Former Gov. Gary Herbert led Utah from the depths of the Great Recession to a decadelong economic expansion. In the latter part of his service, he was known to instruct his staff to never use the “R” word, a not-so-subtle attempt to discourage unwarranted pessimism and avoid a self-fulfilling prophecy. Everything went well until COVID-19 caused a deep but extremely short recession in the last year of Herbert’s service.
Gov. Spencer Cox faces a much different situation today. With high inflation, motor fuel prices approaching $5 a gallon, rising interest rates, a jittery stock market, a stressed supply chain, a lingering pandemic and war in Europe, some economists put the likelihood of recession in the next 12 months as a fait accompli. They reason it’s just a matter of whether it will be short and mild or long and severe.
Other economists recognize risks but aren’t convinced a recession is inevitable. Some supply chain issues appear to be improving, demand remains strong, and household budgets and balance sheets are the strongest they’ve been in generations. In addition, acute labor shortages mean potentially laid off workers will have other opportunities to work.
I put the likelihood of a recession in the next 12-24 months at an uncomfortable near-even odds, with the downside risks outweighing the positive. The Utah economy remains strong with year-over job growth of 3.9% and unemployment at 1.9%. The problem lies in what’s next. We’ve entered a new economic environment that is serious and complicated. Utah is more favorably positioned than other states, but make no mistake about it: The Utah economy will not go unscathed if a national downturn occurs.
Recessions occur for one of four reasons: economic imbalances, overheating, exogenous shocks and policy errors. You can make a good case that all these factors are in play right now. We have significant supply shortages for goods, labor and housing (imbalances), the highest inflation in 40 years (overheating), Russian President Vladimir Putin’s war in Ukraine and the drawn-out pandemic (exogenous shocks), and a federal government that provided too much stimulus and a Federal Reserve that waited too long to raise interest rates (policy errors).
The National Bureau of Economic Research defines a recession as a significant decline in activity that is spread across the economy and lasts more than a few months. Economists break this definition down into the three D’s — depth, diffusion and duration.
A Business Cycle Dating Committee within NBER makes the determination based on an analysis of monthly measures about the economy such as personal income, employment, industrial production and personal consumption expenditures. Importantly, they make the determination of a recession after the fact. For a real-time assessment, decision-makers must rely on their own analysis, experience and intuition.
One of the most talked about leading indicators of recession is what’s known as the Treasury yield curve. It measures the difference between the 10-year and two-year Treasury yields. Typically, analysts expect long-term rates to be higher than short-term rates because of future uncertainty. When short-term rates exceed long-term rates, it signals that global bond investors see more risk in the present than in the future.
Each time the yield curve has inverted on a monthly basis over the past 50 years, a recession has followed within 12-33 months, with the exception of the pandemic. A yield curve inversion leads recessions by an average of 15 months. In early April of this year the curve inverted for a few days, but it has not turned negative on a monthly basis. So far, so good, but the yield curve keeps flirting with inversion, signaling trouble ahead.
Utah enters these choppy economic waters better positioned than most, if not all, states. We weathered the pandemic better than other states giving us a better starting point. Our diverse and well-balanced economy provides stability. As an energy state, we benefit from high oil and gas prices. And our elected leaders plan wisely and prepare for a “rainy day.” The Utah Governor’s Office and Legislature have been stress testing the budget for years and have socked away over $1 billion in budget reserve accounts.
Unlike his predecessor, Gov. Cox uses the “R” word. I think that’s an honest assessment of the increasing economic headwinds. We still may navigate the storm successfully and experience a slowdown instead of a contraction, but now is a good time to keep a steady hand on the sails. Pessimists complain about the wind, optimists expect it to change and realists adjust the sails.