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Will Utah follow the U.S. economic pattern?


Utah's economy ended 1990 as one of the nation's three fastest-growing state economies. That momentum has been maintained in the 1991 first quarter, and the outlook for the remainder of the year and beyond appears favorable despite a stubborn national recession. But what can be expected from the national economy in the months ahead, and what justification is there for continued local economic optimism?

Atypical Recession

The U.S. economic recession persists, but early evidence suggests that housing, automobile sales, and other key sectors may have passed their low point for this cycle. The speed and magnitude of the recovery, however, are still very uncertain. Historically, the typical U.S. business-cycle downturn follows a pattern characterized by rising inflation, higher interest rates, falling demand, and excess inventories. The weakened demand would then reduce inflation and interest rates, and as soon as the excess inventory positions were liquidated, a usually rapid growth phase would ensue.

The current recession is quite different. Certainly the Persian Gulf War disrupted consumer confidence and buying patterns, but contemporary structural economic weaknesses include excess personal and corporate debt and illiquidity, overbuilding, declining values in commercial real estate, and rising levels of nonperforming loans. Unfortunately, these structural economic soft spots do not lend themselves to quick and easy solutions. Solving problems of debt, excess capacity, and nonperforming loans is much more complicated than the historical process of liquidating inventories.

Ultimately, the seeds of recovery from this and any other recession grow from the consumer sector. Renewed borrowing and buying by individuals start a chain reaction toward economic prosperity. At this point, however, economic fundamentals in the consumer sector remain soft and do not imply an immediate resurgence in new spending. Debt levels continue to be high, savings are low, changes in real income have been negative, and nearly 1.5 million net jobs have been lost.

Against this background, the Federal Reserve has continued to nudge interest rates lower. This appears to be appropriate policy, since the dollar has been strong in foreign-exchange markets and the pace of inflation is slipping toward a possible 3.5-percent rate in the second half of 1991. Perhaps the bigger question is whether lower interest rates will change the prevailing incentives to liquidate debt and induce renewed loan demand leading to the creation of additional debt.

All in all, the national economy will soon begin to recover, but the pace of growth through the remainder of this year and into 1992 might be disappointingly sluggish.

Good News for Utah

Even with the superb performance of Utah's economy in 1990, why should we be optimistic that the state can withstand the national trend and avoid being drawn into the sea of economic malaise? The following six factors help supply the required evidence.

1. Improving, Not Deteriorating, Construction and Real-Estate Sectors

Statewide construction activity in 1990 experienced its strongest year since 1986, and additional significant gains were recorded in the 1991 first quarter. Sales and values are up, while vacancy and foreclosure rates are down. Several large projects--the Salt Lake Sports Arena ($66 million), Winter Olympic Games facilities ($56 million), the Salt Palace Convention Center remodeling ($50 million), and the 1991 state bonding for new construction ($85 million)--will continue to augment favorable growth in residential and commercial construction.

2. Top-Rated Human Resources

Fortune magazine's October 1990 issue ranked Salt Lake City as the best city in America for business. Clearly, Utah is unique in the availability, quality, and cost of labor. Utah's population is the youngest in the nation, with the second-highest birthrate. As such, a rapidly growing labor force with highly educated and productive workers in a comparatively low-cost environment makes Utah an attractive location for business expansion. The low cost of living in Utah actually pushed the average real wage equivalent to most and higher than some other western cities.

3. Healthy State Government Finances

Financial World magazine recently named Utah No. 1 in the nation in the management of state-government finance. Utah is one of only eight states that has an "AAA" rating from both Moody's and Standard & Poor's. In contrast to many other states, this means services and infrastructure investment can continue to expand without the threat of increased taxes.

4. Excellent Tourism Growth Potential

As America's choice for the 1998 Winter Olympic Games, Salt Lake's candidacy for the Winter Olympics is part of the area's overall commitment to becoming the amateur winter-sports capital of America. Accordingly, the positive economic impact already evident will remain an ongoing component of rapidly expanding winter-sports business.

5. Cutting-Edge Technology

Computer software, aerospace, biomedical, and telecommunications technologies are enhancing the current job growth. Companies such as WordPerfect, Evans & Southerland, Novell, Thiokol, Hercules, McDonnell Douglas, American Express, AT&T, Sears Roebuck, Fidelity, and many others contribute significantly to the Utah economy as they successfully compete in the national and international arenas.

6. Quality Life

Educational, cultural, and recreational opportunities--combined with comparatively less congestion, pollution, and crime--add greatly to Utah's standard of living. The national accounting firm of Ernst and Young recently ranked housing affordability in Salt Lake City as the highest in the United States.

Utah is the place for business in the 1990s. A rapidly expanding labor force with productive, well-educated employees in a low-cost environment, combined with unique quality-of-life amenities, provide the state with distinct competitive advantages for many aspects of business growth.

Dr. Kelly K. Matthews is senior vice president and economist for First Security Corp.
COPYRIGHT 1991 Olympus Publishing Co.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Matthews, Kelly K.
Publication:Utah Business
Date:Jul 1, 1991
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