In the two years since the COVID-19 pandemic sent economic shockwaves throughout the world, Arizona's recovery has been rapid but uneven, says George Hammond, an economist with University of Arizona Eller College of Management.

"Overall, Arizona has bounced back fairly rapidly from the initial economic impacts of the pandemic," said Hammond, who delivered his economic forecast during Eller's Breakfast with the Economists event May 26. "Arizona replaced all of the jobs that we lost during the first two months of the pandemic by the end of last year."

Hammond, the director of Eller's Economic and Business Research Center, said Arizona's unemployment rate in April was 3.2% – a record low. He said the transportation and warehousing sectors are leading the charge, thanks to the rise in online shopping, which accelerated further during the pandemic.

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While the state overall is ahead of the U.S. in reaching pre-pandemic job numbers, Arizona's metropolitan areas have had varying levels of success. Phoenix replaced all of its lost jobs by mid-2021, while cities including Tucson have not yet reached the mark. Tucson, said Hammond, has only recovered about 88% of the jobs lost during the pandemic, held back by slow hiring in professional and business service companies like call centers, janitorial services and waste management. Hammond said the U.S. has recovered 94.6% of jobs lost during the pandemic.

Feeling the squeeze

Like the rest of the country, Arizona is facing rapid inflation, led in large part by housing prices. Hammond said the problem is an increase in demand meeting limited supply.

"It's a combination of factors generating increased demand," Hammond said. "Household formation is rising, being driven by demographics, the increase in remote work and the fact that Arizona is an attractive place for people to move within the U.S."

The rise in demand comes at a time when active home listings are decreasing. The driving factors for this, Hammond said, are increases in labor and material costs. In April 2022, Hammond said the median house price in Tucson rose by just over 21%; in Phoenix it rose nearly 25%.

Arizona gas prices are also putting pressure on personal budgets. AAA lists Arizona's average gas price at $4.955 per gallon as of May 31, ahead of the national average of $4.622.

On the employer side, Hammond said labor markets continue to make hiring a challenge. He says there were more than 247,000 open jobs in Arizona in March, which is more than a 50% increase from pre-pandemic levels.

Light at the end of the tunnel

While it might not come as quickly as many hope, Hammond does see some relief on the way over the next 12 to 18 months.

"I think we will be in an economic environment where we're seeing lower inflation, falling oil prices and looser labor markets," Hammond said. "I think we'll get back to something that is a little more normal, but I think it will take more than a year."

He expects the Federal Reserve raising interest rates to put the brakes on housing price increases and believes global supply chain issues will loosen up over time, which will ease other consumer prices.

While Hammond believes "increased work flexibility is here to stay," he expects the rate at which employees quit or voluntarily leave jobs to come down in the next year or so, leading to a more stable labor market.

"Overall, the outlook is good," Hammond said. "Arizona, Phoenix and Tucson are well-positioned to grow for the next couple of years, particularly if the nation avoids recession. I think we'll see fairly rapid job growth in Tucson, since Tucson has more of the recovery still to go."

You can find a more detailed report and presentation slides from Hammond's economic forecast on the Eller College of Management website.