Held back by lofty energy prices and rising interest rates, Arizona’s economic expansion is likely to slow down slightly in 2006, according to economists who spoke Wednesday at the 42nd Arizona State University/Bank One Economic Forecast Luncheon at the Phoenix Civic Plaza.
The good news is it will be only a slight tap on the brakes, not a screeching halt, they said.
"(2006) is going to be a year of stable, moderate growth," said Lee McPheters, professor of economics and director of the Bank One Economic Outlook Center at ASU. "The bottom line is the expansion continues, but some of the key indicators may not be quite so robust as they have been."
Among the indicators that are expected to slow next year are Arizona job growth and the number of single family housing permits, he said.
Also projected to grow more slowly are personal income, retail sales and the percentage change in population. But the state’s unemployment rate is expected to fall from 4.5 percent this year to 4.3 percent next year, he said.
The slight slowdown doesn’t worry McPheters much, who noted that 2005 was strongest for Arizona in terms of job growth in 10 years.
What does worry him is the sharp run-up in housing prices, which has decreased housing affordability here.
He said analysts are uncertain what that will mean for future population and economic growth.
"For the first time, Phoenix housing prices have gone above the national average," he said. "That is new territory for Phoenix."
As a result, Phoenix housing costs are less competitive than in the past compared with rival markets in Southern California and Las Vegas, he said.
"What has driven so much of Phoenix growth has been the attraction of affordable housing. . . . There is no question that housing affordability in Phoenix is much lower now than it was just two years ago. So we’re waiting to see how that is going to play out."
Another concern is the state’s relatively slow pace of job creation in the so-called "export" industries that create products shipped out of state, which in turn brings money into the state.
For example, he said the Valley has less than half the ratio of science and research jobs as the national average, an indication the state has a long way to go to build the biotechnology sector.
On the flip side, the Valley’s percentage of lower paying fast food and retailing jobs is no greater than the national average, he said.
A similar outlook prevails in the national economy, which is expected to have slightly weaker growth next year than this year, said Anthony Chan, senior economist for JPMorgan Fleming Asset Management.
"With interest rates rising, it stands to reason that economic growth will slow," he said.
Still, he said the economic expansion, which has lasted 16 quarters, has a long way yet to run.
The average economic expansion cycle lasts about 28 quarters, and the stable growth rate of the current expansion indicates that it could run longer than the average, he said.
Hurricane Katrina has not had a major negative impact on the national economy, and massive government spending next year to rebuild the Gulf Coast is likely to be stimulative, he said.
In planning investments for 2006, Chan is more excited about overseas prospects than the U.S. stock market.
He expects the Japanese economy to continue its recovery.