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Show Page 12 The Ogden Valley news Volume XV Issue XIV July 1, 2008 Fixation on U.S. Economic Weakness, Decline In Home Prices Negatively Impact Utah’s Economy Utah’s economic growth pace has continued to slow in recent months, impacted by flat U.S. economic performance, weak Utah home building activity, soft home prices, consumer caution tied to constant negativity from the national media, and high energy prices. Even as it slows, however, Utah continues to rank among the top states in the growth rate of employment. The Utah economy added roughly 25,000 net new jobs during the most recent 12-month period, a 2.0% gain. Such growth currently ranks second to Wyoming. At the same time, however, Utah’s employment rise pales versus that during calendar years 2005 to 2007, when the state enjoyed gains averaging 49,000 net new jobs annually. The state’s overall goods production sector has seen total employment move sideways during the past 12 months, with gains in manufacturing and natural resources offsetting declines in construction employment. Utah’s service providing sector has accounted for all net job additions during the past year, led by gains in trade, transportation, and utilities; education and health services; professional and business services; leisure and hospitality; and government. The most significant change of the past year has been the sharp slowing in new home construction, with current depressed levels of new activity the weakest since the early 1990s. An excess supply of new homes available, combined with high levels of existing homes on the market, suggest that new home construction activity will remain weak well into 2009. While job creation has slowed sharply, the state’s tight labor market remains largely intact. Zions Bank Small Business Index for Utah The Index is a monthly numerical measure of the challenges and opportunities facing small business in the state of Utah. The Index measures business conditions from the viewpoint of the small business owner or manager. A higher number reflects a greater chance for small business success. The Index includes 14 different factors that influence Utah small business success, including the unemployment rate, retail sales, personal income, bankruptcies, and the strength of the regional economy. Each factor carries a different impact weighting. The Index has declined in recent months, impacted by less impressive Utah job growth, slowing regional performance, and U.S. economic weakness. Utah’s unemployment rate averaged 3.1% during 2008’s first four months, again ranking among the nation’s lowest. By comparison, the Utah jobless rate averaged 2.7% in 2007, 3.0% in 2006, and 5.0% during 2001 to 2005. Utah business managers remain frustrated in many cases in their inability to fill open positions with qualified people, while wary of losing key employees to other firms. External Factors While some Utah residents may feel that the Beehive State is largely insulated from the outside world, developments in the housing and mortgage industries tell a different story. Negative media reporting, weak home prices, wider credit spreads, more limited credit availability, and tighter lending standards are all at play across the U.S. and in Utah. Various national magazines and newspapers constantly berate the housing market with a view to consumers of “Why would you consider buying a home today when they will be cheaper in 6 to 12 months?” Such negative reporting has done a major disservice to the nation’s real estate industry. Estimates of American home values vary widely. The Office of Federal Housing Enterprise Oversight (OFHEO) noted recently that the average U.S. home value fell 3.1% during the 12 months ending March 31, 2008. A five-year measure of home values suggested an average rise of 38.88%. The OFHEO data noted that the average Utah home value rose 5.58% during the 12 months (ranking second to Wyoming), with a five-year rise of 53.02%. The OFHEO data includes only conventional conforming purchase and refinance transactions of single family homes. As a result, it does not include transactions of higher-priced homes wherein much of the nation’s housing weakness has been centered. The widely followed S&P/Case-Shiller index of home values saw prices fall an average of 14.4% in 20 major cities during the 12 months ended in March 2008. The National Association of Realtors noted recently its estimate that the median home (half cost less, half cost more) declined 8.0% during the 12 months ended in April. Similar data from the Salt Lake Board of Realtors noted the median home value rose 2.0% during the same period. Other estimates of Utah home values suggest price declines. Adding to housing frustration is the fact that average mortgage interest rates are roughly ½ percent higher versus U.S. Treasury note rates (or yields) than was the case during 2001-2006. In addition, many aggressive mortgage lenders have closed their doors, while many more traditional lenders have tightened lending standards, some resulting from regulatory pressure. UTAH OUTLOOK A national fixation on U.S. economic weakness and home price declines in many markets has negatively impacted the Utah economy. Even as it has slowed, how- ever, Utah’s economy ranks with the nation’s strongest. Modest performance of the Utah economy seems likely over the next year before a return to more vibrant growth. The American Economy—in the Twilight Zone The U.S. economy seems stuck in that spooky area between minimal growth and (more likely) mild recession. First quarter real (inflation adjusted) economic growth was revised higher to a 0.9% annual rate, with another revision to come. Many second quarter growth estimates are near zero, with most forecasters expecting somewhat better performance in the year’s second half and into 2009. Why? The combination of aggressive Federal Reserve ease, impressive U.S. export growth to a solid global economy, and the $168 billion fiscal stimulus program will help. It is entirely possible that the economy could have one or no quarter of reported economic decline, only to have the National Bureau of Economic Research (NBER) announce later this year that a recession “officially” began around the end of last year. The Federal Budget—a billion dollars daily A menu of weak U.S. economic growth (or modest recession), enormous war spending, and Congressional economic stimulus could see the fiscal year 2008 deficit, which ends on September 30, exceed $400 billion, or more than $1 billion daily. Long-term challenges regarding entitlement funding will keep the pressure on. Unemployment—likely to move higher The nation’s unemployment rate is expected to move toward 5.6%-5.8% in coming months after reaching 5.5% in May. By comparison, the jobless rate averaged 4.6% in both 2006 and 2007. Longer-term labor shortages, especially for skilled workers, will remain center stage for years to come. Inflation—Oil is the key Sky-high oil prices, high commodity prices, and alarming food costs have pushed inflation pressures higher. Last year’s 4.1% rise in the Consumer Price Index was the largest increase in 17 years. Most forecasters expect the CPI to rise 3.3%-3.8% in 2008. Note that a measurable decline in oil prices later this year, should it occur, would unwind much of the inflation pressures that have developed. We still see inflation pressures under control in coming years. The Federal Reserve—Staying on the sidelines The Federal Reserve sliced its critical fed- eral funds rate seven times between 9/18/07 and 4/30/08, with a cumulative decline from 5.25% to 2.00%. Such aggressive monetary ease ranks with any comparable period in the Fed’s 95-year history. The Fed is widely expected to stay on the sidelines in coming months. If U.S. economic performance deteriorates further, or domestic and global credit markets freeze up again, the Fed will cut its key rate for an eighth time. Conversely, solid evidence of U.S. economic stabilization and resumed growth will lead financial markets to expect modest tightening around year-end or early in 2009. Home Prices—Further pain on tap Too many homeowners, builders, and “flippers” got carried away with expectations of higher and higher home prices during the past few years. This phenomenon was followed by one of the most painful real estate corrections ever, which continues today. Those markets which recorded the largest gains are also those under the greatest downward price pressure. Further home price declines are likely in select markets, while others are expected to stabilize. The Global Economy—Slower, but still impressive Most forecasts of global economic growth have been revised lower during 2008, tied to high energy prices and credit market volatility. Even so, real growth within a 3.0%-4.0% range would extend one of the most impressive periods of global economic growth on record. High global food prices are the latest major threat to hundreds of millions of global citizens. The current Chinese fixation is all about a successful Olympic Games experience in August. Global protests regarding human rights were not in the game plan. In addition, Chinese leaders are fearful that severe air pollution could diminish their “image” during the Games. Numerous polluting industries in Beijing have been, or soon will be, mothballed until the Games are over. The Chinese response to its most severe earthquake in 30 years, and the displacement of more than five million people, will also be watched closely in coming months. Solid economic growth in India remains on track, although inflation is a rising issue. Truckloads of money will have to be spent in coming years to bring a largely antiquated transportation infrastructure into the 21st Century. Japanese economic growth has actually improved in recent months as exports to other Asian nations have been impressive. 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