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- This is part two of a two-part series of our economic review, and now this will be our economic forecast for 2024.

Welcome again to the most widely watched and the longest running program on Carolina business, policy and public affairs seen for more than three decades across both North and South Carolina.

At the end of the year and at the beginning of the year it's a good time to assess, and that's what we're going to do.

We do exactly that, and on this program, last time we looked at the year in review.

On this program, we look ahead with our four resident economists, and we start right now.

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And Martin Marietta, a leading provider of natural resource-based building materials, providing the foundation on which our communities improve and grow.

The economic forecast for 2024, featuring Dr. John Connaughton of UNC Charlotte, Dr. Joseph Von Nessen, University of South Carolina, Dr. Frank Hefner from the College of Charleston, and Dr. Jerry Fox of High Point University.

(exciting music) - Happy New Year, gentlemen.

Happy New Year.

Thank you.

- Happy New Year.

- Welcome back to the program.

Joey, you're gonna be the first pitch here.

We're gonna look forward now to 2024.

Where are we headed?

2023 is over.

It's in the books, and you can't really couch this in science, but there seems to be more anxiety, more angst, more concern around the unsure direction of the economy.

Is that the case?

Do you get the sense that the last few economic cycles weren't quite as antsy?

- Well, from a consumer perspective, we do see that there's a big mismatch between consumer sentiment or consumer confidence and the actual health of the economy right now, which is still fairly good.

I think one reason for that is inflation, that prices are rising.

One of the things that is hard to communicate, regardless of how many times you try to do it, is that when inflation's coming down, that doesn't mean that prices are decreasing.

I think the public sees, oh, inflation's down to around 3% from its peak of nine.

Why is everything still expensive?

What it really means, of course, is that prices are continuing to rise, but not as fast.

But if you have lost purchasing power over the last three years, as most Americans have, and you are expecting let's say a 3% increase in prices over the next year, that still impacts your day-to-day budget.

There's the reality of the economic data and then there's that experience that consumers are having.

I think that's a big part of it.

- Dr. Fox, if the Fed gets inflation under control, are prices ever gonna decrease?

- No, they are not.

- [Chris] Good enough.

- Not on average.

We might have low inflation and particular products, the price might go down, but overall inflation, it will always rise.

Maybe it'll be one or 2% if we're lucky to get to that level, but it will always increase, at least at a gradual pace year by year.

- How do you wring out?

Frank, how do you wring out the differences in different prices for the same goods at grocery stores?

For example, Aldi and Lidl.

How do they do it?

The other stores have got to be taking notice of that, but I'm just using that as a proxy here for the discussion.

- Well, two things.

One thing about the other comments was there's a difference between disinflation, which is a reduction in the inflation rate and deflation, where prices are actually going down, so that's one thing.

The second thing in terms of prices, when we look at the inflation, it's a basket.

Inside that basket, an item could be dropping and another item could be rising, and so the question about consumer sentiment is, if this is the thing I'm buying and it's going up in price, I feel bad about that.

This product is dropping in price and I don't buy much of it.

Now, in terms of some of the marketing that's been going on, those are business decisions based on efficiencies, profits, and they can play around with it and they can get there.

But on the consumer sentiment issue, I've always wondered about when you ask people, "How do you feel about the economy?"

No one's asking them, and look in your wallet now, and what do you actually have?

There has always been a disconnect on that.

The other one is, "How do I feel about the economy today?"

I mean, everyone's glued to their cell phones and they're looking at constant minute by minute news, and the minute by minute news isn't usually upbeat.

- No, right, sure.

- I want to pick up on something that Jerry said about prices coming down.

- Is it inflation?

- Yeah, inflation.

Basically what we can possibly see are commodity prices coming down, but service prices are incredibly sticky, manufactured good prices are incredibly sticky, and to what Joey was talking about in terms of anxiety, when you walked into a grocery store in 2019 or even February of 2020 and you walked out paying $150 for a week's worth of groceries and now you're paying over $200 for that with no prospect that that's gonna come down and may in fact be going up, that's what creates this anxiety.

- You think the odds are better as going up than coming down?

- Yeah, I think it is.

They are.

I mean, there'll be certain things.

Frank's eggs will be coming down.

- They have, they have.

- I wouldn't notice that, but maybe you do.

- The wheat prices have dropped also as a resolution of what's going on in the Ukraine.

- The wheat prices, commodity prices have dropped, but not necessarily the products they're made from.

So bread really hasn't come down, even though wheat's come down.

- Well, that's because you end up with contracts that say I'm gonna buy the wheat at this price.

That's one, you're locked in.

The other one is if the consumer was buying that final product at this price, why should I drop it?

- Absolutely.

Every single item in the grocery store is essentially computerized.

They have a computerized model looking at the elasticity, demand and whether or not price changes and that have a significant impact on how much people buy.

- I stopped buying the things I buy.

- Time, time, time out.

Last quick second about this.

- Consumer-centered sentiment, I didn't get a chance to say anything because I said no on inflation, but I have to make a plug for High Point University.

We have been conducting polls, surveys, on consumer sentiment and inflation concerns throughout the state, and my observation is that consumer sentiment is slowly improving in the state, slowly, slowly, as inflation is dropping, and for the first time in November, inflation concerns decreased.

- [Chris] Okay, all right.

- They're still high, but decreased.

- By the way, thank you for the reminder on that, Dr. Fox.

It's very important to disclose High Point University is a supporter and underwriter of this program, in the interest of full disclosure.

Joey, we talked about inflation, we talked about anxiety, but we didn't talk about interest rates, and oh my gosh, you can go anywhere.

When you're pumping your gas, an ad comes up and starts talking about interest rates.

Everyone is forecasting interest rates, so we have to at least give a nod.

Where do you think interest rates go this year, and what is it gonna look like at the end of this year?

- Well, first, I think it's unlikely that we see further rate hikes in 2024.

- [Chris] How would you handicap that?

What percentage?

- I'd say very likely, because we are seeing so far momentum towards the soft landing, meaning the economy is slowing down, but it does remain resilient.

We're still seeing positive growth.

We still see stable consumer spending, a stable labor market.

We've seen fairly strong wage growth.

The economy is beginning to taper, beginning to slow down, and it's moving in the direction that I think the Fed is looking to move.

I think it's more about do we see any rate cuts in 2024 as opposed to rate increases.

The likelihood of that, I'd say perhaps 50/50 in terms of whether we see rate cuts, but that's gonna depend on whether we see a change in the trajectory of inflation in 2024.

Right now it's coming down, and there are reasons why there are still headwinds that could push it back up, which we can talk about, but that's really what the Fed's looking at.

- Okay.

John, this is how tough it is to do this.

You said at the beginning, you said a year ago that no way are interest rates gonna go to 5% or more, and obviously they did.

It's a very difficult thing, so you get a little redemption here.

Where do you think interest rates go this year?

- I think there will be rate cutting.

In the last show I mentioned the fact that the Fed is upside down, they're losing money because they have to pay a premium on the federal funds rate to all the reserves that they hold from banks.

- [Chris] And that'll drive them.

- That'll drive them.

I think, cautious to say this, but the Fed's target's 2%, right?

Depending on which measure you look at, we're right now somewhere between three and 4% rate of inflation.

The question is how long is the Fed willing to ride three to 4%, particularly in an election year, and essentially say let's test the waters, let's start dropping some rates here.

Let's drop a quarter basis point in the January-February meeting.

Let's go ahead and maybe do another quarter point and see what happens.

I think there's a very high probability that rates will go down.

How far, I think it depends on whether or not there's a spring back in inflation somewhere in April, May, June as a result of that.

- Jerry, Frank, I want to ask you both this question.

We talked about this sacred 2% mandate that the Fed has for inflation.

We're very careful to say this time it's different.

That phrase can be overused.

Is this time it's different?

Do we need to rethink what that sacred mandate of 2% inflation, given that there seems to be a secular change going on, or is there a secular change?

- Well, 2% inflation.

That is a fantastic goal to achieve over a period of time, and we're slowly heading in that direction.

I don't know that we'll hit it.

I doubt we're gonna hit 2% inflation in 2024.

It may go down to around the 3% level.

If inflation stabilizes around 3%, then I think that might give an opportunity to lower interest rates for the economy again, especially with the election year coming on.

- Yeah, John?

- I'm afraid that if they change the policy, they will lose credibility, and if they lose credibility, actually, what is the currency of the Fed?

It is the idea that they are all-knowing, all-wise and all-powerful, kind of like the Wizard of Oz.

But then we pull the curtain back and find out that they only have one tool, and this is it.

If they decide to reestablish the benchmark, that's gonna be a problem for them.

I'm also concerned that based on what has happened in 2024, I mean in 2023, 2023 was a good year for the economy.

If you're asking me how do I feel about the economy right now, ask me instead how do I feel about what just happened?

Great, okay?

But we have I think institutionalized inflationary pressures with wage gains, that's one.

The increase in two things, union activity, look what happened in Hollywood, Detroit.

And once you get those kind of contracts, they don't negotiate downwards ever.

That never happens.

So we've embedded increased wage pressures for quite some time on that, and then there's also inflationary expectations.

The expectation has been we're gonna have inflation.

Well, that becomes almost a self-fulfilling prophecy sometimes in a lot of markets.

- Okay, 2024.

I know you like scientific data, that's what you all do.

But how does AI start to unfold here this year?

Are we gonna see more besides just the possibility that it's gonna change everything?

We already know that, but how much is it gonna change, and is it gonna manifest?

- Well, I would start by saying that we have to look at technology.

We have to look at as we traditionally think of AI, but also the incorporation of technology that already is out there in order to get around these labor shortages that companies are dealing with.

I think about a practical example of where you go to lunch at a deli and you order from your phone.

You don't go up to the counter.

So now you have staff there that can service just as many customers, but slightly fewer of them are needed.

So that's using an existing technology that these businesses are getting creative with.

That can help to alleviate some of these pressures with the labor shortage.

With respect to AI as we normally think about it, I think that's coming very quickly.

Again, it's still kind of a black box in terms of how quickly that does emerge.

I don't know that we see a major impact in 2024, but if we look at each new generation of this technology, it's becoming more efficient at writing, at providing background information, at doing more and more practical skills that can assist all types of workers, so it's coming.

Again, it's a multi-year process, but I think we're seeing rapid improvement.

- So the deployment and the adoption of AI within a business model or in an organization, just any organization, is it gonna be more obvious in 2024 besides just talking about it?

- Let's back up for just a second.

I think this AI term is being overused, all right?

Computers still only recognize zeros and ones.

There's no gray areas in a computer.

That's it, zero, one, that's it.

What has happened that has generated the ability to use computers to do a lot more things than in the past that we've been able to use them for is the size of the processing chip, how much more data it can process, how much faster it can process it.

That's been the real breakthrough in the last say three or four years in terms of processing power and speed, and so it can take a lot more information in and do it much, much quicker, which enables you to do a lot of things like remote app ordering for food and stuff like that.

I think Joey's right.

I think that in the near term, next few years, what we'll see is this increased, I just call it increased computing power.

Will enable the companies to take better advantage of technology to replace humans and things that we weren't necessarily sure that they could replace.

- But the interface.

- Let me give you an example of this.

I suspect everybody in our audience has probably used a kiosk at McDonald's.

That's old technology, and it's slow.

It's slower than a human.

The only thing it does is there are more of them so you don't have to wait in line.

It's gonna be a lot faster when the chip is able to recognize somebody walking up, speaking and then passing the car.

- [Chris] So that's the interface with AI.

- Yeah, yeah.

But it's speed and processing capacity.

- But Joey made a good point.

There's a difference between technology and what people are envisioning for AI.

For AI, I'm envisioning "2001: A Space Odyssey" Hal.

I'm envisioning war games where the computer plays strategic behavior, and that's where I see AI.

I envision next year you're gonna have four computers sitting here and ChatGPT's gonna be answering all your questions.

- We have talked about that.

We just don't know how to do the interface yet.

- Oh, well, that's very simple.

You just sit down as my students do, type in ChatGPT, and it gives you a very well-written constructed essay that turns out to be wrong.

- [Chris] It might not be accurate.

- That's correct.

It turns out to be wrong, because there is no feedback mechanism on that, there's no editing.

So when we say AI, I think we're kind of getting the cart in front of the horse on that.

- You know what, I'm gonna leave it there, because we're gonna run out of time, and we've already beat that one up quite a bit.

We talked a little bit at the end of last program right after the show about the elections.

It's an election year.

In North Carolina, it's a gubernatorial election.

In South Carolina, it's the first primary, presidential primary for the nation, and then of course we have presidential politics.

Dr. Fox, what do you think all of the activity and the attention on the politics of the country and the region are going to do to the economy?

- Oh my goodness.

That's just a big, broad question, but I would say one of my areas of research has been the political business cycle, and typically in an election year, the federal government, they do try to stimulate the economy to have an improving economy, a booming economy, so that would boost the incumbent's opportunity to be elected.

In a lot of cases, votes for the president and other politicians are based on the state of the economy, income, GDP, unemployment, even inflation.

I think that there would be some anticipation or some expectations, whatever you want to call it, that the government, federal government, maybe increased spending.

Well, it's already at a high level.

- Even more so?

- Well, it's already high.

I don't see any cuts in it, but let me put it that way, and some attempt to try to engineer it to even get unemployment to dip down lower without any increase in inflation.

That would be the ideal hope for any politician who wants reelection.

- Yeah, I'm sure you're probably right about that.

Joey, do you think that the election year politics are gonna cover up what may be a looming challenge in the economy?

- Well, I would say I take a slightly different approach in thinking about it in terms of what it implies for long-term growth and changes in US policy, because one thing that we've seen from a broader standpoint is a movement I think away from globalization and free trade more towards America-first industrial policies.

That's been for a variety of reasons.

It started with tariffs coming along during the Trump administration.

It's extended into the Biden era where we've seen a lot of subsidies in different industries.

Not necessarily overlapping entirely, but it's a very different landscape today than it was 10 or 15 years ago, and that's aided by the fact that we have so much geopolitical uncertainty.

I think regardless of how the election goes this year, that's a paradigm shift from where we were 10 or 15 years ago.

I think that's going to continue, more of this again, America-first industrial policy, for lack of a better term, regardless of which way the election goes.

- To take policy further, global policy further, John, will Ukraine, Russia, Israel, Hamas become a headwind?

I hate to just standardize it that way and ask it, but will this be a bigger challenge, John?

- I mean, who knows?

That's the bottom line.

We can't even agree on whether or not we're gonna continue to support with US funds the war effort for either of those, let alone the potential for Taiwan down the road.

2024 is gonna be an odd year.

I don't think that at this point in time any economist, any economic group, is looking to see the economy grow at more than 2%.

I think everybody's at or under 2% for next year.

That's not exactly the picture that Jerry points to in terms of an election year for the incumbent.

I think that's the point.

- I'm not saying that that will happen.

I'm saying that that would be what the incumbent.

- The probability is we're gonna not see that election year bump, if you will, that typically takes place.

- [Chris] Why not?

- I think that.

- Disjointed congress.

It's going to push inflation up higher, and so they've gotta keep that under control.

They can't overstimulate.

- And we can't even agree on whether or not to fund the Ukraine and Israel and their wars right now, let alone what happens when the continuing resolution drops in mid-January.

Do you think we're gonna have a budget at that point in time?

I think you talked about the disjointed congress.

I think there's just a whole bunch of issues that are gonna play out in the first six months of this year that could be problematic for the economy going down the road.

- Geopolitical uncertainty is nothing new.

I think it's back again to how dramatic the news portrays it and how people adjust.

We've done very well with the Ukraine war in terms of moving the economy forward.

The economy is doing real well, certainly between the Carolinas, well also, the entire southeast right now is a growth mode for the national economy.

We're getting that in terms of people that are leaving states that are high taxed, highly congested moving in, so we're getting in migration into both of the Carolinas.

We're getting companies that are locating in both of the Carolinas.

Economic expansion along the interstate that splits to South Carolina.

It's amazing.

- But that's not a new story.

Frank, thanks for the lead-in.

- It's a continuing story.

- Well, and that's my point.

In the last three minutes, I want to bring that up.

Joey, this was lost on a lot of people, and I can say that because it came out last summer.

It came out in June of 2023.

I'm gonna read this, because I want to get it right.

This is from Bloomberg.

"For the first time since the government started tracking it, six southern states, North Carolina, South Carolina, Tennessee, Georgia, Florida and Texas, contribute more to the gross national product than northeast states, first time in this country's history."

Bloomberg said that the wealth migration is now moved to the south, and it's squarely in the south.

Is that good news or bad news?

- I think it's good news, certainly for our region, and it is a long-term trend.

If we look at population growth in this region, we're likely to see more growth in any other region of the US over the next 20 years.

That's been a consistent forecast from the census and others, and all of the migration data support that.

There is a lot of migration as the dominant form of population growth.

This is a remarkable statistic.

In 2022, I just looked at this a few weeks ago, it was the first time in South Carolina's history where 100% of our population growth, all of it came from in migration.

That's because we're seeing people moving in, number one, but number two, we're seeing an aging population, so we don't have any natural population growth.

I'm talking just about South Carolina now, but I think those types of trends are gonna continue.

It's good news for the economy, but once again, getting back to this labor shortage, it means that it's gonna be a persistent problem.

- John, beyond just that, and I don't want to be dark about this, but I think this happened in the northeast and the west coast, is they had so much growth that they ended up, the slingshot effect, went the other way.

- I would argue a little differently.

I would suggest that incentives matter.

The second rule of economics that it's just a lot cheaper to do business in this part of the country, and that's been true for 50 plus years as we've seen the economic growth take place in the southeast.

But I think it's been exacerbated in recent years as the contrast between essentially red states and blue states has gotten even greater.

When people are looking or companies are looking, okay, where do we want to spend the next 10, 20, 30 years?

The finances of it are just overwhelming the decision making process.

- We've seen housing starting to close that gap.

Used to be cheaper to have a house in the south.

- Right, but if you are the CEO of a company and you have either zero corporate income tax, state income tax, or maybe a very low, 3% corporate income tax, compared to seven, eight, nine, 10, et cetera, it changes the calculus.

- And in manufacturing, we still have something that they don't have, and we're running out of it, I'd like to point out, but for the next couple years we have water and we have land.

- For the next couple years?

I hope it's longer than that.

- Well, we're running out of water in some places in South Carolina because the water table's dropping, they're sucking so much out.

We're getting to a point where in 15 years, it's gonna be an issue, but right now we have water and we have land, and so if you're a manufacturing plant, a distribution center or a data processing plant which uses lots of water and electricity, we've got it, and it's cheaper than California, Massachusetts, and Connecticut.

- And your regulations.

- The prices equalize over time, so getting back to the point about housing, the Charleston market looks expensive if you live in South Carolina, but not if you live in New York.

But as demand remains high, prices continue to rise, and those differences go down over time, you might see some mitigating effects.

- Thank you.

We're out of time.

Gentlemen, thank you for again doing two programs, hanging in there, John, for doing this 30 plus years.

He's good to come back.

- Thank you.

- Welcome, Jerry.

Hope you come back.

- Thank you.

I've enjoyed it.

- Thank you very much.

Thank you for watching our program.

If you have any questions or comments, certainly go to CarolinaBusinessReview.org.

Until next week, again, thanks for the support.

Happy New Year.

Good night.

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