The Utah Economic Council issued its annual “Economic Report to the Governor,” and how the next year goes in the Utah economy will largely depend on what happens nationally and globally.
In particular, interest rates – the Federal Reserve’s principal tool for addressing inflation – could dictate whether Utah continues to see high growth (2% to 4% increase in GDP), slower growth (0 to 2%) or a shallow recession (1% to -1%).
Rising interest rates also intensify what may be Utah’s biggest challenge: housing.
“We still have this backlog from the Great Recession of an undersupply of housing,” said Phil Dean, chief economist and public finance senior research fellow at the Kem C. Gardner Policy Institute and a co-chair of the council.
The council includes 30 economists and other experts from the public and private sectors. It issues an annual economic report before the legislative session, which this year kicks off on Jan. 17. This year’s report was presented Thursday at the Utah Economic Outlook & Public Policy Summit hosted by the Salt Lake Chamber and the Gardner Policy Institute, which is part of the University of Utah’s David Eccles School of Business.
While nothing in the report points to Utah’s economy withering, 2022 saw an increase in uncertainty. The nation danced with a possible recession from rising interest rates, but it also continued to see low unemployment.
“The post-pandemic economy has altered many traditional economic relationships. 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,” according to highlights in the report.
Here are the report’s three scenarios:
“Continuing Growth: 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 GDP growth in the 2% to 4% range (similar to quarters 3 and 4 in 2022).
“Shallow Recession: 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.
“Decelerating Growth:” Inflation moderates somewhat. Interest rate hikes continue but slow down. Household financial buffers (such as short-term savings) 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.”
One particularly acute effect of interest rates in Utah has been a downturn in dwelling permits at a time when housing isn’t keeping up with population gains, making it even harder for the state to address its housing shortage. Builders must obtain dwelling permits from cities or counties prior to construction. One dwelling is one house or one apartment building.
Utah saw more than 40,000 dwelling permits issued in 2021. That dropped below 30,000 in 2022 as rising mortgage rates pushed buyers out of the market, and the report estimates that permits will be closer to 23,000 in 2023 and 2024.
Still, Dean thinks the state has some advantages. “I do think there is opportunity for us to increase housing supply when other states might not be able to.”
He sees two levers in particular the state could pull. One is zoning policy. Even some suburban cities are now coming around to accepting more housing per acre. The other is leveraging federal stimulus dollars, which are still available, to build more infrastructure like water and sewer to support housing development.
Michael Parker, vice president of strategy for Ivory Homes and member of the council, said, in addition to zoning, cities need to streamline their approval processes for new construction, and they need to have better defined affordable housing plans, which are required by the state.
Parker is expecting the Utah Legislature to increase both the carrots and the sticks for cities during the upcoming session to address housing challenges, but the state can’t just buy its way out of the problem.
“We need public policy change to address this issue because we can’t subsidize our way out of it,” Parker said. “We could spend the entire budget surplus and not be in a better spot.”