Utah Economic Outlook

Randy ShumwayLast year Utah’s economy saw its strongest period of growth in the labor market in the last eight years.

Additionally, Utah consistently registers in the nation’s top 10 for lowest unemployment rate and highest employment growth. While many factors contribute to economic success, the state’s demographics have a strong effect on the current status and future trajectory of Utah’s labor market.

Utah’s population reflects growth from both natural increase—the number of births minus deaths—and net migration. Currently, Utah boasts the highest rate of natural increase in the nation. In 2014, the fertility rate—the ratio of live births in an area to the population of that area—was 2.33 (which was actually a historic low for the state). In 2015, 69.8 percent of Utah’s population growth resulted from natural increase, and the high fertility rate makes the state population the youngest in the country. In 2014, the largest share of Utah’s total population was in the preschool and school age groups. In contrast, the smallest share of Utah’s population is working age, and its retirement-age population is smaller than every state except Alaska. For every 100 working-age people in Utah, there are 68.8 non-working-age people, which is also the highest ratio in the nation. This unique demographic means that even with a high rate of natural increase, it was doubtful at the end 2014 whether Utah would have a sufficient labor force to match employment growth. Fortunately, Utah’s swelling economy attracted a net in-migration of approximately 15,487 workers to the state throughout 2014. This population increase was necessary to meet the growing labor demands of Utah’s booming economy.

At this point, urban populations in Utah are rising, and rural populations are declining. The Wasatch Front, comprised of Salt Lake, Davis, Weber, and Utah counties, is home to fully 76.6 percent of the state’s population, making the state primarily urban. However, in 2014, the state’s fastest-growing counties were located on the Wasatch Back, including Wasatch County at 4.3 percent and Morgan County at 4.0 percent. In contrast, various counties in other rural areas showed negative growth rates.

So what does this disproportionately-young, urban, fast-growing population mean for Utah’s economy? First, it means that Utah naturally has a tight labor market. With high job growth rates and a low share of workforce-age people, it is likely that Utah is reaching full employment. However, the pre-recession labor force participation was around 72 percent, and it is currently around 69 percent, so there is room for recovery. Second, it means that investing in education is vital to the long-term success of our state. With 30.8 percent of our population under 18, we need to ensure young people are developing skills that will be valuable in tomorrow’s workforce. Third, it means that we must make ongoing preparations for population growth, including developing water sources, transportation solutions, and air quality improvement methods that anticipate ongoing growth.

Utah’s economy is poised to support innovation and industry expansion to employ the large number of young people who will enter the workforce in the coming years. With continued investment in education, infrastructure, and employment, Utah will remain an inviting and economically profitable location for our growing population.

Short Term Outlook
 
While economic signals are still mixed, the perspectives shared by economists have reflected a shift from a mixed negative outlook to a mixed positive outlook over the last month. Currently, three influences are significantly affecting the short-term U.S. economic outlook: oil prices and production, China’s market, and the Federal Reserve’s rates.

In March, crude oil futures jumped above $40 per barrel for the first time in three months after OPEC producers discussed setting a higher anchor price for oil. Ecuador announced it would hold a meeting with all Latin American crude producers specifically to discuss prices. Global crude oil prices have risen after reaching 12-year lows fewer than two months ago. The rise in prices reflects depreciation of the U.S. dollar and the drop in U.S. shale oil production, which is expected to fall for a sixth consecutive month in April according to the U.S. EIA. Total output is expected to shrink 106,000 barrels per day due to lower output in the Bakken formation, Eagle Ford formation, and Permian Basin. Some analysts feel it is too early to assume that oil prices are now on a steady upward track—the oil glut remains large, and there is no guarantee that a higher anchor price will immediately affect oil supply.

While China played a major role in market volatility earlier this year, it is beginning to stabilize. China set a growth target of 6.5 to 7 percent this year after growing 6.9 percent in 2015, its slowest pace in the past 25 years. Focusing on services rather than investment, China is juggling growth, job creation, and industry restructuring. Instead of repeating past mistakes—like pumping stimulus money into building ghost cities, roads to nowhere, and presently unnecessary airports—China plans to improve the efficiency of government investment with targeted spending. China has promised not to further depreciate the yuan, which should prevent a repeat of the market instability experienced in 2015.

Finally, and perhaps most importantly, the U.S. Federal Reserve is poised to have significant impact on the market. At this point, economic indicators have been positive: the labor market continues to exhibit growth, and GDP growth was higher than originally expected. While economic data overseas remains shaky, the Fed has alluded that their decisions will be made based on domestic data more than foreign data.

Long-Term Outlook

Federal Reserve officials expect the U.S. economy to grow about 2 percent this year, which will continue to push down unemployment and pull up inflation to the target 2-percent rate. However, tightening of monetary policy may be rolled out more gradually than originally anticipated in order to allow thorough assessment of global developments and their effect on the U.S. economy. The turbulent financial markets send mixed economic signals, which make it difficult to project timing for the monetary policy tightening. In general, the U.S. economy is performing well enough, but it is too soon to say whether the trajectory will move upward or downward.

Labor Market

The unemployment rate in Utah remained unchanged from last month’s revised rate, hovering at 3.4 percent in January. The state’s year-over-year growth in total employment dropped slightly from 3.2 percent in December to 3.0 percent in January. Compared to a year ago, Utah has added 40,100 jobs to the economy, and the current employment level registers at 1,380,800. The United States’ unemployment rate dropped one-tenth of a percentage point from 5.0 to 4.9 percent.

Annual data revisions indicate that Utah averages for job growth and unemployment through 2015 were 3.7 and 3.5 percent, respectively. With eight of ten industry groups posting net job increases this month compared to last year, the outlook for Utah’s job market and overall economy in 2016 is positive. Thanks to the thriving tourism and ski industries, leisure and hospitality saw the fastest employment growth this month. Construction was the second-fastest-growing sector this month since housing starts and business developments are on the rise.

Wasatch Front Consumer Price Index

The Zions Bank Wasatch Front Consumer Price Index (CPI) increased 0.2 percent from December to January on a non-seasonally adjusted basis. The index has increased 3 percent since this same time last year, which is slightly higher than the Federal Reserve’s national inflation target of 2 percent. The large year-over-year rise can be attributed to the period of several months leading up to January 2015, which saw price decreases followed by a period of sustained price increases. The national Consumer Price Index rose 0.2 percent from December to January, and rose 1.4 percent over the last year.

Transportation prices contributed more than any other category to the increase in Utah’s January CPI—up 1.8 percent from the month before as vehicle prices, insurance rates, and airfare costs rose. Prices for flights outstripped falling fuel prices as airline fares typically lag behind falling oil prices.

Aside from transportation, no other sector rose significantly. The overall increase in Utah’s CPI stems from the combined impact of slight increases in prices for utilities, clothing, recreation, education, communication, and other goods and services. Food away from home, housing, and medical care were the only sectors that saw price decreases this month.

Utah Consumer Attitude Index

The Zions Bank Utah Consumer Attitude Index (CAI) rose 0.1 point to 105.8 in February. Increasingly positive perspectives regarding the present circumstances of the economy led to this slight escalation, but were counteracted by dipping expectations for the future. The CAI currently sits 0.8 points lower than its level 12 months ago. In comparison, the national Consumer Confidence Index® decreased 5.6 points from January to February and currently sits at 92.2.

Expectations for the next six months decreased due to a more negative outlook on business conditions, future job availability, and income situations. Compared to January, fewer Utahns think business conditions in their area will be better in six months—down from 30 percent to 25 percent in February. Twenty-four percent of Utahns think there will be more jobs available in their area six months from now—a 5-point decline since last month. In line with this expectation for fewer job opportunities, just 34 percent of Utahns expect their household income to be higher six months from now—a 2-percent decline since January.

The Present Situation Index, the sub-index of the CAI that measures how consumers feel about current economic conditions, has risen 4.4 points since this time last year. Fifty-four percent of Utahns rate general business conditions in their area as good—a 6-percent increase since last month and a 4-percent increase since last year. Forty-six percent of Utahns describe available jobs in their area as plentiful—a 5-percent increase since last month, and a 10-percent increase since last year. 

Housing Market
 
Home prices rose slightly both across the nation and in Utah in January. Utah’s home prices increased 0.7 percent from December to January, and have grown 7.0 percent since January 2015. Nationally, home prices increased 1.3 percent month over month and 6.9 percent year over year. National home prices for single-family homes, including distressed sales, are forecasted to rise by 0.5 percent in February 2016, and by 5.5 percent by January 2017.

Although the annual national increases for home prices are no longer posting double-digits, the U.S. has experienced 47 consecutive months of year-over-year increases, including distressed sales. While the national market has continued to steadily improve, the contours in home prices have shifted throughout the recovery. The shift favors Utah, as the Rocky Mountain states have seen some of the strongest home price growth in the nation due to particularly high demand and low supply of homes. Nevertheless, rising home values may begin to taper. With U.S. construction spending surging in January to its highest level since 2007, the housing supply may begin to rebound, thereby slowing price growth. Furthermore, instability in the national economy and a looming federal interest rate hike may put downward pressure on house prices.