There’s no competition between Phoenix and Tucson. Phoenix won, a long time ago.

That’s what Marshall Vest, University of Arizona economist, told a meeting of the Sunbelt World Trade Association June 13.

The UA’s director of economic and business research at the Eller College of Management noted “that’s not a popular thing to say,” but said understanding the relationship between the two Arizona cities is crucial to anticipating what will happen to the Tucson economy in coming months.

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“Phoenix is a global city. Tucson is not even secondary. It’s a third-tier city,” he said, with an economy dependent on Phoenix for survival and growth.

“If you think of Phoenix as a city-state, it is the hub. Tucson is like Yuma or Flagstaff or Sedona, spokes around that hub.” He said that means what happens in Phoenix will affect what happens in Tucson, and the best strategy for expanding Tucson’s economy is exploring ways to provide niche services to Phoenix.

“Atlanta has Savannah as its port city, and Tucson could be the southern port for Phoenix,” he said.

Also, because Phoenix is a center for manufacturing and distribution he said “Tucson could be a center for research and development.”

“The whole state of Arizona has to be thinking this way,” Vest said. “Rivalry doesn’t sell well, so we’ve got to cooperate.”

In forecasting the next two years, he said looking to what’s happening in Phoenix sets the tone for what’s coming to Tucson.

For all of Arizona, the economy has been doing quite well over the last five years, he said. The last three years in particular have brought the largest economic expansion in the state’s history: 125,000 new jobs, retail sales and individual income taxes posting double-digit increases and a $1 billion surplus in the state budget over what was expected.

But Vest warned the engine of the state’s economic prosperity has been population growth, “with real estate growth as the turbocharger.” Californians cashing out of their state’s over-heated housing market has meant a steady influx of people “buying twice the house at half the price and retiring on the difference.”

Yet, “anything that’s too good to last, will come to an end,” and Vest said the influx of California money is slowing down, as the housing market, including the California market, slows under the weight of higher prices and rising interest rates. As a result, “the economy here will slow fairly dramatically in the second half of 2006.”

While the Tucson area has unique economic features, especially Mexican shoppers, who add approximately $700 million to the local economy, and defense industries, which contribute even more, Vest said they won’t make up for deflation in home construction, which remains the city and the state’s biggest industry.

“Phoenix has the semiconductor industry and Tucson has a much bigger share of aerospace. Some times Phoenix and Tucson move their separate ways, but mostly they move together,” he said. “There’s not a lot of buy-in to this idea, but we’re really in this together.”

While Vest sees the home construction and residential real estate industry as the turbocharger for economic growth in both Tucson and Phoenix, what fuels it is different, said housing industry analyst John Strobeck, owner of Bright Future Business Consultants. “They really don’t compare,” he said.

One difference is who’s building, Strobeck said. Phoenix is dominated by national builders, while the Tucson residential construction market still has major local developers.

“They have a different mindset,” Strobeck said. Local builders are less speculative and also less likely to curtail work, based on national or regional trends. “Second, we didn’t get the tide of investor sales they did, which is now causing troubles in the Phoenix area. It’s an interesting phenomenon, but we know that 70 percent of home buyers over the last year had a local address. I don’t know what the number is for the Phoenix area, but I know it’s a lot lower than that. These buyers were either trading up or renters buying their first home, but they weren’t coming from somewhere else.”

Of the 30 percent of home buyers who were from out of town, many were among the new employees hired by expanding defense contractors, such as Raytheon Missile Systems or affiliated with Davis-Monthan Air Force Base, Strobeck said. “Both are going onward and upward.”

He said he agrees with the forecasts of a downturn, but not for the same reasons as Phoenix. Low interest rates meant “Tucson used up buyers in 2005 that normally would have bought in 2006.”

For late 2007 or 2008, he said what happens to the local housing market will depend on the third major difference between Tucson and Phoenix. “Phoenix is a large metropolitan area with lots of diversified industry.” There’s also a lot more people, Strobeck said, “and the effect of that will always make for a difference between what happens there and here.”

E-mail comments for publication to editor@azbiz.com. Contact Philip S. Moore at pmoore@azbiz.com or at (520) 295-4238.

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