January 17, 2012

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Gary L. Crocker

Gary L. Crocker doesn’t gripe about his days as a broke, Harvard Business Sch...Read More

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In Recovery?

State Economists Eye the Future with Worry and Hope

Heather Stewart

January 17, 2012

We’ve finally stepped off the economic roller coaster—we seem to be through with the unexpected, steep drops. Now all that’s left is a lingering motion sickness. Perhaps that’s why we can’t seem to get firmly on our legs and move forward again. The recession is over—it has been since June 2009. But the recovery has been such a hard slog that it doesn’t feel like much of a recovery at all. Ask the 100,500 Utahns who are still unemployed. And, according to state economists, we can probably expect more of the same: a slow, uneven recovery that may take years to complete. That doesn’t mean there are no silver linings. Indeed, the economic situation has created sterling opportunities for those with the stomach for new risk. The Good News In September, the Salt Lake Chamber’s newly created Utah Economic Council held a roundtable to hash through various economic indicators and come up with a prognosis for the state’s economy. Members of the council have plenty of dire warnings about potential pitfalls—but they also offer a glimmer of hope that the economy does indeed still have a pulse. “Most of the economic data allow us to be cautiously optimistic. We are certainly past the depths of the recession,” says Juliette Tennert, chief economist for the Utah Governor’s Office. Tennert points to some positive trends, like the fact that new auto sales were up 18 percent during the first half of 2010 compared to the same period last year. And international exports were up almost 45 percent, ranking Utah first among states in export growth for that period. Members of the council also report that during the same timeframe, personal income rose 1 percent, payroll tax withholdings increased 1.8 percent and most counties saw increased sales tax revenue. Employment is also on the rebound. According to the latest report from the Utah Department of Workforce Services (DWS), Utah added nearly 19,000 jobs during the 12 months leading up to September 2010. During the same period last year, Utah was facing job losses of more than 70,000. “Job losses got smaller and smaller, and then jobs started coming back,” says Lecia Langston, an economist with DWS. Utah continued to shed jobs through April of this year. And then in May, the economy added 900 jobs over the previous year—a small victory, to be sure, but a trend in the right direction. Since May, employment in Utah has continued to expand rather than contract. Of course, some sectors are stronger than others. Education and health services—industries Langston calls “recession resistant”—never really lost jobs. These industries continued to grow throughout the recession with the addition of 7,900 jobs in the year leading up to September. Professional and business services have also gained strength, particularly due to temporary employment services—an indication, notes Langston, that businesses are expanding enough to need additional workers (but still too hesitant to bring on permanent employees). But it’s not all good news. There are some notable exceptions to the rosy outlook. A Shaky Foundation Utah’s construction industry just cannot get off the ground. The industry is still experiencing job losses, although the bleeding has slowed to a trickle. At its peak in 2007, the construction industry employed 109,000 workers. In August of this year, the number was just over 71,000. And the construction sector is not through eliminating jobs: the August year-over-year job count was down by 1,500 positions. “Because of the irrational exuberance in the market, we were building houses ahead of demand,” says Langston. “What people need to realize is that the peak was artificial…we won’t see construction employment hit 109,000 for a long time.” The year started out with great promise. New housing starts were up 110 percent during the first quarter, but the summer months saw huge drops after the federal housing credit expired. “July was just awful,” says James Wood, director of the Bureau of Economic and Business Research at the University of Utah. “We were like half of what we did in July 2009. So it really got weak.” The state had about 5,200 new housing starts in 2009, and based on the strong first quarter of this year, Wood was hoping for a 50 percent gain overall for 2010. But after the losses in the summer, now Wood is predicting the market will hold steady at 2009 levels. Those numbers don’t really paint a full picture of just how frail the homebuilding industry has become. In 2005, there were nearly 21,000 new housing starts in Utah. In 2009, just 5,200—a 75 percent decline. “We’ll be stronger next year than we are this year,” reassures Wood. “We’re getting job growth again. The interest rates are still at phenomenally low levels. And we’ve got some good demographics. It’s just that people are either unwilling or uncertain. They’re waiting for prices to come down. Or they don’t think they’ll qualify, so they stay in their apartment for an extra year.” Home prices have certainly dropped. According to the Wasatch Front Regional Multiple Listing Service, the median price for a Wasatch Front home was $226,950 in the first quarter of 2007. In the same quarter of 2010, the median price was $209,900. Wood indicates that prices are on the upswing again, although “one quarter doesn’t make a trend… but I think we’re near the bottom in prices.” One factor putting pressure on home prices is the record number of foreclosures in the state. Reports from the Mortgage Bankers Association show that there were about 15,000 foreclosures in Utah this year. The rate of new foreclosures is slowing, says Wood, and the numbers should begin to decline next year. But the large inventory of reduced-price homes on the market makes it difficult for new homebuilders to compete. “The housing prices are going to be very sluggish over the next three or four years. The decline will run itself out here, but we won’t have much in the way of increases over the next three or four years,” predicts Wood. It’s not all about homes: the commercial construction industry has faced challenges as well. The industry dropped from $1.7 billion in construction to $1 billion in 2009. This year, Wood expects to see only $800 million in commercial construction, which encompasses industrial, retail and office buildings. “I expect that we’ll have one more year, 2011, where it’ll continue to drift down. So by the time we’re through, we’ll probably see a decline of 65 percent in non-residential construction, which is huge,” Wood says. One big bright spot has been new governmental and education construction, which are not counted as commercial construction. With an influx of federal spending, construction firms were kept busy with roads, as well as buildings on most of the state college campuses. Wood also points to the new National Security Agency (NSA) building slated for groundbreaking at the end of the year in Utah County. “They’re going to pay a lot of wages and hire a lot of people,” he says. The NSA building will be among the largest building projects ever undertaken in the state—rivaling Micron and the I-15 reconstruction in the late ‘90s. Blue Collar Blues Like construction, Utah’s manufacturing industry was hammered by the recession. In fact, the fortunes of many manufacturing companies are directly tied to new homebuilding. Manufacturers of cabinets, doors, furniture and other related items were the hardest hit by the housing bust. In August 2007, the manufacturing industry employed 128,600 workers; now, it employs about 110,000. And the industry is still shedding jobs, but at an increasingly slower rate. “Anecdotally, the pendulum has shifted so we’re seeing more announcements of hiring than of layoffs,” says Langston. “We’ll see continued expansion, but it isn’t going to be anywhere near boom levels.” Thomas Bingham, president of the Utah Manufacturers Association (UMA) agrees with that assessment. “There is some new hiring going on and the number of people who have been laid off is going down,” he says. Utah’s manufacturing industry is extremely diverse and includes everything from box makers to smart phone component makers. The average manufacturer in Utah employs less than 50 workers, says Bingham, and the recession did not impact them all equally. Medical device manufacturers, for instance, have weathered the downturn well, and many have actually expanded. But overall, he says, “the general recovery is not going to be that significant until the second half of 2011.” The success of the manufacturing industry depends in large part on consumer confidence—on people creating a demand for consumer products. “It’s kind of a vicious cycle,” he says. “People are uncertain about the economy and about their jobs, and that keeps them from buying…we need consumer confidence to come up, but the jobs haven’t come back.” The overall uncertainty has also affected employers, who are hesitant to take on new workers until they can see more clearly where the economy—and the political climate—are headed. “Manufacturers have money to invest,” says Bingham, but they are stuck in a wait-and-see mode. Getting the industry moving again is vitally important to the national recovery. “These are the jobs that pay the highest wages. These are the jobs that support families,” says Bingham. “If manufacturing jobs come back, jobs in the service industry will follow.” Crystal Ball Ask any economist what 2011 will bring for Utah, and the answer is “it depends.” It depends on national economic trends, the stock market, the European debt crisis, rising or falling consumer confidence, oil prices and, some say, whether or not the Bush tax cuts are extended. Natalie Gochnour, chief economist for the Salt Lake Chamber, points out that Utah’s economic peaks and lows tend to follow closely with national trends. Because of that, any blow to the national economy will also hit home in Utah. “The thought of a double-dip [recession] in an environment like we just went through is really scary. There’s a crisis of confidence out there that has arguably created this slump,” she says. “We’ve been improving now for a year, give or take a few little blips here and there. There are definitely some risks for the Utah economy. The predominant view is that in 2011, things will get better.” Steve Kroes, president of the Utah Foundation and member of the chamber’s Utah Economic Council, believes the economic situation will force long-term changes in individual and corporate behavior—but creating a much stronger society in the long run. “The slowdown of the economy is not just a temporary phenomenon,” he says. “There’s a correction going on from a long-term, secular increase in consumer spending that was unsustainable. From the mid 1980s until just a few years ago, consumer spending was growing faster than our incomes almost every year. The way we did that was more debt and less savings. Consumers are starting to cut back and starting to save again.” Because of this trend, recovery and growth is going to be slow. Full recovery could take five years—or even a decade, says Kroes. However, Utah has some inherent advantages, and shrewd investors may find that now’s the time to begin building the new future. “Utah is different from the rest of the country. We do have strong population growth and we may start having people move back into the state. We’ve got companies coming here,” says Kroes. The state also boasts a strong transportation system, a well-educated workforce, reasonable taxes and relatively low property values. Combine those factors with record-low interest rates—and opportunities begin to appear. “Take advantage of some of the silver linings of the downturn,” says Tennert. “Rates are the lowest they’ve ever been. If you’re in a position to borrow and build, take advantage of what we have going on right now.” “I’m a big proponent of being a forward leaner, of leaning into difficult times,” says Gochnour. “Be willing to stick your neck out and take the risk. I believe Utah will be one of a handful of states that will lead us out of the recession.”
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