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At the end of the year and at the beginning of next year is always a good time to assess where we are, where we were, and where we are going, and we do exactly that with a special two-part "Carolina Business Review," first part of our economic year in review with our resident panelists right now and part number two will include a look ahead to what 2024 may possibly bring.

And we start one of our favorite dialogues right now.

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The economic year in review, 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.

(compelling music) - Yeah, appreciate it.

- Happy holidays.

Welcome to the program.

We're not supposed to play favorites, but this is one of my favorite dialogues of the entire year of the 50 plus shows we do.

It's a bit of a mashup, and I wouldn't usually normally use that term with economists, but you all have a different kind of sense about you once we get rolling.

Dr. Fox, you're new to this, so you get the first pitch.

What was the biggest surprise economically, business, financially for you in 2023?

- Well, I was both surprised and I guess in some ways happy that the economy, the GDP growth, especially this third quarter, was about 5%, 5% real GDP.

So the economy has been picking up in that way.

Inflation, well, that has been declining.

It seems to be holding steady right now at close to 4%.

I guess the Fed wants to reduce it down to two.

But the fact that we haven't gone into another recession, some people were predicting that, and I don't think that we are gonna go into a recession.

I think we're gonna have a soft landing.

At least I'm hopeful that that's been the case.

I guess I'm surprised and happy that the economy has done as well as it has, just generally the macroeconomic aspects.

- John, what's your biggest surprise?

- I'm gonna have to agree with that Yeah, seriously, I mean, I think that - Wow, I know.

- It was better than 50%.

No, it's better than 50% chance that we probably would've seen in recession, particularly given the aggressive increases in federal funds rates that the Fed had undertaken during the year.

And, you know, it didn't happen.

I mean, as was mentioned, you know, 5% in the third quarter was kind of a shock, kind of caught off folks off guard.

We're starting to see it slow obviously in the fourth quarter.

The Atlanta Fed GDP Now Tracker is looking at maybe 1%, 1.1% for the fourth quarter, which is probably more in line what I think most of us probably would've expected during '23.

But, you know, I mean, at the end of the day, it's gonna be pushing the 3% growth rate for the year, so.

- Okay, Dr. Hefner?

- Well to, you know, repeat the same story, but I would like to remind everyone, the shock was last year the group here as a panel all agreed unanimously that there would be no recession this year.

And that one was a shock that that happened last December that we agreed, and two- - Didn't mean that there was agreement.

- Yeah, there's agreement.

All four people right there.

I'm looking at each other.

- Nothing to do with the economy.

- It had nothing to do with the economy.

I was like, wait a minute.

And that to me was a red flag because (laughs) if we all agreed, I thought that's probably not gonna happen, but it turned out, for whatever reasons, we all agreed last year that this year was going to be a no recession year with solid growth.

Whatever went into those thought processes matured, and that was a surprise.

The other, no surprise to me 'cause I've been talking about this for years, but maybe we discovered that the one tool the Fed has doesn't necessarily solve inflation problems, and that's not the surprise.

I mean, all they can do is tweak interest rates, and that doesn't change the price of eggs for some reason.

And I'll talk more about that a little bit later.

- Oh, okay, Joey?

- Yeah, I would just add to that that this is part of a multi-year readjustment process.

And I've heard it called the great readjustment period because we're still coming off of $6 trillion in stimulus.

We've had an overheated economy, and this is gonna be a multi-year process to get back to a more normal economy, a post COVID economy.

And 2023 has been resilient, I agree with that completely, but we're still in that process.

It started in 2022.

It's gonna continue into the new year.

So, we're just moving through part of that process as part of the great readjustment.

- Yeah, so thanks for the cue up there, Dr.

Von Nessen, because the idea was this, and I called it, we've talking before the program around how much of a distortion and it's so, I'm not gonna say this very eloquently, but I want to throw it it out for any of you how much of a secular shift is going on, and are we looking at the wrong timeframe?

Are we looking at the wrong indicators?

Are we thinking about this differently now that we've had this, not just the pandemic, but the amazing amount understatement, the amazing amount of liquidity dumped into the system?

- Well, the market, I'll start with that.

If we look at what's been stimulated most, it's clearly been in the goods market that started in 2020 and 2021 when everybody was still staying at home.

And we saw durable goods spending 15%, 20% above trend for a while.

It's coming down now, but it's still elevated three to 5% depending on how you measure it and when, but we saw a major distortion there, and that's why we've seen a pullback in housing markets and in manufacturing, particularly in South Carolina this year, still part of that readjustment.

So a major shift there that we're still moving back from.

- Jerry?

- Well, the Federal Reserve put liquidity into the economy to help us get out of the COVID recession 'cause we had nearly double digit both inflation and unemployment at that time, and we're sinking into a brief recession.

The Fed put money into the economy to get us out of the COVID recession, and that has happened, but then unfortunately, maybe they put too much in.

And so we had this inflationary problem and now having to deal with that with the rising interest rates, the Fed rising interest rates up to around 5% now to get this inflation under control.

If they can get it down, again, 2% might be a little bit too ambitious of a goal.

I hope that the Fed doesn't raise interest rates much, if at all, but they're gonna be watching closely on this inflation due to the liquidity that was put in the market.

- And hold on just a second, Frank.

I wanna remind everyone that we're speaking in arrears.

In other words, we're looking at what happened in 2023.

On our next program, part two, we're gonna talk about forward looking 2024.

Go ahead, Frank, I didn't mean to interrupt.

- Right, well, so couple things.

Old fashioned theory, Austrian economics is probably the only people that talk about misallocation of resources based on inflated liquidity in the market, but nobody that I know of has actually figured out how to measure those misallocations.

So in the past when the Federal Reserve had very low interest rates, mortgage rates were rock bottom, housing took off like a rocket, and should housing have taken off like a rocket?

And that, of course, precipitated the first crisis in housing earlier in the decade.

So, you know, that's a problem.

So where is all this going?

So we can keep talking about what the Fed has been doing in terms of interest rates, but if you take a strict monetarist view, the increase in money supply too has been just like this for the last year.

They've finally leveled it off, but there's a lot of liquidity sitting in the marketplace right now.

- And I don't mean to be just oppositional, but aren't there models for this?

Aren't there predictive models to say if you put in A, then B's gonna happen.

- I'm gonna take a different tack on this.

What you've been having and what we've been wi witnessing in '23 and why it's been so strong and stronger than it should be with the ramp up in the federal funds rate that took place over the last 18, 20 months, and that is that we have on the one hand the Fed fighting inflation with the only tool that they have available to them, but on the other hand, we got Congress and the president simply out of freaking control.

Okay, when you're running trillion and a half deficits, trillion and a half dollar annual deficits in a 4% unemployment economy, that's inflationary, and that's really where this real problem is, and that's why the economy keeps going.

You got two things going on in '23 that generated what we saw is, as Frank said last December, but I'm not sure we could articulate why we saw that.

Number one, you've got Congress and the president spending a trillion and a half dollar deficits that are fighting the Fed, clearly fighting the Fed.

That's aggregate demand that the Fed has no control over.

Interest rates don't matter.

Two, all right, we saw this 100 years ago when we had the Spanish flu.

And what followed the Spanish flu?

The roaring 20s.

What are we in now?

The roaring 20s, again, only a century later, and it is simply, okay, you held us up for a year.

It was tough even for probably 18 months or more for most people.

We lost a lot.

We're gonna get it done before something happens again and we can't get it done.

And so people are...

I mean, when you start looking at credit card late pays and stuff like that right now, it's starting to get a little bit scary in terms of how much consumers are spending, and have spent down all of their savings, spent down all of their stimulus checks, et cetera, all of their, yeah, and it's just getting to the point where something's gonna happen soon.

- Yeah, so we are still doing the Charleston in Charleston from the roaring 20s.

- Yeah.

- And it has been roaring this past year.

- He's more of a poet than he is an accountant.

- But the other thing for those in the audience who've had economics and have forgotten things, remember you got on the one hand and you got on the other hand.

What happens when both hands both predict you're gonna get an inflation, which is exactly what you just said.

- Okay, one of the big data points that is and was surprising, Joey, you used this term job-full recession.

- Great term, by the way.

- Did you come up with that?

- I was at the meeting that he presented that and came up with it and I said, "Joey-" - I heard that somewhere, but it stinks because I think it's very descriptive.

- Guess where you heard that?

- Was it from you?

Might've been, might've been from you.

- He's not saying.

He's implying it, but let's get back to the point here.

Dr. Hefner always does this.

Do you still feel like it's a job-full recession?

Does recession still count?

Are we in a recession?

Will we be in a recession?

I don't wanna forecast for next year, but are we in a recession in some ways?

- No, we're not in a recession right now, but the term job-full recession is more to mean that if we were to see a recession and going back, if we hadn't seen a recession this year, or if we do see one in 2024, it would have minimal effects on the labor market because we've seen such a labor shortage because unemployment is at historic lows.

In South Carolina, the unemployment rate's down to 2.9%, which is right where it was in February of 2020 before the pandemic started.

We have an aging labor force, an aging demographic that's disproportionately affecting the Southeast.

So I think that if we did see a recession next year, this is getting into the future, but it would have minimal effects on the labor market simply because of where we are demographically.

- Were you surprised by the strength in jobs?

- Well, the job report came out just this morning.

And I was thinking that maybe unemployment would move in the other direction up to 3.9% nationally.

It actually failed to 3.7%, which indicates that we still have a lot of strength, a lot of demand in the economy.

As far as the inflation hawks, I think that they were hoping that there might've been an upward tick in unemployment just to help bring down the inflation rate, that presumably there's some inverse relationship between inflation and unemployment in the short-term.

On the one hand, getting jobs out there, that's fantastic.

Okay, that's one goal, but on the other hand, not to get this inflation problem worsening once again.

We gotta keep that under control, get that a little bit lower, somewhat lower.

- So another thing that - Go ahead, go ahead.

was not a surprise to me, but it turned out a surprise to other people, and that was the Silicon Valley Bank fiasco.

And who doesn't know that when interest rates go up, asset prices and bonds go down?

And so that has to like... Where were these people when they were thinking about this?

Did they- - [Chris] You mean where were the bankers or where were the regulators?

- Both.

- Well, I think the regulators had to some degree already may have culpa publicly and said that the surveillance was missed, and it was right in front.

And we're not gonna throw 'em under the bus 'cause we don't have a Fed official here to completely defend themselves.

- Throw 'em under the bus.

- What Frank brings up about Silicon Valley, there's actually a much bigger problem that nobody is talking about right now.

You have the Fed who is trying to get us through a soft landing using interest rates and hopefully get inflation down to that 2% benchmark that they're shooting for.

However, the Fed is conflicted in this.

Not only do they have the dual mandate, okay, which is always there, but right now the Fed is in fact- - And state what that is for people that don't know what the dual mandate is.

- The dual mandate is required by law that the Fed maintains stable prices and full employment.

And so they've got full employment.

They don't have stable prices.

So they can continue to be a little bit firm on interest rates.

However, okay, we're all concerned that maybe the Fed starts loosening because they wanna make sure that we maintain full employment, the dual mandate.

There's a bigger issue.

Fed's losing money right now.

The Fed is having to pay interest on reserves on deposited the Fed by banks.

There's about somewhere between three and a half and $3.7 trillion of reserves that they're having to pay a quarter point of the federal funds rate.

Their bond income from the bonds that they bought, which were like the bond returns that Silicon Valley was buying, one and 2%, and that's revenue they receive.

And the revenue they receive from the function as the Federal Reserve in terms of check clearing and other types of stuff they do for banks doesn't cover that.

They're losing money, billions of dollars, okay?

Right now they're upside down, a little $100 billion in terms of they owe the federal government.

Normally the Fed is a self-sustaining operation.

They don't get any federal funding, and they return money to the Treasury.

And in recent years, they've turned returned as much as 75 to $100 billion to the Treasury every year.

They're drawing down their account.

They're in debt.

And the longer the rates stay up at five and a quarter percent, all right, the longer, the more debt they go into, the more upside down they are.

So they have an incentive.

There's a conflict.

- You think that's a strong incentive for those in conflict?

- Yeah.

I think it's a real strong incentive.

I don't think you want to be the Fed chair where the Fed is now 200, 300, $400 billion upside down and facing the Rand Pauls of the world.

- All right.

- If I may add, it's not only the Fed, but the Treasury itself, the government debt.

As the interest rates rise, that increases, that worsens the burden of the debt, the budget deficit, and the total government debt.

That's gonna be higher as interest rates remain high.

- Yeah, so we got two 600 pound gorillas in the room, don't we?

(laughs) - So, we've got- - So I wanna get back to eggs.

And the reason I wanna get back to eggs is because in 2022, the price of eggs and poultry and turkey were going up.

And as I pointed out back then, interest rates didn't affect that.

It was caused by bird flu.

And that had happened again this year.

And so here's where we run into an issue where tweaking the Federal Reserve doesn't necessarily, the interest rate, affect prices of durable goods or other factors going on.

Housing prices this past year have gone sky high as mortgages have increased also, which is absolutely amazing.

You would think that with the increase in mortgages, people would stop buying houses.

Well, on the other hand, people stopped selling houses also.

And as a result, prices have been increasing.

I mean it's incredible.

In the metropolitan area here in Charlotte, your in-price index is like 600 compared to where it was in 2020, 2000, so six times the price.

I mean, this is, you know, what's going on here.

Naturally, the median price has finally taken a little hit, but that's not necessarily the case in the Carolinas right now where I can't see where prices are dropping.

They tend to be sticky.

- Yeah.

- And to add to that, we see in Charleston, we've looked at these numbers recently, just the percentage of sales in the Charleston market, I mean, Charleston's an extreme example 'cause the housing market is so strong, but between 2019 and 2023, the percentage of sales that came from new construction jumped from about 28% to 50%.

And the reason for that is existing inventory went down because existing homeowners weren't looking to sell, and that's a direct result of these interest rate hikes and partially explains why we see these prices that are staying elevated.

- And you got lots of people with three, 3.5% mortgages.

They're not gonna wanna leave.

- They don't wanna go.

- They don't wanna leave.

- Right.

- And it also triggers a higher property tax.

- Okay, so we're gonna run out of time, and I do want to hit a couple things from 2023.

Charleston, Columbia, Charlotte talking about ports.

So the Charleston Port, the Charlotte Airport, very important economic development assets for the Carolinas, but it also represents a good way to describe supply chain.

Are we back to normal on the supply chain now?

- Well, airport, let me tout ours.

The Charleston International Airport, another banner year in airport traffic.

We have people coming in at a higher rate this year than we did in 2022.

So for us as a tourism industry, absolutely amazing.

- Yeah, well, what about 2021 to '22?

Isn't that a trend, though, in Charleston because it... - Yes, yes.

It just keeps growing.

Now the ports, it's kind of a iffy situation in terms of what's been going in now, but they've had a pretty good year in terms of container traffic again, once again this year.

So, to some extent that does imply that the supply chain issues are ameliorated.

Although when you talk to people, they'll always blame supply chain issues as why they can't get something done.

I mean... (panelists laugh) - That has become the go-to excuse.

- Yeah, right.

- It should be a T-shirt.

It's a T-shirt somewhere.

Jerry, Jerry, do you see supply chain as being fairly normalized now?

- Well, I don't know that I would say it's completely alleviated.

It's close as we get into this next year.

I'm hopeful that we'll have that behind us, but it's taken us a little while coming out of the pandemic to get these supply side shocks under control.

But there are also some supply side pushes forward with the AI and so forth.

It's moving toward lower costs that eventually I hope would bring about help to bring inflation down.

- Yeah, supply chain?

- There are no longer any cars sitting on any lots that don't have chips.

I mean, that problem has been solved.

You can go in right now and you can make a deal on a car.

Cars will buy down the interest rate for five years.

I've seen some ads at 0% for 60 months, which the car dealer, I mean the car company is buying down that.

So yeah, the supply chain issue is really kind of been solved for the most part.

Sure, there're gonna be some things here and there.

One thing that's coming up that probably, again, under the radar, the Panama Canal is not working.

It's 20% down in terms of its ability to push traffic through because of drought.

Fresh water moving the locks, they can't pump enough water.

So what's happening is that ships are...

Fewer ships are being allowed to go through each day.

And so that may create some problems, particularly on the East Coast in terms of supply chain of stuff coming from Asia.

- But that effect is also gonna be mitigated by the fact that we're coming off this durable goods bubble.

So a pullback in demand overall.

And so you've got these two forces moving in opposite directions.

So it can be hard to tease out when you've got these new problems that are being introduced.

- So the last big thing in 2023, and then we're gonna have to wrap it up, next program will be 2024, I'll look ahead, but right now, Joey, this idea that a few weeks ago, a couple months ago actually now, WeWork, the big coworking space, announced a bankruptcy, and here at the peak of their market, they were looking to raise $11 billion.

And everyone was gonna be working from home or a flex space, and this was the new paradigm.

And now they went bankrupt.

Is it fair to say that that is a proxy for what is going on?

And John's already shaking his head no 'cause he knows possibly where I'm going here, but is WeWork's bankruptcy a proxy for what's happening in that flex space?

- Well, I would say that it's not a foregone conclusion where we're gonna land on work from home.

What is that gonna look like in the long run?

Some form of hybrid opportunities will probably emerge.

I think there is a movement we're seeing in some survey data that companies are looking especially next year to move employees back to the office more and more.

So I think we're gonna slowly move back in that direction, not all the way back to where we were before the pandemic, but slowly in that direction.

And that has implications.

One of the things that businesses have told us is that working from home has contributed to the lack of productivity gains that we've seen and losses since the pandemic began.

And we've seen a 40 year low in productivity growth, which is beginning to taper now.

We're seeing some improvement, but that's part of the reason.

So I don't think we are settled on... We don't know quite where we're gonna land on this work from home ship yet.

- You don't think it's a proxy for that?

You got two minutes.

- No, I don't.

I'm not sure it's a proxy.

I agree with Joey.

We're not sure where this is going.

There'll be some retrenchment, but I think, you know, you've gotta separate trends, macro trends from maybe micro mismanaged companies.

(laughs) - It's the shortest answer you've ever said, John.

- Right, but whatever you say, traffic is still congested in every metropolitan area in the Carolinas.

- But that's the growth of the Carolinas.

I mean, can you explain it away that easily?

- And people are still working at home though, so, yes.

So there's still a lot of traffic.

- But when you work at home, for the most part, you can choose when you work from home.

- Right.

- For a lot of jobs, I think that there will be some work from home.

The driving factors, businesses and their profits and their productivity, but I think workers, they got somewhat accustomed to it during the pandemic, and they're gonna be favoring that if it can be shown that they can get the job done, that they can keep their productivity, get the reports done, do their various business activities.

And I think there will be some going forward.

There will be some work from home.

I think it's here to stay.

Probably it's not gonna be full time, maybe half and half, maybe one or two days a week for a lot of jobs.

- But it's tough for businesses with this trade off because they're in a tight spot 'cause they want to attract the best workers with a labor shortage, but they also want to minimize productivity losses.

So where's that sweet spot?

- What's the old Chinese proverb?

May you live in interesting times.

- Right.

(panelists laugh) - This past year has been a good year though.

- Well said.

That'll be the last word.

Dr. Hefner, well wrapped up, and thank you 'cause, Jerry, you were talking about where it's gonna go, and we're gonna do that on this installment, part two of 2024.

It's our economic forecast with the same cast of characters.

So you know what you're getting into.

Thank you for watching our program.

We certainly hope that your holiday season is and has been merry and bright.

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

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