All year, economists have debated whether the United States and Arizona will slip into a recession. As 2022 draws to a close, the debate continues, with forecasters at a University of Arizona luncheon saying they think a downturn is likely in the coming year.

But if you blink, you might miss it.

Gus Faucher, chief economist at PNC Bank, which sponsored the event for the Eller College of Management, said the most likely scenario for 2023 is that a recession finally materializes under pressure from higher interest rates, with stimulus money drying up and with softness in the housing market. And while his forecast calls for a slight dip in economic activity next year, maybe in the range of 1% or so, a recession isn't inevitable, he added.

Factors that might buffer the impact from the downturn, if one arrives, include a tight labor market that will limit layoffs, he said. Faucher's forecast calls for a slight rise in the national unemployment rate to a range of 4% to 5% or so, from 3.7% currently.

The Phoenix area already has recovered all of the jobs that were lost in the 2020 recession, and then some. Tucson still hasn't quite reached that level but job losses there also could be mild in the next downturn, given the area's higher concentration of public-sector employment, said George Hammond, director of the university's Economic and Business Research Center.

"Government activity tends to be less sensitive to interest rates and other drivers of the national business cycle," Hammond said.

The national economy grew 2.6% in the third quarter, contrasting with a 0.6% second-quarter decline, according to a preliminary estimate from the Bureau of Economic Analysis.

Inflation the main culprit

The Federal Reserve's fight to crimp inflation by jacking up interest rates has exerted the main drag on the economy. But Faucher pointed to several positive factors including general optimism among small-business owners and easing pressures on global supply chains that were stretched during the COVID-19 pandemic.

Also, he said, consumer finances are in relatively good shape, with accumulated personal savings and low loan-delinquency rates. In addition, the banking industry is healthy. Those and other factors could mute the impact if a recession arrives.

Hammond agreed that the most likely scenario for the U.S. economy points to a mild recession, possibly starting around now and ending in mid-2023. That could trigger a “significant slowdown in growth” in the Tucson area next year, though he noted that the area still has a “mountain of open jobs” and retail sales are “surprisingly resilient.” Even amid a downturn, he expects metro Tucson to hold up well compared to the nation overall.

Housing and Phoenix inflation

Inflation remains a key concern, especially in Arizona, largely because Consumer Price Index calculations weight housing fairly heavily, and prices in that sector have climbed.

Metro Phoenix has led the nation this year with an inflation rate that stood at 12.1% in October, the most recent reading, compared to 7.7% nationally. The federal Bureau of Labor Statistics doesn’t track inflation in Tucson, but many of the same forces are present there as in its northern neighbor, Hammond said.

The inflationary component tied to housing and shelter in metro Phoenix rose 18.2% over the 12 months through October, Hammond said, compared to 6.9% nationally.

“Skyrocketing house prices have driven inflation in Arizona well above the national average,” Hammond noted. “They have also pushed housing affordability to very low levels.”

More information about the UA economic-forecast conference, which drew about 600 people, are at azeconomy.org.

Reach the writer at russ.wiles@arizonarepublic.com.

This article originally appeared on Arizona Republic: University of Arizona economic forecast event predicts mild recession