Iowa may experience ‘shallow’ economic downturn in 2023

New developments break ground as supply chain delays threaten materials needed to build them. Hospitals and manufacturers expand, despite a shortage of workers. New ventures get bank loans even as interest rates rise.

At the same time, nonprofits are seeing a record demand for food as inflation soars and pandemic aid ends.

As the nation emerged from the worst of COVID-19, a “strange economy” has gripped the attention of grocery shoppers, commuters, homebuyers and charities among many others — and leads to the question: Will it get better in the New Year?

Iowa expectations

State economic experts say any potential economic downturn in 2023 is likely to be relatively brief in Iowa, but there’s ultimately not a way to know exactly what lies ahead.

In a meeting in December of the Iowa Revenue Estimating Conference, the three-member panel projected a slight dip in state revenues, but not to the extent previously feared.

“As always, there are many variables at play,” said a panel member, Jennifer Acton with the nonpartisan Iowa Legislative Services Agency. “While there are no telltale signs of a future recession, many economists indicate that the 2023 economy may have a difficult time.”

Kraig Paulsen, director of the Iowa Department of Management, said the Iowa and U.S. economies remain in a state hard to predict. “Tentative relief in inflation may mean a decreased chance of recession, although recession chances are still elevated,” he said.

The panel estimated state revenue will exceed $9.62 billion in fiscal 2023, the current state budget year that ends June 30, 2023. That’s a 1.9 percent drop from the previous budget year, but less than the 2.7 percent drop the panel estimated in October.

In fiscal 2024, the next state budget year that starts July 1, there will be minimal revenue growth. The panel estimated revenue will be just more than $9.63 billion, an increase of just more than $10 million — or 0.1 percent — over the current year.

“Overall, the state is an incredibly strong financial position and is well situated to manage whatever futures that circumstances dictate,” Paulsen said. “I continue to be optimistic that any downturn will be weathered, and at least in Iowa, it will be shallow and relatively short.”

Labor shortage persists

Peter Orazem, an Iowa State University economics professor, said the worker shortage is disrupting the supply chain and contributing to an inflationary environment, compounding the effects of interest rates continuing to rise.

“We haven’t been able to replace our lost workers at the same rates as other states,” Orazem said.

That’ll challenge Iowa’s economic growth, he said, and those uncertainties will wear on individuals — diminishing their interest in purchasing big-ticket items like houses, cars and durable goods.

So far, Orazem said he doesn’t see the unemployment rate in Iowa as much of an issue, even if employers end up slowing labor demand should the economy struggle.

The bigger challenge, Orazem said, is a lack of people wanting to work in a robust labor market. Immigrants who would often fill voids have either been shut out because of pandemic border closures or because of the state’s unwelcoming stance toward them, he said.

Having fewer workers who aren’t producing enough to meet consumer demand is fueling record-high inflation, Orazem said.

“It’s a really strange economy overall,” Orazem said. “ … Unless we can come up with a way of fixing our undersupply of labor, we’re going to be facing continued restrictions on supplies and goods and services.”

Iowa’s workforce woes hold true locally.

Kirkwood Community College recently released results from the Skills 2024 Survey, a report compiled from about 140 area businesses regarding future regional workforce needs.

Three common themes emerged in the survey, which was distributed to employers across the college’s service area of Benton, Cedar, Iowa, Johnson, Jones, Linn and Washington counties. Predominant concerns were:

Kirkwood Vice President of Continuing Education and Training Services Jasmine Almoayyed said in a statement that regional employers “are facing what may be the most constrained labor market in recent memory.”

“If a business can’t find the right employees, it becomes detrimental to their overall success and can destabilize the organization,” Almoayyed said. “ … If our workforce issues are not addressed, it could be damaging to the regional economy.”

To combat these issues, according to the report, employers must invest in employee retention strategies such as culture assessments and offering professional development opportunities. Businesses also must take a more active role in directing training, education and apprenticeship programs.

Karey Chase, vice president of community impact with United Way of East Central Iowa, said employers and nonprofits also must be mindful of barriers people face to employment, such as transportation or child care.

For example, people might forego a job opportunity that would help them grow and match their skill sets if wages can’t cover the increased costs of child care. Others may need help developing “soft skills” such as communication to help them land a job.

Local economic engines keep turning

Amid workforce constraints, Orazem said firms will have to decide whether Iowa is where they want to produce or whether they want to shift production to a location where it’s easier to find labor.

“At some point, the state’s going to prove unattractive to new investment as a result of its labor supply,” Orazem said.

In Iowa’s second-largest city, Cedar Rapids officials said they’re aware of the potential ripples to come in the national economy in 2023, but are confident in Cedar Rapids’ growth next year.

“Because of the work that was done in 2022 and even before that, we have really strong confidence in 2023,” City Manager Jeff Pomeranz said. “That also gives us some time to readjust as we confront whatever changes in the economy impact us.”

Moody’s Analytics forecasts the Cedar Rapids metro economy will expand over 2023, though metro real GDP growth is slated to increase at a rate below 1 percent.

David Connolly, city economic development specialist, said the local economy will continue adding jobs next year. Moody’s projects a Cedar Rapids labor force increase of almost 1,100 workers in 2023 while unemployment will remain low, about 3.5 percent through next year.

“The abundance of opportunity in the local labor market is allowing for individuals to reenter and for other individuals to find a great career opportunity in Cedar Rapids,” Connolly said.

According to the city, unique job postings in Cedar Rapids have declined about 20 percent since January 2022. Pomeranz said that, combined with information from city staff calls with local employers, suggests local companies have successfully sourced qualified workers.

City staff have been working with consultant AngelouEconomics on a road map that Pomeranz said will help navigate changes in the overall economy and guide economic development strategy.

Pomeranz said the diversity of industries represented in the Cedar Rapids economy helps the city withstand the downturns and upswings that may affect any one industry.

Economic Development Manager Caleb Mason said the road map is showing a need to enhance the current base of businesses while targeting areas with growth potential, such as manufacturing and food processing.

To grapple with the worker shortage facing Iowa, Cedar Rapids has launched several strategies that staff say have helped boost laborforce participation along with more job creation.

In 2020, for instance, the city launched a partnership with nonprofit Urban Dreams to connect underserved populations with job opportunities, helping employers recruit for hard-to-fill low- and middle-skill roles. The city this year also partnered with Kirkwood to provide scholarships for certain career and technical education programs using federal American Rescue Plan Act funds.

While planning is underway for the future, progress continues on massive multiyear developments, such as Annex on the Square, the $49 million mixed-use, multifamily development on the so-called Banjo Block, at 515 Fourth Ave. SE, named after the Banjo Refrigeration Equipment Co. that operated there.

The $81.5 million First and First West mixed-use complex at the corner of First Avenue W and First Street SW will begin to come online in phases next year, starting with Pickle Palace bar and grill as well as a Big Grove Brewery.

And other massive projects got underway this year, including high-end appliance company Sub-Zero’s $140 million, 400,000 square-foot light manufacturing facility that will add 192 new jobs, as well as the $36 million mixed-use DOMOV Lofts project — a five-story structure with commercial space on the first floor and 186 market-rate units — at the former Loftus Lumber site on Third Street SE.

Overall, 17 projects approved this year amount to a $371.7 million capital investment and will add 273 jobs and hundreds of residential units.

“Whether it’s the banks lending money or individuals locating in these centers or building for themselves, there’s a high degree of confidence in the Cedar Rapids economy,” Pomeranz said.

Development projects in the Iowa City area continue to move along and aren’t stalling once they get started, which is encouraging, said Austin Korns, director of business development at the Iowa City Area Development Group.

Developers that Korns recently spoke with also added that there continues to be interest in new projects as well, but they just might take longer to mature.

“The thing that seems to be true, at least in the Iowa City area, is the projects are taking longer to mature just because with interest rates and cost materials still climbing,” Korns said. “ … There's just more questions being asked. There's more rigor into the financing side, and that has just extended the time frame for new projects.”

Korns said developers are reporting that the supply chain is “marginally better” but getting the supplies still is what is driving schedules, along with labor shortages. Material costs are still climbing, he added. Developers don’t expect materials costs to go down but do hope they level off.

Developers are often ordering some supplies before projects get approved so they have them on hand in an effort to speed up development, Korns added.

“There's still very key things that are on long delays,” Korns said, adding that this includes electrical transformers, chillers and steel.

Meanwhile, University of Iowa officials in the upcoming year plan to continue or initiate hundreds of millions of dollars in construction — transforming, in large part, the west side of UI’s 2,000-plus-acre Iowa City campus with hospital, medical college and athletics projects.

Some of the work aims to pave the way for a new UI Hospitals and Clinics inpatient tower the campus expects to spend more than $620.9 million building over the next five years.

Among enabling projects is a $65 million “Hawkeye Ramp” north of Kinnick Stadium connecting with the existing hospital skywalk and adding 900 parking spaces; a new west campus academic building housing UI’s Wendell Johnson Speech and Hearing Center and its Communication Sciences and Disorders program; a renovated Pharmaceutical Sciences Research Building; and a larger water tower.

UIHC also is planning a $24.6 million emergency room renovation and expansion, with the first half that two-phase project starting in February and the second half starting in May; a $95 million vertical expansion of its existing inpatient tower, currently in the planning phases; an $8 million conversion of UIHC’s south wing into 13 inpatient rooms, with construction starting in spring 2023; and a $2.3 million “ophthalmology simulation lab” in Parking Ramp 4.

The university plans to spend $212 million over the next five years on a new “modern health care research facility,” scheduled to start in 2024 and end in 2027.

Contributing to UI’s west-side construction boom are UI Athletics projects in the works, like a $31.6 million Hawkeye wrestling facility, $5.8 million upgrade to its recreation fields, $20 million renovation of Duane Banks Field and possible upgrades to softball, field hockey and track and field complexes.

To accommodate the growth, UI officials recently asked for Board of Regents permission to move forward with the second phase of a “UIHC Emergency Generator Facility” project. That $45 million phase would add 10,000 square feet to the existing emergency power generation facility.

A third phase would add a third generator; the fourth phase would add another facility “to support emergency power generators for the new UIHC inpatient tower.”

Housing market likely weak

Housing prices rose fairly rapidly earlier in the pandemic, Orazem said, in part because fewer were being built.

Now, he said the market is constrained by the rising costs of construction materials, and interest rates and mortgage rates more than doubling what they were a year ago. All of that will make it more expensive for people to finance their houses, Orazem said, so he expects a weak housing market in 2023.

“That creates downward pressure on housing prices,” Orazem said. “I think housing prices may moderate a little bit, but the actual mortgage amounts may be going up because interest rates will rise faster than housing prices will go down.”

In Cedar Rapids, home sales held relatively constant in 2019 and 2020 at nearly 2,500 for each calendar year, according to Cedar Rapids assessor’s office data. In 2021, sales were up 12.9 percent from the prior year, climbing to 2,819.

While it’s impossible to forecast 2023 conditions, City Assessor Julie Carson said, the number of sales this year has fallen 10.5 percent compared with last year, to 2,524. Data shows the drop-off in home sales mainly started in August, as the Federal Reserve hiked interest rates in an attempt to cool the economy.

Carson said interest rates, building costs and motivations of a buyer and seller are all factors affecting where sales prices eventually land.

Houses in Iowa City are generally selling for “significantly more” than assessed value, Iowa City Assessor Brad Comer said.

“The market seems to have leveled off but is similar to what it was six months ago and is quite a bit higher than it was at the start of the year,” Comer said.

While the number of sales is down, prices have held up, he said.

The Iowa City Assessor’s office is expecting that the average increase in residential assessments will be around 20 percent, Comer said.

Demand for safety net has ‘grown worse’

Despite the building booms, nonprofits are seeing increased need after pandemic aid programs have sunset.

The number of homeless people living outdoors has quadrupled in Linn County since July 2019 has more than tripled from 33 to 107 — the first time in recent memory the number surpassed 100. In July 2012, the total number was 11.

And demand at food pantries in recent years have seen a consistent growth in demand, challenging some Eastern Iowa food banks to keep up. Need has been high since the onset of COVID-19 in March 2020, but the end of pandemic-based subsidies of food stamps in Iowa this year only pushed the need even higher.

Chase, with United Way, said those safety net or basic needs are always in demand, including access to food and shelter, but the pandemic and 2020 derecho have heightened those long-standing issues, especially housing access.

Record-high inflation is pressuring people’s pocketbooks, challenging their ability to keep food on the table, a roof over their heads and gas in their cars.

“It’s just grown worse,” Chase said.

Nonprofits are hamstrung by the lack of extra COVID-19 relief funds to meet people’s needs, though they are pooling resources to try to better collaborate and support households with rent and utility assistance.

“We have to stop putting Band-Aids on the issues and look at some of the solutions that may be long-term solutions,” Chase said.

She said there’s been a recognition that for individuals already struggling to keep up, sometimes the systems to get help just add hurdles — forcing people with limited resources to call around to numerous different organizations with varying degrees of success.

However, Chase said she’s hopeful there is a paradigm shift underway as companies, nonprofits and government agencies work together on solutions and recognize the need to meet people where they’re at. By taking a broader community approach, Chase said she hopes to bust the barriers individuals face to growing in their own economic mobility and safety net.

“Those small steps are going to build and build and grow,” Chase said.

Izabela Zaluska, Erin Murphy and Vanessa Miller of The Gazette contributed to this report

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