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- Happy holidays and welcome to the longest running and most widely watched program on Carolina business policy and public affairs, seen each and every week across the Carolinas for more than 30 years.

Thank you for supporting this dialogue.

And speaking of dialogue the year that was wow!

2021, we take a look back at our four resident economists, something we do every year, right around this time, stay with us, we start now.

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On this edition of Carolina Business Review the economic year in review, featuring Sarah House of Wells Fargo securities.

Dr. John Connaughton from UNC Charlotte.

Dr. Doug Woodward from the University of South Carolina and Dr. Frank Hefner of the College of Charleston.

(upbeat orchestral music) - Happy holidays, welcome to our dialogue.

This may be, I don't play favorites, but this may be one of my favorite dialogues of the year.

We have our, as we affectionately call, our resident economists, welcome to you all.

Sarah, you're gonna get the first pitch because if we don't give it to you first, sometimes, these guys roll over all of us, quite frankly, but Sarah biggest economic news of 2021.

And what do you think it was?

And number two, second part of that, were you surprised?

- Biggest economic story of 2021 I would say is inflation.

So we've seen the highest inflation according to the latest CPI data since 1982, and I think the direction wasn't surprising.

So we knew that there was a lot of spending to be had coming out of the worst of the pandemic.

Lot of fiscal monetary policy support, and pent up savings, pent-up demand.

But I think the magnitude is what's really surprising and maybe not so much looking back on things, but I think we really underestimated just how much pressure was going to be coming out of the initial phase of the pandemic.

- John, Doug, Frank?

- Well, I wasn't gonna lead off with inflation, but as a macro economist professor, this was a fantastic example of both the supply side driving inflation and a demand side driving inflation.

So all those crazy debates we've had for years, where it's the demand side or the supply side, we got the combination of the two coming together.

And the other aspect of that is, all of the sudden, everyone heard about supply chain.

Very few people would have thought about that, five years ago, 10 years ago.

We, I mean, in academia we knew, but, and sorority logistics people, and then added on top of that, which really wasn't necessarily an economic news item, but it sure did create a lot of havoc, was virus.

And you roll that all into a combination of who would have thunked that that's the way this year would have turned out.

- I'm gonna bring it down, if I can, really quickly to what we see in South Carolina.

The biggest surprise here is that we are almost in a full recovery this year.

This is a V-shape recovery who would have thought?

In just one year, we've recovered our employment levels back to the pre pandemic level.

We're a 3.9% unemployment rate in South Carolina, and they're struggling to find workers now.

That's the problem we had going into the pandemic that we had this very tight labor market, and it seems even tighter now.

And it happened very, very quickly.

- John, biggest surprise?

- I'm gonna pile on with Doug only I'm gonna use the North Carolina example.

By the second quarter of 2021 GDP in North Carolina was back at the level it was in 2019.

By the end of this year, we expect GDP in North Carolina, the fourth quarter, to be three and a half percent above where it was in the fourth quarter of 2019.

That's about a percent and a half growth per year during this two year pandemic period.

So I think that that's a surprise.

Now we have a low unemployment rate, we're at 4.1%, but we haven't quite gained back all the jobs that we had in February of 2020, but we're close, we're within 20,000 jobs in a four and a half million job economy.

That's pretty darn close.

So yeah, I'm with Doug on this.

Yeah, inflation's a problem.

There's no question about that, but you know, how strong this recovery has been, just to put a cap on this, right now in the US we're at 4.2% unemployment, since we've gone through this two year cycle of this recession and recovery period.

Two years into the 2007, naught eight, nine recession.

Guess what the unemployment rate was two years in?

But essentially the same period we're in now, 10%.

So, if you think about this and you think about the great recession a decade ago, and you think about the pandemic recession.

Yeah, this has been horrible on a health side, but on an economic side, it's been as Doug mentioned, a lot closer to that deep V recession that we haven't experienced in decades.

- But of course the reason is we've had unprecedented fiscal and monetary policy stimulus, the likes of which we haven't ever seen before.

So that's what it took to get us here.

- And Doug, good, good point.

We're gonna take that and expand on that on part two of next week's program, but you know, I want to come back to something Frank said, talking about supply, demand.

An economist somewhere somehow said, while a supply chain crisis is important to know, this person, and I was looking for the source, this person said, "It's not so much a supply chain crisis, it's a demand crisis."

And it was being pushed more than pulled.

You agree with that?

Anyone?

- Well, not from my conversations with people in logistics.

I mean, I've asked people at the ports that are involved with port activity here, like, well, what's going on?

And it starts with factory closures in China.

And so there was delivery problems.

So ships were getting stopped right there where they couldn't load and then add into it, the pandemic issue of offloading with workers, truckers, and you get this backlog.

I mean, LA had close to 100 ships off shore, anchored, waiting to get into the port.

Savannah had close to 35 last month.

So, you know, this never used to happen.

So there's a choke point there and that has created, clearly, shortages in a lot of materials, shortages in retail's items.

At least this time, this year, there wasn't a massive manic buying of toilet paper.

So we didn't run out of toilet paper this time.

- We ran out of cars.

(chuckles) - Yeah, we ran out of cars, we've run out of microchips, we've run out of, at one point just getting a dishwasher was problematical, of certain brands.

So what's amazing, is that prices didn't actually go up higher given the constrained supply.

That to me was kind of an amazing phenomenon.

- So I think.

- Go ahead Sarah please.

- I think demand has, so while the supply side has certainly struggled and there have been, some temporary closures, some disruptions, not just in Asia, but if you think back to February, the deep freeze in Texas that had an impact on supply as well.

But I do think the demand element has been underappreciated.

So we are more than 20 months into this pandemic and real good spending.

So think of this in volume terms, nevermind the inflation, it's up 17% from where we were before the pandemic, you know, kind of piggybacking off of John's comparison to the last cycle.

It took us nine years to get 17% higher in terms of real spending on goods.

And so I think that's in part why the supply side has struggled so much.

It's just this overwhelming demand, nine years worth of growth in the span of a year and a half.

And so I do think it's both push and pull inflation that we're seeing right now.

- John, let me ask you something, let's zoom back out to the animal spirits of all of this at the beginning of the year, the idea that, it seemed like a good part of the entire year, if not, last year for sure, that companies, organizations, people were in this triage mode, this fight or flight, is that abating?

Are we now finding some kind of normal operating procedure?

Do you expect that that is abated this year?

I think is the question.

- Yeah, yes and no.

First of all, on, yes.

We've seen a tremendous change in the, let me go back to what Frank was talking about.

I'm sorry, but this is kind of a long, drawn out answer to explain this.

We've talked about demand-pull and cost-push.

And I would agree with Frank that we've been experiencing both, but we've been experiencing them at different times.

I think early on, we had the demand-pull that started this whole thing.

And that was because the average family, say to two adults and one child, over the course of a year, up until the early part of 2021 had received about $9,000 in checks, stimulus checks, tax free checks.

And we saw our consumer expenditures as a part of GDP increase at roughly twice the rate during the first and second quarter of the GDP and that's, during those same quarters, that's a classic case Frank, demand-pull inflation, right?

And then we saw the supply side really start to pull in in the second half of the year.

I've identified six things that have fundamentally changed the supply side of this economy.

One is the work lifestyle balance adjustment that folks made because of COVID and are still making.

They made that decision because of the severity of the disease.

Second, we've got a demographic shift that people aren't paying attention to that would have been problematic.

Doug alluded to it earlier about, you know, we were there in 2019, it's just worse now.

But the group of people that are retiring, is a bigger number of folks than the group that will be replacing them, all right?

So we've also had early retirement push forward.

We got gig employment, which we don't necessarily pick up in the surveys.

People have virus concerns and we've had a series of work disincentives, but not so much any longer, but during the early part of 2021.

So all of these things have led to a supply side that's in trouble and don't see it going away anytime soon.

- Can I add one thing to that?

That was a good list of points and I think we all agree it's supply and demand, but the demand surge is really, I think fundamentally, what's driving higher prices right now with constraints on supply.

Also, because for many years, we've had this just-in-time inventory system that the businesses just don't, they keep very lean inventories and they weren't ready for this big demand surge and that's exacerbated by all the problems that have happened globally.

- If you drill down into the 400 items that are the CPI that are driving this, what you'll find is that there are two or three items that are driving inflation.

One is car prices, particularly used car prices up 25% year to year, okay?

That's a shortage brought about because we got, as Doug mentioned earlier, we're not making cars, all right?

- Chips for the cars, we don't have enough.

- We're not making cars cause they're not the chips for the cars.

And so that drove used car prices up tremendously.

Second thing is energy, it's up 50% versus a year ago.

And the third thing is protein in the supermarkets, the cost of protein.

Those are the three things that have driven this inflation and those are predominately being driven on the cost side.

That's my argument anyway, certainly in the last several months.

- I think that the inflation pressures are broader than that.

So that's certainly been what's pulled the inflation numbers up to the highest levels we've seen in decades.

But even if you look at the median price change, that was the highest rate that we've seen since the early 1980s through October as well.

- And what was it Sarah?

- So it is broader than just autos even if autos and protein and energy, even if that's where the most acute pressures have been.

I think in some ways we've seen, given the strength of demand, consumer balance sheets, finances, et cetera.

We've seen businesses able to pass costs on to a degree that they just haven't experienced in decades.

- Thank you, and I'm sorry to interrupt you, Sarah.

Let's leverage out the inflation, talk about what's gonna happen in 2022 on part two and reason I want to say it cause I want to see what kind of distortion in price that you all think.

But I want to come back and shift a little bit to the worker.

Big changes culturally, big changes in the profile of the worker.

We saw the rise of a social handle called the Great Resignation.

Is that a hyperbolic handle is that something that does really have its roots in what is happening and what has happened to the worker in 2021?

Frank go ahead first.

- Well, someone else coined another term that I thought more appropriately describes what's happening.

Yes, everyone's buying into The Great Resignation, but this commentator said it really is the great switch.

And so what people have done is they have left jobs.

The pandemic has caused them to reevaluate a lot of things, lifestyle, health.

The subsidies have afforded them the opportunity to take the time to reevaluate and in the process because of labor shortages, some people are finding they're more marketable at a higher wage.

So there's been a transformation from some job sectors to other job sectors.

So we're getting, because as Doug has pointed out, employment has increased.

So people are in the job market.

The question is, they're just not doing some of the lower paid, lower skilled jobs.

They've gone back to school.

There's a whole host of reasons for that.

So rather than say the Great Resignation, which is partly, but you know, a retirement, isn't a resignation.

That's what John was alluding to about the demographics.

So there's, or Doug, demographic shifts that were missed out on.

So there's a retirement issue and there's a switching issue that's taking place at the same time.

- I'd agree, there's a churning in the labor force.

There's no great resignation.

People need jobs, and they need income.

Actually in South Carolina, the labor force is above where it was, the overall labor force where it was, in the pre pandemic era.

So that we have the highest number of people in the labor force right now.

They're not resigning.

- That's not happening everywhere.

In North Carolina- - That's true.

We were one of the few states that are in that.

- Yeah, in North Carolina we're about 70,000 below our peak labor force level.

- It'll come back.

- And we're over 2 million nationally, but that's certainly a lot better.

But yeah, I go back to, and I agree with what Frank said on this, we have been so concerned for the last year and a half to two years about the virus that we've lost track of a lot of other things that were naturally occurring in the economy that are independent of the virus, the big one being demographics.

I think that's, as I've said before, I think that we as economists, we don't look at demographics as closely as we should.

We can look back at the seventies without, I hope we can go back to the seventies in this show, and we see that, we had big inflation during the seventies and a lot of that was driven by demographics and we simply don't acknowledge that.

We have the baby boomers coming into labor force.

We had high unemployment rates and the government thought that they needed to stimulate the economy to try to get the unemployment rate down, which they couldn't do because the labor force was growing so rapidly because of the influx of baby boomers.

- So sir.

- We almost got the reverse situation now as the baby boomers are set to retire.

- So Sarah, to take the demographic as John talks demographics and all of y'all have talked about that, the idea that we also saw this shift in the workforce in 2021, and it seems that there is a hybrid model emerging, but is it too early to tell what that looks like?

And are there permanent aspects that became apparent of what a new working model for remote working, in office working look like?

- I think it's still too early to tell, just given where we are in the pandemic and the virus.

And there's threats of another wave here over the winter months and you have businesses pushing back their return to office.

So I still don't think we know what the balance between remote work and office work is going to look like once the dust settles.

But I do think you will see some blend of at least hybrid system.

And so I think on balance, that's going to support even different parts of cities and metropolitan areas, you know, favoring the suburbs and externs at the expense of more urban areas.

But it's still too early to tell what the ultimate balance looks like.

- While the idea that capital markets are an indicator, obviously, of the health of an economy, leading indicator, as you all know, but when we look back again on 2021, Doug, capital markets, equity markets, global equity markets, not just domestic were more than double digit, very healthy, very, and some would even say overpriced and real assets as well, not just commodities, but commercial and residential real estate.

Did any of that expansion or rising prices in what has happened in all those areas surprise you?

- Well, not given the amount of quantitative easing and easy money that's been pumped into the economy.

And we talk about inflation, but there's been asset inflation all along.

So it shouldn't have been a surprise because it happened after they started the quantitative easing following the great recession.

We saw what that did to asset markets.

And then when they started tapering it, we saw asset markets go down.

This year, of course, they just kept going with the easy money policies on the federal reserve and that just kept pumping up and now we're addicted to it.

I mean, every time they even hint at tapering off and that'll probably happen next year, the markets go down.

So they're very dependent on this.

And that's one of the reasons why I believe baby boomers can retire now.

They're looking at their 401k, they're looking at their assets, including their home, which is the primary asset that most people have.

And they're just worth so much more than they ever were before they don't have to work.

Or they don't have to work as long as they thought.

So I don't think, it wasn't a surprise to me.

The surprise was that they kept the easy money policy going as long as they did this past year.

That even when it was clear, we were moving quickly towards full employment, which is supposed to be their goal, they wouldn't let it off.

And they just kept this oxygen flowing in, you know, keeping the patient alive.

Now we're gonna have to see what happens when they start, we'll have to live without this oxygen flowing in 2022.

- Just to put an exclamation point on what Doug said, before this pandemic, the Fed's balance sheet was $3.8 billion, which is obscene given where they were a decade ago.

- Brilliant.

Yeah.

- Yeah, $3.8 trillion dollars, thank you Don.

It's now eight and a half trillion dollars.

Eight and a half trillion dollars.

They've essentially added virtually $5 trillion dollars to their balance sheet, which is the absorption of assets as Doug mentioned.

And they're halfway responsible for bidding the price up with these things.

What I find interesting is, this is sort of the new monetary policy that the fed has adopted since the great recession.

And I believe they're in a position where going forward, they're gonna have a hard time tapering, let alone raising interest rates.

And we can talk about that in the next show, but that they're in a position of, you know, Doug outlined it.

He said he didn't understand why they've been doing it through 2021 as well, made sense, maybe in 2020, but it hasn't made sense for the last 12 months, for sure.

- So a trillion here, a trillion there, we're getting used to trillions these days, the fiscal and the monetary side, you know, I'm thinking about some, you know, what we used to call banana republics pretty soon.

But the other issue is, and Doug pointed this out.

I mean, at one point, I don't want to say how many decades ago, Doug talked to me about this.

He came up with the term boomer bust, and that was sort of the idea that when the baby boomers retire, we're gonna have a problem.

But because of this huge asset price appreciation, we don't have a bust.

As boomers are retiring, they're retiring with a large balance sheet and it's allowing them to live quite well and encourage them to retire earlier.

- That includes pension funds too, which we thought a few years ago were going bankrupt and now they're healthy.

- Of course, this all depends on asset prices staying at this level.

- Yes, yes.

- Sell now.

(chuckling) - With that $5 trillion dollars that John was talking about, of extra liquidity they've got, it's got to go somewhere.

It's going into housing, it's going into assets, It's not going to disappear.

So if they pull it out of the stock where it's gonna go?

- Well, let me bring Sarah in.

We've got about four minutes left.

So Sarah, as you hear this conversation, do you get the sense that the younger demographic, and I'm not picking on you or being patronizing to you, but you're probably.

- Why would you ask me about the younger demographic?

- (scoffs) But you're more in touch with it than maybe some of the other faces on this call.

But the point is, do you get the sense that even folks that are 40 understand, even the last 10 years we've seen expansion in asset prices.

Is there a realization that this is a very unique time, Goldilocks time, the best of times?

- So I think among younger households, so they've had a obviously very different experience with the recent run-up in assets where they didn't get to take advantage of it quite to the same degree, but I would underscore that we've also seen tremendous strength in balance sheets, among younger households as well.

On a percentage basis, they're actually up more than kind of your boomer age.

Although that's starting from a much lower base, as they have benefited from a fiscal transfers, helping to pay down debt, getting the student loan forbearance, et cetera.

And so that's benefited their balance sheets, but then you also have to look at the housing market, for example.

And so I think you still have some big questions hanging over their financial future in terms of just getting into to the housing market, given the big increase in prices that we've seen, which benefited the equity position of a lot of boomers, but it's been very tough on millennials, nevermind gen Z who's not even contemplating getting in the housing market at this rate, given where prices are.

- Anyone else on that?

- Well, the housing market is, I mean, as we know, it has been really frothy.

I mean, at least in the Charleston metropolitan area prices have soared, availability is just not there.

And so the question that a lot of people would be wondering is how much longer can that last?

Are we looking at a housing price asset bubble again?

Probably not because the construction industry has not declined that much.

Good luck trying to find a contractor right now, I mean, it is booming in this local area.

- Also the credit profile is very different this time around than it was in the mid 2000's in terms of who's actually buying these homes at this price.

- I don't know, I think that, you know, the housing market roughly has gone up 20% in terms of prices during this past year.

I don't really see that coming back down again, because as Frank mentioned, good luck finding a contractor to build a house.

So, the problem is on the supply side, again, in terms of building new units, thats driving use prices up, same things in the car market.

We've seen new cars go up by about 9%, but we've seen used cars go up by 25%.

Again, it just spills over to what's available and what's sitting out there and what can be bought.

So it is the housing market and the auto market is basically being driven by supply shortages of new products.

- About a minute left Doug, was there any marketable difference between all these indicators we've talked about in arrears, as we look back to 2021, between rural and urban, is it dramatically different or as you would expect?

- No, it's all urban, rural here in the Carolinas.

So we've always had this problem, the rural areas lagging behind, but the places that are actually doing well are in the exurbs.

I think it was Sarah was alluding to this before, you take Lancaster County, not far from Charlotte in South Carolina, it's the fastest growing county right now.

It was considered rural 20 years ago, but people are moving out, they want more space.

So the rural areas that are attached to a thriving Metro area like Charlotte are doing very well right now, better than they've ever done, but there are a whole set of rural counties that have not.

- Yeah, we'll have a chance maybe to talk that in next week in part two, we'll take a look forward.

Lady, gentlemen, as always, we so appreciate you being part of this.

Stay with us for next week's program until next week, I'm Chris William Happy Holidays, Happy New Year.

Have a good week.

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