December 1, 2011

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2012 Economic Forecast

Heather Stewart

December 1, 2011

Business and policy leaders in Utah share a commitment to fiscal prudence and economic development. That fiscal prudence definitely helped us weather the recession and left us well-positioned as we’re recovering because we didn’t fall so far into the hole. Leading up to the recession, we had this tremendous expansion in Utah’s economy in part because of those economic development efforts. That’s helped mitigate some of the effects of the downturn. We’ve continued to focus on economic development, and that’s helped to accelerate the growth.

Schaefer: The state is gaining an increasing reputation for being business friendly. We have low taxes on business...We also have very favorable state demographics—our state is younger than the rest of the nation. The state is growing fast, and so this is a place with a ready supply of labor and growing markets.

Construction is another sector in Utah that has struggled to recover. When are we going to see real growth in construction?

Knold: The best thing for construction is that it doesn’t look like it’s going to fall anymore—it’s finished its employment slide. We have a big construction project going on at Camp Williams with the National Security Administration, but on the other hand City Creek is winding down, so the non-residential at best will hold even. But that’s not the biggest contributor to construction—that’s got to come from the housing market.

Tennert: New housing starts seem like they’re stabilizing. They remain well below peak levels. As that pent-up demand comes into play, we should see those housing starts start to slowly increase, and that should help to boost our construction sector. We lost so many jobs in construction that any increases show up as relatively good growth. We even see in 2012 construction being the fastest-growing sector in employment at around 4 percent growth, but that’s just related to the fact that we lost so many jobs there.

In 2006-2007, construction jobs were running at 12–13 percent of total employment. Now, we’re down to below 5 percent of total employment. The level of 13 percent of total employment is just not sustainable or healthy for an economy. It’s been really challenging, but we’re going to get the point where we’ve bottomed out and we’re going to grow back to sustainable levels. So 6–7 percent of the total is long-term average.

The housing market is still floundering. How is that impacting the economy and when will we see improvement?

Knold: We need to get rid of all the bad debt that’s in it—all the foreclosures. You do that one of two ways: you either speed up the foreclosures and kick the people in the shins, or you buy the whole system out—and that would be the government. That would be the ultimate solution to this whole thing and it would get us out of it sooner, but there’s no political will to do that. So it’s not going to happen, and the recession’s consequences will continue to drag on next year…

We’re building some houses, but not in proportion to household formation growth—people getting married, having kids. The underlying demand is there for a house, but do the economics allow it? Do they have jobs and feel stable? Do they qualify? Housing prices are close to being done sliding, but we still have too many people upside down, still trying to work their way through foreclosures.

Tennert: We’ve been going through the process of bottoming out for awhile now, and looking at the data, we see that continuing for a year or two. There are some encouraging signals in Utah’s housing market. Our foreclosure rate peaked at 4.5 percent at the beginning of 2010, and the latest numbers put our foreclosure rate at 2.6 percent. Prices are still falling, but the rate at which they’re falling is starting to decline. So we’re going through that bottoming out process, but the indicators seem encouraging.

Schaefer: There’s still a big supply of excess inventory in our housing market. I don’t think house prices are going to recovery anytime soon, and that means people are going to continue to get underwater on their mortgages, and that’s just another factor that limits economic growth. People feel poor and they can’t borrow against their homes the way they could three or four years ago.

I don’t see an easy way out of it. It’s just going to take time for population growth to catch up to the size of the housing stock we’ve built.

How will the economic instability in Europe impact us locally?

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