♪ Welcome to This Week in South Carolina.

I'm Gavin Jackson.

This week we take a look at the economy with research economist Dr. Joey Von Nessen with the University of South Carolina Darla Moore School of Business.

Joey, welcome.

Welcome to the set.

Joey> Gavin, I love it.

This is great.

>> Great to have you in person versus Skype.

>> Yes.

Yes But Joey, let's start off with some of the big news right now, talking about inflation numbers.

We just a consumer price index come out this week showing that inflation is still sticking around.

It's still accelerating to the tune of 3.5% in March.

What was your read on this report, which we know?

Joey> Well, I think we know for certain that this battle against inflation is not done yet and the Fed is going to continue to have to take this very seriously.

So, we can back up and talk about the progress that we've made so far to give the viewers perspective.

So, inflation peaked at 9.1% back in June of 2022.

And it's been steadily coming down but over the last 6 months, it basically got stuck around 3%.

It's been bouncing around between three, and three and a half percent ever since, with 3.5% being the most recent reading.

And so the question is, is this a blip or are we going to continue to see inflation come down to 2%?

And right now, most of the drivers of inflation make it appear as though it's going to be tough to get inflation to 2% this year.

We have housing costs, which are still driving inflation.

We have energy prices that have been picking up in recent months and wage growth remains very strong, which is good news for workers.

But again, from the perspective of the Fed, trying to get inflation to 2% makes it much more challenging.

So there are a lot of headwinds and we are not out of the woods yet.

>> Yeah, you said sticking around.

I don't want to say sticky, but is this getting sticky at this point, especially we look at core CPI when you get rid of food and energy costs there.

Joey> Yes.

So core inflation is actually a bit higher.

So it's coming in about 3.8%.

So again, roughly three to three and a half percent overall based on fluctuations in the last six months or so.

And what we had seen in 2023 was a major movement in a downward direction because of a tapering of housing costs.

So the housing market has been readjusting in terms of sales activity coming off of a high in 2020 and 2021, and that includes tapering of housing prices.

In other words, housing prices haven't been rising as much over the last year as they had been in 2021 and through early 2022.

And housing markets, the housing the housing market represents about a third of inflation of, of our measure of inflation.

And so that had been really helping as housing prices have been tapering because of the pullback in demand.

But the market has now stabilized and we're seeing prices continue to rise.

And so that's not going to be an element that's going to help pull inflation down in 2024.

So, again, we're looking for specific factors that can get us to 2%, and they're just fewer of them now than there were six months ago.

>> So you think we kind of maybe reached, I guess, the floor, the ceiling, however you want to call it, when it comes to these interest rates, too?

When you look what the Fed's done and how that's affected the housing market and now you're saying that the housing market's priced out and people are okay, in a sense spending 7% on a 30 year mortgage at this point.

So, that's not doing anything really to stop this inflation train.

What else needs to be done, I guess, in order to stop this?

Is it going to be a matter of having some slow down in the economy?

What needs to be done?

Do they need to raise rates instead of cut rates?

>> Well, I think at this point they're looking at either postponing the rate cuts longer or just not doing as many cuts going forward, because the other factor that we don't hear as much about is that what the Fed is the really looking at is the real interest rate.

And that is the difference between the federal funds rate and what inflation is doing, because that's... that's where you really see an effective monetary policy take hold, because we want to see rates that are that are making the cost of borrowing money more expensive.

That's...that's what the Fed is trying to do.

And real rates have actually still been rising because inflation has been coming down.

So even though the federal funds rate has remained steady as inflation continues to come down, that difference goes up.

So there's still a little bit of wiggle room there for the Fed to bring rates down and still keep monetary policy as tight as it has been over the last year, because it's almost by definition getting tighter as inflation comes down.

So that's the argument for maybe one or two rate cuts instead of four or five that the Fed had been looking at earlier.

So...so we'll see what happens.

But I think almost certainly we...we're looking at fewer rate cuts now than we were four or five months ago.

>> Yeah, probably safe to just write off a June rate cut right now at this point?

Joey> Most likely, yes.

I'd say we're looking more at the Fall now.

And they're, they're also going on these latest economic data.

So they're waiting to see.

And Jay Powell has been very clear that they want to see more evidence that inflation is steadily moving towards their 2% target.

And we just...we're not seeing that right now.

>>Yeah, because we've had these three months of it's showing it's still sticking around.

So I'm guessing you would want to see another trend similarly of it going down.

Joey, is it possible I mean, I know, they want the Fed is always trying to get down to 2% or below.

What if it just sticks at three?

I mean, obviously not what they want it to be.

People still feel that pinch at the grocery store, at the pump, but is 3% maybe or something around that area as close as we're going to get for the foreseeable future, you think?

Joey> It's possible?

I don't think we...

I think it's almost certain that we don't see 2% in 2024 this year, at least 2.0%.

And so, the...the real key is, is the timeline that the Fed is looking at, because they have not been specific there.

So they say 2% is their goal, but they haven't said 2% by December of 2024 or December 2025.

So they have some wiggle room there.

And I think that's... that's really what they're looking at now with 2% still is the target.

That's their goal.

But the timeframe, again, a bit of... some wiggle room there, just based on what they're seeing month to month, based on the data.

>> So is the soft landing where the economy's not too badly impacted from trying to lower inflation?

Is that still where we're at right now?

You feel like?

Joey> That... and that's the good news.

Yes.

And we're actually far more optimistic that we avoid recession now than we were last year, even though inflation is getting...appears to to be getting stuck at around 3 to 3 and a half percent.

But there's a very specific reason for that.

And that's because even though inflation is still higher than the Fed would like to see, it's still below the rate of wage growth.

In other words, wages are now rising faster than inflation is, which was not the case this time last year.

That's something new that's emerged in the second half of 2023.

And so if wages are growing faster than prices, which has been happening, that means that consumers, even though they have lost purchasing power over the last three years, they're not continuing to lose purchasing power.

And so given that we've seen steady consumer spending up through early 2024, which is the bulk of our... the bulk of GDP growth, about 70% of GDP growth comes from consumer spending.

That makes us more optimistic that consumers won't cut back significantly this year... again, because wages are rising faster than prices.

So the pullback in inflation from 9% to 3% has been very good news for the economy.

It makes the recession far less likely.

But again, it doesn't get us to where the Fed wants us to be just yet.

>> I was going to say, this is all in light of the fact that we have a really strong economy too.

You know, strong GDP, strong unemployment, which we'll talk about in a moment.

So, again, a little bit of a bright side is that we're not doing this in the middle of a recession versus, you know, kind of a roaring economy.

Joey> Exactly.

Growth has been good and very resilient to these.. these rising interest rates and the high inflation that we've seen.

Consumer spending, as I mentioned, remains fairly strong.

We see a very tight labor market, historically low unemployment that has persisted into 2024 and strong wage gains across the board and now positive real wage gains.

Wages are rising faster than prices.

So all of that bodes well in terms of avoiding recession this year, which is why we're far more optimistic.

>> And Joey, another factor that seems to be driving this is a rally in the commodities market, too.

We're talking about oil, gold, copper.

A lot of these things underpin the goods that we all use and can drive up prices.

Do you see that also being maybe a little bit of a stubborn factor when we start talking about inflation and it's sticking around?

Joey> Yes, we've seen energy prices... We've seen commodity prices in general.

Rising energy prices in particular have been going up more.

A lot of that is due to the geopolitical uncertainty that we've seen emerge.

But that is, that's a major factor.

The other component of this of the most recent report and this has been driving inflation for a while now, are insurance costs.

And we think, well, why would that be the case?

>> Tell me about it.

Joey> But it actually flows from the fact that prices are rising overall.

So if you look at...so it's been auto insurance especially.

And if you look at the price of new vehicles, they've gone up significantly.

And so those have to be insured.

And the same is true for...for housing, as well.

Prices have been rising.

So insurance costs follow these rising prices in the...in the goods market.

And so in a sense, that's a lagging indicator, but that's been the number one driver in...in this most recent report, but it's a natural flow from price increases elsewhere.

>> And people just need to drive smarter and safer and we can all have lower insurance.

Is that right?

(laughs) Joey> Yes.

That's right.

>> Get these EVs to drive us around.

We'll talk about EVs in a minute, too.

But, Joey.

Well...you know, we were talking about this... you were talking about we have a lot of strong fundamentals right now in the economy, but is there ever a possibility that the US consumer is going to get to kind of a breaking point?

We're seeing, you know, credit card debt going up.

We're seeing people just, you know, griping here.

They're going see all these... you know, gas prices going up, things like that.

But do you see...foresee any way of folks just hitting a wall when it comes to these prices and just pulling back on certain things?

>> I think that's a possibility, but I think that would be more likely to happen if we were to see inflation tick back up and outpace wage growth again.

So, wage growth has been fairly stable at about 4% over the last year.

And again, inflation's been coming down.

It's bouncing around between three and three and a half.

If inflation picks up because any one of these factors, say energy costs continue to tick up and all of a sudden consumers begin to lose purchasing power again.

Well, now they're more likely to pull back on spending activity, right, because they're more becoming more budget conscious and they don't have excess financial reserves to draw on, the way they did two years ago.

Because remember, in 2021 and 22, when inflation's peaked at around 9%, consumers still had those access to those stimulus checks.

They had access to various tax credits.

They had... We had a very strong stock market and all that put financial...households in a uniquely good financial position, well above where we were before the pandemic.

And you can...in a sense, there was a financial asset bubble.

I hate to use that word, but... but it was partially, partially true.

>> Well, the meme stocks helped, too, right?

>> That's...that's right.

That's right.

And...and we've seen that, that bubble subside.

Consumers have drawn on those excess financial reserves to keep spending while inflation was high.

But that's...those reserves are now exhausted.

So if we do see inflation tick back up and it gets above wage growth again, then I think we're in... and have far more of a concern about a recession.

>> And we'll talk about unemployment really quickly.

I just want to say there's a quote that we saw from the Richmond Fed president, Tom Barkin, who said before the CPI numbers came out that, quote, "Keeping rates somewhat restrictive "can bring inflation back to our target.

"While, I don't see the economy overheating, "the Fed knows how to respond if it does, "And if the economy slows, the Fed has enough firepower "to support it as necessary."

So basically just you know, they're always very middle of the road in their statements too.

Not too much there, but I guess it's just essentially saying we're going to wait and see.

We're kind of in this limbo state.

>> Yes, I think wait and see is...is the right phrase there.

It captures what their thinking is.

And the other factor here, too, is that because we have such a strong labor market, I think the Fed is more likely to be, to favor leaving interest rates where they are for longer.

Because remember, the Fed has two goals: the price stability and full employment.

So they want to keep inflation low, but they also want to maximize, maximize employment levels.

And employment is or unemployment rather, is historically low.

That's true, especially in South Carolina, but for the US as a whole.

So they have some wiggle room there to keep interest rates higher for longer, even if it has or begins to have an effect on the labor market.

Now, that's, of course, not good news for, for individuals.

But from the Fed's perspective of having to balance those two, the strong labor market means they have more flexibility to wait and see, wait longer before cutting rates.

>> Yeah, they're not completely out of whack since, you know, one of that... one of those aspects, jobs, is still cooking pretty hot.

We're talking about 300,000 jobs in March alone.

>> Yes.

>> I'm guessing they want something a little bit lower because every time we talk, we go over 250.

That's always a really good sign.

So your read on the unemployment?

>> Yes, it remains strong and employment growth has been very, very solid.

And that goes along with consumer spending, which has remained very, very steady.

And so as long as that's the case, I think the Fed is more likely to, to stay in their holding pattern, to wait and see, because they really want to get the soft landing right.

They don't want to, to, to lead...to lead us to recession.

But they...they're still targeting that 2%, which is, which is important.

So, it makes the Fed's job harder.

There's no question about that.

>> And a big part of that, too, is immigration.

It's a big driver of the unemployment rate going down and staying down.

How critical is it to have that robust immigration system when it comes to having a supply of workers?

I mean, you look at other countries that don't have the immigration that America has, the good and the bad of it, but also how it just continues to feed our economy.

>> Well, immigration has certainly been part of why we've seen these employment numbers grow.

That's, that's, that's been true for the last several years.

And we are still in a labor shortage.

There's no question about that.

And most industries are seeing it.

Most businesses are seeing it.

That's certainly true in South Carolina.

And so when you look at if you look at it from a business perspective and you say, well, where do I, how do I saw my, my labor problem?

Right.

And I think about the three "I"s, You got three, three ways of doing it.

You can then "incentivize", which is you pay more, provide more flexibility, benefits and so forth.

You can engage in innovation, so lessen your need for workers through the adoption of technology.

And then you have immigration, which is the third element.

And so that's, that's got to be part of the, part of the story and part of the solution.

So again, from a political perspective, you know, we'll see.

But, but there's no question that's, that, that's one of a... one element of three that has to be used to, to address this labor shortage, which is not going away.

>> Yeah.

Joey, that second "I" innovation... AI is everywhere right now.

Everyone's talking about AI There's there's concern about what that could mean for the labor market.

I'm sure students, you know, business leaders and policymakers you speak with, express concerns.

What are you telling them about the future of AI and how it could... how it could change things?

>> Well, I think first we have to distinguish between... automation and AI, which are very different.

So automation is something that's already here and something that we see adopted on, on a regular basis.

And looking at technology to help address a labor shortage can be as basic as, for example, a company, let's say a restaurant that uses an app for, you know, you or I, to order lunch on our phones rather than going up to the counter.

Right.

So all of a sudden, they don't need quite as many staff to do just as much business.

So that's using technology, but that's not necessarily AI, but that's, that's part of the strategy that businesses are, are taking right now to deal with the labor shortage.

From an AI perspective, I think that's much more, much more up in the air because we, that's, it's coming.

We're going to see more, more adoption of AI.

You know, we hear all about Chat GPT and the... the assistance that it can provide.

So it's coming.

I don't think that's this year, but I think that, that we just have to continue to track the, the progress of that technology and, and see at what point it becomes more regularly used in the workplace.

There's no question that it's coming.

But again, a lot of uncertainties there right now.

>> Do you crackdown on your students using Chat GPT, at all?

>> Well, there are multiple philosophies on that.

You have to you have to prevent them from cheating, of course.

But I think the other element is, is teaching them how to use it and use it effectively.

Because when we look at any technology and...and how it disrupts the labor force, it's typically workers who know how to use it, replacing workers who don't know how to use it.

And that's true in almost every profession.

You don't necessarily see... you do in some cases.

But...but in many, many industries, workers aren't just laid off and replaced by a particular technology.

It's usually those that can't integrate the technology or learn the technology in a way to make them more productive.

And so we have to teach students, you know, this is the future.

This is coming.

How do you use this to make yourself more productive and more valuable in the workplace?

>> So definitely being re-written into the curriculum over at the Darla Moore School of Business, right?

>> Yes.

Oh, yes.

It's, it's changing every day.

And I talk to professors all the time that are thinking this through and how do you responsibly incorporate it into the curriculum, letting students learn how to use it as a tool.

But obviously not replacing the work that they need to do for themselves.

>> A fine line to walk.

Joey, another fine line that we walk is how people feel about the economy versus what is actually shown in the data.

This is my favorite question to ask you, and you can give me the same response.

It's okay.

But...a Wall Street Journal headline the other day summed it up, in saying, "In today's economy, voter's vibes, "battle with clear cut data."

We're not talking about a recession, but a vibe session.

The vibes are at war with the facts and it's winning.

One case in point was 47% to 41% more general respondents think their investments or retirement savings went in the wrong direction in the past year, a period when the stock market was roaring to record highs, home values held steady or rose and interest on savings went up.

Of course, it's still playing catch up to the year before, but it hardly qualifies as the wrong direction.

Is it really more of a matter of what is individually affecting me, whether that's grocery prices, whether that's the stock market or the pump?

I mean, is it just what it comes down to, how it affects all of us individually?

>> I think that's right.

And the problem with inflation is it really it doesn't spare anybody.

Right.

So we all see prices rising.

And it's very clear that if you if you look at wage growth versus inflation over the last three or four years and inflation has gone up more than...than wages, prices have risen more than wages have overall.

And that's especially true when you look at sectors where consumers are spending money every day.

So if you look at the... at, at the gas pump or when you're going to the grocery store, prices have risen significantly.

And to put some numbers on that, wages overall have risen about 15% in the last three years.

If you look at inflation as a whole, it's up about 20%.

But food and energy prices are up between 25 and 30%, depending on how you measure it.

That's a big difference.

And consumers see that every day.

And so I think that's largely what they're responding to.

So even though the economy is doing well, we are not likely to see a recession this year if, if that's what you're saying and what you're evaluating as your primary metric for, for the economy, then that creates a bit of a disconnect there.

And as a result, you see some of these conflicting data, consumer sentiments still very low, but that's because consumers have lost purchasing power.

They are paying more and that has a, that has a significant impact.

>> Yeah, and oil prices are rising like we were talking about commodities, especially with the geopolitical risk that we're talking about, you know, Israel and Iran now getting into it more and more and how that could affect oil in the future.

Definitely a major concern.

But when we talk about global trade, of course, we'd be remiss if we didn't talk about the port of Baltimore and the situation that happened there more than two weeks ago with the six deaths and the closure of the port.

They're trying to get that port reopened by the end of May, which seems pretty, pretty energetic to do.

But how, how are we seeing that play out?

What were your thoughts when you saw that that disaster unfold and what that ramification could be for South Carolina and how's it been now, I guess, two weeks out?

>> Well, so far we've seen that the implications for South Carolina have not been that, that significant.

And I think that's largely because we're seeing the, the disrupted cargo traffic routed, routed elsewhere.

Now, that, that may change and I can't speak to that too specifically, but the data that I've seen suggests that the, the disruptions in South Carolina into the South Carolina port have been fairly minimal there.

But it does go back to show that any type of, of disruption in shipping, whether we're talking about what happened in Baltimore or what we've seen happening in Israel or, or any other disruption, that can have a meaningful effect on shipping costs.

And getting back to this discussion around inflation and getting down to 2%, you know, a short run disruption in shipping costs can have a meaningful impact.

And that's, you know, all you need to to get you from 2% to maybe 2.5%.

So that's just another wildcard in this battle against inflation.

And again, it, it makes the Fed's job more challenging.

>> Yeah, and, of course, there's different things going on in the Middle East.

And then, of course, what we're seeing over here in the port.

But it's not like it was with the Suez Canal in 2021 when everyone was trying to buy furniture or fitness equipment or any number of goods, because we were all cooped up with all that money to spend.

It's different now.

We're not spending money the same way we were when there was a huge disruption in 2021.

>> Correct.

So I don't see this having what the incident in Baltimore having a meaningful impact on our forecast for the year.

And largely because of that, we've seen a shift in spending away from the goods market towards the services sector, and we're still in that process.

So, so yeah, not a not a major factor in our in changing our outlook for this year.

>> And then Joey, when we look at South Carolina.

We have about 5 minutes left here.

I want to ask you just about economic development in the state.

If we're talking about headwinds with inflation, but an overall strong economy, is that affecting, from what you've seen, economic development and growth in South Carolina at this point?

>> Well, we're seeing strong, we're continuing to see strong interest in South Carolina and businesses.

Our...businesses still see South Carolina as economically viable for them.

The pandemic has made that even more true.

So infrastructure and workforce development remain.

I would say our, our biggest two competitive assets looking, looking long run.

And of course, we're seeing more people move into this region of the country and that really benefits the logistics sector and all businesses in transportation, distribution and warehousing, because not only are they going to be able to access consumers in South Carolina, but they're looking to access consumers located throughout the Southeast.

So the fact that this region of the country continues to grow and is likely to see more population gains than any other region over the next several decades puts South Carolina in a very strong competitive position.

And so that's why we've continue to see interest in the state.

And I think 2023 was in the top three in terms of, of capital investments, in terms of total capital investment in the state.

I think number one was 2022.

Number two, may have been 2023.

I may have that backwards.

But regardless, we're seeing consistent interest in the state and the pandemic and the migration patterns where people are, are moving towards the southeast and moving into the southeast puts us on a good path going forward.

So I'm very bullish about the long run outlook of the state.

>> Yeah, Joey, when we look at you're talking about infrastructure, you talk about the workforce here.

We had former secretary, now former secretary Christy Hall of SCDOT on, talking about that and I asked her, you know, are we...we've had decades of neglect and underfunding for the roads and the bridges, and infrastructure in our state.

It's now catching up.

And I said, have we gotten to that point where we're keeping up with this growth?

And she said, not quite yet.

So it's a matter of really just trying to get everything in place.

When we look at, you know, whether it's the widening of 26 or 95 or "malfunction junction" or any number of things down to the port with the intermodal and all that stuff, it seems like we're really just kind of lock and step and in some ways there maybe somewhat behind all this growth and trying to keep up with it at the same time and then look at housing also in these different areas.

>> I think...

I think that's fair.

And in a real sense, it's a good problem to have, >> Sure.

trying to, trying to catch up.

But, but yes, and in the housing market, we clearly see that.

We've had a decade long period of under building in the state.

Coming out of the Great Recession in 2008, many builders went bankrupt.

Others were skittish about getting back into the market early on.

Meanwhile, population growth has continued to... at a...at a very steady pace.

Then it went up after the pandemic.

And so you have a decade long period where demand is growing because of population growth.

Supply is not, a lack of inventory.

And so now we're facing these inventory challenges in the housing market.

And I think you could make that case more generally for for infrastructure overall, perhaps not to that extreme, but...but those are the supply and demand imbalances that have emerged and that we're trying to catch up to now.

>> And Joey, we have one minute left, and I just want to ask you about electric vehicles.

We're seeing major investments, of course, with the electric vehicle battery manufacturer, AESC, which broke ground on its Florence plant last summer and doubled its investment to $1.6 billion last December It now recently announced a further $1.5 billion for a new factory to also supply BMW down to Mexico.

So really full steam ahead with these EVs here in the state, but also, you know, nationwide, the trends seem to be cooling.. cooling a little bit when it comes to suppliers and producers.

Are these just growing pains with the transition?

What do you... what's your take?

>> I think growing pains and uncertainty about what... how demand is going to evolve.

And the other factor is interest rates, because as interest rates go up, that makes the cost of borrowing money more cost of borrowing money higher.

And so what does that affect first?

It typically affects luxury goods and EVs are still on average, more expensive than an internal combustion engine vehicle.

So we would expect that in an environment with higher interest rates, you're going to see the EV market hit first.

And I think that's largely what's been happening in the last year.

>> Gotcha.

That's Dr. Joey Von Nessen, research economist at the Darla Moore School of Business at the University of South Carolina.

And that is it for this week.

I'm Gavin Jackson from all of us here at South Carolina ETV.

Thanks for watching.

Be well, South Carolina.

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