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

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The pandemic has had a major impact on the US and global economies.

But now we're on a bumpy road to recovery, and I'll sit down with PNC Global economist Bill Adams for a closer look at that recovery coming up on Economic Outlook.

Before we get started, here at WNIT we are respecting social distancing and as such, have both our hosts and our guests joining us today virtually instead of in person.

He spends his days analyzing the U.S. and national and regional economies and preparing forecasts of international economic conditions, interest rates and exchange rates.

We're sitting down today for an in-depth conversation with PNC Global economist Bill Adams today on economic outlook.

Welcome, Bill.

Jeff, thanks for having me.

Hey, we're sure grateful.

Bill, you're a repeat guest.

We appreciated your perspective so much when you were here before that, we have invited you back for your insights.

You and the PNC team have been great partners for us, and we're grateful for you sharing some of your insights.

Bill, before we really get into the economy discussion, just remind us a little bit about your role at PNC and what it is you do there.

I'm part of this economic forecasting team, so we put together these forecasts for the most likely path of the US economy and the global economy over the next one to two years, and that includes forecasting how much the economy will grow, how many jobs are going to be added or as we are now coming out of an economic downturn, how many jobs will be recovered over our forecast horizon?

How much prices will rise?

So, how intense inflation will be?

And then what will the Federal Reserve do to raise or lower interest rates over this period?

So and--so a complicated job, and we appreciate people like you that do it that help us better understand jobs and economy.

Of course, our show is really aimed at talking a little bit about the economy, which is why we like having you back to talk a little bit.

But, when we were here before we were, you know, ten years coming out of the recession, we were talking about, you know, some success that we were having.

We were asking you to look into your crystal ball and think a little bit about the year ahead and where--and I think you gave us a good report card last time and thought that we were going to experience some growth.

And then a funny thing happened along the way to realizing that the global pandemic showed up so--and obviously had some impacts on the economy.

So let's start, you know, basically there and talk a little bit about, you know, going back to pandemic--the beginning of the pandemic and some of its impacts on the economy and--and before we sort of get into, you know, kind of the recovery now.

So the pandemic caused the deepest economic downturn on record for the United States economy.

Nationally, we lost--you know, there are different ways to measure it.

If you measure the number of people working on employers payrolls in the United States, we lost about twenty two million jobs over the course of two months from February to April of last year.

And if you're looking at the unemployment insurance rolls, we saw a maximum of about over thirty million people claiming unemployment insurance benefits at its peak last spring.

So a very severe economic downturn.

But the economic downturn that was most concentrated in the high contact, what I call high contact parts of the economy.

So, things that we do face to face; you go to a restaurant, you're around other people, you go to a movie theater or you go out to an entertainment venue, you go on a vacation and travel through an airport.

All of those sides of the economy took the most severe blow from this economic downturn into--into the spring of last year.

And in the recovery, those different sides of the economy have--have come back at very different speeds.

So--so, Bill, when I think when we talked before, you know, some of your expertise has been looking globally as well, too, so when you think about economic impacts of--of the pandemic sort of equally spread around the globe, were there parts of the world that were hit harder than others?

What was kind of the global impact of of that economy or the pandemic?

The pandemic has, I mean, spread around the world, at a different pace in different parts of the world, so of course, hitting China first and then spreading elsewhere from there.

And so because of that, the impact on the global economy first showed up in China.

And then as the US economy was being locked down, China's economy was already reopening.

And one way that--that affected northern Indiana, as well as the US more broadly, is because you're seeing lockdowns in different parts of the world at different timings and policies very dramatically from country to country.

It caused just havoc in the global shipping industry and global supply chain.

So if you're thinking of products like electronics that are coming from--you have components from one country being assembled in another country and then shipped around the world to consumers in the US or Europe or--or elsewhere.

Those types of very complicated supply chains just were much harder to keep running during the pandemic.

And one of the knock on effects of how the pandemic has affected the global economy is the shortages of goods that are now a severe chronic problem in the US and are hampering our recovery.

So Bill, I want to stick on the supply chain for a second because we did hear so much about that early on.

We've heard, you know--so, are we still in a--in a crisis with--with supply chain?

Have those recovered significantly?

What's--what's your--what's your prediction when we might be back to, you know, something more normal on the supply chain side of things?

So the way I see the supply chain crisis is through the lens of consumer spending on goods and especially durable goods, because that's the part of consumption that has pulled demand through the supply chain.

And what we've seen since the pandemic hit was consumers, you know, they couldn't go on vacation, couldn't go to restaurants, couldn't go out to--to a concert.

And so they were concentrating their spending dollars on new electronics, new home--home appliances, you know, exercise equipment, all these things that are often manufactured overseas and then have to come in through these global supply chains.

Consumer spending on durable goods jumped by more than a third from February of 2020 before the pandemic hit the US to March of 2021.

It's--and so because demand for durable goods has been so strong, you know that's been more than the supply chain could keep up with while the pandemic was hampering labor supply.

Pandemic causing restrictions on movement across borders and so forth.

So I think we're going to start seeing some relief on the supply chain, probably in the next two to three quarters as the pandemic recedes, as Americans are spending more time out of their houses, more--going more to restaurants, going more on vacations.

And those consumer spending dollars shift back toward services which don't require as much products moving through supply chains.

And then some of the pressure on those supply chains eases as demand for durable goods starts to--starts to cool.

So you touched it in the opening about the--the impact that the pandemic had on unemployment, and we talked just briefly there about, you know, labor supply.

So can you talk to us a little about why we're seeing some of the challenges that we're seeing today?

I think the general agreement, and certainly my view, is that the--the labor supply issues affecting the business community right now are a combination of the effect of enhanced unemployment benefits, but also ongoing health fears, as well as the impact of child care and other caregiving responsibilities that have pulled people out of the labor market.

You hear the most about the unemployment insurance benefits because that's a politically controversial, but even in as we've started to see those unemployment benefits lapse and that in theory at least so far, should--should have started to cause a change in job seeking behavior of unemployed people in the states that ended those unemployment benefits earlier.

We didn't really see job growth faster than in the national average.

And so it looks like either of those other factors are more important to why job seekers have been slower to take new jobs or quite possibly being out of the labor market for a couple of months gave people a time to reevaluate what they wanted to do in work.

And I think a lot of job seekers are likely looking for jobs in different occupations and different industries than they were prior to the pandemic.

So that is going to mean a slower job search process.

That's a slower matching process for employers to decide which--which job applicants they want to bring in with than just matching someone who's working in a very similar job into the same job coming out of this.

And so I think that could be one of the reasons why we're still seeing labor supply come back relatively slowly.

But I think the bigger picture, you know, Jeff, going back to where we talked last time with coming into a very mature U.S. economic expansion with a very tight job market, it looks like we are coming out of this economic downturn back into a tight job market.

A lot of that is driven by the aging of the US workforce and demographics.

We've had less immigration in the United States in recent years, and that also reduces the workforce.

And so those factors are, I think, going to keep a challenging job market for employers to staff up and to find new workers, especially entry-level workers, as the economy matures.

Sure.

So let's--let's shift a little bit.

You talked about, you know, people are home, they're spending more money, they're buying large ticket items or buying, you know, furniture.

And I don't know cars and--and, you know, talk a little bit about just maybe influence on pricing and such like, I'm thinking maybe a little bit about homes and the lack of supply there.

I'm thinking about automobiles and the lack of supply and how those things influence what's happening on the price side of things.

So we've had demand has been super charged since the pandemic struck.

This is a combination of people spending less on activities restricted by the pandemic, which I won't--I won't make you listen to me twice on that.

But also the enhanced unemployment insurance benefits, putting cash into consumer's pockets and the stimulus checks that we received in 2020 and early 2021, as well as the--the new tax credit for four households with children.

All of those stimulus to households means more consumer spending power.

And so that is meant, you know, a lot of spending power directed at goods.

People, especially households who had windfalls where they got a stimulus check and the government hadn't really had a plan for what to do with it.

That created a lot of demand for vehicles for--and for consumer goods.

And that coincided with, you know, especially in the auto industry.

There was the carmakers.

They canceled their orders for a lot of components in the spring of last year because they were preparing for what might have been a much worse economic downturn.

And then, as the economy started to recover and demand for autos caught up, picked up well ahead of the rest of the economy.

They tried to replace their orders, but because demand for electronics was also very strong at the time, the chip manufacturers specifically were not able to manufacture and promised the same quantities of--of the chips used to manufacture the flat screen displays and the other electronics in a modern car.

And so for that reason, we've had a shortage of--of autos over the last three to six months.

Demand for--for cars and trucks is very, very strong in the United States.

But, you know, supply is holding back consumer spending in that respect.

And so we've seen an increase in flight prices of new vehicles and even larger increases in the prices of used vehicles.

Because, you know, with--without new vehicle inventory, people are trying to buy used vehicles.

And we've seen big jumps in the cost of renting a car because the rental agencies they liquidated their fleets, also planning for a very potentially long and severe downturn last year.

And they're trying to buy out of the same market that consumers are, and there's just not enough inventory for them just to get their--get their fleets back to normal size.

So that is showing up in the--in consumer inflation in a very big way that's driven--I think it drove a third of the overall increase in--in inflation in the month of July just came from used cars.

Similar story in--in housing where a pandemic strikes, people spend more time at home, the demand for living space increases and especially people who might have been in a big city living in a denser living environment like an apartment complex.

If they're working from home, they don't need to be close to their office to commute.

And so demand for single family homes further out from urban centers exploded.

But the construction industry could only manufacture new homes, could only build new homes so quickly, and so that caused a surge in the prices of new homes.

On top of that, we have seen the inventory of existing homes coming to market be very, very limited in the last year because a lot of that inventory historically comes from older Americans downsizing, moving to smaller spaces, moving to either retirement communities or--or senior housing.

Also, denser communities and understandably older Americans are very reluctant to move right now.

And that has meant that there's been less existing home supply coming into the market.

So it's going to continue to be a very tight market for--for housing in the next few months.

I think in to 2022 again knock on wood as the pandemic gets better under control, we should see more existing homes coming to market, as well as more new homes being built as some of those supply chain problems become less severe.

And so that will ease some of the the supply pressures on housing.

We expect demand to still stay quite strong.

And so we think that the really huge price increases that we've seen in the last year and a half are going to slow, but we don't think that prices are going to fall outright.

We think it's more likely that we'll see home prices just rise at a much slower rate in 2022 and 2023.

Great.

Thank you.

He's Bill Adams.

He's an economist with PNC Bill.

We're going to leave the studio here real quick.

We're going to go out into the local community.

George Lepeniotis, my co-host is out on the street with a little local perspective on economy.

George, let me toss it to you.

Thanks, Jeff.

I'm near Notre Dame's campus at the southern end of Eddy Street Commons.

As you can tell in the background at the new development with Trader Joe's, I'm joined today by Bill Pratt, our old friend, professor of economics at Holy Cross University and also a business coach.

Bill, thanks for being with us today.

Glad to be here.

Bill, the last time we talked, we were standing a little bit further north.

This development hadn't happened yet.

What is it about this area that really spurs economic development and is having such a good impact on this community?

Well, first of all, I mean, we have the university.

There's no question.The University of Notre Dame, it's a huge part of everything, but not just at the university.

There's a lot of innovation.

This--this--this whole area of the South Bend area is really focused on proactively looking at how can we build the business community?

You know, a lot of places just let it happen.

But this is all about being active.

How do we reach out?

How do we seek out people, seek out partners and things like that?

So a lot of that work's been taking place over the last several years economically in this area to intentionally build this place up.

And you know, that's--that's an interesting statement because I really do think that's true, right?

Economic development can happen either the laissez faire model or in a more modern model, a more proactive approach of--of creating a business activity.

Is there success in that proactive approach?

Absolutely.

Because businesses by themselves kind of--if you think about it, what a business is, it's a person being active or corporation being active.

So it's kind of like when you're active, you kind of attract the attention of other people being active.

If I had two places to plant my business right, and I knew that one was actively trying to make sure that things were going well for the business community and the other one just kind of sitting back and letting things happen.

I want to choose the one that's actively out there because I know they're engaged and they're going to listen to my concerns as a business owner as well.

Well, and when you say active, obviously you mentioned the university and there's a number of universities in South Bend; Holy Cross, Notre Dame, IUSB, Bethel and then even around the surrounding areas of Goshen Andrews University.

There's--there's quite a lot of that and--and they are active.

You know, Notre Dame is probably the most active in promoting business activity.

Is there--is there a direct benefit to a community when you get that increased business activity?

Well, yeah.

I mean, first of all, you're going to have a lot more jobs and not just the number of jobs, but as you're starting to see more and more, you're seeing the salaries creep up.

So what's happening is by having that--that labor demand, you end up increasing the--the cost of well, increased the cost of labor.

But what it ends up doing is it makes the wages go up.

And when the wages go up, you start desiring better workers.

When you desire better workers, now you have a better work pool, which means you're going to attract even better businesses.

So it's like an upward spiral as opposed to a downward spiral by doing it that way.

Got it.

Now, a little with--a little bit of time we have left, talk a little bit about some of the supply constraints that are happening in the broader market.

I mean, those can impact these developments, can they?

Absolutely.

What was great about like Trader Joe's as an example, was they saw--they were looking ahead and they said, Look, we know there's a problem now, but it's going to clear up.

So we're going to go ahead and build now, which was great because if they tried to build today, it's going to be a little bit harder, right?

More competition.

Well, but ultimately, yes, there is--there is a bit of a shortage, but it's a temporary thing and we are working our way through it.

Awesome, Bill.

Thanks again for being with us.

I know we got rained on.

Jeff, I appreciate your sending me out into the rain.

Better than the snow, I guess.

It is a warm, beautiful day, as I'm sure you're going to be discussing in the studio.

There are a lot of economic activities here locally and hopefully they will continue into next year.

Thank you, George.

Always great to see you.

Thanks for the local perspective there.

I'm back in the studio with Bill Adams.

Bill is an economist with PNC.

Bill has been a frequent guest and loves--we love having him on to share his insight on the economy.

Bill, we've got a few minutes left here in our interview today.

So Bill, as I've seen you talk, you talk a little bit about the--the bumpy road to economic recovery.

Sort of no smooth sailing along the way.

Tell us a little bit about, you know, kind of the--the month and--and year ahead and what that bumpy road looks like.

So right now, the especially the labor market is in an intense period of transition with the end of unemployment insurance benefits.

Nationally, in September, we've seen seven to eight million people coming off the unemployment insurance benefit rolls in the first half of the month of September.

And so we are expecting that to be, you know, a one hand, other hand kind of an effect on on the economy in the near term.

On the one hand, we are expecting to see a little bit softer growth of consumer spending as those households that were receiving unemployment benefits they're not getting that money anymore.

They're likely to be more cautious on spending until those unemployment benefits are replaced by--by new income.

On the other hand, we think we're going to see a increase in our labor supply and labor supply, hopefully growing faster over the next couple of months with more job seeking as--as those unemployment benefits cease being a factor in the labor market.

So the net effect on the economy really depends on what type of jobs these unemployed workers find their way into.

I think if--if I'm right that a lot of people who lost jobs in the pandemic are looking for jobs in different occupations, most likely paying better than the jobs that they came out of, but also likely in more productive jobs.

Many businesses are able to generate more revenue per worker than I think we could be shifting towards a higher productivity economy with better long term growth prospects as we come out of this near-term transition.

On a longer time frame, you know, I'm pretty optimistic about the course for the economy.

One reason is PNC's own small business survey, where our fall round of this survey we saw that the highest optimism of small business owners across the United States than we have on record since the survey began in 2007.

And another reason is that the pandemic, it's--it's really kind of a form of a natural disaster.

And if you look at the impact of natural disasters elsewhere in the United States, look at what's happened after hurricanes or--or other severe weather events.

Typically, you see a rapid rebuild and then the economy moves on with--with relatively few long term scars from the downturn, like the kinds of damage that you saw after the housing bubble burst in 2008 2009.

And--and that severe and protracted downturn and slow recovery.

So I think we are headed into a--a period of hopefully very solid economic activity in 2022, 23, 24.

And where consumer spending is going to stay strong and demand for businesses will be strong.

And businesses, while they are facing higher inflation and higher input costs, also are having pricing power.

And so they have opportunities to pass on price increases to their customers and to--and to defend their profit margins and keep their businesses operating sustainably--sustainably.

So, Bill, we're in our last two minutes here, so and I think we could talk all day on some of this.

So the pandemic is not over.

We've had, you know, during the course of the pandemic some spikes, you know, here and there where we've done better and then we've done worse.

Is there--is there concern that a new variant, you know, other things could derail that bumpy road, just make it a longer recovery?

I mean, does it give you any pause as you're making your predictions that that the pandemic still is, unlike a natural disaster, it's potentially is still around and could flare up again?

Well, I mean, I don't think an economist is going to do any better forecasting the next wave of the pandemic than we were at forecasting the pandemic to begin with.

So it's not something that I'm--I'm going to understand when it's going to happen or how severe it would be.

What we have seen so far is that each successive wave of the pandemic has had a smaller impact on economic activity because businesses and consumers have found ways to adapt around how the pandemic affects day to day life and our ability to to to work with each other and to keep life going.

So I think if we--if we do see an additional wave of the pandemic similar to what we've seen over the last year and a half, I think it will likely slow the recovery somewhat.

But I think we're going to see something more like what we saw in the months of--of August and September where--where we saw the recovery continue, but at a slower pace than in--in May, June and July, rather than what we experienced in the winter months where we're in a couple of months, we saw activities fall slightly and very different from what we had last spring.

Great.

He's Bill Adams.

He's a senior economist with PNC and a senior vice president there.

Bill, we're grateful for your time.

We know you're busy.

We appreciate the insight here, and we look forward to having you back sometime in the future for some additional conversation about the economy.

Thanks again for having me on.

That's it for our show today.

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.

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I'm Jeff Rea, I'll see you next week.

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