State’s economic outlook for 2025 looks good | News

As Arizona heads into 2025, the state’s economy is positioned for continued growth, say its two top economists, with strong fundamentals driving job creation, income gains and business investment.

However, significant risks loom on the horizon, stemming from proposed changes to federal policies on immigration and trade.

This duality — of optimism tempered by uncertainty — was a central theme in recent Inside Tucson Business interviews with the state’s two leading economists: George Hammond, director of the Economic and Business Research Center at the University of Arizona, and Dennis Hoffman, director of ASU’s Office of the University Economist.

Hammond and Hoffman emphasized the strength of Arizona’s baseline economic forecast — assuming no major policy shocks disrupt the current trajectory.

“We’re in a good place in Arizona,” said Hoffman. “Inflation rates keep coming down, job growth is strong,  income growth is outstripping price growth, and purchasing power is coming back.”

But Hoffman then added a cautionary caveat, like a mob boss offering protection. “I’d hate to see anything mess this up.”

Worrying each economist are two new policies heavily discussed on the campaign trail by the incoming presidential administration: mass deportations and tariffs.

President-elect Donald Trump has pledged to deport millions of undocumented immigrants, aiming to remove between 15 and 20 million individuals, despite estimates placing the undocumented population at around 11 million. In addition to immigration policies, Trump has proposed imposing a minimum 10% tariff on all imports, with specific tariffs as high as 60% on goods from certain countries.

For Arizona, these policies could have pronounced effects, say both Hammond and Hoffman. The state’s economy benefits significantly from immigrant labor, particularly in sectors like agriculture and construction. Mass deportations could disrupt these industries, leading to labor shortages and increased operational costs. Similarly, tariffs could affect Arizona’s trade relationships, especially considering its proximity to Mexico and reliance on cross-border commerce.

“Arizona would be hit harder than many states, by both of these policies,” said Hoffman. “It’s just a recipe for disaster when we fail to address the integration of immigrants into the labor force. We need workers. Many unauthorized workers have been here for 10, 20, 30 years. They own homes and are part of the fabric of the community.”

Hammond agreed. “As of 2022, there were approximately 190,000 unauthorized immigrants in Arizona’s labor force, making up about 4.9% of Arizona’s labor force overall,” he said, ranking the state 13th nationally in this metric. “We’re simply not producing enough workers to sustain our labor force going forward unless we address these issues.”

Both economists emphasized the need for comprehensive immigration reform. “We need to reform our work laws, think about long-term employment, and create pathways to green cards,” Hoffman said. Such measures, he argued, would integrate immigrants into the labor force legally and sustainably.

As for tariffs, Arizona’s economy is deeply tied to international trade, particularly with Mexico.

“Mexico is by far Arizona’s number one trading partner,” Hoffman noted. “One-third of Arizona’s imports come from Mexico, and it’s also a huge destination for our exports.” Tariffs on Mexican goods, he said, could significantly disrupt this relationship, with Southern Arizona, including Tucson, particularly vulnerable.

“Most of this is really bad for Southern Arizona, which depends more on international commerce from Sonora than Phoenix does,” Hoffman explained. Tariffs would raise costs for businesses and consumers, with higher prices disproportionately affecting low-income households. “The incidence of a tariff falls on the consumer.”

The interconnected nature of modern supply chains amplifies these risks. Hammond pointed out that many goods, particularly auto parts, cross the U.S.-Mexico border multiple times during production.

“Tariffs would compound costs at every stage, reducing competitiveness for U.S. manufacturers and raising prices for consumers,” he said.

Aside from these potential threats, both economists say there’s reason to be optimistic about Arizona’s economic outlook for 2025.

“We’re seeing solid growth in healthcare, manufacturing and the service-providing sectors,” said Hammond, adding that Arizona’s job growth remains in the 2% to 3% range — strong by national standards. “Personal income growth is also outpacing inflation, which is a positive sign for purchasing power.” Hammond remains optimistic about the state’s resilience, adding, “If the national economy avoids a recession, Arizona is positioned to maintain its strong trajectory.”

Despite these positive indicators, Hoffman acknowledged the disparities in Arizona’s economic landscape. “It’s a have-and-have-not economy, in many ways,” he said.

“The winners are people who owned a home before the pandemic hit. They’ve seen their home prices double and refinanced mortgages to save hundreds of dollars a month.” Higher-income households, he noted, have also benefited from substantial state tax cuts and education savings accounts for private schools.

The losers, Hoffman said, are renters and lower-income households, who face mounting challenges going into the new year.

“Renters, commuters, kind of paycheck-to-paycheck folks, find it tough to get raises, and their rents are going up dramatically,” Hoffman explained. For these groups, Arizona’s rising costs of living have outpaced their financial gains, deepening economic divides. “ These folks have seen their rents double or they haven’t been able to refinance mortgages to make the pain go away. So, you know, that group continues to struggle.”

Another thing that could potentially “mess up” Arizona’s economy is the state’s long-term challenges related to climate change and infrastructure.

“A few years ago, one of my colleagues coined the term ‘heat Katrina,’” said Hoffman, describing a scenario where unrelenting heat and power outages could threaten the state’s livability.

“If we had rolling blackouts during 110- to 120-degree days, it’s hard to imagine how we would cope,” he said.

Hammond highlighted water availability as an ongoing issue that Arizona must address to sustain growth.

“We need to carefully manage water resources to support a growing population and economy,” he said. “Water scarcity is a real challenge, particularly as we balance growth with sustainability. Extreme heat, combined with power infrastructure challenges, is something we’ll need to monitor closely. It could deter businesses and residents, particularly in regions with limited resources to adapt.”

Fortunately for Tucson, in particular, addressing climate concerns through green energy has become another emerging business opportunity. Hammond pointed to the American Battery Factory as an example of the region’s potential to attract sustainable industries.

“It’s easy to be optimistic about manufacturing over the next few years in Arizona,” he said.

Overall, Arizona’s economic outlook for 2025 is strong, driven by robust job growth, moderating inflation, and a favorable business climate. However, the disruptive potential of mass deportations and tariffs casts a shadow over this optimism.

Hopefully, both economists say, neither of these campaign promises the incoming administration made will pass.

“We’ve seen before that campaign rhetoric doesn’t always turn into actionable policies,” Hammond said.

“Businesses are operating under the assumption that mass deportations or full-scale tariffs are unlikely. But the mere threat creates instability, which is not conducive to investment or planning.”

Hoffman also holds that many in the business community assume these policies will not come to fruition.

“Employers today are saying, ‘It’s not going to really happen. It can’t really happen,’” he said. “If anything, Mr. Trump has proven he’s very transactional. In 2018 and 2019, there was selective tariff enforcement. Some businesses negotiated their way out of it, so they assume this time will be similar. Mostly, businesses are counting on this being more talk than action.”