Western Blue Chip Current Outlook

December 3, 2018

The states included in the Western Blue Chip Economic Forecast are Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming.

SPOTLIGHT ON ARIZONA

The Western Blue Chip forecasters expect the Arizona economy to slow somewhat in 2019, after strong performance in 2018.  Analysts are eyeing headwinds at the national level, as higher interest rates, increased costs of doing business, and labor availability issues all begin to affect the expansion.

Arizona personal income growth for 2018 is projected to be 5.1 percent, down from 5.6 percent in 2017. Preliminary personal income growth figures from the U.S. Bureau of Economic Analysis for the first half of 2018 show an increase of 5.4 percent, which compares favorably with the U.S. growth of 4.4 percent for the same period.  The major drivers of Arizona income gains through the first half include strong earnings in health care, construction, and professional and scientific industries.  The consensus for 2019 calls for a similar 5.1 percent increase.

Arizona Economic Outlook

(Annual Percentage Change)

Indicator 2017 Consensus Forecast 2018* Consensus Forecast 2019*
Personal Income 5.6% 14.7% 9.4%
Retail Sales 4.1% 12.8% 8.9%
Nonfarm Employment 2.4% 22.0% 11.3%
Population 1.6% 17.2% 10.0%
Single-Family Permits 13.0% 7.3% 6.0%

*Western Blue Chip Consensus, December 3, 2018

Retail sales are forecast to rise by 5.3 percent in 2018, and by 4.8 percent in 2019.  The 2018 consensus is a bit bearish, as year-to-date through September retail sales reported by the Arizona Department of Revenue are up by 6.7%.

Arizona ranked seventh in the nation in nonfarm job growth through October, with a percentage gain equal to the consensus expectation of 2.6 percent growth for 2018.  The state ranked first in the growth rate of new construction jobs, second in manufacturing job creation, third in new state government jobs, and fifth in professional and technical jobs.  The 2019 consensus forecast is 2.4 percent job growth, but there is diversity of opinion, with three forecasters projecting growth of less than 2.0 percent while others see gains as strong as 3.0 percent.

Arizona population growth has stabilized in recent years, after dipping below 1.0 percent in the recession years.  The 2018 consensus is 1.7 percent growth, followed by a modest pullback to 1.6 percent in 2019.  Even at this lower rate of increase, 2019 will be the fourth consecutive year of population growth of 100,000 or more new residents.

Rising costs of lots, materials, and labor are expected to combine with rising interest rates to slow Arizona single-family permit growth to 10 percent in 2019, after an increase of 13.6 percent in 2018.  The 2018 consensus forecast aligns with recently released figures from the U. S. Census Bureau showing single-family permits up by 13.8 percent in the Grand Canyon State through October.

In summary, Arizona analysts are forecasting solid growth in the Arizona economy in 2019 at a pace somewhat slower than the current year.  Nonetheless, the state will remain among the top ten for job creation, with growth across diverse industries including construction, manufacturing, and services such as finance, health care, technical, and professional services.

IS A WESTERN CONSTRUCTION BUBBLE LOOMING?

The national rate of construction employment growth is 4.1 percent year-to-date through October.  With the exception of Montana and Wyoming, all Western states are adding construction jobs at a faster pace.  Two Western states, Arizona and Nevada, rank in first and second place, respectively, for the rate of growth of new construction jobs; and a common concern among construction firms is availability of workers.

The 14,160 new construction jobs in Arizona added through October account for 19.3 percent of all new jobs, raising concerns about the possibility of a “bubble” in construction employment, and the attendant risks of a generalized economic downturn if construction stumbles.

Between 2000 and 2017, construction nationally has accounted for 4.9 percent of all employment.  Through October of 2018, construction accounted for 4.8 percent of all jobs and 11.8 percent of new jobs created. The table below shows new construction jobs in the Western states as a percent of all new jobs.  Construction accounts for a greater percent of new jobs in several Western states, particularly New Mexico (21.9 percent), Arizona (19.3 percent), and Oregon (18.1 percent).  Washington (10.5 percent) and Utah (11.0 percent) are below the national ratio.

The year 2005 was the peak year for construction job growth during the boom period.  Construction jobs made up 5.5 percent of all national jobs in that year, and construction jobs accounted for 15.9 percent of all new jobs.  The table shows that construction jobs had a greater share of new jobs in all Western states except Texas in that year.  If 2005 is to be taken as typical of a construction bubble year, it is Oregon, New Mexico, and Arizona with a construction share of new jobs approaching the share of 2005.  While construction is somewhat frothy nationally and in the West, it appears the industry is robust but not, as of now, in bubble status.

New Construction Jobs as a Percentage of All New Nonfarm Jobs in the Western States

State Annual New Jobs 2005* Year-to-Date New Jobs October 2018*
NonFarm Construction Construction Share
NonFarm Construction Construction Share
Arizona 128.0 27.7 21.6% 73.3 14.2 19.3
California 287.5 52.1 18.1% 344.4 50.1 14.5
Colorado 46.3 8.7 18.8% 72.6 8.4 11.6
Idaho 23.0 5.2 22.6% 22.1 2.9 13.1
Montana 9.5 2.7 28.4% 5.8 0.9 15.5
Nevada 70.3 16.5 23.5% 42.9 7.7 17.9
New Mexico 18.2 4.2 23.1% 14.6 3.2 21.9
Oregon 47.7 8.2 17.2% 45.2 8.2 18.1
Texas 244.1 22.6 9.3% 348.8 43.9 12.6
Utah 43.7 8.8 20.1% 49.2 5.4 11.0
Washington 72.9 13.2 18.1% 100.2 10.5 10.5
Wyoming 8.5 1.5 17.6% 5.7 0.7 12.3

*Thousands of Jobs