New report: ‘Equilibrium’ not in sight as Utah’s 2023 economic outlook remains hazy
Unprecedented conditions have made economic forecasting trickier than ever. Here’s what experts believe is in store for Utah in the year ahead
Harvard University social scientist, author and commentator Arthur Brooks had an interesting piece of advice for Utah Gov. Spencer Cox, state lawmakers and other leaders attending the Utah Economic Outlook and Policy Summit on Tuesday in Salt Lake City.
“Go looking for contempt,” Brooks said. “And go running toward it.”
That nugget came amid a broader talk Brooks gave as the keynote speaker at the annual gathering where he shared an overall message of how to find common ground and understanding with those whose viewpoints and, perhaps, political ideologies run counter to our own.
“I believe that the skill of becoming happier people and passing it on to others is the secret of success,” Brooks said.
The message may have particular prescience for the many elected officials in the audience as the 2023 state legislative session kicks off next week in a year that will require some thoughtful fiscal planning for the turbulent economic conditions ahead.
That turbulence, and future turmoil, was underscored in the Utah Economic Council’s 2023 Economic Report to the Governor which was publicly released Thursday morning and ceremonially presented to Cox at the event.
Unsettled and unprecedented conditions have turned economic forecasting into a game of three-card monte since the worst of COVID-19 restrictions have subsided, and that challenge is clearly evident in the council’s latest report.
A collaboration of the University of Utah’s David Eccles School of Business and the Governor’s Office of Planning and Budget, the economic council’s 2023 report retreats from its past approach of presenting a single best estimate of Utah’s economic path and instead poses three possible scenarios for the months ahead.
Why the trifecta?
Current economic conditions have been roiled thanks to a set of extraordinary functional and financial circumstances and, thus, have never had to be figured into economic prognostications. A global public health crisis, subsequent widespread disruptions to product supply chains, seismic shifts in consumer behavior and government-backed cash inputs such as individual stimulus checks and massive business subsidies have blown up the previous models when it comes to guessing what’s coming next.
“The post-pandemic economy has altered many traditional economic relationships,” the report reads. “These economic transformations make accurate predictions challenging because it’s unclear if or when old patterns will return, or if new arrangements will chart a different economic course.”
Report authors note that the current overheated economy comes with plenty of grim earmarks including stubbornly high inflation, rapidly rising interest rates, low consumer sentiment and unmistakable construction and real estate slowdowns. But on the somewhat brighter flip side, analysts say extremely low unemployment coupled with improving supply chains and very strong overall household, business and governmental financial reserves could provide a powerful hedge against economic challenges that could spiral into a recession.
Speaking at the event, Cox said his latest budget proposal is one built to weather the coming economic uncertainty while pushing to extend massive new tax breaks and bolstering funding in critical areas like housing affordability, Utah’s water crisis and chronically low public school teachers’ salaries.
Cox and his fiscal team were able to thread the needle on tax breaks and new funding thanks to record levels of tax revenue inflow and a growing, at least at the moment, budget surplus.
Ultimately, Utah legislators have the final say on the state’s budget plan and it’s one that will need to be flexible enough to get government operations successfully through any of the three potential outcomes predicted in the economic council’s report for Utah’s near-term economy.
Those three scenarios are:
Inflation recedes, interest rate hikes stabilize, historically high financial reserves and low debt levels prop up consumer spending, employers work to retain employees in light of recent hiring challenges, and international geopolitical and supply chain challenges stabilize, combining to create 2023 real gross domestic product, or GDP, growth in the 2% to 4% range (similar to the last two quarters of 2022).
High inflation comes down slowly, continued rapid interest rate hikes drive down consumer and firm demand for large capital acquisitions, sizable construction slowdowns and layoffs extend broadly into other sectors. Continued international challenges remain disruptive, similar to 2022, resulting in a relatively short (two to three quarters) and mild -1% to 1% change in 2023 real GDP.
Inflation moderates somewhat, interest rate hikes continue but slow down, household financial buffers only partially offset broader economic challenges, including layoffs in interest-rate-sensitive sectors such as construction, resulting in 2023 real GDP growth in the 0% to 2% range.
Economists point out that Utah has plenty of built-in resilience, thanks to a state economy that was outperforming the rest of the nation before pandemic conditions turned the tables, recovered from that downturn faster than any other state and has since regained its spot as one of the hottest economies in the country with ultra-low unemployment, a diverse economic base and swelling GDP.
And all this in spite of ongoing record-high inflation.
U.S. inflation in January 2022 came in at 7.5% and climbed steadily until hitting a 40-year high of 9.1% in July. Since then, the rate has ticked down to 6.5% in December, according to the latest report from the Labor Department. The U.S. Federal Reserve has pitched a yearlong battle against the elevated prices of goods and services, instituting the most aggressive series of rate hikes in decades in an attempt to cool off the red-hot economy.
The rate hikes aim to raise the cost of debt for businesses and consumers which should, theoretically, reduce the amount of spending and overall economic activity, a shift in dynamics that typically brings inflation rates down.
But consumer spending has remained robust and the U.S. labor market has continued to run hot, with unfilled jobs far outnumbering the number of available workers to fill them.
On Thursday, Phil Dean, public finance senior research fellow at the University of Utah’s Kem C. Gardner Policy Institute, presented the economic council’s report, noting that the single biggest theme that’s characterized economic conditions over the past few years, and one likely to continue in the year ahead, will be economic uncertainty.
Dean said the U.S. economy has reflected “ever-shifting pockets of strengths and weaknesses” and was “still not back to equilibrium, in any sense.”
“We’re still trying to find the new normal,” Dean said.
With near-term economic conditions showing no signs of getting easier to parse, or predict, the economic council’s advice to Utah policymakers, which applies equally well to business owners and household budgeters, was pretty straightforward: Be ready for anything.
“Wise decision makers will prepare to respond to any of the three scenarios by following the indicators, making midcourse corrections, and applying vigilance and caution while still pursuing opportunities,” the report reads.