♪ opening music ♪ ♪ Welcome to "This Week In South Carolina."

I'm Gavin Jackson.

The economy was the focus of Election 2024 and it remains so.

In fact, we're looking forward to 2025 and what's in store there and to do that, we have Doctor Joey Von Nessen who is a research economist at the Darla Moore School of Business at the University of South Carolina, who just released the 2025 Economic Outlook.

We do this every year.

Joey, welcome back.

<Joey Von Nessen, Ph.D.> Thank you, Gavin.

It's always good to see you.

Always good to be here.

<Gavin Jackson> Yeah.

So we are at the end of the year here.

But we want to, before we talk about 2025 let's kind of recap 2024.

Like we were saying, the election, the economy was so big during the election, people focused on that.

We're talking about inflation, higher prices, the housing market, the labor market.

Kind of look back at 2024, Joey, and just kind of tell us, you know, where do you think people were most frustrated about the economy and where was the economy, you know, outstanding in some ways?

Well, the frustration level really comes from high prices.

It comes from inflation.

And I think that's very clear.

That comes through in the data, both from a consumer confidence standpoint.

From a voter standpoint.

We saw polling data very clear that the economy was at the top of the list of voters concerns, and that's because prices have risen much faster than wages and consumers have lost purchasing power compared to where we were on the eve of the pandemic back in December of 2019.

And so that's just generated a lot of frustration.

And there's a real disconnect there because consumers are worse off compared to where they were in terms of purchasing power.

But, overall the economy continues to perform well.

And that's something that we don't often see where the performance of the economy as a whole is very different from economic perception.

And the bottom line is that we are recovering from a pandemic bubble.

We've had red hot demand.

And the good news as we look forward is that that correction period is now largely behind us, and we may actually see consumers make up for all that lost purchasing power in 2025.

<Gavin Jackson> And so when we talk about that consumer sentiment, we talked about, you know, inflation was declining most of this year.

We did see the feds step in there and start lowering those rates too.

When it comes to just how people measure the economy, do you think it was because of, you know, the purchasing power there, too, because the economy grew?

I mean, we had strong G.D.P.

every quarter.

The employment was strong, too I mean, sort of cool.

But, but is it really just that, that economic perception that folks have on the economy?

<Dr.

Von Nessen> I think that's exactly right.

And a good comparison point is to look at this recovery from the 2020 recession compared to the recovery in the 2008 recession, because it took us about seven years in South Carolina to recover all the job losses after 2008.

It only took us two years this time around.

So we think, oh, that's much better.

But the price was that high rate of inflation because we had so much stimulus that generated that high level of demand.

So we basically said as a country, we want to recover our job losses faster, but we're willing to trade off or accept higher prices as a result.

And, so we've really been in recovery mode still through 2024, because you've got to get both back to to really have a genuine expansion.

You've got to recover the lost jobs and the lost purchasing power.

We haven't done that second piece yet, and that's why consumers really are still frustrated.

<Gavin Jackson> When you looking back at 2024, what do you what do you think was the top moment for you?

Was it rates coming down?

Was inflation starting to cool?

What's the highlight for you in 2024 for the economy?

<Dr.

Von Nessen> I think the highlight is where we saw inflation finally fall below the rate of wage growth.

And so the latest numbers show wage growth at 4.0 percent, average annual wage growth compared to inflation, which is currently at 2.7 percent.

And that difference has been steady throughout the year.

And that's a real turning point for South Carolina and for the U.S., because it means that consumers are clawing back that lost purchasing power.

They haven't gotten it all back yet, but we are projecting that they will likely get it back in 2025.

It's not a very satisfying answer [laughs] to address this frustration, to say, well, you know, prices have been up, let's say 10 percent, but oh, by the way, you're slowly getting that 10 percent back.

But that's the reality that that we're seeing.

And so that's actually very good news as we move into the new year, because consumer spending is the biggest piece of G.D.P.

And so it's important that we see consumers get this purchasing power back so that they can continue to spend in the way they have been.

<Gavin Jackson> Were you surprised that the economy played such a big role in the election?

I mean, of all the issues, I mean, it was a surprise to you.

<Dr.

Von Nessen> I would say it's I would say no, because again, consumers really don't like when prices rise.

And that generates a lot of frustration.

And the other thing about inflation that is really a challenge is that it permeates all areas of the economy.

You can't get away from it, right?

No matter who you are, you know, you're going to the grocery store on a regular basis, you're buying things on Amazon, you're going to the gas station.

So you're constantly seeing prices go up.

And it's just being reinforced in Americans minds every single day.

So when prices are rising faster than their paychecks, they notice and that has an impact on their day to day lives.

<Gavin Jackson> But there's no easy way to tame inflation, too.

Besides, you know, lowering these rates, hoping that doesn't cause any other reverberations in the economy.

I mean, it's easy to yell at the economy and talk trash about inflation, but until you get in there and try and fix it, I mean, it's really stubborn too.

<Dr.

Von Nessen> Yes.

And the reality is, from an economic perspective, we really don't want prices to come back down.

And again, that's not a very satisfying answer.

[laughs] <Gavin Jackson> I don't like the way that sounds.

<Dr.

Von Nessen> But, the only way you see deflation where prices come back down to where they were before the pandemic, as if we have a recession and deflation also generates other problems that are actually worse.

So, the best we, the best we can hope for, and what we want to see is for prices not to go up more in the future.

In other words, we want them to stabilize where they are and get back to slowly ticking up over time at about two percent.

That's what the fed wants.

And so then how do we make consumers better off?

And the answer is we need to see stronger wage gains.

And we're beginning to see that in 2024.

Again, that's a very positive development that we've seen this year.

And something that we expect will continue in 2025, which makes us more optimistic about the new year.

<Gavin Jackson> Kind of the reverberations from the pandemic economy when, you know, we did see, you know, labor really start getting that upper hand when it came to wages and demand for jobs and all that.

So we're still seeing that kind of play out right there.

But Joey, when we're talking about, you know, we had a soft landing still, we're still on that soft landing.

No one's talking about recession.

We're looking at that unless there's something catastrophic that happens.

But it's always a factor.

But when you look at, just the stickiness of inflation, I think we can call it sticky at this point because it was 2.7 percent.

The C.P.I.

came out this week for November.

Is that kind of concerning to you to see that kind of not going down as much into being almost like plateauing It seems like?

<Dr.

Von Nessen> Yes, that is the major wild card and the biggest short run threat to South Carolina's economy and to the national economy, because, you're right, it bottomed out at about 3.1 percent about a year ago.

And then it's been essentially bouncing around ever since between about two and a half and three.

So it does seem to have settled down.

And the feds goal, remember, is 2.0 percent.

That's what they've said they wanted to achieve even if it takes a recession to get there.

So they're very serious about pulling it down.

And the major factor that is that has brought inflation down so far from that 2022 high of nine percent was housing costs.

Housing costs had tapered because as interest rates started to rise in 2022, that tapered demand because it made the cost of buying a house higher and lowered affordability.

And so we saw a pullback in demand.

And that helped taper the rate of price increases.

So that helped to pull down inflation overall.

But, housing prices have stabilized.

So if we look and say well, what else can pull inflation down?

How are we going to get to two percent from where we are?

And we look around and we say, well, there's really not much that can get us there.

We have a lot of inflationary pressures that are still fighting the fed, strong consumer spending, high wage growth that we've seen.

Again, that puts upward pressure on inflation.

We've seen an increase in shipping costs, global shipping costs this year.

So there are just a lot of different factors.

And that doesn't even bring into consideration the potential for tariffs in 2025, which also can be an inflation, can also put upward pressure on inflation.

So the bottom line is that, we see about a 50 percent chance that inflation might actually tick back up towards Three percent next year, because there are so many factors at play, and we just need one or two of those to gain some momentum to really move the needle on inflation.

<Gavin Jackson> So do we, excuse me.

Do we see the F.O.M.C., the Federal Open Market Committee with the fed, do you see them making more aggressive cuts then if that's one way to maybe combat this, when we talk about all these other pressures that are at play that could be at play?

<Dr.

Von Nessen> Oh I think they are still likely to lower rates next week when they meet.

Probably by 25 basis points.

That's the consensus.

That's what they've led, led everyone to believe based on their statements.

And I think they will likely stick to that.

And then as we look ahead to 2025, I think it's very much up in the air what they're likely to do.

There's a lot of speculation.

They'll continue to cut rates, but I think they are really going to be focused on inflation.

And if we do see inflation tick back up towards three percent, the reason that matters so much is because it does influence fed policy.

It would make them less likely to want to cut rates further.

And that impacts what businesses can do, what consumers can do.

So that just prevents that stimulative effect of lowering borrowing cost, which again helps businesses and can help consumers.

<Gavin Jackson> But they were looking at trend data.

They were looking at C.P.I.

reports.

They were looking at a variety of things when it came to those decisions to lower the rates, especially when we saw that half percent rate cut as well.

So I guess when we don't, we don't want to keep fueling the economy too hot when you do those rate cuts.

Do you think that they, they should still cut or do you think it's maybe for the best to let it sit where it is right now?

<Dr.

Von Nessen> So I think, so I would say that the 25 basis point cut that is likely to happen next week is probably the right the right decision there.

And I think what they're seeing and what I think they're doing correctly is they're taking a wait and see approach.

How does inflation evolve?

What types of policy changes do we see with the new presidential administration coming in?

How does that move the needle on inflation and then make a decision at that point?

The other factor that they're looking at, as well as the jobs market, which we haven't really touched on yet, and that's been cooling this year, as well as part of this broader movement away from a pandemic bubble, again, where we've had this red hot demand because of all the stimulus dollars, and we've seen a bit of a cooling of the labor market.

It appears to be stabilizing.

But that's the other factor.

And if we see the labor market continue to cool by more than the fed would like to see, that's more justification for stimulus because the fed, at the end of the day, they have that dual mandate, right?

They want to keep prices stable.

They want inflation low, but they also want to maximize employment.

So they have to consider these risks of inflation going up.

But also look at the labor market, which is cooling.

So, it's a tough decision every time they meet.

But but that's really what they're what they're considering.

Yeah I guess the markets are very priced in that 0.25 percent reduction too.

So you don't want to upset the markets there.

So what's the headline for 2025.

And Joey you guys spend time putting together this economic outlook forecast.

You have a lot of business leaders a lot of policymakers come to Columbia.

You I'll talk about that.

What's your forecast for next year.

Well overall we expect steady growth and more sustainable growth.

Sustainable is really the key word for 2025 because we're moving away from recovery mode.

We're moving away from this pandemic bubble where this economy has been running red hot and really unsustainably hot and moving towards a more sustainable rate of growth going forward.

And we can see that in multiple ways, and especially when we combine that with the fact that this adjustment is largely behind us, with the fact that consumers are likely to regain all that lost purchasing power.

In other words, if wages continue to rise faster than inflation in 2025, the way they are now, we expect that on average, again, your mileage may vary for everyone out there because not everyone is in this position.

But on average, when we look at consumers, they will have recovered their lost purchasing power, meaning that, that purchasing power that was eroded over the last several years, they will have made up for that in terms of wage growth.

So really, the economy in South Carolina has the potential to really be firing on all cylinders for the first time since 2019.

So it's a fairly, positive outlook for the new year.

<Gavin Jackson> So when we talked about, you know, the benefits, what could happen, what are some threats that could affect that outlook in your opinion?

<Dr.

Von Nessen> Well the main threat goes back to inflation.

That's the wild card.

Because if we do see inflation go back up, that can impact what, what the fed does, with, with interest rates and that can affect, business investment in South Carolina.

It can affect what consumers are able to do.

So so that's really the key threat for next year.

And then more long term, the labor shortage that that is a bottleneck on growth in South Carolina.

And it is likely to be in 2025.

And really for the foreseeable future, certainly for the rest of the decade.

And that's because of broader changes in demographic patterns that we're seeing at the U.S level.

The, the aging of the baby boomers is really the core of that component.

And South Carolina, because we are very attractive for, retirees as well, we're aging faster than the national average.

So, employers across the board, across all industry sectors, are struggling to find the workers that they need, and that is certainly going to be a problem in 2025, just as it has been for the last several years.

<Gavin Jackson> And I promise we'll talk more about labor in the state in a moment.

But when we talk about tariffs, that's obviously a word that everyone's learning more and more about.

You see these current proposals from the incoming Trump Administration.

What do you think that could mean for some of our biggest trading partners, our neighbors to the north, in the south?

How that could affect goods.

We're talking about 20 percent.

up to 60 percent if it's from China, things like that.

How do you see these playing out?

I know it's it's early, but where do you where do you see things right now, Joey?

<Dr.

Von Nessen> Well, we have to really separate what we know from what we don't know.

And we have to start with what we know.

What is a tariff at the end of the day?

It's just a tax.

It's a tax on imported goods.

And ultimately it's a tax that's paid by the American consumer.

Because when you see prices go up for goods that are imported, that means that consumers are paying more if they're buying those goods directly from overseas, or prices can go up indirectly when businesses are paying more for materials that they're inputting or that they're, using as raw inputs that they then in some cases have to pass those price increases along to, to the consumer.

So it is a it is a price, a price increase that's paid by consumers, but there are potential benefits as well, especially to states like South Carolina that have a major manufacturing footprint.

And tariffs are designed to in this case looks like they will be designed to support manufacturing, bring more investment to the United States.

And so to the extent that that is successful, that can actually benefit South Carolina in the long run.

If we do see more on shoring, more manufacturing investments in the state.

So it's the, so you have those costs and those benefits.

That's the economics of it, right.

There are costs and benefits.

And then the politics is the base, is the big question of was it worth it?

Right.

Are these benefits worth the costs?

And vice versa.

<Gavin Jackson> And I mean, at the end of the day, too, I mean, you have other countries, you have Canada, you have Mexico, you have other countries threatening even the E.U.

of course, big trading partners there, threatening that they could also retaliate with tariffs.

I mean, at the end of the day, it could be all for naught and we could just actually descend into a whole trade war just to prove a point, that my countries better than yours are superior or show the, the interconnected nature of our global economy right now.

So, some people say that these are just tactics from the Trump Administration, but it seems like some other countries will be willing to play hardball, if it comes down to it.

Is that worth it when it comes to how that could impact inflation and these prices that everyone voted to bring him in office for?

<Dr.

Von Nessen> Well, it is a risk.

And inflation going back up is a is a major risk associated with with these tariffs.

And businesses don't like uncertainty.

You know they like to know what's coming and we can see businesses having to pivot based on what we might see.

So retaliatory tariffs as you mentioned is is one good example of that.

If we were to see manufacturers in South Carolina, we are an export oriented manufacturing state, meaning that we produce a lot here that we then sell to customers all over the world.

And if they impose retaliatory tariffs, well, what does that mean?

It could mean lowering, that could impact the demand for those goods that we're producing here.

And those businesses may have to look elsewhere.

They may have to pivot to if we see a retaliatory tariff from China, for example, they may have to pivot to the European market or to the American market.

Is that feasible?

How easy is that for them to do?

How disruptive is it?

Those are all really good questions.

And again, we don't know enough about how these tariffs are going to be implemented to know specifically how these companies will be affected.

But it's definitely a risk.

And and again, companies don't like uncertainty at the end of the day.

<Gavin Jackson> And we're all waiting to see what happens.

But you were talking about globalization, Joey, and how we're, so connected to the international market.

So, you were talking more about on trend.

Are we seeing return of manufacturing jobs or other jobs coming back to the country, coming back to the state?

<Dr.

Von Nessen> We have seen that in, to a limited degree in the last several years.

And when we look at onshoring overall, the other thing to keep in mind with these tariffs is it does create uncertainty.

But the good news from a, from the perspective of what businesses are looking at is that they have, in a sense, been prepared for this because of the pandemic itself.

Right.

So we went through a major period where businesses began to look for alternative supply chains that were more local because they saw so much disruption.

And the just in time delivery system, which most companies were international companies especially, were beginning to to really rely on, they backed off from some of that looking for secondary sources and looking for alternatives, recognizing that a pandemic or a pandemic like event may occur again.

And so just what do we do in that, in that scenario?

So that helps prepare them for this type of thinking where tariffs may be a reality and they may need to pivot again.

So that's good news in the sense that this isn't coming out of nowhere, that they have been thinking in this direction for a while.

<Gavin Jackson> Which is also worrisome because then they could quickly pivot if they need to if they don't like the way things are going.

There's a lot of factors at play.

But right here in South Carolina, state economists are forecasting 2.5 percent growth for the next fiscal year budget and a $1.1 billion surplus thanks to previous years revenue boost.

But they have said that things will slow from the above average rates of growth.

I mean, is that is that good or we're returning maybe to a more stable, steady growth pattern compared to the sugar highs that we were writing after the pandemic?

<Dr.

Von Nessen> Yeah, I think that's exactly right.

And that's what I alluded to before when talking about sustainability or sustainable growth being the key term for 2025.

We have seen a very strong recovery over the last several years.

But again, it's been more of a pandemic bubble, I think is just the best way to describe that.

And it hasn't been sustainable.

So as we look forward, we're looking for more steady rates of growth.

We're looking for consumers to be able to recapture that lost purchasing power and hopefully get get more purchasing power as we move forward.

That's now a possibility as well as we move to a more sustainable growth pattern.

So I think those, projections are accurate and reflect the really a new norm that we hope will be emerging in South Carolina next year.

<Gavin Jackson> Yeah, getting some actual organic growth and seeing those numbers, too.

And we've also seen lawmakers lowered the individual tax rate by about, 0.1 percent over the past few years.

It's currently at 6.2 percent.

Do you think the state can go lower?

You have a lot of folks calling for lower tax rates.

Maybe also lower tax rates for the corporations in our state especially, we're looking at competitiveness in the southeast.

What do you think needs to happen when it comes to tax policy in South Carolina if you want to weigh in?

<Dr.

Von Nessen> Yeah.

So I think overall that that is one area where we haven't been as competitive in South Carolina relative to our peer states or other states in the southeast.

So what does that look like from a political standpoint?

I really can't speak to that point.

But, but I think that is certainly a worthwhile conversation to have because it is very important for us to remain competitive.

We've built so much positive momentum in South Carolina.

We've been a leading figure.

And in terms of advanced manufacturing, that's been the primary driver of our state for the last 10 to 15 years.

And we've outpaced all others in the southeast when we look at advanced manufacturing growth.

So, South Carolina has built a very strong reputation, and we want to build on that momentum.

So when we think about tax policy, how can we what do we need to be doing to improve that brand that our state has developed and improve that momentum?

And I think that's where the conversation needs to start.

You'll be hearing a lot of that when they get back in January, for sure.

And we've also seen where we're talking about the, you know, this strong manufacturing industry that we have in our state.

We're talking about the job market.

We've seen the unemployment rate tick up to 4.7 percent here in the state.

We've seen it cool down a little bit this year.

Like we're talking about things kind of coming back down to earth.

I want to ask you, do you see any red flags when it comes to the stability of our labor market right now?

And possibly also, what role do you think A.I.

when we start talking about, you know, productivity gains and and replacing workers, it seems like, how you see that factoring into all this too.

Well from a labor market perspective, in terms of red flags, the short answer is no.

I think we are in a pretty good position there.

We have seen the unemployment rate tick up from 3 percent, 3.0 percent back in January to 4.7 percent today.

But again, that's cooling from a red hot rate, a labor market that's almost been too tight, too hot.

And the way to see that is, if we look at the average unemployment rate in South Carolina historically over the last 50 years, just during periods of economic expansion, right?

So just forget about the recessions and just look at the expansions.

The average unemployment rate is 6 percent.

So in that context, 3 to 4.7 doesn't look so bad.

It looks like the what it is, which is a readjustment from a, from a labor market that's been running too hot back to more sustainable levels.

And that's what we want to see in 2025.

So that cooling is not concerning, at least not at this point.

Also, we have not seen any increase in layoff activity.

That's all been from slower job growth.

So that's a positive development as well.

We don't want to obviously see people losing their jobs.

So this is a good reason for the unemployment rate to go up simply because of slower job growth.

But we can also look at other elements of the labor market.

You mentioned A.I.

I think that certainly has the potential to boost productivity, over the next 5 to 10 years.

Again, that's slowly being, introduced.

And because we have such a major labor shortage across the country because of these demographic shifts, these productivity gains are, have the potential to really help employers.

And although it will certainly change the skill sets that are needed and require retraining for certain workers, overall, we don't expect as much displacement or as big of a threat to the market simply because the labor shortage is so significant.

So, A.I.

and technology developments will help businesses to, to satisfy the the demands that they have, particularly when they can't find workers.

Let's, find alternatives in a labor market that is very tight.

And again, the tightness of the labor market also means that workers aren't going to be displaced quite as, as quickly as they might have otherwise been.

Plus they have the ability to be retrained.

<Gavin Jackson> So that's another thing we'll be watching for of course, when it comes to all that.

Joey, we have like less than three minutes left.

I want to ask you about immigration, because that's also another big issue that will be seen from the incoming Trump Administration talking about mass deportations.

Very unclear on how that would work or what that even looks like.

But when it comes to immigration and our state, our country, tell us about the role immigration plays when it comes to the workforce and the needs of our, of our employers, especially in South Carolina.

<Dr.

Von Nessen> Well, when we look at, when we would look at immigrants specifically, so we don't have, a lot of good data, particularly if we're looking at, say, legal versus illegal immigrants.

But in general, when we look at immigrant labor, they tend to be mostly employed in agriculture and construction, to a lesser extent, in tourism and leisure and hospitality.

But agriculture and construction really are the big two.

So depending on what type of policy we see, those would be the two sectors that could be affected.

Again by how much is is really hard to, hard to say.

But it's also important to recognize that immigrants are more likely to be filling unskilled jobs, unskilled labor.

And so when we look at the labor shortage overall, it extends to both unskilled labor or unskilled jobs as well as skilled jobs.

And so when we look at areas like manufacturing, for example, that require very high skilled positions, they're already facing a labor shortage.

And this is not necessarily going to affect those, those sectors manufacturing specifically, as much as something like agriculture and, and construction, for example.

And the other factor here is that if we look at the cooling of the labor market that we've seen over the last two years, I think that gives us more reason to be optimistic that it won't be as, that any immigration policy that is initiated won't quite be as, as have as much of an effect as it would have a year or two ago when the labor market was much, was much tighter.

<Gavin Jackson> So it can absorb it a little bit more.

<Dr.

Von Nessen> Exactly.

So it's really hard to say, but I think, again, we have to just look at the markets, the industries in South Carolina, where it could have an impact.

And again, recognizing that you've you have skilled labor and unskilled labor in different sectors, depending on the occupations.

And, immigrant labor tends to, be disproportionately in, in the unskilled labor category there.

And so, again, that just helps us look at where sectors will be impacted versus where they're less likely to be affected.

<Gavin Jackson> And that could also affect prices in some way, too, if it's a very large deportation.

<Dr.

Von Nessen> Yes.

Absolutely.

Hard to measure that, but that's certainly a possibility.

And again, that goes back to our inflation risk rate for 2025, which, is that is the single biggest factor that we're going to be watching and what the feds going to be looking at to.

[laughs] <Gavin Jackson> Put a bell on that.

That's Doctor Joey Von Nessen a research economist with the Darla Moore School of Business at the University of South Carolina.

Telling us what we got in store for 2025.

Joey, thanks as always.

<Dr.

Von Nessen> Thanks, Gavin.

My pleasure.

And that's it for us this week.

For South Carolina E.T.V.

I'm Gavin Jackson.

Be well South Carolina.

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