PHOENIX – The future of the Arizona economy – and the amount of money the state can spend on programs – may depend on the richest residents keeping the state afloat, financial experts said at a recent meeting.
Several economists, speaking Thursday at a meeting of the state’s Finance Advisory Committee, said 90% of Arizonans are curtailing their spending as they are worried their income isn’t keeping pace with the cost of goods. And at least part of what makes that significant is that a big chunk of the state budget is financed from sales taxes.
Richard Stavneak, director of the Joint Legislative Budget Committee, also warned there are increasing costs headed this way.
That includes the normal year-over-year changes in things like state aid to schools due to inflation and enrollment growth and more people and higher costs for the Arizona Health Care Cost Containment System.
Then there are the unexpected things, like the state being penalized $139 million because of its error rate in determining whether people are eligible for food stamps.
And none of this considers what happens if Arizona alters its tax code to conform with the tax cuts in HR 1, the “big beautiful bill” enacted by Congress earlier this year.
All that means consumer spending will need just to keep pace – and pay state sales taxes on their purchases – to finance all the new and additional expenses. Only problem, the economists from across the spectrum of private and public sectors who serve on the Finance Advisory Committee concluded, is that not everyone is doing that.
Randie Stein called it “a tale of two economies.”
“The spending on the consumer side seems to be happening in the upper 10%,” said Stein, who works for the investment banking firm of Stifel, Nicolaus & Co. “The rest of us are trailing off.”
And that, she said, isn’t good.
“There’s a lot of us in the lower 90%,” Stein said.
“And that group is cautionary with their spending. We may already be seeing that in the economic data.”
She’s not alone.
Ben Henderson, the budget director for Gov. Katie Hobbs who will be helping her prepare a new spending plan for the fiscal year that begins July 1, said there are reasons for concern. And the key is “who is spending” in the Arizona economy.
“What we’re beginning to see is folks that are particularly well off, the kind of folks in the top 10% of income, are the ones really keeping consumer spending going,” he said.
“But if you tend to be of lower income status, meaning you’re not doing as well, your spending might be petering off,” Henderson said. “And that might be an indication of the economic activity that we have to look forward to over the next few years.”
What’s behind all this, according to economist George Hammond, is income inequality.
“We seem to be back to a situation where the lower-paid occupations are seeing less wage growth,” said Hammond, a professor in the Eller College of Management at the University of Arizona.
“A lot of the wage growth is being experienced by the higher income cohort fueling their spending.”
But it’s not just wages.
“The stock market’s been in pretty good shape,” he said. But that largely helps the folks who already have the higher incomes and are invested in the market, giving them more money to spend.
Hammond said there are other factors that hold down income growth in Arizona. Consider, he said, the manufacturing sector which tends to have higher wages.
“We hear a lot about TSMC and all the jobs they have brought,” Hammond said of the expanding operation to manufacture the latest generation of computer chips. But what’s not mentioned, he said, are job losses at Intel.
“And you don’t hear as much about the other manufacturing sectors that I think are dealing with elevated interest rates holding down demand for goods,” Hammond said.
Not everyone sees the spending patterns as linked directly to income.
Alan Maguire, president of an economic and public policy consulting firm that bears his name, said demographics also are involved in who is spending and who is not.
He said those raising families are using their cash for daily living expenses and setting aside cash. But he said something changes when folks get older.
“You have more money than you did your whole life,” Maguire said. “You start going on trips, you start going to visit the grandkids.”
Mixed in with all this are the new tariffs.
On a theoretical basis, that should result in manufacturers choosing to bring operations back to the United States. But Jim Rounds said there are a host of problems with that, including higher labor costs, union issues and price increases.
And Rounds, president of Rounds Consulting Group, said that presumes the U.S. wants all those jobs back. Why, he said, would U.S. companies seek to once again manufacture rubber ducks?
Henderson said that, so far, he’s not sure how much effect the tariffs have had so far on consumer spending.
“People were anticipating the tariffs and higher costs,” he said. “And so they front-loaded a lot of those expenditures that they were planning.”
The flip side is that, having bought those items, they don’t now need new ones.
Hammond is not a fan of tariffs.
“In the short run, tariffs are not going to help,” said Hammond, saying they will drive up costs for everyone.
“But the lower-income individuals are going to feel that more than the higher-income individuals,” coming back to the point about the top 10% of wage earners being the ones who have the resources so that they’re not deterred by the high costs and continue to spend.
And Rounds said there’s another nasty effect of tariffs on what consumers pay – even for items manufactured domestically.
Consider, he said, the cost of Samsung phones manufactured in Korea which until now has been selling for $1,000. If its phone is hit with a 50% tariff, the cost of all that will be built into the ultimate sales price for consumers, boosting it to $1,500.
By comparison, he said, a company like Apple might be able to build its own $1,000 phone entirely within the United States.
“Do you think Apple’s going to keep their price at $1,000?” he asked. “Or are they going to go up to $1,495?”
It’s simple market forces, Rounds said, which will drive up inflation overall.
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Howard Fischer
Mr. Fischer, a longtime award-winning Arizona journalist, is founder and operator of Capitol Media Services.