Hi, I'm Jeff Rea, your host for Economic Outlook.

Welcome to our program.

We hope you enjoy the show.

Please make plans each week to join us as we discuss the region's most important economic development initiatives with a panel of experts.

He's a frequent contributor to The Wall Street Journal, The New York Times, and has appeared on most major national news shows.

This week, he's joining us on economic outlook for an outlook on the regional, state and national economy.

Stay tuned for my conversation with PNC Financial Services chief economist Gus Faucher Coming up on economic outlook.

The state economy is at the top of people's minds and certainly is a regular topic of interest around water coolers at the office and in the upcoming elections.

We're sitting down today with Gus Faucher, the chief economist with the PNC Financial Services Group, for conversation about the economy, its current state, and what you might expect in the days and months ahead.

Gus, welcome.

Thank you very much, Jeff.

Pleasure to be with you.

Gus, we're happy to have you back.

You were a big hit when we had you here.

before.

We appreciate your work in the economy space, and you're helping us understand better, you know, kind of the economy and what's going on.

So we're going to pick your brain on, on a lot of different topics here today.

So appreciate being here.

Gus, just to start and frame yourself.

So as I mentioned, you're chief economist with PNC Financial Services Group.

Just give us, maybe a high level for those who aren't familiar with PNC.

kind of who PNC is and what you do there.

Yeah, so PNC is one of the top ten banks in the United States.

we're in all 30 of the largest metro areas in the United States.

we completed an acquisition, a couple of years ago that expanded our presence, particularly in the South and in the West.

And we do also have a lot of operations in Indiana as well.

in terms of what I do for PNC, we put out a baseline U.S. economic forecast.

We do write ups on the US economy on the economic data as it comes out.

and then I also speak to a lot of civic groups, client groups, and then do media interviews like this one.

Great.

Well thank you.

We're grateful to have you back.

I've had a chance to read many of your, things and seen some of your public, whether it be in the Wall Street Journal, a New York Times, or on major newscast.

And so we're grateful to have you share some insight here today.

So, Gus, just to start, like I think generally in our local area, we're kind of bullish on what's happening.

We've had some success with some projects.

We've got and it feels like construction activity happening.

Just maybe asking you for kind of a high level overview, a little bit of the state of the economy, kind of what's going on in the in the economy these days.

generally the US economy is doing quite well.

So we've had good economic growth over the past year of a little bit better than 2%.

that's the above, the above the rate that the economy can grow out of the long run.

And then unemployment is very low.

The unemployment rate, in, in May was 4%.

It's been below 4% for 27 straight months before that.

That's the longest stretch we've had like that since the late 1960s.

Employers continue to add jobs.

wages are growing and in fact are growing more quickly than inflation.

So overall, things are looking pretty good, I think in terms of your viewing area.

you know, we have seen a bit of a slowdown in growth there.

a lot of the industries, in, northern Indiana are tied to durable goods manufacturing.

So autos, RVs, those types of things, they tend to be dependent on what's going on with interest rates.

And so we've seen the Federal Reserve aggressively raising interest rates from 2022 through 2023. that has weighed on purchases of things like RVs, on cars, on appliances and so forth.

So it's been a bit softer growth in northern Indiana.

We've seen the unemployment rate in the area increased, but still holding up pretty well.

And conditions are still pretty good.

Great.

You know, thank you for that insight there.

So just, you know, particular, you know, industry or segments of the economy that are, that are doing better, that are driving some of this is, you know, manufacturing leading this is is, you know, real estate commercial, you know, give us a feel for maybe some of the, the stronger performing pieces of the economy.

Yeah.

So a lot of the growth is coming from consumer spending right now, particularly consumer spending on services.

so with the strong labor market, with good wage growth, with slowing inflation, we are seeing consumers increase their spending to some extent on goods, although high interest rates are a drag there.

But I think more on services.

So travel tourism retail those types of things.

So those industries generally are doing pretty well.

And obviously higher and higher education, that's an important part of your local economy that's doing quite well.

and then we're also seeing business investment growth is solid.

So businesses are profitable.

they're trying to expand.

It's tough to hire.

So they may invest in technologies that make their workers more productive.

Higher interest rates have been a bit of a drag there.

But generally, we see business investment increasing a lot of, investment tied to government efforts in terms of the Chips Act, the Inflation Reduction Act, the infrastructure bill, and so forth.

So that's supporting both government spending, but then also private sector spending in industries like tech and so forth.

And then finally, we've seen a slight rebound in the housing market.

So, you know, we had a big run up in interest rates.

mortgage rates.

So back in 2021, mortgage rates were below 3%.

they got up close to 8%.

They're down a little bit, from those highs.

And so we've seen a slight rebound in the housing market over the past six, nine months or so.

not back to the level that we saw in 2020 second half of 2020, 2021.

But certainly housing is a positive for the economy in mid 2024.

Whereas in 2022, first half of 2023, it was a drag on the economy.

Great.

That's going to come back in a second to housing.

I want to just more speak to maybe historically over the last couple of years, obviously, I think the last time we talked maybe was Covid or pre-COVID and, and a lot of things were having as the economy, you know, for the most part, you know, recovered from Covid times, been on an upswing since then, or are there still some, you know, some pieces that aren't doing as well?

after Covid?

Just give us a little historical perspective there.

Yeah.

So so the United States has seen a very strong recovery from the from the Covid pandemic.

So we lost 22 million jobs in March and April of 2020.

I mean, historic job losses, absolutely enormous.

But we now see employment is about 9 million higher than it was before the pandemic.

If we look at GDP output of goods and services, we're producing about 8 or 9% more goods and services in the US economy than we did before the pandemic.

And that's after adjusting for, for for inflation.

So that's not higher prices.

It's actually higher volumes in compared to other developed economies.

The US recovery has been very strong.

in the initial stages of the recovery, a lot of that was on the good side.

So we were stuck at home.

We could travel, we couldn't go out to dinner.

So we bought a lot of stuff off of Amazon.

Right.

and interest rates were low.

So we were able to finance those purchases.

But more recently, over the past year and a half, two years, we've seen most of the growth coming on the services side rather than on the goods side of the economy.

But it's caught up there and we're spending a lot on things, you know, education, health care, travel and tourism, personal financial services, those kinds of things.

And so we're doing quite well there.

I think the one, concern for the economy in mid 2024 remains high inflation.

you know, obviously with that very strong goods demand coming out of the pandemic, we all trying to buy stuff, that allowed for higher prices.

And we had shortages of a lot of goods and supply chain difficulties and so forth.

But now we've seen goods inflation slowing.

The inflation now is coming on the services side.

So strong wage growth that's pushing up services prices.

And then also we're seeing you know we've seen over the past couple of years big increases in rents because of strong housing demand.

we're seeing house prices go up.

And so the, concern with inflation in 2024 is services rather than goods.

As consumers, we actually buy more services than we do goods.

and that inflation is a little tougher to get out of the economy.

And so we've seen some improvement on inflation over the last six months or so, but not as much progress as we made in 2023.

Great.

Thanks Gus.

I mentioned housing and want to come back to that.

You know, we like I think communities across the country are are struggling with that.

We haven't really recovered from the housing crisis of 2008.

In terms of the amount of inventory.

cost of housing right now is pretty extensive.

There's a lot of conversation in our communities, in the viewing area here about how to do affordable housing.

And so it's give us just I know you've written and talked a little bit about housing in recent cases.

Give us a kind of a little state of housing and some of the things that that we as, that maybe that are limiting you know, the new construction of it and maybe some ways that we can help fix that.

Yeah.

So, so if we look back, you know, before the previous recession, the Great Recession back in 2007 through 2009, that was a housing driven recession.

we had a lot of home construction.

We had too much home construction nationally.

So when the economy started to slow, we didn't have demand for those homes.

And there were a lot of homes sitting empty.

we had a lot of people who, had borrowed heavily against their homes.

We saw home prices fall.

Their homes were, worth less than they had in the amount that they had finance.

And so they ran into difficulties, you know, during the recovery from the Great Recession.

So roughly 2010 through 2020, right before the pandemic, we didn't see the same excesses in the housing market.

And in fact, if anything, we saw home under construction, we weren't building enough homes.

So what that means is that when the pandemic hit and we saw mortgage rates fall below 3%, when people received stimulus payments and had extra money from the government, they all wanted to go out and buy a home, or they wanted to go out and rent a new apartment.

Young people were looking to move out of their parents homes.

And so we saw big increases in house prices in rents.

then we saw mortgage rates go up, starting in late 2021. and, you know, now you're in a situation where if I have a mortgage and I'm paying 3.5% on my mortgage and it to get a mortgage, now it's going to cost me 7%, my payment's going to, you know, close to double.

I don't want to move.

And so there just isn't enough inventory out there on the in the market right now, given the shortages that we've seen in construction and now a dearth of existing homes for sale.

And so even though housing is really expensive and it's, less affordable relative to incomes given high mortgage rates, we don't see house prices falling in.

In fact, they're increasing.

and so housing is a particular problem.

Now, if you own your home, you're in good shape.

You have a lot of equity in your home.

But for people who are either looking to change jobs and move to somewhere else or, you know, graduating from school and are looking for an apartment or something, the market is difficult and housing is expensive relative to incomes.

For those folks.

Yeah.

So Gus any signs signals of when that will improve?

Is this something that communities are going to continue to deal with?

I know like in our communities if you like, they're like government.

Others are trying to come up with some subsidy to bring cost down to fight, you know, kind of the inflation related to prices there.

But in any if you're looking in your crystal ball, will this improve?

in the in the months or years to come?

I think we will see an improvement.

But it's going to it's going to be gradual and it's going to take a few years.

I think we'll see an improvement because we are seeing more home building relative to what we had before the pandemic.

whether that's apartment construction or whether that's single family construction.

So supply is increasing there.

And then I also think that we will see mortgage rates come down through the rest of 2024 and into 2025.

So maybe we see mortgage rates fall to five and a half, 6%, something like that.

And that will encourage more people to move.

But it's going to be a gradual process.

I think that, you know, it takes time to build homes.

It, takes time for, this impact of lower mortgage rates to work its way through the economy.

and so I think we'll see a gradually gradual easing in the housing market.

But it's not going to occur.

All of it this year.

It's going to take place later this year, 2025 into 2026.

Great.

All right guys, let's move on from housing and move more into commercial real estate.

So you know we like many communities have a fair amount of commercial development everywhere.

uncertain about, you know, what's going on with any what do you think about the commercial real estate market and what's going on in that space?

Yeah.

So so I think the big point to make is, is that there are very different aspects of commercial real estate.

So if you look at things like retail, if you look at industrial and warehousing space, those are holding up pretty well.

Demand is still pretty good for those segments.

On the other hand, the office market, you know, it's it's a significant problem for the overall economy.

we simply have too much office space out there.

Now, given that many of us are working from home more frequently, and that many jobs have gone fully remote.

and so we just see lower structural demand for office space out there compared to what we had before the pandemic.

Vacancy rates are very high.

you know, it depends on the property type, where it's located.

But, you know, central business district versus outlying areas.

Certain metropolitan areas are holding up better than others, but generally we just have too much office space out there.

you know, it's difficult to convert that space into something new.

and so, you know, we do think that we are seeing price declines for office, properties.

I think we'll continue to see price declines for off office properties.

High interest rates are a concern there.

you know, and there is a lot of, financial market exposure to falling office, prices.

So, I think overall, when you look at the banking system, I think the regulators are doing a good job in making sure the banks hold enough reserves.

But there will be problems in particular markets, in particular segments tied to commercial real estate.

I think the overall economy is strong enough to withstand that, but there will be some pockets of trouble going forward as we continue to see the office market adjust to this lower structural level of demand post-pandemic.

Great.

That's on a shift a little bit.

So I think of of maybe just your work at PNC and and obviously, you know, hundreds of thousands of business clients across, you know, kind of the country part of my guess your services is, is sort of understanding what they're thinking about, you know, some of the things what's the what are small businesses feeling today about, you know, kind of the, the economy.

Are they excited, encourage nervous, give us a feel for, what business thought right now.

Yeah.

So so I think small businesses are actually very encouraged by the way things are going.

we do a small business survey twice a year.

The latest results were from the spring of 2024.

They were the strongest in the in the more than 20 year history of the survey.

this is across the country.

So this is not just PNC clients.

These are all sorts of small businesses, but they see strong demand.

They see that inflation is slowing.

They see that they still have problems finding employees.

But those are easing to some extent.

and they are feeling very optimistic about their own company's prospects, about prospects for their local economy, to some extent, about prospects for the national economy.

But they're feeling pretty good about things.

And I think this reflects an expanding U.S. economy in mid 2024.

And to some extent, the fact that we have seen inflation slow still higher than these businesses would like.

But certainly the inflation picture is much better than it was a year or two ago.

No.

That's great.

I think I appreciate that, perspective.

Always good to hear what, what the small businesses are thinking.

And thank let's shift a little bit to, international influence.

You know, we think a lot about the American economy, but obviously stuff that happens all around the world influences what goes on in the US.

Can you give us a just insight into, you know, whether things around the world have a positive negative impact or, or any, you know, signs or trends that are influencing sort of U.S. economy one way or the other.

Yeah.

So so I would first point out by, I would first I would start by first pointing out that the problems that we're dealing with in the United States, those are occurring all over the world.

So other economies are dealing with high inflation.

They have seen their central banks, the Bank of Canada, the European Central Bank, the Bank of England raise interest rates in response to high inflation in those countries as well.

So just like we're dealing with those issues in the United States, we're dealing with those issues globally.

Now, that being said, also like we've seen inflation slow.

We've seen it slow in other parts of the world.

And in fact, we have seen rate cuts over over the past month or so from the European Central Bank and from the Bank of Canada.

So there are indications that although interest rates are high globally, they are coming down somewhat.

Haven't come down.

We haven't seen the Federal Reserve cut rates here, but I expect that'll be coming up later this year.

That being said, the recovery in the United States has been much stronger than the recovery in the rest of the world.

I think we provided more stimulus, more aid to households, more aid to businesses.

I think the Federal Reserve was more aggressive in cutting rates than what we saw internationally.

and so we're in a situation where consumers continue to spend, and that is leading to imports of goods into the United States.

And then we did see some softness in the global economy kind of second half of 2023, as those economies were dealing with high interest rates.

So, we've seen the US trade deficit actually expand over the last six, nine months or so.

That's been a bit of a drag on US economic growth.

But the US economy continues to hold up.

and I do expect that we will see stronger demand from overseas later this year as those lower interest rates start to work their way through those economies.

And that leads to greater demand for us producing, goods and services abroad.

Gus I feel like in recent years there's been a little bit of this effort to get manufacturing maybe that has been overseas coming back to to the US and producing some on an American soil.

Is, is is that what's happening and are there more folks producing here versus elsewhere?

Is it still, you know, pretty balanced around the world?

yeah.

No, we have seen a rebound in US manufacturing for a couple of reasons.

the first of which is, is that businesses recognized following the pandemic, the problems with these long supply chains, getting products from Asia, getting products from China in particular.

And that made it difficult during the pandemic to actually get their hands on the either the goods to sell to consumers or the goods or inputs into other goods, auto parts, things like that.

And obviously that's very important for for the Michiana, area where you have, you know, a lot of imported, parts into the RV's, the appliances and so forth.

So what we've seen is businesses respond by sourcing more from within the United States or sourcing more from within North America, at least where those supply chains are shorter and they're more stable and they have less concerns about supply issues.

And then we've also seen a policy response.

And this was true under the Trump administration.

It's also true under the Biden administration that, the United States policy makers are concerned about so much dependance on China, particularly as it relates to advanced technology.

we've seen efforts, you know, again, when the when the pandemic hit and there were semiconductor shortages, we couldn't get chips from overseas.

There was a sense that that's an important from a national security, perspective.

So we've seen efforts to increase domestic production of some of these, high tech items.

And that's also supporting manufacturing in 2023, 2024.

Now, again, high interest rates are a bit of a drag on the manufacturing industry.

a lot of those goods tend to be financed.

And so if interest rates are high, that makes it more expensive to do so.

But I think overall that, you know, manufacturing has done pretty well given the downturn that we experienced with the pandemic.

and I do think that we will, see growth in manufacturing activity in the United States later this year, 2025, even into 2026.

Great.

Gus a quick question.

Like on on energy, for example.

And you know, so much conversation here about do we have the power we need to power the everything we need?

We the water, that we need?

Can we produce more solar panels in the US?

You know, what influence sort of what's happening energy space have on the overall economy?

Yes.

So, you know, first of all, I think we, after the Russian invasion of Ukraine in the cut off of natural gas supplies, in particular to, to Europe, you know, we started to export more there.

We saw global energy prices increase, but we've also seen a supply response in the United States.

So if you look at domestic production of oil and natural gas, that's actually been at a record high recently.

So high prices encourage more domestic production.

that being said, there is a policy effort to move towards renewable energy, things like solar, hydroelectric, perhaps nuclear.

and again, I think from a national security perspective, the view is, is we want to make sure that we have those capabilities in the United States.

So we see the Biden administration investing in those types of technologies in the US.

So EV plants and so forth, battery plants, those kinds of things.

And, you know, that is providing a lot of support to economic growth, particularly in the Midwest and in the southeast, where a lot of these auto manufacturers are located.

and I think that that is going to remain a positive for the industry over the next couple of years.

Great.

Gus the rumor is there may be elections, later this year, as there are every few years, a federal election.

You know, we're just the curiosity is, you know, how do elections impact economy?

Does that make people more nervous, less nervous?

Do they wait?

And do they have any impact at all?

they have a very minor impact.

We don't change our forecast because it's an election year.

The one thing that I will say is that historically, we have found that stock prices tend to go up during election year, which makes sense because the incumbent party wants, you know, has it has an incentive to keep stock prices high.

But what's much more important are the economic fundamentals, what's going on with the labor market, what's going on with with population growth or businesses investing and so forth?

Are consumers feeling good about things?

And then depending on what happens in November, we're not going to change our forecast.

Then.

it depends on who's in office.

It depends on who's in control of Congress.

You know, then as we start to see policy decisions being implemented, whether it's tax cuts or tax increases, spending programs or spending cuts, whatever it is, then we'll start to adjust our forecast depending on those policy efforts.

But it's around the edges.

You know, really it's not like the economy is a lot better under one party than on another.

If you look at it historically, you know, it's it's it's pretty much goes according to trend.

And so those may have slight impacts on economic growth on the job market, but but not huge ones.

And we're not going to make wholesale changes to our forecast depending on who wins the election or who's in control of Congress.

I, I appreciate I think that's very helpful to know because I hear all kinds of stories sometimes, but they hear from an expert that I think that's great, Gus, we're starting to get here near the end the last couple of minutes here.

So you touched earlier on the labor markets.

And I think that, you know, there's so much conversation, our communities all the time about the labor market and wages and, and, can we find the workers that we need for 100 years?

I think we've been looking for the workers, to fill the open spot to just maybe spend our last, you know, minute and a half or so just talking about the labor market kind of what happening what you maybe what you see happen in that through the rest of 2024.

Yeah.

So so the labor market is historically strong.

you know, as I mentioned earlier, we've seen an unemployment rate that's been below 4% for 27 straight months now.

It hit 4% in May.

So up a little bit.

but job growth is still good.

Over the past few months, we've added about 250,000 jobs per month.

That's actually above the level of job creation we can sustain over the longer run.

Given growth in the labor force, the number of people who are emigrating to the United States, or the number of people who are graduating from school and so forth.

so if anything, I think the Federal Reserve would like to see a little bit softer labor market a little bit not job losses, but a little bit slower job growth.

And then, you know, a couple of years ago when inflation was very high, we saw wages growing more slowly than inflation.

So people were falling behind.

That situation has reversed itself over the past year or so.

Wage growth is still pretty good.

Businesses are still competing to hire, inflation is slowed.

So now we see that real wages, wages adjusted for inflation are increasing.

And that's good news for consumer spending and overall economic growth.

Great, Gus I got about a thousand more questions.

But we're going to have to leave it at that.

We're grateful for your time.

Thank you for always being willing to share a little bit of your insight on what's going on with the economy.

Appreciate you being a guest today.

Well, thank you very much, Jeff, and it's been great to talk with you tonight.

So that's it for our show today.

On behalf of the entire team here at WNIT PBS Michiana, we want to thank you for watching on WNIT or listening to our podcast to watch this episode again or any of our past episodes.

You can find Economic Outlook at wnit.org, or find our podcast on most major podcast platforms like us on Facebook.

Follow us on Twitter.

I'm Jeff Rea I'll see you next time.

This WNIT local production has been made possible in part by viewers like you.

Thank you.