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Economists forecast ‘choppy waters’ as Arizona recovers from Covid-19

Phoenix Arizona skyline framed by saguaro cactus and mountainous desert

The Covid-19 pandemic is easing in Arizona, with daily reported cases down significantly from a peak in January, but the effects of the pandemic — social, personal, economic and otherwise — are still materializing.

On Thursday, economists from the University of Arizona’s Eller College of Management presented a forecast for the state’s recovery with the broad theme of unevenness; Some places will recover quicker, as will some industries and individuals.

George Hammond, director and research professor at Eller’s Economic and Business Research Center, said Arizona is still down 94,800 jobs from pre-pandemic levels, and it will be months before they are recovered.

“Uncertainty still matters, but upside risks are rising,” Hammond said over Zoom on Thursday. “What I mean by that is that we may in fact do better than expected under the baseline, particularly over the next year or so.”

The baseline projection is that the state will hit pre-pandemic levels of employment by the first quarter of next year, with an optimistic alternative suggesting it could come as soon as the end of this year and a pessimistic alternative suggesting it may take until Q3 2022.

From June 2020 to April of this year, Arizona has been adding about 9,000 jobs per month. This rate of job growth is significantly higher than a more typical 6,000 jobs increase that the state has seen during previous periods of growth.

Leisure and hospitality, unsurprisingly, suffered the largest losses since February 2020, shedding more than 45,000 jobs statewide. That sector has improved as more vaccines are distributed and people feel safe to dine out again, but many restaurants are still reporting hiring difficulties.

The perceived shortages of labor, Hammond said, may have several causes. Generous unemployment insurance benefits were enacted during the pandemic, but that alone does not explain the situation.

Some people may still be worried about contracting the virus in customer-facing roles, older workers might have opted for an earlier-than-planned retirement, child care options may still be limited in parts of the state and some people might have just found a new job.

“We’re hearing some stories that the one sector that was growing rapidly was transportation and warehousing,” Hammond said. “People may just have transitioned from a restaurant or travel and tourism job into transportation and warehousing, and now they’re happy there.”

As a state, Arizona has recovered about 71% of the jobs lost since last year, which is outpacing the national recovery of 63%.

Phoenix focus

Phoenix is still down about 64,000 jobs from before the pandemic, but the capital city is replacing jobs the fastest among Arizona metros.

“Phoenix accounts for most of the state’s job growth. That’s about 80% of the state’s job growth, which is a larger share of our growth than Phoenix actually makes up in terms of the share of jobs statewide,” Hammond said. “The recovery has been a bit disproportionately concentrated in Phoenix.”

Hammond did not have a specific reason why Phoenix was recovering faster than Tucson, but he noted that the different mix of industries in the two cities likely played a role.

Despite the signs of progress, one of Hammond’s takeaways from the presentation was that housing affordability will become an increasingly pressing issue for the state.

“Housing affordability has been declining across Arizona. And if house prices continue to rise at a much faster pace than we’re seeing an income growth, then our housing affordability overall will continue to drop,” he said.

The seasonally adjusted median house prices in the Phoenix metro area have climbed past the most recent peak that occurred just before the Great Recession in 2008. Hammond said home prices have increased because there is a smaller supply with less active listings, prices for building materials are higher and there is a heightened demand with more people looking for homes.

Hammond also noted that data from the US Bureau of Economic Analysis shows that Flagstaff, Phoenix and Arizona all had costs of living lower than the national average in 2019, which makes it an alluring place for remote workers to relocate. 

In March, home prices in metro Phoenix averaged $470,200, up 24.8% year over year, while the median sales price was $359,300, up 18.8% year over year, according to Arizona Regional Multiple Listing Service.

The changing climate

The majority of Thursday’s Breakfast with the Economists event was devoted to a presentation by Derek Lemoine, associate professor of economics at Eller, who detailed how climate change is impacting and will continue to impact the economy.

He displayed a variety of data sources that described how extreme heat decreases yields from corn fields and other crops, how it stresses electrical grid stability and how labor output decreases when it is hot, though he noted that economists are still exploring exactly why this happens.

“No matter what, we’re gonna be living in a different world by 2100,” Lemoine said. “We can still control how different that world is going to be.”

Lemoine said that part of the economic solution to climate change includes fixing prices to account for pollution, which is called an “externality” in parlance of the field. 

“The problem with a lot of environmental challenges is that markets don’t work well when faced with pollution,” he said. “The reason is that pollution cost are what we call an externality. Firms that pollute don’t actually see the true cost of air pollution, because it is often free to dump into the atmosphere, or dump into the water or abuse the land. And there are real costs associated with that, but those costs don’t show up in the price that we all pay.”

Pricing carbon will be an important factor in the economic solution to climate change, Lemoine said, as will coordinating solutions internationally.

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