At this time last year, there was hope that 2022 would ring in more predictable economic activity in the U.S. and Inland Northwest. Sadly, it was not to be so. The disruptions started by the pandemic, notably the labor market and supply chain disruptions, are still with us.
The supply chain disruptions have been prolonged by the Ukraine war and China’s stubborn adherence to a zero COVID policy. The war by itself has done significant additional damage to food and energy supply chains. The combination of China’s policies and the Ukraine war is keeping inflation stubbornly high here and abroad.
In response, the U.S. Federal Reserve (the Fed) and other central banks are aggressively pushing up interest rates to move consumer inflation closer to their long-run target, which is 2% in the U.S. It’s likely that U.S. and regional inflation will not be near 2% until 2024. Getting near 2% by 2024 may also come with an interest-rate induced recession in 2023. Even if an outright recession is avoided, U.S. and regional growth will still slow noticeably in 2023.
Although congress has charged the Fed with multiple mandates, the Fed views price stability as the first among equals. If getting there requires a recession, the Fed will accept this as the price for reducing inflation. Regionally, a recession means a decline in employment growth, a significant moderation of regional rent and home price growth, and potentially slower in-migration to the region.
Even before the risk of another recession fully emerged, employment growth in the combined Spokane-Kootenai metro area started to slow early in 2022 (see graph). Even with slowing growth, the region has fully recovered from the 2020 recession and will end 2022 3% above the February 2020 pre-shutdown level of employment.
The current slowdown in employment growth reflects an odd combination of some sectors still struggling to fill job vacancies, while others hold back on hiring because of economic uncertainty. Given the Fed’s aggressive anti-inflation stance and the risk of a recession, it’s possible the region will see essentially no employment growth in 2023.
Along with slower employment growth, the Fed’s rate increases will slow the red-hot growth in regional home prices. On a year-over-year basis, the Federal Housing Finance Agency existing home price growth in Spokane-Kootenai metro peaked in second half of 2021 at around 30%. In the first half of 2022, year-over-year growth slipped slightly, to around 25%. Given that mortgage rates have increased from under 3% in Q1of 2021 to around 7% this fall, the region should experience a significant slowdown in home price growth. Sales data from the real estate industry indicates that initial seller prices are coming down in many markets, including our region.
Rental rates, which were growing faster than inflation before the pandemic, should also start to slow in response to a weaker economy and the impact of new complexes opening. The last three years have seen robust apartment permitting on both the Washington and Idaho sides. This publication recently reported that in Spokane County, eight of the 20 top construction projects are apartments (October 6, 2022).
Although housing inflation will slow in 2023, the likelihood of repeating the big price deflation from the 2008-2009 housing bubble burst seems unlikely. This means regional home prices will remain elevated compared to the start of 2017, when regional price growth accelerated. In addition, research from the San Francisco Fed (Working Paper 2022-11) shows that the pandemic surge in home prices reflected a fundamental increase in housing demand, especially with more people working from home. This means regional affordability will continue to frustrate low- and middle-income households.
In addition to working from home, regional housing demand continues to be supported by in-migration. Census estimates show that in 2021, the Spokane and Kootenai metro areas’ populations grew at 1.1% and 4%, respectively. Estimates from Washington’s OFM show Spokane metro will have grown 1.5% in 2022. In the 11-year period 2011 to 2021, Spokane-Kootenai metro added over 100,000 residents, with nearly 50% coming in the four year period 2018 to 2021. Although a recession will likely slow in-migration, regional population growth will continue to exceed the U.S.
As I travel the Northwest, I see crisis fatigue everywhere. This reflects a world in constant turmoil since 9/11. Much like the first 50 years of the 20th century, the first 50 years of this century will reflect unrelenting change. Unfortunately, 2023 will likely provide little fatigue relief. Although 2023 will be rocky, inflation will likely moderate, setting the stage for stronger growth in 2024. The main risk to the economy over for the next 24 months is an overly aggressive Fed and/or an escalation of the Ukraine war that brings the major powers into direct conflict.
Dr. Grant Forsyth is the chief economist at Avista Corp. and previously was an economics professor at Eastern Washington University.
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