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 latest annual report from the Utah Economic Council presented to Gov. Spencer Cox on Thursday.
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.
Here are the three potential outcomes for Utah’s economy in the year ahead, according to the council’s findings:
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.
In a December interview, Phil Dean, public finance senior research fellow at the University of Utah’s Kem C. Gardner Policy Institute, noted high inflation on its own is usually enough to put a damper on rampant spending, but an unprecedented level of cash flowed into the pockets of consumers in the form of pandemic stimulus funding and that, along with other factors, continued to buoy spending throughout 2022, even in the face of record-high prices.
“Inflation and rising interest rates have created some challenges in the current economy,” Dean said. “But alongside that, consumer spending continues to be very strong in Utah and across the U.S. During the pandemic, fiscal stimulus checks flowed to consumers and many took advantage of low interest rates that facilitated refinancing of mortgages that freed up even more money. And if you look at consumers overall right now, they still have a lot of money to spend.”
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.
This story will be updated.