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Holding Steady, Moving Forward

Utah's Economy Has Slowed, But Remains Among Nation's Strongest

Marie Mischel

July 1, 2008

The blistering pace that has characterized Utah’s economy for the past few years has begun to cool, experts say. The national housing slump and high oil prices have both played a part in the slower pace, but the Beehive State remains at the head of the pack in significant areas such as home appreciation and job growth. Experts see the slowdown as part of the natural economic cycle and are cautiously optimistic that Utah will continue to attract companies looking to relocate, thus maintaining low unemployment and providing a stable local economy. Yellow Flags When the national housing market took a hit in 2007, Utah seemed unaffected at first. By the first of this year, however, home sales had dipped and the number of housing starts declined dramatically. In the first quarter of 2008, for example, home and condo sales in Utah were down 11 percent compared to the previous quarter while housing starts were down 60 percent. Despite the negative number, that 11 percent decrease was an improvement over the fourth quarter of 2007, which showed a quarterly decrease of about 33 percent, according to the Utah Association of Realtors and it appears that picture will continue to brighten. In May, the Office of Federal Housing Enterprise Oversight reported that Utah showed a 5.58 percent change in housing prices in the first quarter of 2008 – the second highest home price appreciation in the nation. “The housing market is still a little sluggish. We anticipate it will stay that way probably through the summer, but the third or fourth quarter should improve some,” says David Mansell, president of the Utah Association of Realtors. Like the housing trend, other national factors affect the local economy, says Kelly Matthews, executive vice president and economist for Wells Fargo. “The costs of food and energy are evident in terms of the Utah economy. We have not been immune. The Utah economy has slowed in its growth.” Matthews is almost as optimistic as Mansell about the duration of the housing decline, saying that he thinks the market is “probably at least halfway and maybe more than halfway through the adjustment process. We’re not done yet. A lot of these homes are not sold yet [and] I think that home prices will still decline. I think by the end of this year we will have a significant reduction in the size of the housing overhang and, in fact, I think sometime this year we will actually start building a few more houses.” Curves Ahead As with the housing market in 2005 and 2006, the state’s unemployment and job growth rates accelerated at a record-setting pace. In the first half of this year, they’ve slowed down. The Department of Workforce Services estimated the April job growth at 2 percent while unemployment was at 3.1 percent. Experts say job growth will likely slow even more through the end of the year. “I could clearly see us dipping to a point where we may have a 1 percent job growth on average for this year,” Matthews says, but also adds that “we will remain among the better-performing economies in the Western area.” The retail sector also set records during the past few years, but had an unremarkable showing in 2008. That’s not surprising, says Darrell Tate, an investment specialist with Commerce CRG, because new retail projects weren’t planned for this year. “This marked slowdown does not reflect the health of the market. Retailers are establishing their market position and the product [built in the past few years] is being absorbed.” Vacancy and lease rates remain low, Tate says, indicating a healthy retail sector. Nevertheless, he does see retailers being less likely to expand in the current economic climate. “There’s virtually not a retailer we work with or have talked to that hasn’t expressed a more cautious approach,” he says. Meanwhile, construction of City Creek Center in downtown Salt Lake and the remodeling of virtually all the major shopping malls in the Salt Lake Valley, except South Towne, point to a vigorous retail picture in coming years, Tate says. Much more promising for the current economy is the manufacturing sector, which continues to draw new companies such as Procter & Gamble. The closure of La-Z-Boy’s Tremonton plant and the layoffs at West Jordan’s KraftMaid appear to be anomalies, says Mark Knold, chief economist with the Department of Workforce Services, “but it does show the vulnerability of manufacturing and does bring home the point that it is fragile. If the national [situation] does get worse, if the oil just pushes people too far, then one of the first places it’s going to show itself in Utah would be the manufacturing sector.” Forging Ahead Jeff Thredgold, Zions Bank economist, compares Utah’s economy to a car: “In the summer of 2006 it was going at about 80 mph. The summer of last year it was down to about 60 mph and right now it would be running about 25 mph.” That may seem to be a snail’s pace, “but when you look at a U.S. economy that’s right on the edge of recession, that has slowed down to essentially zero mph, then that 25 mph pace doesn’t look quite so bad,” Thredgold says. Within that speed limit, Utah’s economy has many green lights. Every market sector except construction has showed job growth, and even non-residential construction remains strong. Knold points to health care, which has had consistent growth of nothing less than 4 percent in the past decade, as one particularly vigorous sector. The education and government sectors have also been strong during this cycle of weakening economy, he says. Another of Utah’s bright spots is exports, Thredgold says, and the natural gas, coal and oil exploration sectors are doing very well also. In the residential investment market, the flippers of the past few years seem to have fled, but “investing in apartment buildings and multifamily right now may be the darling investment of our small economic downturn here,” says Kip Paul, a Commerce CRG investment specialist. “There are a lot of good reasons why they’re not only good right now but they’re going to get nothing but better from the investment perspective.” The supply of apartments in the Salt Lake Valley has grown only about 1 percent annually, while the pool of renters has swelled, leading to the classic problem of high demand and low supply. As a result, rents have risen, Paul says. “And I don’t think anybody sees those variables or circumstances changing in a dramatic way that’s going to change the outlook of increasing rents. And as rents increase, that’s how you develop rapid equity in your apartment investments.” Unfortunately for investors, the supply of multifamily properties for sale also is at a premium, Paul says. “We can sell them as fast as we can find them. It’s difficult to get current owners to become sellers. We definitely don’t have enough sellers for what we have as buyers.” Slow But Steady The number of firms looking to relocate or expand in Utah “has continued to be steady, if not increasing,” says Jeff Edwards, CEO of the Economic Development Corporation of Utah, “and the inquiries are from a diverse set of industries. There is expansion of manufacturing going on and it’s happening in areas where there needs to be a high value added and other concerns that won’t allow that process to be off-shored.” Utah’s educated workforce, as well as the state’s increasing population and central location, are appealing factors to companies such as Sephora, West Liberty Foods and Nucor Steel, Edwards says. Moreover, those companies are locating throughout Utah, not just along the Wasatch Front. “There are opportunities all over this state,” Edwards says. His examples: a new FedEx facility in Salina, Heritage Plastics in Millford and Charlotte Pipe in Cedar City as well as Oracle in West Jordan. While several of the new companies have yet to open their doors, Utah’s job growth is half that of a year ago. That’s not entirely a bad thing, Matthews points out. “The important thing for everybody to realize is that [there] is still growth,” he says. “That 2 percent in April still represented about 25,000 jobs greater than what was in Utah a year ago. Yes, we have slowed, but we continue to be in pretty good shape compared to some of our major competitive states, which are already flat or negative in terms of job growth performance.” Crystal Ball Overall, local economists are mixed in their predictions about Utah’s economy through the remainder of 2008. Matthews remains the most optimistic. “I think we’re well on the way to adjustment in the housing sector, we’re fortunate that our job growth is positive even though it is slow, and I don’t think that Utah is facing anything that would remotely be a state recession,” he says. “If somebody smiles on us and crude oil prices should stabilize at this point and gradually ease, I think our economy in Utah nine months from now could be noticeably better.” For Thredgold, the good news is comparative. “It’s an economy that’s slowing down, but one that still looks awfully good versus its neighbors and versus the rest of country,” he says. Knold, on the other hand, balances positive factors such as the job growth against the higher prices of oil and food. “Consumers are the weak point here,” he says. “The more things that keep battering consumers as we go on through the rest of this year, the more it weakens the overall [economy.]” He projects Utah’s job growth will bottom out at 1 percent, but adds, “the odds could be worse than what I think. There are some real tough tea leaves out there.”
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