Arizona's economy is on the brink of a significant shift, and it's time to dive into the details. The state's economic growth is about to accelerate, but there's a catch - it's a slow and steady race, not a sprint.
Despite the post-pandemic challenges, Arizona's economy is showing signs of resilience. Employment trends, although slow, are on an upward trajectory. Visualizing the job market since 2019 (Exhibit 1) reveals a steady, albeit uneven, rise in state jobs. The growth is modest, with a 0.3% increase over the year through August 2025, lagging behind the national rate of 1.1%.
But here's where it gets controversial: the growth is not uniform across regions. Phoenix MSA jobs saw a 0.4% increase, while Tucson experienced a 0.1% decline, and Prescott faced an 0.8% drop. So, what's driving this uneven growth?
Private education and health services have been the key sectors propelling job growth in Arizona, Phoenix, Tucson, and Prescott. However, the pace of growth varies, and it's this disparity that adds a layer of complexity to the state's economic landscape.
Moving on to income, Arizona's personal income growth started 2025 on a slower note, with a 4.5% increase over the year, compared to the national average of 5.1%. Net earnings from work followed a similar trend, rising just 4.5%, well below the national average of 5.2%.
Now, let's talk about housing affordability. According to the Federal Reserve Bank of Atlanta, there's been a modest improvement over the past year. Housing costs as a share of median household income dropped to 46.7% nationally in September 2025, a decrease from 44.1% a year ago. Tucson and Phoenix witnessed similar declines, with housing costs falling to 41.0% and 43.9%, respectively. However, when compared to pre-pandemic levels, housing affordability remains significantly impaired.
In terms of housing costs relative to income, Phoenix and Tucson fared better than the national average in September 2025. However, when compared to other western metropolitan areas, the costs remained high. California's major cities, such as Los Angeles, San Jose, San Diego, and San Francisco, had housing costs ranging from 67.3% to 84.1% relative to income. Within Arizona, the range varied from a high of 73.4% in Flagstaff MSA to a low of 37.9% in Yuma MSA.
Housing permit activity has been a cause for concern in 2025. Due to the federal government shutdown, data is only available up to August 2025. During the first eight months of the year, total housing permits in Arizona decreased by 13.1% compared to the same period last year. Single-family permits saw an 8.1% decline, while multi-family permits dropped by 23.9%.
The Phoenix MSA also experienced a decline in permits, with a 15.2% drop in total permits during the first eight months of 2025. Tucson MSA permits fell even further, with a 17.9% decrease compared to the same period in 2024. Single-family permits in Tucson declined by 7.9%, while multi-family permits dropped by a significant 51.8%.
Consumer price inflation in the Phoenix MSA has been a bright spot, moderating to well below the national average. Over the year in August, Phoenix consumer prices rose just 1.4%, compared to 2.9% nationally. This is a positive sign for the state's economy.
Retail sales and remote sellers have seen a strong acceleration this year, with a 4.8% increase statewide through September. Taxable sales in restaurants and bars have also rebounded, with growth of 3.2% statewide, 3.5% in the Phoenix MSA, and 2.7% in the Prescott MSA. However, the Tucson MSA has lagged behind with a weaker growth rate of 0.9% through September.
Looking ahead, if the U.S. economy continues its growth trajectory, Arizona's income, job, and population growth are expected to accelerate next year. The forecast predicts a modest deceleration in job growth in 2025, followed by a brighter outlook in 2026 and 2027, with gains of 1.6% and 1.5%, respectively. The unemployment rate is expected to increase slightly, reaching 4.5% in 2027.
Nominal personal income growth is forecast to slow down to 4.8% in 2025, before picking up again to 5.7% in 2026. This growth will help sustain retail and remote sales, which are expected to accelerate to 3.6% in 2026.
Population growth is expected to remain steady at around 1.3%-1.4% per year, primarily driven by net migration. Slow population gains will impact housing permit activity, with a forecast decline to 53,067 in 2026.
The growth pattern for the Phoenix and Tucson MSAs mirrors the state's outlook. Phoenix MSA job growth is expected to stabilize at 1.6% in 2026, while Tucson MSA job growth is projected to rebound modestly to 0.6% in the same year. Population growth in both regions is expected to face long-term demographic pressures, leading to a gradual decline in growth rates.
And this is the part most people miss: Arizona's economy is poised for a steady, sustainable growth, but it's a complex journey with various factors at play. What do you think? Is Arizona's economic future as bright as it seems, or are there hidden challenges that could impact its trajectory? Share your thoughts in the comments below!
