CEOutlook 2018 - Quarter 3

U T A H ’ S Q U A R T E R LY E C O N O M I C S U R V E Y O F B U S I N E S S E X E C U T I V E S

2018 - QUARTER 3

Are the seasons changing for the Utah economy?

As I reviewed the results of this quarter’s CEOutlook, I’m reminded of how much I love the four seasons of our state.

They’re dynamic and ever-changing. Often fall’s crisp mornings come to a frosty end with early winter snow, or it seems that just when we get our ski legs underneath us, we can be surprised with a warm spring. The Utah economy is not too different. While consumer sentiment and national economic growth reach exceptional levels, I think we’re starting to see a possible changing of the seasons for the Utah economy and many executives seem to agree.

Derek B. Miller President and CEO Salt Lake Chamber

This quarter, the Salt Lake Chamber’s CEOutlook Confidence Index declined from 62.32 in the last quarter to 60.89, primarily because only 34% of executives, the fewest number in the surveys short history, are anticipating improving economic conditions in the next six months. Additionally, 19 percent of executives expect the economic conditions to be somewhat worse in the same span of time. Most notable is that 41 percent of executives see their overall headcount decreasing in the next twelve months.

To be clear, there are many positives including our nation-leading job growth. 41 percent of executives reported that current economic conditions have improved compared to six months ago, and 47 percent feel that the next six months will remain about the same for the nation’s leading economy. Additionally, 41 percent of executives see their industry improving in the same six months, and 68 percent anticipate strong profit growth. But the changing colors of fall are bright reminders of shift of the seasons, and the broader results from this quarter’s CEOutlook are signaling much of the same for the Utah economy.

So what’s behind this shift? Business leaders are concerned about our ability to find qualified talent, reasonably priced housing for their employees and the disruptions to global trade—and the risk these issues are to our state’s economy. So before the crisp fall mornings end, it’s time for our state’s business, civic and elected leaders to look ahead and act on the opportunities and challenges that await us in the months ahead. Our ability to do so will define whether the Utah economy continues to be among the national elite or if we’ll simply fall into winter hibernation.

Utah’s economic turning point is coming In many ways, the Utah economy mirrors the national economy. Both economies are in a long expansion with strong job growth, low unemployment, and intensifying wage and price pressures. All of this is occurring coincident with monetary tightening and rising interest rates. Business leaders enjoy the fruits of an abundant harvest, but know harvest season will eventually end.

This quarter’s CEOutlook confirms business leaders understand these economic dynamics. Optimism is waning as expectations for the next six months hit a significant low. In the prior three quarters, 45 percent or more of the CEOs responded that the next six months would be better. This quarter only 28 percent expressed that same confidence. The number of executives that felt the economy would be “somewhat worse” jumped from 3 percent last quarter to 19 percent today.

Natalie Gochnour Director and Chief Economist Kem C. Gardner Policy Institute and Salt Lake Chamber

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My economic barometer tells me we still have several months of expansion, but the benefits of the Salt Lake City International Airport expansion and deficit-financed tax cuts will end, and rising debt levels and higher interest rates will take hold.

I encourage business leaders to monitor economic conditions closely. The economic turning point may be six months away or 24 months away. Either way, businesses that manage costs, invest in long-term success, and save for a rainy day will be most successful.

CEOutlook: Utah’s Quarterly Economic Survey of Business Executives

SALT LAKE CHAMBER’S CEOUTLOOK CONFIDENCE INDEX AND JOB GROWTH The Salt Lake Chamber’s CEOutlook Confidence Index is based on responses to the four standard questions included in each quarter’s survey (Questions 1-4). The index can range from 0 to 100. A score below 50 indicates executives believe the economy will worsen; a score above 50 indicates a belief among executives that the economy will improve. Over the next year, we will fine tune and evaluate the index to better understand its relationship to economic performance.

4%

90

Year-Over Job Growth

2%

45 30

1%

60.63

62.36

62.32

60.89

Utah Job growth

62.00

Index

62.84

0%

66.29

15

2017-Q1 66.29 3.0%

2017-Q2 62.84 3.1%

2017-Q3 62.00 2.5%

2017-Q4 60.63 3.0%

2018-Q1 62.36 3.2%

2018-Q2 62.32 3.1%

2018-Q3 60.89 3.1%

Concern <50

60

>50 Optimisim

75 3%

0

Source: Index is produced from the Salt Lake Chamber’s CEOutlook with support from the Kem C. Gardner Policy Institute, including analysis of the Utah Department of Workforce Services’ statewide job growth data.

ABOUT THE SALT LAKE CHAMBER’S CEOUTLOOK The Salt Lake Chamber’s CEOutlook is a statewide economic survey of Utah business executives. Modeled after other national business sentiment surveys, it provides a forward-looking view of the Utah economy. The results of the survey are intended to help business and community leaders make informed decisions about likely future economic conditions. The survey will continue to be evaluated through 2018 to assess its predictive value.

QUARTER

CONDUCTED

SAMPLE

Quarter 1

February-March 2018

44

Quarter 2

May-June 2018

35

Quarter 3

August-September 2018

32

Quarter 4

November-December 2018

2018 - Quarter 3

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STILL IMPROVING: EXECUTIVES REPORT UTAH’S STRONG ECONOMY SUSTAINED EXPANSION OVER PAST SIX MONTHS. 1 - How would you describe the current economic conditions in Utah compared to six months ago?

60% 50%

50% 43%

5%

47%

43%

3%

0%

5%

2%

2017-Q4 N=40

Somewhat Better

6%

0%

0%

2018-Q1 N=44

Significantly Better

41%

40%

6%

0% 0%

0%

2018-Q2 N=35 About the Same

2018-Q3 N=32

Somewhat Worse

Significantly Worse

MODERATING EXPANSION? FEWEST NUMBER OF EXECUTIVES ANTICIPATE IMPROVING CONDITIONS SINCE CEOUTLOOK BEGAN IN 2017-Q1.

2 - What is your expectation for economic conditions in Utah six months from now?

52% 45% 45%

49% 49%

47%

41% 28%

19% 10%

7% 0%

0% 2017-Q4 N=40

Significantly Better

0%

0%

0%

2018-Q1 N=44 Somewhat Better

3%

0%

2018-Q2 N=35 About the Same

Somewhat Worse

*Some totals may appear to exceed 100% due to rounding for simplification.

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CEOutlook: Utah’s Quarterly Economic Survey of Business Executives

6%

0% 2018-Q3 N=32

Significantly Worse

INDUSTRY OPTIMISM: EXECUTIVES HAVE HIGHER EXPECTATIONS FOR INDUSTRY IN NEXT SIX MONTHS THAN BROADER ECONOMY FOR SECOND QUARTER IN A ROW. 3 - What is your expectation for your own industry six months from now?

55% 49% 43%

41%

40%

48%

40%

35%

15% 3%

0%

5%

0%

2017-Q4 N=40

9% 3%

0%

2018-Q1 N=44

Significantly Better

Somewhat Better

0%

2018-Q2 N=35 About the Same

10%

6%

0% 2018-Q3 N=31

Somewhat Worse

Significantly Worse

SOARING PROFITS: EXECUTIVES ANTICIPATE SIGNIFICANT PROFIT GROWTH IN YEAR AHEAD. 4 - What is your expectation for your firmâ&#x20AC;&#x2122;s profits in the next 12 months?

58%

55% 45% 40% 34% 23%

18%

31% 17%

14% 0%

0% 2017-Q4 N=40 Increase Considerably

2018-Q1 N=44 Increase Moderately

13%

11%

7%

3%

26%

0% 2018-Q2 N=35

Remain the Same

Decrease Moderately

6%

0%

2018-Q3 N=31 Decrease Considerably

*Some totals may appear to exceed 100% due to rounding for simplification.

*Questions 5 and 6 were not asked for this quarterly report.

2018 - Quarter 3

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LOOK AHEAD? RECORD NUMBER OF EXECUTIVES EXPECT HEADCOUNTS TO DECLINE IN THE NEXT YEAR.

2017-Q4 N=40

2018-Q2 N=35

2018-Q1 N=44 Increase

Stay the Same

6%

3%

9%

10%

34%

41%

43%

53%

54%

45%

45%

57%

7 - Do you expect the overall headcount at your company to increase, decrease or stay the same over the next 12 months?

2018-Q3 N=32

Decrease

EXECUTIVES REPORT HOUSING AFFORDABILITY AS SIGNIFICANT EMERGING RISK TO UTAH ECONOMY. TRADE WARS AND LABOR SHORTAGES REMAIN NOTABLE CONCERNS. 8 - What emerging trends, risks and other factors do you think may have a positive or negative impact on Utah’s economy in the next 12 months?

Below are highlighted, anonymized quotes from executives:

Limited trained labor is our biggest problem.

Number of qualified employees not keeping pace with industry growth.

The issue of housing affordability will be critical going forward. If we are able to make headway, then it will be a net benefit; however, if we do not move the needle towards improvements, then our economy over the next 12 months will be challenged and we could see an economic correction.

A lack of real estate product in the market is leading to increasing costs and timelines, which may impede growth at the firm level.

The United States has started several trade wars which have begun to impact us negatively - in fact, very negatively. We operate in 28 countries and are a global player. Now, being headquartered in the United States is turning into a liability.

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CEOutlook: Utah’s Quarterly Economic Survey of Business Executives

Utah has historically competed on cost for corporate expansion. However, the Utah cost structure is changing quickly, and this is threatening a prior competitive advantage. Leaders should be cognizant that other, more expensive markets, have been able to overcome cost disadvantages through quality of place (diversity, arts, entertainment, welcoming culture, etc.). Utah should both consider how to maintain or decrease costs but also be mindful that a maturing market calls for more mature amenities.

For all the talk of trade, an organization like ours would be the one to see what proponents of an “America First” strategy are attempting to achieve: increased investment by foreign firms and re-shoring. We are seeing only a negligible amount of project activity as a result of trade disputes and therefore would warn that if the trade dialogue continues globally oriented Utah firms may suffer.

Rising interest rates and dwindling labor pool, high housing and transportation costs putting pressure on employers and businesses, cutting into profits and reducing spend on services.

EXECUTIVES ARE MOVING TO ENHANCING PRODUCTIVITY WITH TRAINING AND TECHNOLOGY. 9 - What are you doing to increase the productivity of your current assets? How large a productivity increase are you expecting next year?

Below are highlighted, anonymized quotes from executives:

We are investing in training tools and mechanisms, as well as using technology to continue to streamline our operations. We expect a 10% 20% increase in productivity.

Very slight. Not as strong as the previous 12 months. I think we are in a better regulatory environment and that will foster modest growth in 2019. Continuing Education.

We are increasing our international marketing efforts because of tariffs. Next year is very uncertain because of this issue.

Technology is playing a huge factor into our productivity.

We provide consistent training to employees to help them be more effective. We invest extensively in technology.

Using automation, more technology... not so much productivity gains from people... but using technology so people can do people things.

We are working to keep and attract good employees in this time of low unemployment. We anticipate a slight increase.

EXECUTIVES WANT PUBLIC LEADERSHIP ON KEY ISSUES TO SUPPORT THE ECONOMY. 10 - Entering election season, what one policy change-at any level-would you ask for to support your business and the broader economy?

Below are highlighted, anonymized quotes from executives:

Continued review and revision of regulatory landscape.

Actual immigration reform and creating a pathway to legal status and citizenship for those who are impacting our local and national economy positively.

Have Congress ratify the TPP, Trans Pacific Partnership Agreement, that will eliminate roughly 18,000 trade barriers in other countries that are now negatively impacting U.S. businesses abroad.

We need a comprehensive infrastructure bill to address the declining state of our countryâ&#x20AC;&#x2122;s infrastructure.

More cooperation between the two main political parties to enhance more transparent public policy making and more predictable legislative and governmental outcomes.

Normalization of alcohol laws.

Maintain status quo. Support of industrial development in the North West Quadrant. The media message needs to take a positive tone and not the constant negative message that we are hearing.

2018 - Quarter 3

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KEY ECONOMIC INDICATORS FOR BUSINESS LEADERS QUARTER 3 AVERAGES UTAH’S EMPLOYMENT SITUATION The Utah Department of Workforce Service reported, as of September 21, 2018, Utah’s nonfarm payroll employment for August 2018 grew by an estimated 3.7 percent, adding 54,700 jobs to the economy since August 2017. Utah’s private sector employment grew by 3.9 percent year-over with the addition of 47,600 positions. Utah’s current employment level registers 1,517,800. July’s year-over job growth rate was revised upward one-tenth to 4.0 percent.

August’s seasonally adjusted unemployment rate remained unchanged from the prior month at 3.1 percent. Approximately 49,800 Utahns were unemployed during the month and actively seeking work. The national unemployment rate also remained unchanged from the prior month at 3.9 percent.

“Utah’s labor market continues to perform at an optimal level with the addition of almost 55,000 jobs over the last year,” reported Carrie Mayne, chief economist at the Department of Workforce Services. “The state’s labor force continues to grow and is quickly absorbed into the employment rolls by Utah’s expanding businesses.”

BUSINESS LEADER SENTIMENT The Salt Lake Chamber’s CEOutlook Confidence Index slightly decreased from 62.32 to 60.89 in 2018-Q3, as executives had strong, but declining sentiment.

The Conference Board Measure of CEO Confidence™, which had increased in the first quarter of 2018, declined slightly in the second quarter. The Measure now reads 63, down from 65 in the first quarter of 2018 (a reading of more than 50 points reflects more positive than negative responses). Similar to the CEOutlook, “CEO Confidence declined slightly in Q2, but overall sentiment remains positive,” said Lynn Franco, director of economic indicators at The Conference Board. “CEOs’ optimism regarding the growth prospects for both mature and emerging economies have eased considerably since the beginning of the year. However, most CEOs expect profits will increase over the coming year, with market/demand growth and cost reductions the major driving forces.”

The MetLife & U.S. Chamber of Commerce Small Business Index climbed to 69.7 in Q3 of 2018. The record high score reflects a rebound in national economic outlook, matching the highest levels in the history of the survey. The trend line for business owners rating the overall health of their business as good has moved upward after five consecutive quarters of unchanged results. Despite such optimism, revenue expectations for the year ahead were down for small business of all sizes.

The economic outlook among Business Roundtable CEOs remained strong in the third quarter of 2018. The Q3 2018 CEO Economic Outlook Index was 109.3, a decline of 1.8 points from 111.1 in the second quarter of 2018. At 109.3, the Q3 Index is the fifth-highest in the survey’s 16-year history and well above the historical average of 81.6. This is the seventh straight quarter where the Index has exceeded its historical average, signaling a continued positive direction for the U.S. economy.

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CEOutlook: Utah’s Quarterly Economic Survey of Business Executives

CONSUMER PRICES The Zions Bank Wasatch Front Consumer Price Index decreased 0.1 percent from July to August on a non-seasonally adjusted basis.

Shrinking prices within the transportation and food away from home sectors are causing essentially all of the first decrease in overall cost of living since March of this year. Although transportation prices overall decreased, prices of gasoline still inched up from the previous month. Airfare and car rental prices, which often feel a lagging effect from gas and oil prices, dropped after the temporary price decrease to gasoline in July.

“Some may be wondering about why prices are changing more rapidly in Utah than in other parts of the country,” said Scott Anderson, president and CEO of Zions Bank. “Although the full answer is complex, much of it comes down to the fact that Utah’s economy is growing rapidly due to a strong business climate which attracts workforce growth. As more people come they buy more goods and services, and with Utah’s high population growth, housing is one of the most rapidly growing sectors around. Utah has more population growth and economic prosperity than many other states, so buying increases and prices follow suit.”

The steady and overall increase in housing and transportation prices continues. Year-over-year housing prices have increased since November 2014 and are a sign of Utah’s strong economy, which attracts population growth. Year-over-year, the Wasatch Front Consumer Price Index has grown 5.2 percent, while the National Consumer Price index has increased 2.7 percent since August of last year.

“In this time of such rapid price growth, it is worth noting some of the context and reason the housing and transportation sectors are getting so much attention,” said Randy Shumway, chairman of the Cicero Group. “The recent price increases now mean the average Utahn spends about 56 percent of their income on housing and transportation combined, which is a high for Utah. This can place strain, particularly on lower income Utahns. For that reason, we are happy to see homebuilders pushing to alleviate some of the supply issues we currently see in the market.”

CONSUMER ATTITUDE The Zions Bank Utah Consumer Attitude Index (CAI) increased 1.4 points to 114.9 in August. Year-over-year the CAI is one-tenth of a point below the level of 115.0 measured in August last year. In comparison, the national Consumer Confidence Index® increased 5.5 points to 133.4 this month and is 10.5 points higher than what was reported in August 2017.

The Utah Present Situation Index increased 6.3 points to 130.3 which represents the fourth time that this Index has exceeded 130 since Zions Bank began tracking consumer attitudes across Utah in 2011. Utahns are most confident about the employment outlook, with a record low 8.5 percent of Utahns indicating jobs are hard to get. Additionally, Utahns’ assessment of general business conditions has held steady for the last 12 months.

The Utah Expectations Index slipped 1.9 points to 104.7 and is down 1.7 points year-over-year. Utahns’ expectations for future income and future business conditions have tempered relative to current conditions as 32 percent of Utahns believe their household income will increase, down eight percent from 40 percent in August 2017.

Utahns are noticing increases in the prices of both homes and consumer goods and expect these prices to continue increasing. Threefourths of Utahns (75 percent) expect home price increases while two-thirds (67 percent) expect an increase in consumer goods prices in the next twelve months. These price expectations have also affected how Utahns think about their future income relative to prices as four percent fewer Utahns see their household income increasing by more than the rate of inflation over the next two years.

2018 - Quarter 3

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The Utah Economic Outlook and Public Policy Summit is the state’s premier economic forecasting and public policy event that is attended by over 1,000 business, policy and academic thought leaders from across the state. The summit presents an unrivaled opportunity for attendees to gain insights on the future of Utah’s economy and the policy priorities for the upcoming legislative session.

ABOUT THE SALT LAKE CHAMBER

ABOUT THE KEM C. GARDNER POLICY INSTITUTE

The Salt Lake Chamber is Utah’s largest and longest-standing business association. A statewide chamber of commerce with members in all 29 Utah counties, the Chamber represents the broad interests of the state’s 63,000-plus employers, which employ more than 1.4 million Utahns. This includes thousands of members and their employees.

The Kem C. Gardner Policy Institute at the University of Utah develops and shares economic, demographic and public policy data and research that help individuals and the community make informed decisions. Housed in the David Eccles School of Business, the Institute seeks to be a vital gathering place and center for independent economic, demographic and public policy thought leadership that helps the Utah economy to prosper. The Institute is a strategic partner with the Salt Lake Chamber in serving Utah.

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CEOutlook: Utah’s Quarterly Economic Survey of Business Executives

RESPONDENT INDUSTRY MAKE UP SECTOR

NUMBER RESPONDING

TOTAL POSSIBLE

3-YEAR CONTRIBUTION TO GDP

2018

Q1

Q2

Q3

Q4

Finance, Insurance Real Estate, Rental & Leasing

11

10

9

11

25%

Manufacturing

5

3

4

6

14%

Professional & Business Services

5

5

4

5

12%

Retail Trade

4

2

3

3

8%

Education, Health Care & Social Services

2

2

1

3

8%

Construction

4

4

1

3

6%

Wholesale Trade

3

1

2

3

6%

Information

2

2

1

2

5%

Mining

2

2

2

2

4%

Arts, Entertainment, Recreation & Accommodation

2

2

1

2

4%

Transportation & Warehousing

1

1

1

2

4%

Other

1

0

2

1

3%

Utilities

1

1

1

1

>1%

Agriculture, Forestry, Fishing & Hunting

0

0

0

0

<1%

*Sample attempts to proportionally represent Utah’s business sectors. Sectors are determined by the Utah Department of Workforce Services FirmFinder.

METHODOLOGY The Salt Lake Chamber partners with the Kem C. Gardner Policy Institute at the University of Utah to design, tabulate and assist in analyzing the survey. Sixty business executives from Utah’s fourteen major industries are asked to respond to 6-8 questions, depending on their responses, about their company and Utah’s economic performance. Respondents are selected by each industry’s contribution to the Utah economy. Panelists come from a range of firm sizes and locations within Utah.

FOR MORE INFORMATION Abby Osborne Vice President of Public Policy and Government Relations Salt Lake Chamber 801-328-5071 aosborne@slchamber.com

Natalie Gochnour Director and Chief Economist Kem C. Gardner Policy Institute and Salt Lake Chamber 801-585-5618 natalie.gochnour@eccles.utah.edu

Dianne Meppen Director of Survey Research Kem C. Gardner Policy Institute 801-585-5618 dianne.meppen@utah.edu

2018 - Quarter 3

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