By George W. Hammond for AZ Big Media
There is still a huge amount of uncertainty about the future of the outbreak and the economic impacts on the Arizona economy associated with it. Regarding the outbreak, the question at this point is when government and self-imposed social distancing will ease. The April 2020 U.S. forecast from IHS Markit, which underpins the Arizona forecasts, assumes that social distancing begins to ease in the July-August period.
The epidemiological uncertainties create economic uncertainties. We are on track for a major downturn, the question is how bad and for how long. This forecast update is the second step in assessing the damage and the recovery. It projects a much more significant adverse shock to the state economy than the March Interim. As more hard data is released in coming months, we will know more about the economic impacts and the prospects for recovery.
For the April U.S. and Arizona forecasts, the baseline projections are assigned a 45 percent probability. The pessimistic scenario has a 35 percent probability and the optimistic scenario has a 20 percent probability. I view the baseline and pessimistic scenarios as being about equally likely.
Arizona Outlook
The national forecast is combined with my assumptions about the impact of industry shutdowns on employment and retail sales. I assume massive reductions in employment in leisure and hospitality and retail trade and significant shutdowns in personal services and health care, during the second quarter of 2020, driven by the government- and self-imposed social distancing measures.
To give you a sense of the estimated shutdown impact, employment in leisure and hospitality is assumed to drop from 335,000 in the fourth quarter of 2019 to 91,000 in the second quarter of 2020. Trade, transportation, and utilities jobs drop from 546,000 in the last quarter of 2019 to 405,000 in the second quarter. Health care and social services jobs decline by 16,000 jobs as dentists, doctors, and physical therapists avoid non-emergency interactions with patients and clients. Personal services decline by 11,000.
Taxable sales at retail establishments and restaurants and bars also experience a huge decline in the second quarter.
The current baseline projections put the magnitude of the coming downturn at about 50 percent greater than the 2008-2009 recession but shorter in duration. Total nonfarm employment in Arizona declines by 48,000 from the first quarter to the third quarter of 2020. That translates into a peak-to-trough decline of 16.2 percent. For comparison, Arizona lost 305,000 jobs from peak to trough (quarterly) during the Great Recession. That was an 11.4 percent drop.
The state unemployment rate surges to 19.0 percent by the fourth quarter of 2020, but then drops rapidly.
Taxable retail sales decline this year, as job, income, and wealth declines take a toll on consumers.
Population growth slows, with reduced net migration, and that generates lower levels of housing permit activity.
Once we get past the shock this year, the recovery should be solid. Arizona was in very good shape before the outbreak and once the outbreak is under control, growth will accelerate significantly.
Growth rates will look very good initially, because we’re restarting large sectors of the economy. The forecast calls for the level of employment to return to its fourth quarter 2019 level by the end of 2022.
The pessimistic scenario assumes a deeper, more prolonged downturn. Arizona jobs decline by 695,000 from the last quarter of 2019 to the third quarter of 2020. That translates into a 23.4 percent drop.
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