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- Clearly, as this year winds down now, the presidential election was by far the biggest event that affected the most people.

By the economic science of it all though, what is called the Trump trade has pushed capital markets higher and by and large has buoyed investors and business owner's expectation for the economy.

Welcome again to the most widely-watched and the longest-running dialogue on Carolina Business Policy and Public Affairs, I'm Chris William and on these two special editions of "Carolina Business Review", this program is focused on our review of 2024 here, right at the very end of the year with our resident economists and economic experts.

Please stay with us.

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This is the "Carolina Business Review, Economic Year in Review," featuring Sarah House of Wells Fargo, Mark Vitner of Piedmont Crescent Capital, Dr. John Connaughton of UNC, Charlotte, and Anders Persson from Nuveen.

(dramatic music) - Happy Holidays.

Merry Christmas.

Happy New Year.

Glad to have y'all here.

Anders, welcome to this gang.

You might be sorry for this at the end of this dialogue.

- Looking forward to it, thank you.

- Thank you, it's good to have you here.

Sarah, I'm gonna start with you.

If the presidential election of most recent had a different outcome, would the animal spirits in markets in the economy and business be different right now?

- I think they would be.

I think you really saw consumers and businesses looking for some sort of change.

I think, you know, they've been plagued by the inflation environment of the past few years where even as inflation has slowed, we still see prices significantly higher than what they were just a few years ago.

And I think that's really weighed on a lot of economic actors over the past couple of years.

And so with this election outcome, we've seen big jumps in consumer confidence.

We saw the biggest jump in business confidence going back to the mid-1980s.

And so I think there definitely, it has been a release of some animal spirits or increased optimism about the account, the economy.

- Anders, how do you take that?

- Yeah, I would concur I think, you know, having a very decisive outcome I think was something the market was hoping for.

So removing some of the uncertainty in general, I think the view being that the Republican kind of type focus will be a little bit more corporate-friendly and business friendly.

I think it's definitely adding to the animal spirits, using your term.

So we're seeing that with, you know, stock market moving up, credit spreads, you know, on the fixed-income side and moved in quite dramatically.

And I think that's reflecting basically a little bit more confidence around less regulatory pressure, a little bit more confidence around, you know, outlook for 2025.

- Yeah, and I know you two have an opinion on this and I want to get into it right now, Mark and John.

Mark, do you think the reaction in capital markets was an overreaction to optimism on what may come?

- Well, the stock market always tends to overreact, and it's already pulled back a little bit since then, but I think it's got it right in that there was a good bit of regulatory pressure on business.

And one of the things that is going to change is the M&A outlook.

It's going to change in a big way.

And so we're going to allow more mergers under Trump than we're allowed under Harris and the startup community, and particularly in Silicon Valley, which went for Biden in the last election, went overwhelmingly for Trump in this election because they've just been clobbered.

It's been virtually impossible to start up a company and sell it to Facebook or sell it to Amazon.

And without that, if you can't have an exit, it's very hard to get funding to start a company.

And so we've seen a sea change there and I think that's going to make a worlds of difference.

And that's why the stock market's reacted like it has.

- So is there real smoke and substance to this optimism?

- Probably not.

Government moves very, very slowly.

There will be some presidential orders that take place early in the Trump administration that will reduce, as Mark said, the regulation.

And it has been overbearing under the Biden administration in terms, particularly, the Antitrust Division of the CON.

It's been horrendous in terms of, I mean, look at what happened with Spirit Airways.

It's probably gonna go outta business now.

How does that improve competition?

But anyway- - Well, yeah, economists would call that creative destruction, right?

- Well, the JetBlue and Spirit combined may have been a better competitor to American United, Delta, et cetera.

And now you've got JetBlue going alone, essentially.

Yeah, they've cleared this space in the low-cost carriers would Spirit being in as much trouble as they are, and that will help them, but it doesn't help them go up against American, United, et cetera, so.

- Yeah, and on that point, JetBlue has said that they're now planning to go upscale, so they're not going to be a low-cost carrier as much.

So it's frustrating because it, on the surface, it's like, no, we're gonna have less consolidation in this industry and really they should be looking at what the total of impact is on competition.

- So in 2024, Andrews, do you think, and Sarah, do you think we have achieved the soft landing, the nirvana that the Feds always talked about?

- Yeah, and short answer is, I would say yes.

I think if I look back to 2024, I would say probably the biggest surprise that I would see is that the US economy has held up so incredibly well.

I mean, if we were sitting here a year ago, you know, like the Fed was expecting sort of a 1.4% GDP for 2024, well-achieved that and exceeded that.

There were plenty of economists calling for a potential hard landing or recession of some kind.

And we obviously avoided that.

So, yeah, I would say we're in a soft landing possibly.

There's no landing kind of type scenario as well.

But, certainly, I would say the US economy is well-exceeded expectations this year.

- Yeah.

- I'd agree with that where we're pretty close in terms of you've continued to see the economy grow.

Inflation has improved a lot, but I would say we haven't landed quite yet.

You know, if you look at inflation, it's still above the Fed's target.

It's been moving sideways since.

So I think we made a lot of inroads and I think, got into a much better place with a lot less pain than I think was initially feared when we had inflation above 9%.

And the Fed was raising rates at 75 basis points a meeting.

But now I think at least with the Fed easing policy to some extent, I think, you know, really what's been the biggest risk hanging over the US economy has been removed as- - To stay with you on that.

Is the inflation, are we just now seeing the effects of this long, I know inflation has dropped to that 9% print that everyone was stunned, maybe not stunned by, but this long effect, the long tail on inflation, is that what we're seeing right now?

- I think we're seeing part of that, but at the same time, we've seen goods inflation.

It's the deflation that we've seen, it's really petered out.

So you're not seeing as much downward pressure as that, where we had a lot of low-hanging fruit.

If you think about, okay, well, we saw oil prices and agricultural commodity spike in 2022 with the Russian invasion of Ukraine.

So as those prices came down, that made for some pretty quick deceleration in inflation.

But now this is a harder part of the inflation battle.

We're still seeing some progress on services, but it's very slow.

So we're still dealing with inflation.

- Are we seeing the effect of inflation on consumer spending in a big way?

- Well, it depends on where you look.

I mean, it's been a softest landing and it's been softer for some than others.

And if you earn the median income or less, you're getting squeezed because food prices are up and they're 26% higher than they were in February of 2020.

And if you're trading down and you're buying more ground beef or you're buying chicken or you're buying pasta, prices are up 44%.

And so, that's really squeezed the life out of half the consumers in America, whereas, if you're on the upper end and you own your own home and you've got a 3% mortgage, you've got plenty of discretionary income and you're out traveling and having a great time.

- So who wins that battle?

The latter or the former?

Who drives more of that consumer spending?

The smaller.

- Well, I want to go back to the original question in terms of a soft landing.

Okay, I mean we, no, we talk, no, listen, we talk about the Fed dual mandate, okay?

- Yep, yep.

- And they're not there yet and they're not close and they've stalled.

And particularly if you look at the core CPI, which is less food and energy, that has definitely stalled above 3%.

- So is this a new normal on inflation?

- No, it shouldn't be.

But let's ask ourselves a question.

Why did the Fed scramble to reduce rates in the second half of this year, '24?

All right, while we still had pretty significant and sticky core price inflation.

All right, the reason is the Fed is just like Silicon Valley Bank.

They've got a mismatch between their asset yields and their liabilities.

The EELS, okay?

They're paying more to banks for the deposits, reserve deposits than they're receiving from the treasuries they own.

For the first time in history, for the last two years, the Fed has lost money.

Normally, the Fed makes money and remits to the treasury, any profit they make.

And typically, that's 70 to 100 bill a year.

- When was the last time that happened?

- September of '22.

They've been losing money since then.

And in fact, over the past two years and change, they've lost over $200 billion, which they are borrowing from the treasury with the IOUs.

And so if you ask me, one of the principle motives why the Fed is reducing interest rates has less to do with inflation and soft landing than it has to do with the fact, they're continuing to lose money.

10 bill a month.

- Yeah.

- Let's not forget about the labor market though.

So that's the other side of its mandate and I think that was a- - How can you argue with 200-something-thousand jobs being created last month?

- You can look at the quarterly census of employment and wages, which shows it's about half the pace and we've seen a much more market slowdown, and I think we've seen the unemployment rate move up where I think when the Fed's just looking at its two core mandates, yes, we've seen a lot of improvement on inflation, not there yet.

But I think a lot of what motivated the beginning of the cutting cycle was that you're starting to see, I think some more cracks in the labor market, and- - I'm just skeptical.

- They don't wanna see that.

- Anders, if you were Keanu Reeves in "The Matrix," and you could read "The Matrix" by looking at a screen and you do that with fixed income and rates.

- Yeah.

- What do you see based on what we're talking about?

- Yeah, I would say that what I see is a lot of crosswinds that the market is trying to really kind of digest.

And it's been really difficult to do.

If you look back again throughout this year, what the 10 years's been doing is, is pretty spectacular in terms of the volatility we started.

- Explain that a little bit.

- So we started the year in 2024, around 4%, 10-year yield, right?

It went all the way up to four and three quarters, down to three and three quarters, you know, up to four and a half post-election, now we're around 4.3%.

That type volatility is unprecedented.

And why is that?

That's because there's so many moving pieces here and the Fed, you know, kind of to John's point has been so data-dependent.

So each data point that we're seeing here is just driving the market to try to reprice in expectations and what the Fed will be doing.

So sitting through that matrix, it's been very, very difficult.

You know, we, at Nuveen I've been reluctant to take big bets on duration just because there's so many moving pieces have been much more comfortable kind of playing the credit markets and that side of the fixed-income side.

And I think that's gonna continue for the coming months and quarters as we move into next year.

Just because there's still so much to digest for the market and for the Fed ultimately.

- Mark, what do you?

- Well, you know, when you look at the economy and monetary policy is a blunt instrument, it works with a long and variable lag and they are trying to lift parts of the economy without lifting other parts.

It's a very difficult thing to do.

Housing is one of the most cyclical parts of the economy.

It has one of the biggest add-on effects of any part of the economy.

And this past year, we sold fewer homes in the United States, fewer existing homes in the United States.

- But that follows though, right, if rates are high, you're gonna sell less homes.

- But we sold fewer homes last year than we did going all the way back to the financial crisis.

We sold less in 2024 than we did in the worst year of the financial crisis.

And that really hits home in the Carolinas 'cause we make a lot of furniture that goes into those homes and we make a lot of carpets and home furnishings that go into those homes.

I've had a horrible year.

- Well, you just scoffed at something.

What were you laughing about?

- No, I was agreeing with Mark.

I mean, but again, I look at the Fed's behavior over the past several years.

- Well, did he agree with it?

(everybody laughing) - Yeah, uh-oh, (laughs) yeah.

I look at the Fed over the last several years and they've not done well in terms of managing the economy.

As Mark said, it's a blunt instrument and they were extremely late to the party.

They didn't even start raising rates until after it hit 9%.

- All right, well, let me ask this question because every time I ask this question of an economist or a fixed income or a Fed official, I get a look like a cow looks at a new gate.

And the idea is, are a lot of these effects that we can't, like you call them crosswinds and the market's having trouble digesting them, can a lot of this be because there's been an incredible amount of liquidity, historic liquidity dumped into the markets, dumped into the public, dumped into the hands of consumers and corporate over the last four years.

It's big.

It's a big, big number.

- Absolutely.

- So does does any of this have that kind of effect on, and we're trying to figure out, as a doctor said, "Well, I don't know where it's coming from."

I don't know what the pathology is, but we know it's doing something we've never seen before.

Anyone?

I know that's probably not a fair question, but- - No, but I think there's no question that, you know, kind of the punch bowl that the Fed has left out there for so long has meant that the markets have been, you know, pretty happy at the holiday party for some time and that's changed pretty dramatically.

And they're trying to figure out how slowly can they move that away from the party table, so to say.

And that's a tricky one for them to balance for sure.

And the markets have become very used to the Fed sort of bailing the markets out and anytime there's any kind of hiccup one way or another, I think that's, you know, something that we can't rely on as much anymore and the markets need to start reacting to that.

So, you know, it does feel a bit concerning around how quickly the equity markets are reacted here and where we're heading going into next year.

But that is a balance that they have to kind of now basically be striking going into next year.

- Sarah, final word, and this is on the interest rate, an interest rate question is it fair to say that the rates are normalized at this level?

In other words, over the last 100 years, this has been the average of long-term rates?

- Yeah, it's hard to say right now 'cause, of course, a lot of things have changed within the economy, so how fast the overall economy can go when you factor in things like demographics, productivity trends.

But that's been, I think one of the major challenges of this past year is what is a good level of rates where you're putting enough pressure downward on inflation but not so much that you're tanking the economy.

And I think this is gonna be an issue that the Fed continues to struggle with in the year ahead as well.

- I was gonna say that long rates may be getting to normal, but normal would probably be a low of 430, and somewhere around five.

So we're at the lower end of what normal would be for the tenure year.

- You say you think it's gonna stay well, now we're gonna hold that for the next program.

I'm sorry, that was my mistake.

We've got another program coming up.

It's the forecast for 2025.

I do want to ask you this, John, what surprised you most about 2024?

- That it continued to grow the economy as strong as it was.

I mean, we're probably gonna have a 3% GDP for the year and that was a lot more than any anyone expected a year ago with the Fed having raised rates as much as they did and as quickly as they did after, you know, after they were a little late to the party.

It was surprising how strong the economy was.

And you know, just to talk about what you mentioned, Mark, in terms of the rates, nobody knows where the neutral rate is, but they know it's not 2%.

(everybody laughing) Okay, it's probably closer to 4%.

So, yeah, but it has been a surprise.

- So if they fix GDP, they fix an inflation problem because isn't a strong GDP inflationary?

- Not necessarily if in turn productivity follows.

So there's no particular reason to get oh, angsty about 3% growth.

I don't think we'll see that this coming year.

But I think that it, that was, you asked me what the surprise was, that was the surprise.

- What surprised you about 2024?

- Well, that we had 3% growth and we had to change election, you know, it just, the two don't go together.

- Yeah.

(laughs) - And that was a question I got.

I was traveling in Europe and everybody was like, "It is like how, what, you've got twice the growth that we have and, you know, why did you throw the bombs out?

You know, what goes?

It just doesn't go that way."

And it really gets back to what I said a little earlier in that it's not 3% for everybody if you earn the median income or less and the median is the midpoint, so that's half of the country, it hasn't been 3% growth for you.

It hasn't been a good economy.

And those are the folks that really came out and voted for change.

- What surprised you most?

- I think similar to John, it's just that we had another year of resilient growth and I think in some ways, it shouldn't surprise us 'cause I'd say that's probably been the surprise of the past couple of years now, is that the economy has just continued to chug along and we're expecting a more pronounced slowdown that it just hasn't happened.

But I think, you know, we're still grappling with I think just some of the changes that occurred through the pandemic, some of the fiscal policies that we've seen in recent years, some of the secular pol changes that we've seen, and some of the technological investment like around Generative AI and all of these have come together and just kept the US economy going.

- Anders, what do you think, biggest?

- Yeah, no, I think I mentioned earlier I'm in the same camp, I think the economic growth this year has been surprising from that perspective.

On the market side, again, as I mentioned, just the rates volatility has been crazy, I would say, and quite surprising, and even a little bit this animal spirits, to your original question, the fact that credit spreads on the fixed-income side and equities rallying as much as it had.

It's not what your market consensus was going into 2024.

- We've got about six minutes left and I do want to, you mentioned housing, Mark, but John, I want to go to the commercial space.

Do you think that commercial real estate had bottomed out in 2024?

- No.

(laughs) - When it came to valuation?

- No?

- No, we don't know what's gonna happen going forward.

I mean, you know, the reason that commercial real estate took such a hit is 'cause there's so much vacancies, so many vacancies out there.

I mean, we've got buildings in the Carolinas that are ghost towns, whole buildings are empty and you know, that's what's been driving commercially real estate.

- What drove that though in 2024?

- People going home and working.

- But that's coming to an end, even if there's a hybrid model, it's coming to an end.

- You think so, but not necessarily.

- I wanna bring us back to our norm here where we totally disagree.

I do think that commercial real estate bottomed in 2024 in terms of valuations.

Certainly, we've got problems in the office market, particularly older.

- And you mean beyond just class A space, you mean in general?

- Yeah, I think overall, the commercial real estate market is bottomed.

It is somewhat interest-rate dependent and the Federal Reserve has to reverse course and drives rates up unexpectedly.

That would be very disagreeable for commercial real estate.

But I think we've seen the worst of office vacancy, and I even expect to see new towers announced in markets in the Carolinas in 2025.

- Even on the yields of some of those, what's that?

I'm sorry, Mark, go ahead, finish that.

- I said I didn't wanna get too far ahead, but even on the yields of this because what we're seeing is that people want to locate in areas where people want to live and work.

And so in Charlotte, that's South End and it is one of the fastest-growing sub-markets in the country and I would not be surprised to see another building go up in South End because there's just such strong demand for space there.

- Yeah, did you see that kind of growth in the other city centers in the Carolinas, Charleston, Columbia, Raleigh- - Charleston's seeing even faster growth than Charlotte is and in Raleigh, they're seeing a lot of growth.

It's, you know, it's not as concentrated as in Charlotte, it's a little more spread out and Greenville is growing very, very rapidly as well.

- We've got five minutes left.

And, Anders, I promise, I'm not trying to put you on the spot with gambling because that's probably not a good thing to talk about with a fixed-income boss like you are.

But gambling itself, sports betting, online gambling, all in is expected to be about $150 billion spent in gambling in 2024.

Just for context, in 2018, that number was 7 billion.

So it's to say it's on a J-curve is probably an understatement.

What, is that an, I don't even know how to ask this question.

Is that an industrial sector?

What kind of effect and are you surprised by the growth in that business industry?

- Yeah, I mean I would say we would call it, you know, from a industry sector perspective broadly in that gambling space, you know, Vegas has obviously had a presence and particularly in fixed income in the high-yield market.

We've had a gaming sector that's been around for a long time, issuing bonds and what have you.

So there is definitely a core around that.

But there's no question it's been exploding and been growing incredibly fast.

I would say if you look at Europe, gambling has been very prevalent for a long, long time and much more part of society than we've seen here in the US.

So I think we're sort of seeing that trend just moving over to the US now and obviously, US is a massive market.

So from that perspective that J-Curve is gonna play through and as more and more states are adopting it, North Carolina being one of them, you know, I would see that continues to be impacting the economy and the growth in general.

- Yeah, I don't wanna spend too much time on this era, but does the gravitational pull of that kind of money start to affect the economy or start to affect you?

You know, you start to look at it and we have to forecast that, we have to include that in our forecasting.

- Yeah, I mean you'd have to fold it in somehow, but it's like, okay, so what are some of the employment effects?

- [Chris] Right.

- You know, what does this mean for other areas of spending that are maybe, that you're also considering?

What does it mean for inflation in terms of demand for those other items in areas that we can more easily measure, like what the cost of some of these activities are.

So, there's still a lot to unfold there.

- Yeah, okay, we have a minute left.

Are you in general glad or indifferent or disappointed that 2024 is over?

- Indifferent?

Just another year?

(chuckles) - Yeah.

- It wasn't a spectacular year, but it was an okay year.

- Okay.

- Yeah, I'm probably in the same camp indifferent.

It was a pretty good year and you know, I would take, I'd be gladly take another.

(laughs) - Yeah, okay.

(everybody laughing) - Indifferent, time marches on.

- Really, okay, to the point.

Anders, what do you think?

- No, I would say probably more on the glad side.

It's been, you know, a lot of volatility in the markets, a lot of things that could have gone wrong.

So from that perspective, kind of happy to move on.

- Yeah, it's funny when you talk to in capital markets, when you talk to a bond guy, that's what we hear a lot.

We're glad to have that volatility behind.

- Exactly.

- Thank you.

Thanks for joining this gang.

Thanks for being here.

All of you, stay with us because next week on this program, we're gonna ask them questions about 2025.

Thank you, I am grateful for all of you all for being here and that's how we say plural in the South, all of y'all.

And Merry Christmas, Happy New Year's.

We are genuinely grateful for the support.

And I wanna also thank our senior producer, Donna Chavis because Donna brings the advent candle, she brings the poinsettas, she brings great treats.

Thanks, Donna, for being so good.

Until next week, I'm Chris William, goodnight.

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