2022 Q4 Dakota Outlook

Welcome to the inaugural edition of the Dakota Outlook. The Dakota Outlook is a quarterly publication produced by the Dakota Institute that explores the key trends shaping the South Dakota and regional economy and provides data-driven forecasts of where those trends might take us. Every quarter our experts provide professional and informative analysis on key economic sectors of interest to business leaders and policymakers.

In this issue we provide a special focus on the high inflation rate in the US and how it impacts the South Dakota economy. The 2022 Q4 forecast expects inflation to remain elevated for an extended period, and we forecast inflation will remain above the Fed’s 2% target through 2023. While inflation remains stubbornly high in the face of Fed action, higher interest rates are slowing demand and economic growth. We still forecast 1.8% growth for South Dakota and 0.8% growth for the US in 2022, but that leaves the strong growth of 2021 a distant memory.

Slowing growth and high inflation are also biting into paychecks across South Dakota and the US. Nominal incomes, which don’t account for the effects of inflation, continue to grow strongly but income growth has not kept up with inflation which is causing real income growth (i.e. inflation adjusted income growth) to turn negative. Real personal income at the national level contracted through the first and second quarters of the year, and we forecast it will close the year down 5.6% before rebounding slightly in 2023. Real personal income for South Dakota, in contrast, was mostly flat through the first half of the year, though we forecast the second half of the year will turn negative and result in a 3.3% contraction for 2022 before rebounding in 2023.

Perhaps no market has seen prices rise as rapidly over the past year as the housing market. Housing prices in South Dakota and across the United States increased dramatically over the past two years. The ramp up was especially pronounced in South Dakota where the inflation-adjusted median list price in September 2022 was 17.1% higher than it was the year prior. Higher interest rates have stalled housing markets but the current forecast has median list prices in South Dakota ending 17.8% higher in 2022 than they were the year prior and national prices closing the year up 5.9% from the prior year. The forecast also anticipates a construction slowdown, but the state is expected to weather it better than the nation. Building permits are forecasted to close 2022 up 42.3% in South Dakota compared to only 4.0% at the national level, and new permit issuance in South Dakota is forecasted to grow an additional 10.7% in 2023 compared to 3.0% for the US.

The final section of this issue of the Dakota Outlook explores the worker shortage which has dominated the workforce conversation throughout much of 2022. Both South Dakota and the US have enjoyed strong employment growth in the wake of the pandemic. Total employment at the end of Q3 2022 is now higher than it was before the pandemic, both for South Dakota and the US. Labor markets remain stubbornly resistant to any rumors of macroeconomic slowdown, though cracks are starting to appear.

The current forecast estimates South Dakota will see 2.8% employment growth in 2022 and 1.2% in 2023. National employment is forecasted to finish 2022 more strongly with 3.1% year-over-year growth, but the slowdown in 2023 is expected to be more severe leaving 2023 employment growth flat at 0.0%. Slower hiring growth and a potential macroeconomic slowdown will combine to push the national unemployment rate higher according to the forecast. We expect a 4.9% unemployment rate in 2023 compared to 3.8% in 2022 and 3.9% in 2021. We also forecast that South Dakota’s unemployment rate will rise to 2.8% in 2023, compared to 2.3% in 2021, and 2.9% in 2021.