In October 2022, the Wall Street Journal reported that a survey of more than 60 economic forecasters expected the U.S. to enter a recession in 2023 with inflation continuing to run high and employers cutting jobs as the economy contracted. Az Business magazine sat down with the following Greater Phoenix Economic Council (GPEC) experts to discuss if the predictions of 2023 were borne out, potential weaknesses in the region, the second-order effects of attracting large projects and what to look out for in 2024.
Chris Camacho, president and CEO
Kristen Stephenson, senior vice president of research and analytics
Brad Smidt, senior vice president of business development
Tim Bourcet, vice president of corporate development and
community engagement
The following responses have been edited for clarity and length.
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Az Business: Going into 2023, there were lots of bleak economic outlooks in the press. How did those forecasts hold up to reality this year?
Chris Camacho: First, I’d say a lot of the economists were viewing the paralysis tied to the inability to curb inflation as something that was going to be a long-term problem for the country. While that has been a challenge, the Fed has been very active to try to neutralize inflation as best as they can.
But one of the positives is that a place like Phoenix — due to its location next door to California and Mexico — is strongly positioned to capture a lot of global manufacturing growth that’s happening now in America. I think it’s going to lead to a decade’s worth of economic diversification, which is something that we’ve strived for over the past two decades.
Kristen Stephenson: We saw some strong employment growth in the Greater Phoenix market over the last year; we added about 51,000 jobs year-over-year. Our unemployment rate is still pretty low right now at just under 4%, which is good for our market.
As Chris was saying, we saw the inflation numbers come down. We had, both nationally and in Greater Phoenix, record breaking inflation rates when looking at 2021 compared to 2022. In 2023, they were still above long-term averages, but inflation rates are much more in line with where we want them to be. Greater Phoenix is back on par with the national inflation rate, whereas in 2022 we were actually higher.
Brad Smidt: I think the activity we’ve seen in manufacturing has rescued this market in a lot of respects. If you’re an office developer or owner, you might think the sky is falling, but the industrial growth has saved a lot of jobs and moved our market towards manufacturing rather than the service industry we relied on in the past.
CC:There is a view that the sky is falling in the office market nationally, but there have been some acute success stories at certain locations that are highly amenitized, highly accessible with very low vacancy rate, like at The Grove at 44th and Camelback.
I would also argue that in contrast to the black swan event of 2008, when Phoenix became a blacklisted market for about three years by capital markets because we were over reliant on housing and construction, the last three or four years have been far different.
We now have 50 million square feet of new product still in the development process that’s adding 13% to our industrial base. Unlike other national macro level downturns when Phoenix got hit pretty hard, we actually got accelerated levels of investment in the COVID-era recovery, which is a pretty strong testament to what we’ve done in the last 15 years.
AB: Chris mentioned that the Fed has raised interest rates to get inflation under control. But has the increased cost of capital affected Greater Phoenix’s growth?
KS: On the industrial side, it has had less of an impact. With today’s economy, people still need to manufacture things, so they’re essentially having to absorb those costs versus just not doing anything. Maybe there’s more lengthening of timeframes to get things done, but it’s still going to get done. I think where our concern is in the office market as loans come up for refinancing, and capital is going to get more expensive for them.
CC: On the residential side, I thought that 30-year mortgages at 7.5% would’ve cooled things off, but it’s still a very active residential market. There’s such an under-supply issue in this market and an over-demand cycle where people are still moving here and that’s creating a demand for residential across all the different asset classes. It still surprises me that, even with the interest rates, the level of multifamily product being built in the Valley is on par with where it’s been the last several years.
Appreciation on single family homes hasn’t been what we saw the last three years, which was a massive acceleration. It’s flattening out, but that’s the product of an economy that’s producing this opportunity-driven demand. People still want to be here, and they’re still taking down a lot of the existing housing product.
AB: Tim, is there anything you’d like to add from a policy angle on housing?
Tim Bourcet: Last year, we saw numerous proposals go through that did not end up being signed by the governor. They were interesting bills that were divisive to various groups, but in all the meetings Chris and I have had since the end of the spring session, housing is always a topic we’re going to hear about, along with water.
Legislators are worried about having enough housing and are looking at fixes, whether that’s changing how projects go through zoning or planning committees. Those are municipal issues, but that hasn’t stopped the legislature from getting involved.
Now comes the question of what these new proposals look like as we approach the 2024 spring legislative session. That’s why GPEC has been meeting with our board, member organizations and the 22 mayors who are part of GPEC. They will tell you exactly what they’re experiencing on the front lines, which is important. From a policy perspective, the focus is on what could be proposed in the spring and bringing the right folks to that conversation so it’s a valuable piece of legislation.
AB: You mentioned water as an issue you’re asked about often, and I’ll ask about it again here. What should folks know about what’s being done to ensure the state’s water supply?
TB: We have a drip campaign that was developed by our team members to get the proper information out to the public, because there are a lot of misleading things out there. Thankfully, we have great partners like Sara Porter at the Kyl Center for Water Policy who are experts that can distill that complex information down, and we can get that information to our networks.
In our line of work, site selectors and national consultants are the middlemen, so we need to make sure that the right communications are sent out to potential companies and industries looking to locate here in Arizona.
AB: Getting the facts out there must be especially hard with Arizona showing up in national news with sensationalized headlines around water. Has that affected your conversations with potential locates?
CC: Water has always been a top priority for the due diligence process. When Brad and I, and the rest of our team, are working on large scale projects, they treat the evaluation of water just like they would any other natural resource, the electrical grid or labor supply. It’s prudent to do that.
The New York Times, Washington Post and others have covered water in the west and have focused on the Colorado River — which is a third of our water supply — but the issue becomes more real when you have an image of Lake Powell or Lake Mead at the levels they are.
We’re not dismissing the seriousness of our current water position, but when you look at the history of water in Arizona, we understand that we’re building an economy in the heart of one of the warmest places in the country. The Groundwater Management Act of 1980 spells out the utilization of water in the desert. The way we deploy our water is smart and extraordinarily formulaic. We still have 70% of our water used in agriculture, and that will transition over time.
I’ve answered this question no less than 200 times to national media: “Why would GPEC support TSMC coming to Arizona?” Well, if you put TSMC’s project side by side with dozens of acres of cotton, which would you rather have in your community? The 4,000 jobs with an average wage over $100,000 or acres of cotton?
Those are the things we try to share with anyone who will listen. But the challenge is starting from the image of Lake Powell or Lake Mead, but the full story includes the Salt River Project reservoirs having to release water because of the snowpack in the Mountain West.
BS: Companies are always going to ask about water since we’re in the Southwest, but I think we’ve done a good job as a state to counteract the effect of those negative press stories. It still comes up, certainly for manufacturers since some of those companies need a lot of water, but we have the data to show that we have the water in the right locations.
CC: I’d like to add that a lot of the time water is covered as a state issue, but at the end of the day, water is local. If you are a young, high-growth community like Queen Creek and Buckeye, they’re in the early stages of planning their long-term water story.
Places like Phoenix, Mesa, Glendale and others have been water planning for decades. So yes, you have state law that governs the use of water, but each city goes through its process to expand its portfolio. Oftentimes an entire market gets lumped together, but cities have been shoring up their water supply for decades.
That means some cities are in a fortuitous position to welcome the kind of users that Brad and the business development team are working on attracting, whereas others are building their water portfolio for the future.
AB: Chris brought up TSMC, which is spending $40 billion on a manufacturing complex in North Phoenix. That is, in and of itself, a massive investment in the region, but what are some of the knock-on effects of large projects coming to Greater Phoenix?
KS: Since we’ve seen TSMC come here, we’ve had 20 semiconductor or supplier related locates enter the market over the last two and a half years. The great thing is the impact that it’s having on the entire metro region. Some of the suppliers want to be right up near TSMC, so we’re seeing a lot of activity in the Deer Valley area. But for a lot of the suppliers, anywhere within the Greater Phoenix market is close enough in proximity. We’ve seen projects going in places from Casa Grande to Surprise to Mesa.
This is all building on the fact that Intel has been here for 40 years and the strong supply chain network already here. We’re becoming the epicenter of semiconductor activity in the market because we’re covering so many aspects of the supply chain.
AB: Brad, what about other businesses that aren’t in the semiconductor sector? Do big projects such as TSMC serve as a proof of concept of sorts for other industries?
BS: Definitely. Companies know that TSMC — or Intel, LG and many others — would not make that decision lightly. It showcases this market as a location that is business friendly and willing to work with those types of companies, so yes, I do think it makes a big difference.
CC: There’s no question that having Intel and TSMC making announcements within the timeframe they did put this region on the global stage. We have some major international companies that will be coming here, and we will be telling the success story of the last 15 years of intention policymaking decisions, investments in STEM and infrastructure that were critical to TSMC and Intel doubling down here.
In our world, success begets success. But it’s also about building future infrastructure for the companies that may want to come in 10 years from now. It’s not like we can say, “Well, we got $60 billion in cumulative investments, so our work is done.” We’re already moving on to the next set of companies in the supply chain, as Kristen talked about.
AB: Tim, what are some things that need to happen in the legislature to make sure the region stays competitive?
TB: Prop 400, which is the half cent sales tax extension, has built nearly all of our transportation infrastructure over the last 40 years. We have to educate legislators that if we want to plan for the next TSMC or LG, we need to be doing that now. It was a bit of an uphill battle last year getting the enabling legislation for Prop 400. But it got done. As a reminder, Maricopa County is the only county that has to go down and seek enabling legislation for these types of things.
Prop 400 is exactly what we need to see the region grow, and then on the back end, it’s about us talking with legislators about what good workforce development looks like. Of course, it’ll always come down to the budget every year.
AB: Do presidential election years have an impact on business attraction?
TB: There is somewhat of an impact from presidential elections. For some of our larger public international companies, they have to check the pulse of every capital market in the world. In that sense, you can see the correlation between what’s happening here, especially impacts on federal trade policy.
For a majority of our work, the focus is generally on local government. Companies want to know their state legislators, county supervisor and mayor because they have more control than almost anything coming down from the feds. When a company has a question about the permitting process, they’re not thinking about the president — they’re going to call the city manager.
Looking at 2024, local elections could influence our business attraction efforts more than the presidential race, but that’s not to say it’s unimportant. Arizona is projected to be No. 2 in political spending, only behind California. There’s going to be a lot of noise.
AB: Even though we’ve established that making predictions about the economy is tricky, what are your thoughts going into 2024?
KS: Going back to your first question about the bleak outlook for 2023, the funny thing is we’re seeing something similar happening for 2024. There are some mixed signals for the national economy with job growth numbers. The economy is still growing, but it was at a smaller rate last month. Consumers are still spending, but if you ask them their sentiment on the economy, they’re kind of unhappy with it. I think we’ll see that continuing into 2024.
CC: I think consumer confidence will continue to have an effect as they work through student loan payments coming back online and are carrying more consumer debt. That impacts products and goods manufacturing.
While I don’t want to say we’re fully immune to national macro level trends, when I talk to my peers across the country, they’re not seeing the kind of activity this market is. This region’s economy used to be characterized as a three-legged stool with the defense, agriculture and tourism industries. Now, there’s so many other legs of that stool that if one market is down, the other legs keep us in good standing.
So, I think we’re going to do pretty well in 2024. But we’ve had this bull cycle for quite some time, and those periods often don’t last this long. Yet 2023 has been an exceptional year, so if there is a storm, let’s weather it and ensure 2024 is another good year for our market.
