @ 5.3% 3-Month Moving Averages
-8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% Information
Financial Activities Manufacturing Prof. & Bus. Svcs. Other Services Leisure and Hospitality Government Educ. & Health Services Trade, Trans. & Utilities Total Nonfarm
Prescott MSA Employment Growth By Industry
Number of Employees
Less More
Year-over-Year Percent Change, 3-MMA
May 2015 0 1 2 3 4 5 0 1 2 3 4 5 90 92 94 96 98 00 02 04 06 08 10 12 14 Th o u san d s Th o u san d s
Prescott MSA Housing Permits
Single-Family: May @ 840 Single-Family, 12-MMA: May @ 896 Multifamily, 12-MMA: May @ 24
Single-Family Average (1998-2003): 1,984
Diane Schumaker-Krieg Global Head of Research,
Economics & Strategy (704) 410-1801 (212) 214-5070 diane.schumaker@wellsfargo.com
John E. Silvia, Ph.D. Chief Economist (704) 410-3275 john.silvia@wellsfargo.com
Mark Vitner Senior Economist (704) 410-3277 mark.vitner@wellsfargo.com
Jay H. Bryson, Ph.D. Global Economist (704) 410-3274 jay.bryson@wellsfargo.com
Sam Bullard Senior Economist (704) 410-3280 sam.bullard@wellsfargo.com
Nick Bennenbroek Currency Strategist (212) 214-5636 nicholas.bennenbroek@wellsfargo.com
Eugenio J. Alemán, Ph.D. Senior Economist (704) 410-3273 eugenio.j.aleman@wellsfargo.com
Anika R. Khan Senior Economist (704) 410-3271 anika.khan@wellsfargo.com
Azhar Iqbal Econometrician (704) 410-3270 azhar.iqbal@wellsfargo.com
Tim Quinlan Economist (704) 410-3283 tim.quinlan@wellsfargo.com
Eric Viloria, CFA Currency Strategist (212) 214-5637 eric.viloria@wellsfargo.com
Sarah House Economist (704) 410-3282 sarah.house@wellsfargo.com
Michael A. Brown Economist (704) 410-3278 michael.a.brown@wellsfargo.com
Michael T. Wolf Economist (704) 410-3286 michael.t.wolf@wellsfargo.com
Erik Nelson Economic Analyst (704) 410-3267 erik.f.nelson@wellsfargo.com
Alex Moehring Economic Analyst (704) 410-3247 alex.v.moehring@wellsfargo.com
Donna LaFleur Executive Assistant (704) 410-3279 donna.lafleur@wellsfargo.com
Cyndi Burris Senior Admin. Assistant (704) 410-3272 cyndi.burris@wellsfargo.com
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