Pittsburgh’s 2023 Economic Forecast
With the U.S. facing a strong possibility of recession in 2023, the Pittsburgh metropolitan statistical area is at risk of losing more than its fair share of economic activity in such a downturn. Pittsburgh’s labor market has not yet recovered to its pre-pandemic levels, in terms of employee headcount, in eight of 11 major industrial sectors. A key driver of this lag is a lack of available workers, which speaks to Pittsburgh’s longtime, ongoing demographic trends. Pittsburgh is notoriously home to an older workforce. Through two periods of economic recovery, after the 2008 and 2020 recessions, the local economy has been unable to alter that condition by attracting younger workers. The impact of another recession while Pittsburgh is still floundering, post-pandemic, will leave its economy vulnerable to permanent loss of resources and potential future growth.
An entire generation of workers finally had achieved momentum in their careers when the pandemic forced the U.S. and global economies to shutter in 2020. Younger workers were hindered in their career aspirations by a rising labor force participation rate among older workers. As the latter remained in their roles — either by choice or necessity after the 2008 financial crisis — a logjam of sorts ensued in the U.S. labor market. As older workers delayed retirement, mid-career employees saw diminished potential to earn promotion into those more senior positions. In turn, less-experienced workers had their upward career mobility thwarted and the creation of even more entry-level positions across professional industries became difficult to justify.
This environment is of particular concern to Pittsburgh’s economy given its older workforce. A lack of career opportunities is a surefire way to drive younger workers out of a local economy in search of greener pastures. Pittsburgh’s labor force ended 2022 at 2.5 percent below its pre-pandemic level, implying that workers have exited the Pittsburgh region for jobs in other parts of the U.S. Indeed, Pittsburgh’s employment recovery is in the bottom fifth among the nation’s approximately 400 metropolitan statistical areas. A recession in 2023 would exacerbate Pittsburgh’s labor force issues as other local economies, better able to absorb a slowdown thanks to stronger post-pandemic recoveries, likely will attract even more workers away from Pittsburgh’s workforce during the next recovery.
Pittsburgh’s low cost of living is touted as an attractive economic quality. During long-term periods of economic stability, this statement is indisputable. But the past few years, and expectations for 2023 and even 2024, call for anything but stability. A low cost of living signals to employers that lower wages, relative to higher-cost regions, are warranted. Inflation in the U.S. over the past two years has deteriorated purchasing power, regardless of where a worker calls home. Couple this fact with rising interest rates that will raise the financial burden, especially on younger workers who are just starting out in their careers, and those workers’ drive to find a bigger paycheck will be amplified. Pittsburgh’s low cost of living can only be exploited as an advantage if job creation is strong and spans a broad spectrum of industries. The lagging local job market and potential further damage from a recession will delay Pittsburgh’s ability to capitalize on low living costs for several more years to come.
Pittsburgh’s housing market presents further potential stumbling blocks on the path to a rejuvenated local economy when looking across the near-term horizon. After escaping the housing bubble of the mid-2000s virtually unscathed, Pittsburgh home values have increased by more than 25 percent since the onset of the pandemic. This rise compares to a 40 percent gain nationally, but is rivaled in Pittsburgh only by the sharp home price gains during the hyperinflationary period of the late 1970s.
Current home value appreciation is good news for existing homeowners as support for their personal wealth. But for potential homebuyers — which of course includes younger workers, perhaps shopping for their first home purchase — this increase is a blow to their plans. Interest rates, too, have risen sharply over the past year, including mortgage rates. Higher borrowing costs compound the rapid rise in Pittsburgh’s home prices and undercuts affordability.
Average wages in Pittsburgh are now 1.5 percent and 8.0 percent below the Pennsylvania and U.S. averages, respectively, after matching or outperforming the state and national averages as recently as 2019. Pittsburgh homebuyers, faced with hampered housing affordability prospects locally, may again look to other regions’ local economies where wage growth and employment gains have been stronger in order to achieve their homeownership goals.
Despite the dim outlook for the Pittsburgh economy over the coming year, some industries in the metropolitan statistical area are at least on the right track, for now. Job gains in both Transportation & Utilities and Manufacturing trended well through the second half of 2022, up 5.2 percent and 5.0 percent, respectively, versus one year ago. These industries represent relatively high-paying jobs, and will offer support for consumer spending in the near term. Supply chain issues that have plagued the U.S. and global economies throughout the post-pandemic restart have not been fully resolved. As such, Pittsburgh’s Transportation & Utilities and Manufacturing recent job creation may see some measure of insulation from the impending economic downturn this year. Businesses in these industries may be reluctant to lay off workers as quickly, as has been the case in past periods of economic decline, for fear of being caught short of resources once recovery inevitably takes hold.
Consumer spending among Pittsburgh households appears to have held up well, despite gathering economic storm clouds. Leisure & Hospitality employment gained 9.8 percent in the metropolitan statistical area throughout 2022. Although still 4.3 percent below pre-pandemic levels, Leisure & Hospitality is the one sector where Pittsburgh has performed better than the national average in recovery, with the nation sitting at 6.6 percent below its February 2020 jobs count. Leisure & Hospitality jobs are only created when households are spending money in the local economy.
Unfortunately, national statistics suggest that some of Pittsburgh’s ongoing consumer spending is being fueled by credit card debt accumulation. Inflation has eroded households’ ability to keep up with their spending habits, and credit card debt is growing at the fastest pace since the mid-1990s. Pittsburgh households that do not still have the luxury of burning through the savings accumulated thanks to pandemic-era stimulus payments will find it difficult to maintain their consumption patterns beyond mid-year. And once consumers pull up stakes, the Leisure & Hospitality gains in Pittsburgh, and nationally, will face pressure from businesses looking to survive the downturn by cutting back on their costs, including staffing.
In summary, Pittsburgh’s economy will likely endure an amplified version of the economic weakness that the U.S. is set to experience in 2023. Structural labor market issues are a long-running story in Pittsburgh and will be even more of a concern as other regional economies have regained their economic footing much more quickly, post-pandemic, than has Pittsburgh.
The Federal Reserve’s aggressive monetary policy tightening track over the past year is not likely to be reversed, even if the broader economy begins to show signs of weakness; extinguishing inflation is their top priority and they will not relent until all signs of above-trend inflation have vanished. Although this is a problem for businesses across the U.S., Pittsburgh is in dire need of a business-led spark to rejuvenate its labor market. For Pittsburgh to turn the corner for the better on the other side of economic weakness in 2023, the metropolitan statistical area must find ways to attract a younger workforce that can take advantage of the current low cost of living, but who also feel able to grow their careers locally over the long term.
Kurt Rankin is vice president and senior economist and Stuart Hoffman is senior vice president and senior economic adviser with the PNC Financial Services Group.