How bad of a recession will we see in Arizona? The answers to these questions will be key

V-shaped, U-shaped or something else?

Now that a recession is here, economists are trying to predict how sharp and protracted it will be, and what the eventual rebound will look like — for Arizona and the nation.

That's still difficult to determine given that coronavirus infections still are weeks or months away from peaking, while policymakers continue to unveil a slew of programs to alleviate it's financial damage.

Here are the key questions to which economists and policymakers are trying to find answers:

Will the recovery depend on progress in halting the disease?

Probably, unless government authorities and businesses ease the social-distancing measures that have ground the economy to a halt. If anything, those measures continue to expand, as was evident in recent announcements that Arizona will broaden social distancing restrictions while asking banks to provide foreclosure, eviction and loan-repayment relief. 

"Although the U.S. is still transitioning into the worst phase of the pandemic, the experience in China, Italy and other countries suggests that the number of cases could peak in the spring or early summer," noted a recent report by economists at BBVA USA, which operates banks across Arizona.

"Therefore, the direct economic impact should be large, but temporary," BBVA said, while cautioning that a deeper downturn and slower recovery remains a possibility.

What do V- or U-shaped recoveries mean?

In a V-shaped scenario, the economic damage happens faster and the fallout is more pronounced, but the recovery comes sooner and with more momentum. A V-shaped situation implies that the sharp losses in jobs and economic output during the first and second quarters would be followed by significant gains over the second half of 2020. With a U-shape, the bottoming process takes longer and the rebound is more gradual, with the unemployment rate continuing to rise well into the recovery.

There's also the potential for an L-shaped recovery, with the pace of recovery subdued, possibly dragging out over a couple years. That could be the worst scenario.

BBVA's economic team expects something between a V- and U-shaped rebound. So does economist Jim Rounds of Rounds Consulting in Tempe.

"We'll pick up some of the activity we're losing now," he said in a webinar hosted by the Greater Phoenix Economic Council or GPEC. "We'll have a decent expansion after this." The coronavirus outbreak came just as Arizona was poised to have an exceptionally strong year economically, he added.

How steep might the downturn be locally?

According to some forecasts, the numbers could be mind-boggling.

Maricopa County's economy could contract by 23.5% during the second quarter, wiping out nearly $15 billion in output, according to James Chung, a partner at StratoDem Analytics in Cambridge, Massachusetts. That's roughly $8,800 in lost output per household, mainly due to fewer people working. Tucson and Pima County could see a 22% second-quarter decline and $5,900 lost of gross domestic product per household.

The company's estimates are based on an expected drop in national GDP of 18.1% for the quarter, according to a consensus estimate by Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley and UBS.

Tourism and cyclical manufacturing make metro Phoenix vulnerable, but Maricopa County doesn't even rank among the projected 10 worst counties in either measure. Tourism-heavy counties in Florida and Nevada could slide 30% or more from April through June, and manufacturing-dominant areas of Michigan and northern Indiana could tumble closer to 40%, according to StratoDem Analytics.

Then again, by the time these numbers are officially reported, if the damage proves to be this severe, the economy could be on an upswing again.

What industries are suffering the most right now?

Take your pick, but the shock has been especially intense for industries such as airlines, hotels, entertainment and recreation. Aerospace and airline manufacturing also has been hurt and much manufacturing generally.

"With supply chains disrupted and demand weakening further, manufacturing, wholesale and retail trade and freight transportation are experiencing a sharp slowdown," noted the BBVA report. Commodity-price declines have hurt entities such as copper mining giant Freeport-McMoRan, one of Arizona's largest companies. Oil companies also have suffered as crude prices approach their lowest points in a generation.

The hotel/travel/tourism sector is being hit especially hard. This is a big sector in Arizona, noted George Hammond, an economics professor at the University of Arizona. Leisure and hospitality jobs recently accounted for 11.1% of statewide employment, with the Tucson area slightly more and metro Phoenix slightly less. Flagstaff has a much higher concentration, at 23.2%.

How else might curtailment of Arizona's tourist season hurt the state?

Let's face it: Arizona gets a lot of favorable publicity and positive vibe from events like spring training baseball, so cancellation of that and other tourism activities does hurt.

Chris Camacho, GPEC's president and CEO, cited winter visitors as important in driving future business expansions and relocations to the state. When business leaders visit here, especially during times of favorable weather, they are more inclined to bring jobs with them, eventually. During such times, Arizona's business-conversion rate "picks up considerably," he said.

Over the long haul, population growth is a key driver for Arizona, with net migration of 91,000 people here in 2019, the third best of all states that year, said Lee McPheters, an economics professor at Arizona State University.

"It is very likely that net migration will slow down in the next few months, taking more steam out of an already slowing economy," he said. "While Arizona is little affected by swings in oil prices, like some Western states, anything that affects population flows and tourism will weaken the economy."

He expects Arizona will be harder hit in the recession than many other states due to slower population growth and declines in the travel/tourism sector.

What economic indicators might shed near-term insights on the economy?

Hammond said he’s tracking several statistics, especially those that reflect the impact of social distancing and fallout on travel and tourism. These range from weekly U.S. movie-ticket sales/movie releases to hotel occupancy rates. Both have dropped sharply in recent weeks.

“I’ll also track legal northbound border crossings through our border ports of entry,” he said. “These will tell us about the impact on Mexican visitors, which are a big part of tourism in Arizona.”

Other important indicators include taxable retail sales as well as unemployment-insurance claims and overall employment, though much of the jobs data will lag the pace of the downturn and eventual recovery.

Indicators like taxable sales and retail jobs are critical, Hammond said, as they reflect not just employment setbacks but also income and wealth losses.

The University of Arizona now tracks these and other relevant indicators at azeconomy.eller.arizona.edu.

Will people and businesses change their economic behavior?

They already have. Rounds said he expects to see a greater permanent reliance on telemedicine and working at home, to cite a couple examples. Consumers might decide they no longer need certain goods and services as much as before, but other products might become even more sought-after. Online schooling also seems likely to proliferate.

"Innovation and entrepreneurship could expand in areas such as food security, smart transportation, healthcare and sustainability," said the BBVA report. It cited digital nursing assistants, automated temperature screenings and more robotic deliveries as other examples.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.