The Backyard Economy: Arizona

— -- Real estate is one of the engines behind Arizona's economy, but that engine has been sputtering lately. The state had the third-highest rate of foreclosures in the United States in the first quarter of the year, according to the research firm RealtyTrac.

"Real estate is, historically, very cyclical in Arizona," said Dennis Hoffman, a professor of economics at Arizona State University's W.P. Carey School of Business. "We've had major ups, major downs. This is a certainly a time period when we're experiencing some of the worst downturns that I've seen."

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The cities of Phoenix and Tucson are in particularly rough shape, with sharply dropping home prices and rising unemployment, prompting Moody's Economy.com to declare recently that both cities are in a recession.

Retail sales in the Grand Canyon state have also fallen dramatically. The conventional thinking, Hoffman said, is that Arizona homeowners have been spending less because their home equity credit lines "are tapped out," he said.

But there's more to the story, Hoffman said. Arizona automobile sales are also down because consumers are buying smaller, cheaper and more efficient — if not necessarily hybrid — cars instead of expensive sport-utility vehicles to cope with rising gas prices.

A reduction in purchases by undocumented immigrants is also affecting sales, Hoffman said. A slowdown in construction work and increased sanctions on employers who hire undocumented workers has led more to leave the state, he said. Moody's Economy.com described construction payrolls in Arizona as "hemorrhaging."

The combination of flagging auto sales, pinched consumers and fewer undocumented workers has led to "a perfect storm of retail collapse," Hoffman said.

Outside of real estate and retail, however, the picture is brighter. Arizona's export-based businesses, including aerospace, defense and information technology companies, are doing well.

Increased demand for defense technology has bolstered companies like Phoenix-based Honeywell Aerospace and defense contractors like General Dynamics and Raytheon, the largest employer in Tucson.

Tech companies Intel and Motorola also have a presence in the state, and they, along with other export-based businesses, benefit from the weak dollar and increased global demand,

Overall, Hoffman said, Arizona's economy is more diverse than some might think and that, in addition to the state's strong population growth, should help the state's economy bounce back.

"I would not be surprised to see us recover really quick [and] smartly over the next year or so," he said.