♪ Gavin> Welcome to This Week in South Carolina.

I'm Gavin Jackson.

This week we're talking about the economy.

And to do that, I have Tom Barkin with me.

He's the president and CEO of the Federal Reserve Bank of Richmond.

Tom, thanks for coming back.

>> No, it's great to be here.

I look forward to the conversation.

Gavin> So, Tom, everyone's talking about the economy.

We can't get enough of it: Inflation, jobs, reports, all that good stuff.

Start us off by giving us an overview of what's going on in the fifth district here, the Carolinas and up the East Coast.

Tom> Well, my district, South and North Carolina, Maryland, D.C., Virginia and West Virginia.

I sort of think of it as three different economies.

There's the South and North Carolina economy, very healthy, very vibrant and importantly, workforce is growing, population is growing, which means on the positive side, jobs are being, you know, hired for and people are available for jobs, On the negative side, pressure on housing.

But one more positive, actually is a significant growth in housing.

Now, exclude Charleston from that, but you know, around Greenville, around Columbia, around, you know, Raleigh and Charlotte, you're just seeing a lot more building of housing than you're seeing anywhere else in the district.

On the other side, D.C. and Maryland, they've not recovered workforce from before the pandemic.

You've got people... you've got net mobility moving out, not in.

You've got significant issues with the federal government, you know, on site versus not on site that are really creating challenges.

And of course, in Baltimore, you had this tragedy in the harbor a few weeks ago.

And so that's a different set of economies.

In Virginia, somewhere in the middle.

So, three different economies, at least the way I see it.

Gavin> Well, so you brought up housing and I was going to talk about that in a moment, but just let's stick with that and see what you see going on in that market right now because it is so hot right now, even with the interest rates being what they are, the mortgage rates being what they are, how do you... how do you make that mesh and do we need more?

You talk about Charleston, obviously really trying to keep up there, but you're talking about folks here in Columbia, talking about all cash offers over asking price.

It's just a bidding war, nonstop.

What needs to be done to mitigate that situation?

Tom> Well, if you just take a look back, you know, post the Great Recession, we under built housing for ten years and we didn't notice it because millennials were moving later to move into a house.

And so, we didn't have enough housing.

But then when the pandemic happened, you had two things at the same time.

One is, a bunch of millennials finally had kids and decided they really needed a house, but maybe more importantly, people who spent time at home discovered they needed a better home, or the way the economists would put it, is they wanted to put more of their spending basket into their house.

And so demand just skyrocketed.

And it was for a better home.

It was for fewer roommates because, you know, working from home, you may want a little bit more space.

Second homes, which obviously is a big issue for opportunity on the coast.

And I just went on and on.

So, demand skyrocketed and it skyrocketed well in excess of available supply.

So then you get to 21-22 and it was a frenzy.

We started raising rates.

That obviously takes a little bit of the bloom off the demand frenzy, but you've still got demand and now you've got this situation where people with 3% mortgages don't want to trade out into a 7% mortgage.

Gavin> Yeah.

Tom> So supply is still very short, so high demand short supply, that's the challenge.

Now... it is definitely... the...the answer to this to your question is more housing.

We've got to build more housing.

If you look at the economy in total, we are building a lot of single family housing.

That's the good news.

The more good news is permits are... the places getting built the most is Florida, Texas, South Carolina and North Carolina.

And so we're building it and we're building it here, but it's got to come online a lot faster, I think, to get over the supply and demand imbalance.

And you could try to solve this problem through demand, but that's a very painful way to do it.

The right way to solve it is through more supply.

And that has some combination of getting developers interested, the price of land certainty and permitting and taxes and those sorts of things, all of the kinds of things that one needs to do to get the supply on the ground.

Gavin> But, are you still surprised, even with the rates being what they are?

We're talking about 7% mortgage, which is historically on average, right?

So, I mean, what do you tell folks when they're complaining about that and when we can see those rates come down or be a little bit lower?

Tom> Well, so people don't always complain.

There's a lot of people in my generation who remind everybody that their first mortgage- Gavin> I'm thinking of my generation, Tom.

Yeah, (laughing) Tom> I was thinking, you were in my generation, so now you won't have me back.

But...and I don't think the 3% mortgage thing is a rational thought.

So I tell people... Gavin> Sure.

Yeah.

Tom> if you need a house, you need a house.

And if the kids are growing and you don't have enough space, you need a house.

And if you think rates are going to come back down again, you could always refinance, right?

If you don't think rates are going to come back down, you still need a house.

And so know, I think that's where that's going to go.

And you do see at the beginning of the year, rates came down just a tick and it seemed like demand for housing really picked up.

I think that's, you know, that's what's going to that's what's going to have to happen.

Gavin> And before we jump to inflation, just one more thing on housing here.

But what about affordable housing?

That's a big concern, too, especially when you're talking about these big metro areas like Charleston, where people are priced out of the market but to keep places like Charleston vibrant, you need a strong workforce.

How do you mitigate that situation?

Tom> It's supply.

I mean, you've got to bring supply online.

In the classic affordable housing, there is a subsidy stack and there's money that's being put behind it in lots of cities.

Charlotte's had a huge investment from the banks and others in terms of that affordable housing subsidy stack.

But there's also this next issue, which I call workforce housing.

It's not pure affordable.

It's not rent subsidized, but...but it is for, you know, nurses and firemen and place for people to live.

And that is most available in places where you've got exuberant land at relatively low cost, like around Greenville.

It's the least available where it's really hard to figure out where to build, like around Charleston, where, you know, you've got the ocean on one side, you've got a national park.

I mean, state park on the other side.

It's just hard to find the land.

Gavin> And so now let's pivot to the economy and looking back at challenges.

What do you see as the biggest challenge right now facing businesses in the region?

Is it inflation?

Is it workforce?

Is it housing?

How do you see it right now?

Tom> Well, the businesses I talk to...

I should...

I should segment it.

There is a set of businesses in interest sensitive sectors, like residential real estate, commercial real estate, banking...

I put some parts of goods manufacturing in there.

There in what they would feel is a recessionary moment.

Demand is way down from where it was, you know, hard to get loans if you're a bank.

And so they're really getting hit by interest rates.

The rest of the economy, though, is actually doing just fine, not as frothy or as you might think the numbers would suggest, but it's doing just fine, solid.

And... the supply chain issues are over.

For the most part the labor issues are behind them, too.

Now the exception would be skilled trades and construction manufacturing.

I'd even put nursing veterinary assistance.

So those places where you actually need a credential to get in there, they're still tight.

But otherwise the labor markets kind of... loosened up as well.

And so for them it's all about demand.

And the good news is, demand's not falling off the table.

I don't hear anybody other than those few segments talk about being in a recession.

I don't think that's the situation we're in.

To the extent that the people have concerns, it's just uncertainty and there's uncertainty about where the economy is going.

There's uncertainty about geopolitical events like the Middle East.

There's uncertainty about what the Fed's going to do and I think that's actually the big concern people have.

They're beyond, you know, they've moved up Maslow's hierarchy, They're no longer on can I find enough workers or do I have a customer, or even my costs are going up six, seven, eight, nine, ten percent.

They're really just concerned about what's going to happen tomorrow.

Gavin> So you're in town today here in Columbia, May 6th.

You're speaking to a group here.

What's your message to them?

What's your message to folks when you go and talk to these groups across the district?

Tom> Well, I'm speaking to the Columbia Rotary today.

I've got the Lexington Chamber tomorrow, and I'm going to say what I've been saying for the last few weeks, which is demand is solid, not overheating.

Labor market is normalizing, coming back into...balance.

Inflation is way down from where it was at its peak, but unfortunately, it's still a little bit too high.

And that calls...when you've got a strong labor market and inflation that's a little bit too high.

That calls for a deliberate patient approach.

And that's what we're doing.

I'm also talking a little bit about the dynamics of inflation, because against that backdrop, the dynamics of inflation matter a lot.

And the businesses I talked to who before the pandemic would have said they have no chance to increase prices, who during the spikes in the pandemic said, I have no choice but to increase prices, who then found out there were no consequences.

They're not yet back to no chance again.

And I hear people saying there's just no crime in trying.

And that's what they're doing.

They're... trying to segment products, trying to segment prices, trying to benchmark competitors.

You've seen if anybody's renewed their house or auto insurance in the last six months, they've seen... there are still places where prices are increasing.

And so I've just been out talking about why it is that prices are still increasing.

Why haven't we just gone back to 2018 or 2017 with the snap of a finger?

And that's...

I want to learn from them... the groups I'm with, as well.

Gavin> I was going to say, what's the big misunderstanding there?

What's...where are folks are not getting when it comes to prices versus inflation, in your opinion?

Tom> Well, I'd say there's a piece to it which, you know, from a economic theory standpoint, if inflation expectations are stable and we're through all this supply chain stuff, you'd think they would just bounce back to where they were.

That's one different point of view.

Another different point of view would be those people who said, we really didn't have inflation, we had supply chain shortages.

We had labor shortages.

And now that they're over, you got to get inflation back down and inflation has come down a lot.

That's part of why the numbers came down so much last year was that a lot of the supply side stuff got loosened up.

But I still think there's this issue where price setters in an economy got used to not having any pricing power.

Then they experienced pricing power and they'll give it up in time, but only when their customers really make a... Gavin> bolt and run.

Tom> Yeah, I mean, and you see that in places.

I mean, you'll see apparel prices have come back down.

We were with a carport manufacturer a couple of weeks ago and you could see their prices coming back down.

But across the broad economy, you just have to price flights sometime soon to say this hasn't broadened across the services part of the economy.

Gavin> Yeah, and Tom that kind of leads into my other question here about why people seem so unhappy about the economy.

That's what we're talking about here The Conference Board Consumer Confidence Index has fallen for three months in a row and is now at levels around from July 2022 when inflation was close to its major peak.

So people are still unhappy.

And I'm guessing it's because of those prices that we're talking about.

Is it going to be a matter of just not spending like we used to spend, and then maybe folks will get an idea like, "Hey, we need to lower prices" or how does that work?

Tom> Yeah, far be it for me to describe why people are happy, unhappy, and you know, the newspaper isn't full of things that make you want to get happy.

But I think when it comes to inflation, we think about it as year over year price increases.

So, good news... You know, over the last year, prices in the economy have increased at 2.8, 2.9%.

Our target is 2%.

So we look at it and say we're getting pretty close.

I think that consumers think about it as the price level and they think about it most particularly with the stuff they buy every day gasoline, groceries...okay.

And if you go to the grocery store, I drink a lot of Diet Coke.

A Diet Coke, which used to be 5.99 for a 12 pack and about every other week, you can get buy three, you get one, buy two, get one free.

Now it's $9.29 for a 12 pack and its buy three, get one free.

And people notice that sort of stuff.

They know that what they buy every day has gone up.

And...and I can tell you that year over year, prices are not increasing nearly the way they used to.

But you're still close enough to 2019 that you can remember what things used to cost.

And I'll put it another way.

Your grandfather, my grandfather used to tell us that things cost a nickel, but when it cost a nickel, that was forever ago.

It wasn't that we remembered stuff costing a nickel three years ago, and I just think it takes time for those memories to fade.

>> Yeah, I remember gas being a dollar a gallon back in 2000, early 2000... Tom> You've just dated, you've just dated yourself.

Gavin> I was there.

But yeah, of course those days are gone and you know geopolitical events being what they are.

But we don't have April inflation data.

That's coming out next week.

But the first quarter data was a little discouraging, I would say, a little hot still.

You're a member of the Federal Open Market Committee, which sets these rates.

You all met last week.

How has this recent data influenced your decision making at the Fed?

>> Well, the most important thing to remember about inflation as we look at it on a 12 month basis and the reason you look at it as a 12 month basis is things move up and down in a certain month.

Some people move rates, prices in January, some people move them in April.

There's some residual seasonality in the numbers on the 12 month numbers.

Headline and core inflation are both 2.8, 2.9%.

So that's a lot of progress from where we were at 7.1%, headline five point something percent core in the middle of 22.

I will say that the last seven months of last year were even better than that.

So June to December last year was at or under 2%, depending on where you're looking at headline or core.

And so there were some people certainly when I went to Christmas parties this year, I had people pat me on the back and say, "Congratulations, soft landing, you're done."

And if you just looked at those six or seven months, you would have said, "Yeah, that looks pretty good."

In the last three months have not been as good as the prior seven.

If you look at a 12 month basis, still, like I said, pretty good.

But the last three have not been as good as the prior seven, and we'll have to see whether this is the beginning of a trend or just a bump along the road toward where we're trying to get.

Gavin> Yeah.

So again... still kind of separating, not entrenched, would you say?

It's just it seems like the last percent or so is the hardest percent for you guys to get down.

How is it impacting what's going on in that room at the FOMC?

Tom> Well, what we're seeing is goods prices have come way down.

And so you know, whether it's automobiles or apparel, washing machines, the price of goods, which really spiked during all the supply chain shortages, has come back down.

The price of shelter has not.

And there's a lot of leading indicators that would suggest that shelters are just about to come down and do rents, for example.

But we'll have to see.

They haven't yet come down.

And the place where you still have significant price being taken is on services, non- shelter services.

And I mentioned travel.

I mentioned insurance.

Those are just good examples of the kinds of services that have not yet come back to the kind of price levels they were before COVID.

And that's what we're all waiting to see.

Gavin> And that's going to be demand driven pretty much at that point?

Tom> Well, it could be demand or supply driven.

You know, when it comes to air travel, Boeing's had its issues and there's a certain amount of capacity out of the system that's undoubtedly given, you know, pricing power to the airlines.

You've got insurance companies leaving certain markets.

That's certainly given pricing power.

So it's not just demand.

But I think for us, you can't really count on supply to solve every problem.

And so the impact rates has over time.

is it... takes the edge off of demand.

Gavin> And so will we see rate cuts this year?

Will we see a rate increase this year?

And what can you...

I don't know- Tom> Are we going to see inflation come back to Target this year?

I mean, it's hard to know where we go from here.

You know, for me, I'm looking for the progress we've made and the inflation to sustain, and I'd love it to broaden from beyond goods to services and shelter.

And so that's what I'm looking to see.

Gavin> Can you tell us a little bit about what it's like in that room when you were at the FOMC?

You guys are making these decisions.

Chair Jerome Powell goes out the next day and does his press conference.

What's it like in there?

Who makes up the FOMC?

How does that work?

Tom> Yeah, so there are 19 members of the FOMC.

12 of them are bank presidents like myself, representing each of the 12 regions of the country.

Seven are governors appointed by the president, confirmed by the Senate, and they live in Washington and we go into a room.

We have a two day meeting.

The doors are locked, the cell phones are in the next room.

And we talk about economic conditions in each of the districts and overall.

We talk about various policy choices and the potential implications.

We try to talk about the path forward.

We have a statement that gets issued.

We actually finish the meeting, you know, around 11 or 12, and the statement comes out at two.

So it comes out a couple of hours after our meeting that we discuss at it, vote on.

It's a serious conversation.

We're all aware that what we're doing affects businesses and families.

You're trying to do the right thing for the economy against our mandate, which is stable prices and maximum employment.

There are obviously tradeoffs in there, and I think lots of really smart, well-intentioned people trying their best to make a difficult choice, given the... given the tradeoffs.

Gavin> You know, it's a tough job.

No one envies you there.

But when we talk about recession worries, we have not been talking about the R-word in a while.

We talked last year that was something we did talk about.

We haven't really mentioned it this year.

Fed Chair Jerome Powell has dismissed concerns over stagflation, which is another thing that's cropping up.

So tell us about that tightrope that the Fed is walking right now.

And like you said, you're waiting to see what inflation does.

I'm guess you're also waiting to see how these jobs reports continue to come out.

Tell us about maintaining that soft landing.

Tom> Well, so first of all, recession, if you keep predicting one, then it will eventually happen because no one ever canceled the business cycle... And so expectations were quite elevated last year that we would have a recession, in part because the Fed was raising rates, in part because of a set of indicators that people use, like the index of leading indicators or the yield curve was flashing, you know, yellow or red.

And so people thought we were going to have a recession.

We haven't had one.

Why not?

I think that's because there's still a lot of spending in the economy.

The stock market is up.

House prices are up.

And so people who have stocks or have houses are wealthier and the savings rate would indicate their spending into savings.

The job market is healthy.

Unemployment's been under 4% for the last 27 months, which is the longest period since the 60s.

And so people have jobs are also spending.

And so, you know, it's I think it's hard to find a recession where the stock market is up and people have jobs.

I just don't think those are consistent.

So the risk here is that something happens that causes employers to pull back and maybe even markets to pull back, and that creates that recessionary impetus, which then leads to a downturn.

That's the risk you worry about.

Like I said, it's hard to find it.

In what we've seen to date, soft landing you mentioned I try not to use those two words in a sentence because it's bad karma.

I will say that... we've come an awfully long way.

GDP last year grew at 3.4%, If you took core GDP in the first quarter, in other words, there's inventories and imports and exports, I'd take them out.

You're at 3.1%.

And so the economy is growing nicely.

We're adding last month 175,000 jobs.

As I said, unemployment's under 4% and inflation's come all the way down from 7.1 to into the high twos.

So that's a lot of progress.

But, you know, a lot of progress doesn't get the plane at the gate.

It just gets the plane closer to the airport.

And we're... we're getting there.

And I...hopefully we'll get there safely.

Gavin> And again, talking about sentiment, people to see gas prices or the price of groceries.

And that's what they think about, even though you're mentioning all this progress that has been made.

It must be a little confounding sometimes to deal with folks who are like, "Why is it so bad here?"

But it's so good, too.

Like...that disconnect.

Tom> I like the opportunity to talk to you and to get out, as you talked about with these clubs, because people will ask those questions.

And we have a really good, you know, back and forth on it.

You know, like I said, the rate of price increases has come down significantly.

People need to hear that.

It's not nearly as interesting a headline to say, prices are settling.

as it is to say prices are up.

And I think this notion that we have a historic labor market is something worth reflecting on and, you know, there were a couple of years, 21', 22' where prices went up so fast they outpaced wages.

But in the last year and a half, for sure, wages have gone up at a level that they're outpacing prices.

That's also part of why I think people are still spending.

Gavin> Keeping with the labor market.

We did see that April jobs report.

You mentioned 175,000 jobs added.

That was below estimates and much less than what we saw in March, which is 300,000 jobs there.

Did these numbers put some wind in the Fed's sails when it comes to saying, okay, now we're starting to see this, this drop off a little bit here when it comes to employment.

Obviously, one month is not a trend, but I'm guessing that's going to be part of what you guys are looking at going forward.

Tom> Yeah, you have to be very careful as you interpret the jobs report, as you say, "One month's not a trend."

Also, response rates are down.

These numbers get revised.

Also, you don't want to root for lower wages or root for fewer jobs or root for overheating the economy.

It's so I tried to take the data as it comes in and try not to get too excited or too depressed.

What we saw this month was still a very nice job gain.

175,000 is a is a good jobs report I think I saw we've added over 100,000 jobs now for I think it's 40 months which is in a row which is the longest streak in...in our recorded numbers.

So we are adding jobs.

That's very healthy.

Another thing to be positive about in this jobs report, I talked about the unemployment rate, but also wages, average hourly earnings went up, but not nearly as much as one would expect in an inflationary environment.

So that's also consistent with the notion of inflation...settling.

You know, on the downside, job gains have been increasingly narrow in a few sectors like health care and social assistance, state and local government and leisure and hospitality.

And so you worry, are we just still in catch up mode?

And then we get to the other catch up mode?

And then the other thing, which isn't a plus or minus, but it's just something to note is we've had so much supply side help in the last year from increased participation, particularly from women who are at all time records, increased immigration, legal and illegal, which has its own issues.

But, of course from a workforce standpoint, you know, increases people available for jobs.

And it's hard to know how much of that's continuing.

And so is that 175,000 a good number?

Because break even is usually about 100?

Or is it not as good a number, because with all these new people in the country, maybe it should have been even higher.

We'll have to take a few more months to see that.

Gavin> So, I mean, this is kind of maybe a more specific question, but if you were to looking for a job right now, would it be smarter to hang on to your job based on how the economy is doing, based on how the jobs market is going?

Or could you feel comfortable looking for a new one, jumping around right now still?

Tom> If you work for me at the Richmond Fed, hang on to your job.

Nah, I mean, You know, everyone's got to make a choice.

Tom> As to what they what they're doing.

Gavin> Sure.

Tom> I'd say hiring rates are down, but still reasonable from historic proportion.

Quitting rates are also down.

They're down below where they were in 2019.

And I think it's totally by sector.

The places that I hear that are hottest, like I said earlier, would be skilled trades.

So construction carpenters, plumbers, welders, nurses,... truck drivers, veterinary assistants, all of those seem very hot, still.

You know, the places that people are, I think cutting back on are the professional jobs, you've seen some of the tech companies cut back.

And so that market, which was very hot a year and a half ago, seems to have cooled down.

But I think talented people can always find something productive to do.

And, you know, in an economy not yet in recession, people are still hiring.

>> Tom, we have about 3 minutes left.

I want ask about the Port of Baltimore, which is in your district, the fifth district here.

We saw that cargo ship hit the Francis Scott Key Bridge, which destroyed it, also closed the port of Baltimore.

We saw six lives lost.

Efforts rem... efforts remain ongoing to open the port by the end of May.

How has the fifth District reacted to this closure?

When you look at all the other ports in the area.

>> Yeah, so a real tragedy.

I grew up in Tampa and I remember when the Sunshine Skyway went down in 1980 and, you know, six people died.

20,000 workers work in the Port of Baltimore and of course, their jobs have been affected.

And then you've got 35,000 commuters who added, you know, anywhere from 15 to 45 minutes, you know, to their commute.

So it's been a real disrupter for Baltimore.

They've now opened up a 35 foot channel as of week before last, and so, you know, goods are now flowing again into Baltimore.

So that's good for those workers.

It'll take years, obviously, for the commuters.

What's happened is the goods have been moved to other ports.

To the extent you've had those issues and, and Norfolk has certainly seen a big increase.

Newark has seen a big increase.

I think Charleston a little bit, you know, less of one just because, you know, you're looking for distance in whatever proximity being a big issue.

But I think all the other East Coast ports have certainly stepped up to try to help.

Gavin> So, again, could have been a bigger supply chain situation maybe a couple of years ago, but it seems like everything's kind of mitigated.

We learned a lot of lessons during the supply chain issues.

Tom> So you, so you forget, you know, in 2017 when a supply chain thing happened, you said, "Oh, yeah.

We'll be fine."

All of a sudden every calamity happened at once in 2021 from, you know, ports being backed up to a Ukrainian war, to...and you know, to this refinary thing.

Yeah, you just it supply chains are more resilient than we think.

They're even more resilient now because people have had time and a chance to look at them.

And so any one thing doesn't really seem to do it.

It's when it all...it's when you flood the dam.

It's when the everything, you know, hits at once.

And that's what happened to us, obviously, in 21.

Gavin> And 30 seconds Tom, just to kind of encapsulate everything for us there and just what you are looking forward to going forward.

Tom> Well, I'm looking forward to inflation coming all the way back to target.

Like I said, the economy is remarkably healthy for as much as has happened, and that's a sign of the resilience of the American consumer, more than anything else.

Inflation's on the path down, not all the way there, but we're certainly hopeful with appropriate monetary policy and a little bit of time, we'll get there.

Gavin> Gotcha.

That's Tom Barkin, president and CEO of the Federal Reserve Bank of Richmond.

Tom, thanks as always.

Tom> No, great to be with you.

Gavin> For South Carolina, ETV, I'm Gavin Jackson.

Be well, South Carolina.

♪ closing music ♪ ♪ ♪ ♪