There’s no doubt that 2018 has been a hectic year for the American economy. Investors have seen the single longest bull run in equities market history this year as well as a subsequent decline as tensions rise around international trade concerns. Growing consistently since the 2008 financial crisis, the US economy has been doing exceedingly well.
However, some areas of the country are doing significantly better than others. One state in particular, Arizona, is growing the fastest it has since before the Great Recession in 2007 and is expected to outpace the national average GDP growth in 2018, with the Arizona economy already advancing 4.2% year over year in Q1 2018. That puts the state in the top five states with the fastest growing economy, according to a report from BMO Capital Markets. But what’s causing the growth, and what does the future of the state look like moving forward?
What’s the Cause?
Likely the most impactful cause for Arizona’s economic growth is the country’s broader economic expansion over the year. In Q2 of 2018, US real GDP expanded at an annual rate of 4.2%, which was the fastest pace in nearly four years as BMO expects an average growth of 2.8% for the year as a whole. For Arizona in particular, some economists contribute the state’s economic growth to efforts from officials to attract more talent and job — an effort that’s paying off as the state is set to outpace the national average growth.
Jim Rounds, an economist with Rounds Consulting Group, sees growth as a result of state decisions, saying that:
“Incomes are going up because of the state’s aggressive efforts to not just add jobs, but to add higher wage jobs, and to become a hub for innovation and entrepreneurship. In a very short period of time the state went from being reactive to proactive when it comes to building the economy. Lots of things matter, including regulatory reform, competitive tax policy, and marketing of the state’s assets. Good public policy is what’s driving these numbers up.”
Leading the Charge: Real Estate and Manufacturing
At the forefront of economic growth in Arizona are two industries, manufacturing and real estate. Manufacturing was the largest contributor with an impressive gain of 8.5% year over year, according to BMO. Behind manufacturing, the real estate industring was the second largest factor, contributing 15.5 percent to the state’s GDP.
Growth in government expenditures, healthcare, finance, and insurance all followed the primary drivers to contribute to the successful growth in the state. Over the same time period, the labor force is growing in Arizona with incomes rising as well. BMO reported that incomes rose 4.1 percent throughout 2017 and are projected to climb 5 percent by the end of 2018. Besides being good for employees, rising incomes have also proven beneficial for the real estate industry with BMO’s report noting that:
“The strong growth in the labor force is keeping housing demand strong. However, lean inventories are constraining sales...In consequence, prices climbed at a rapid 9.0% y/y clip in Q1 and look to have continued at that pace since….Overall housing starts have trended firmly higher and building permits point to further gains.”
With income and housing starts trending upward in a healthy direction, the need for home warranties in Arizona is skyrocketing as well. Due to a lacking inventory in the state, home prices are going up and with those larger investments, consumers are looking to protect their assets for the long haul. Increases in home warranty purchases and declining delinquencies in the state indicate that buyers are planning to hold and preserve the properties they’re acquiring.
While the economy has been growing across the US as a whole over recent years, some states are moving forward at a faster pace than others. Arizona is one of those states above the average as it continues to see higher incomes, a greater demand for homes, and developers looking to catch up as housing starts rise — along with prices in the meantime. The success can be contributed to the economic growth of the country as a whole as well as the state’s aggressive efforts to get more businesses, people, and jobs into the state. Whatever Arizona’s plan is, it appears to be working well.