December 1, 2011

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2012 Economic Forecast

Heather Stewart

December 1, 2011

This year was characterized by wildly fluctuating markets, political and economic uncertainty, and continued job growth stagnation. We talked to three local economists to get their take on Utah’s economic situation and the forecast for next year.

Recovery has been painfully slow, and economic indicators continue to disappoint investors and economists. Is the national economy going to fall into a second recession in 2012?

Tennert: [Economists] are saying the most recent probability of a recession is 40 percent. It’s more likely that the nation will not enter a recession, but a 40 percent chance of a recession is definitely too high for comfort. Nationally, there is a lot of uncertainty related to economic policy. That is weighing on the national economy, and of course that filters down to Utah.

Knold: Probably not. But I say that with weak confidence. The United State’s economy is very vulnerable to a shock or a disruption, even if it’s a weak one. It wouldn’t take something drastic to push it into a small recession. I really wouldn’t see it as being a situation that would produce job loss in Utah. It would just slow down the rate of growth.

It doesn’t have the highest odds of what I expect to happen next year, but it has high enough odds that you have to acknowledge it and prepare for it.

How is Utah’s economy performing compared to the rest of the nation?

Tennert: All of the data that we’re seeing are still pointing at continued improvement in Utah’s economy and a lot of the indicators are looking much better than national averages…Utah’s employment growth rate right now is at 2.8 percent year over, and nationally that rate is 1.1 percent. So relative to the nation, we’re doing really well.

Schaefer: We’re fortunate that we don’t have near the problems with our state budget that other states have. Our legislature has done a nice job of making sure the state doesn’t get over-committed, and as a result we’re not looking at massive cuts to public education, we’re not looking at big tax increases to try to close budget holes, and that’s a good thing.

What are some of the obstacles we face on the road to recovery?

Tennert: The challenges in Utah really reflect the challenges at the national level. Right now, the downside for the state is really tied in with what happens with the national economy and the global economy.

Schaefer: A big question mark on the horizon for Utah is public education. We have the lowest per-pupil funding in the state, and that’s partly a function of the large family sizes and the young population. That’s going to be increasingly problematic as our state becomes more diverse: it is more expensive to educate children well when the children are more heterogeneous and come from different backgrounds.

In the Salt Lake City public schools, there is a very heavy population of students with Hispanic backgrounds and many students who don’t speak English at home. Educating those kids is expensive. The rest of the state is going to look more like the Salt Lake City public schools over the next 20 years. It’s a real question as to whether we’re going to be able to educate our young people to contribute to a growing economy with the dollar amounts we’re putting in.

What factors are working in our favor in Utah?

Knold: The number one factor is our labor force growth. Pent-up demand is finally spilling over the top of the dam. From 2008 all the way into the beginning of 2011, we basically had a period of job loss while the labor force kept growing. You have the labor force growing, but you don’t have any job growth to accommodate it. You can have periods of time when that can exist together, but it can’t do that indefinitely. At some point in time that labor force needs an outlet.

Even though they don’t have jobs, they’re consumers, they’re commerce generators. After three years of it, there’s pent-up demand that just spills out. The dam is still intact—there are still strong economic barriers on a national basis, but the water we’re putting behind that dam is so much that it’s just leaking over the top. That’s why we end up with the growth that we have—you just can’t hold it back indefinitely.

Tennert: Our young population means that we have a high pace of household formation. Leading into the downturn, there was a lot of speculation in places like Nevada, Florida, Arizona—and definitely to some degree there was speculation here in Utah—but the high pace of household formation would suggest that some of the increases in housing price were driven by actual demand. So the buildup wasn’t as artificial as it was in other places, which helped to mitigate what we experienced. Now, as we’re entering the recovery, with that high pace of household formation, there should be a lot of pent-up demand for housing and goods…

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