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- Happy holidays, welcome to this program.

In a moment, we will unpack some of the biggest issues of 2022 with our resident economists.

I'm Chris William, and welcome again to the most widely watched and longest running program on Carolina business, policy and public affairs scene every week across the Carolinas.

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In a moment, we will start, stay with us.

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On this edition of Carolina Business Review, the economic year in review featuring Dr. John Connaughton of UNC Charlotte, Dr. Laura Ulrich of the Federal Reserve Bank of Richmond, Dr. Frank Hefner from the College of Charleston and Sarah House of Wells Fargo Securities.

- Happy holidays, welcome to our program.

John, did you get that tie at Costco?

- Yeah, yeah.

(chuckles) - Okay.

- Same place you got yours.

(laughing) - Happy holidays.

It was probably not the best, most auspicious place to start the dialogue.

Thank you guys for being game.

Sarah, let me start with you, what was the most surprising thing in 2022 for you?

- Well, I think the most influential surprise was what we saw with inflation.

So we are expecting it to remain high and continue to be a problem, but I think just the sheer magnitude of the increase that we continue to see this year was a huge game changer for the overall economic outlook.

I don't think anyone was really looking for over 9% CPI at one point this year.

And part of that reflected things that were difficult to predict, like the Russian invasion of Ukraine and the impact on energy.

But I think in general, it was beyond that, it was just the persistence of supply chain issues, the ongoing resilience of the consumer to spend and not blink in the face of these price increases as well.

And then also huge surprises, I think just how forcefully the Fed reacted to that in terms of just the aggressive pace of tightening that we've seen this year.

- Lauren, what do you think?

- Yeah, I would totally agree with Sarah, and then I would say once the Fed started tightening, one of the things that's been surprising to me is how resilient the job market has been.

I mean, we just continue to add 200,000 plus jobs in the economy every single month.

And yeah, I've been surprised that we haven't seen more of a pullback.

- John, Frank as Sarah just talked about this dynamic of, and I found it interesting the way you said that the consumer didn't even blink in the eye of 9% inflation.

Is that because they didn't know or they didn't matter or John?

- I think there are two aspects to it, one is there's been a change in consumer behavior because of Covid, you know, that year off that we all took and postponed things with family and just living and the uncertainty that it has created, I think has pushed consumers to the front foot in terms of making decisions about having experiences.

And so they're willing to spend whatever it takes to regain their life.

That's number one.

Number two, households had very high savings levels as a result of not being able to spend for a year, and then all the checks that came out to about 80% of the households, and they're bleeding those down now, however, and so they're now at levels below before the Covid came.

So I'm a little bit concerned.

As far as surprises are concerned, the surprising thing in 2022 to me was Laura's boss all of a sudden, you know, becoming Paul Volcker, we didn't see that a year ago.

- Meaning what?

- Meeting Paul Volcker.

- He's become much more hawkish, willing to fight inflation, whereas a year ago he was, it's just temporary, it's transitory, it's not a real problem.

But he has really strapped it on, I think, at this point in time, and scaring a lot of folks in terms of his hawkishness.

- Mm-hmm, okay.

Frank, what do you think?

- I got it right.

I've been predicting inflation for quite some time.

- Was that a surprise for you?

- No, except the size.

I mean, the magnitude was absolutely amazing.

And so that was one.

The other one is the resiliency of the economy has already been addressed, I think was amazing.

The other big surprise, and it's really not a big surprise, I think was the accelerated household prices.

Housing costs just went through the roof and it happened pretty much in the latter half of the year.

I mean, I'm looking at Redfin and I'm seeing this house sold two years ago for 200,000, now they want 500 for it.

I mean, this is absolutely, it was a big surprise.

We never saw that in the housing run up before 2008, that kind of house surprise appreciation.

So that was a big surprise.

But I think the resiliency in the labor markets, as we've already pointed out, the hawkishness of the Fed, finally.

- Finally.

- It was a big surprise.

And then there's a whole host of other things that we just couldn't anticipate that was kind of surprising to me.

Port traffic in Charleston, all time record high.

And so.

- Even given supply chain issues?

- Well, that's a good question.

What were we bringing in?

(chuckles) And so I understand empty containers went out, but the containers coming in had material in it.

So as we, oh, we're not bringing, well, we don't have a toilet paper shortage anymore.

Maybe that's what we're bringing in.

But the containers are coming in and there's a huge amount, and if you look at traffic on the interstates in terms of container traffic and trucking, it's mind boggling.

So yes, why is there a supply chain problem?

- I think it's also just the restocking of inventories.

- Right.

- That we've seen where.

- You think its back to normal levels, is that what you're saying?

- Again, the consumers still holding up pretty well in terms of spending, but I mean, inventories were run down to essentially all time lows versus the sales volumes that we were seeing, so.

- Right, right.

- I think a lot of that reflects that.

- And a lot of companies too got really burned by their trusted inventory systems.

- Right.

- You're right.

- A lot of these things wouldn't be happening without the, and this is my turn, the oxygen of liquidity in the system.

How much liquidity is still in the system, not just from stimulus John, but in general, how much liquidity?

- Oh, a lot.

- A lot.

- You know, and one of the problems we've had, and this goes back to 2009, 2010, we've been underpricing capital for quite some time.

- Meaning low interest rates?

- Low interest rates, and it's really gotten out of balance.

And I think that's really the big issue that, I think the Fed is trying to correct.

But they've got a tough job in front of me.

Yeah, they can raise interest rates, but that balance sheet, there's not a lot they can do about that anytime soon.

And that's problematic in terms of, if they would've dumped that balance sheet, which is now about eight and a half trillion, if they would've start to go more than 95 billion a month in terms of shrinking the balance sheet, that would start to slow down the economy much more than their interest rate hikes.

- You know, Laura, we're talking across you about the fed.

(laughing) - I like that.

- Seems ironic.

- Yeah, I like that, I can just nod, but unfortunately you can't.

- Yeah.

- So.

Weigh into this a little bit.

Yeah, is that job won, is that how you feel about Fed and liquidity and the interest rates?

- Yeah, I mean, to John's point, I mean, the balance sheet is massive compared to what it was, especially pre great recession, right?

I mean, if you show that chart to audiences, it's always shocking to them.

And to John's point, they've gotta balance out reducing the balance sheet, which they've set as a clearly estated goal, but not disrupting bond markets, and doing so, so instead of selling bonds, they're just waiting for them to term out and then not buying new bonds.

And so it's a slower process, and so it's, his point's well made and it's gonna move very slowly getting it down and so it's hard to see who knows where they'll take it to exactly.

But because of that, the interest rate increases had to been more of the primary tool.

And that's a secondary tool.

- We've heard the R word a couple times, recession, and there are two aspects I wanna unpack with this.

And that is a recession as if we talk about it as if the sky is falling, and a recession is it's part of a regular cycle.

So Sarah, can we assume we're in a recession right now?

We did see two quarters in GDP of decline.

So that technically says recession, but are we in a recession right now?

- No, I don't think we are.

So I think in terms of the GDP two quarters of back to back declines, that's just a definition, it's not the definition, it's just kind of a convenient tool, but it's not perfect.

And I think particularly the declines we saw a lot of that had to do with just some of the GDP accounting, inventories, trade.

But I think what's a really good barometer of is the activity broadly expanding is what's happening with the jobs market?

So Laura already mentioned that the jobs market is held up surprisingly well.

So still seeing job growth above 250,000 on average, even as we get late into this year.

If the economy is contracting, why would businesses be hiring to this degree?

And similarly, you're still seeing income, even accounting for inflation and taking out the transfer payments, that's still growing on net.

And so we're still seeing broad activity increase.

I think there's just been some GDP quirks here.

- So I had one time a phrase for a jobless recovery after one of the recessions.

Well, I've been telling everyone if this is a recession, then it's a job full recession.

And that's to your point, I mean it's.

- Why couldn't it be that way?

- Well, it would be unique and that would be a surprise where we would have technically a recession, some kind of contraction in GDP, which we kind of haven't, 'cause it went up 2.3%.

So that rebounds from that trivial little drop that was reported earlier and we're still manufacturing jobs.

- It could come down to rebuilding savings.

So John mentioned the saving rate having dipped below where it was before Covid, it's the lowest since 2005.

So in theory you could have still jobs being added, but spending decline if consumers are trying to rebuild those savings.

But when we look at the overall savings stance, so yes, the saving rate has gone down, but that's after it had jumped so markedly over the past few years.

So we estimate consumers are still sitting on probably over a trillion dollars in savings above and beyond what we would've expected before Covid.

- Chris, the idea of two successful quarters of GDP decline, the National Bureau of Economic Research Business Cycle dating committee, who are the keepers of the business cycle going back to 1854.

That's not one of the five things that they look at.

And so that's not even on their radar in terms of looking at when a recession happens.

And the big thing is that, you can't have a recession when the unemployment rate is continuing to decline because that's one of the big indicators that they look at is the labor market.

And so we didn't have one this year, and in fact this year, one of the problems the fed's facing is if you look at the Atlanta Fed GDP tracker, they're looking at almost three and a half, 3.8% growth in GDP in the fourth quarter this year.

So that tends to suggest that this has actually been a fairly good year and I think that there was some quirks in GDP in the first and second quarter and that's why it happened.

- I do think it's important to acknowledge though, and to Sarah's point, there still is this tremendous amount of excess savings that exist, partially because people pulled back their spending in the beginning of Covid, some of it is stimulus payments and PPP loans that went out to individuals.

But for the bottom quintile of income earners, they very much probably feel like they are in a recession, right?

Inflation is a tremendous tax on lower income families.

And so if you look at some of the data on those lowest income families, their excess money from kind of that Covid period is gone and their housing costs are up, groceries are up.

So for those individuals, sometimes I have to remind myself that we may not be in a recession overall, but for certain segments of the economy, that doesn't mean it's not especially difficult for those people.

- Speaking of prices, I kind of jokingly commented to one group one time, I'm just glad my car doesn't run on milk because (laughing) milk prices have gone through the roof, but other, and it's amazing, gasoline prices have stabilized and that's kind of unusual in this period of uncertainty with the Ukraine issue and everything else that's been going on.

So these are, you know, after the last great recession, the standard buzzword was, is this the new normal?

And here we're sitting here looking at this past year.

- Following '08, '09.

- Yeah, right.

Looking at this past year, it's like this doesn't look anything normal under any historical time period that we've ever seen.

So that was a surprise.

I mean, all the indicators are north, south, east, west, and all points in between.

So I mean, that's an unusual scenario.

- A couple overriding things, I just want to make a comment on Laura's point about what happened to some wage earners.

We know since August of 2020 when we all started to head back to work, et cetera, that prices have gone up by 15%, but wages have only gone up by 11.

So on in general, we're 4% less purchasing power than we had a year and a half ago.

So that's one, or two years ago, that's one problem.

And that affects lower income people a lot more than it affects upper income people 'cause they don't have the savings to kind of make that difference up.

But there's another thing that's been going on in the last, say five or six years that's independent of the recession that occurred in March of 2020.

And that is that there's a demographic change taking place in this country.

We have 20 million people who are 60 to 65 that are in the process of retiring.

And the group that's coming in is smaller with lower labor force participation rate.

And if you think it's bad now, the group that's between 55 and 59 is much larger than the group that's 14 and 19 that'll be replacing them.

And so we're gonna have labor force participation rate problems for the next decade or more, that's gonna be a problem.

- So we're gonna unpack that, we're gonna keep you all together and unpack that, looking forward to 2023.

But I.

- It's affecting us right now.

- Yes, important distinction John, I agree.

I don't wanna leave the recession point yet.

Sarah, can we talk about this from the softer science of psychology and behavioral just a little bit around recession.

Well, and I know, but why are we, it seems like when you read headlines, and maybe it's just the coverage in the media that people are mortified of a recession.

Isn't this part of an expansion contraction cycle that's been going on since the dawn of the free market economy?

- Well, think of how bruising the past two recessions have been that are in most people's memory, 10% contraction in GDP in 2020, 4% contraction coming out of the great financial crisis or the great recession financial crisis.

And that took us a long time given that it was a financial crisis to recover.

And it was a very hard time for million, for the population.

So I think it's understandable that people are a bit afraid.

I think one other point on just whether we're in a recession now or not, is I think also this has to do with, it's a little bit of semantics, so recession is an outright decline.

And I think what a lot of business owners, a lot of workers, just everyone is feeling is that we've seen a sharp slowdown in activity.

And so maybe we haven't actually seen activity contract, and that's why we're all saying, "No, no, no, we're not in a recession", but we have seen that sharp slowdown, which is another reason why it might feel to many like we are in a recession, particularly if you're in some segments of the economy, like the housing market where activity is outright declining.

- And one more question on this, and I promise I'm not beating a dead horse (chuckles) around the psychology, how people fish.

But you're a scientist, you're a financial scientist, you know a little something about this doctor.

Is the fear of a recession exacerbating the situation or possibly a recession?

- It certainly can, right, and I've actually been talking about this with interest rates in the same way, historical context matters, right?

So Sarah's point about these two past recessions being really severe matters because there is now a large segment of the working age population that does not remember anything else, right.

And the same thing with interest rates, you know, I can stand up in front of a group and say, "Well, the federal funds rate is still not historically high, but to everyone under 40 years old, they've never seen a mortgage rate above 5%.

So to them this seems like the highest interest rate that's ever existed, right, and those people are making decisions, they're making decisions on how they spend their money as households, they're making decisions as business leaders on how they invest money.

And so it certainly can, right, I mean, if people, it can be a bit of a self-fulfilling prophecy that if people feel like there's gonna be a problem, they pull back their spending and then consumption declines.

But I will say to the point that Sarah made in the very beginning, consumption has remained very resilient.

And if you go out in most places in the Charlotte area, in Charleston and Raleigh, people are out, they're eating out, they're spending money.

And so a lot of businesses we talk to have been anticipating some sort of decline, but they have not seen it.

They'll say, "We think it might happen, but we just haven't seen it yet."

- So if you're going back to the psychology aspect with good old FDR, we have nothing to fear but fear itself.

And so maybe in the next session, we can discuss the real issue is how do we react to that with policies and where we're going forward.

But recession is not driven by psychology pretty much.

I mean, I always wonder about the consumer sentiment surveys.

I mean, it kind of depends on what the news was that day when you're asking the person.

And yeah, I feel bad, sure, the headlines were pretty bad today, and then I go out and I spend $50 on an entree in a restaurant.

Well, I mean, there's a dichotomy there, so.

- Just a reminder, in a couple weeks, we're going to also keep this gang together and talk about what is to come in 2023.

John, retail sales, here we are in the fourth quarter, very important during the holidays is are retail numbers going to be exceptional?

And is this going to be, and again, this is my term, the last hurrah for spending from consumers?

- It kind of looks that way.

Retail sales come out earlier this week and they were not down, but they were not as high as what was being expected.

And that included Black Friday was in that report.

So it was a little disconcerting that retail sales were a lot lower than they were anticipated to be.

So, but they were higher again than they were a year ago, considerably, not enough to offset inflation, but still pretty good.

So it may be, we're seeing a little softening in retail, but one data point does not make a trend.

- So Sarah, how do you tease out retail number?

- So one thing I've been looking at a lot is within retail sales, there's a food services and drinking component.

So you actually get a little bit of a taste for how much are we seeing good spending weekend versus services, so that shift in consumption just as a lot of us missed going out and meeting friends for dinner or a cup of coffee versus just spending at the sporting good store some sort of game to entertain the kids while they're stuck at home.

So I think that's an important distinction.

And also thinking about what's happening with inflation.

So we saw a negative retail sales number yesterday, but that was against a slight decline in goods prices too, so doesn't look quite as weak as I think it did on the headline.

- Is there some defensive play that the Carolinas have around retail sales, Frank, whether it's goods or services?

In other words, because of the in-migration, because of the growth that's going on in the Carolinas that, yeah, retail sales may be challenging, but it's not gonna be nearly as bad.

And again, that's my outlook.

- Well, if you're looking at the coastal areas with tourism, the answer is yeah, that's our play basically.

We have not only in migration, but we've got massive amounts of tourism still coming in and so they're continuing to buy and spend money.

So that's ongoing.

Probably the area that's gonna be hurt the most would be things like home furnishings and home repair because of the decline in housing construction.

But I was looking at the permit numbers and yeah, they may be down, but compared to a year ago, two years, three years ago, I mean, pretty much every graph that I look at, I think I'm all right here if you wanna look at 'em.

is that, we've exceeded pre pandemic levels this year in many, many areas.

And income is one, what you alluded to employment, construction has gone up also.

So we're just chugging along and there's a certain amount of momentum that will carry on into the next.

- And Frank, they still have this problem where you've got 10 million unfilled jobs.

- Right.

- You'd start to see that pair back long before companies would be interested in laying people off.

- Right.

- They just stop hiring people.

But we haven't seen a drop in that in quite some time, and it's still just sitting out there trying to hire people.

At one point, people were talking about hoarding labor.

I don't think they're hoarding labor, they're just desperate.

They've got more at the front end demand than they have people that they can fill things.

And that's part of the supply chain problem you're talking about.

It's not just the just in time supply chain issues that we ran into during Covid.

Right now, factories aren't producing at full capacity because they don't have the help.

- So one of the other surprises to me, and you remember this from the meetings in Columbia was the size of the budget surplus for state governments.

It was huge, billions.

And so what that did and is doing right now is massive infrastructure projects and that started.

- Which are working through the pipeline, will show up a year and five.

- Some of it's already started.

I mean, you get traffic jams like crazy on the interstate, Some of it's already started and then it'll continue in the future.

- Yeah.

- We've got about three minutes left.

And Laura, I want to ask you this question, earlier, in the summer actually what happened in the UK was the idea not just the Ukraine war, but it was a perfect storm.

And what happened was there was parody for the first time between the currencies between of course the pound sterling and the US dollar.

That was pretty meaningful.

But what I want to ask you about that, is there a much closer relationship now when it comes to global movement of money, central banks, goods and services?

Is the world even flatter than it was before?

- You know, I think this year's been really interesting because we've been, there've been some geopolitical issues that have just reminded people I think how exposed we are to the rest of the world and to issues that, like, "Oh, we do use a lot of things that are made in Russia or in Ukraine, right?"

Or we do interact with a lot of companies that are UK based and they buy a lot of our goods and services, right?

So I don't know that I believe the world is flatter than I thought before, but I just think we hadn't had quite a reminder like we've had right now in a long time.

And I think what's happened in the UK is a great example of why policy matters and looking at how it impacted, I mean, I can't remember how long the Prime minister was in power, but just a few days, right?

- Yeah.

(laughing) - Just a few days, 41.

- Yeah, and so to see markets respond in the way they did to policy that was kind of contradictory to what needed to happen.

I mean, in some ways it's a good reminder that it doesn't matter.

- And literally 30 seconds, was it surprising to you when the Fed announced interest rate increases, it didn't nearly have the effect on the US capital markets as when the ECB the next day announced the same increase in interest rates and that seemed to really unsettle capital markets?

- Yeah, I think what's going on in Europe broadly, I mean, in some ways, they were much, much more exposed to what's going on in Russia, Ukraine than we were, right?

And so they are on top of all the other, I mean, they also have demographic shifts, they also have all these things we're talking about, but then they also are having a true energy crisis.

They're not a producer of energy like we are.

And so, okay, I think you've also got a lack of trust in lot of those countries.

- Thank you, you are so lucky that we ran out of town.

(laughing) Talk about interest rates.

I'm glad to see you guys again.

Merry Christmas, happy holidays and happy Hanukkah and Kwanza and we're so glad to see y'all.

So thanks, stay with us.

We're gonna have this group back together in a couple weeks and we're gonna talk about 2023, which we'll probably have a breakout surprise.

What will that be?

(chuckles) Wow.

Until next week, or until two weeks, happy holidays.

Good night.

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