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- Happy New Year.

It's gonna be hard to top what happened in 2021 when it comes to dramatic headlines, for sure, but what will happen?

We have four resident economists and on this part two of the "Carolina Business Review" economic forecast, we will unpack, maybe, some of the biggest headlines yet to come.

Please stay with us because we start right now.

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(dramatic music) On this edition of "Carolina Business Review," the economic forecast for 2022 featuring Sarah House of Wells Fargo Securities, Dr. John Connaughton from UNC Charlotte, Dr. Doug Woodward from the University of South Carolina, and Dr. Frank Hefner of the College of Charleston.

(dramatic music) - Happy New Year, welcome to a new year, a new program.

We're glad to have all four of you back.

Thank you.

This is part two of our economic review, and now forecast.

We're gonna take a look at where we might be headed.

Here comes the even more fun parts.

Sarah, again, going to start with you for better or for worse.

Sarah, the last 20 months or so I think it's probably fair to say it has reshaped many things, how we live and how we work, but do we have a new permanent set of rules of engagement now in business and strategy and planning and economics and capital markets, et cetera?

- [Sarah] Wow, well, I think nothing is permanent in the economy.

We're constantly shifting and evolving, and there's still many ways, some shakeout from the pandemic and how we work and do business that remains.

But I think there will be some important dynamics to keep an eye on in the year ahead.

So the one I'm looking at probably most closely is what happens in terms of that labor supply.

So we talked in our last episode about the degree of retirements, but to what extent do workers begin to come back, perhaps as their financial cushion thins out a little bit?

And you know, basically, we have seen a lot of job opportunities and higher pay available to get workers back into the labor market.

So that's gonna be a dynamic that I'm looking at is how permanent are some of these exits and how much can we get workers back in the labor market?

- John, what do you think biggest changes coming are going to be X?

What's X?

- Well, I think to kinda paraphrase Don Rumsfeld, I think there's some known knowns going into 2022.

We've got supply chain issues and labor market issues that are gonna be with us the entire year.

We're gonna have some level of inflation, although we don't really know what level it's gonna be, but it's not gonna be pretty.

And we've got continued deficit spending on the part of the federal government.

All of those things are gonna be big drivers going into 2022, but we also have some known unknowns, so things that we know are gonna be problematic, but we don't know anything about them.

The new variant, we don't know what shape that's gonna take, whether we're gonna have to go through another round of vaccines, we don't know.

And we also don't know what the Fed's gonna do.

The Fed has two issues.

They've talked about tapering, and they've talked about interest rate policy, but they've talked in generalities.

They haven't talked in specifics, and we don't know what's gonna happen.

And those will have big impacts on the economy in 2022 going forward.

- Okay, let's keep going down the line.

Frank?

- Chris, you talk about changing the rules of engagement, just from a economic point of view, maybe we call it pandonomics.

There's a new kind of economics out there that came in the pandemic when everyone's expecting now, and this'll be true in 2022, that the government's gonna be there for 'em, whether it's the Federal Reserve, or if we get another variant, we need more stimulus checks.

There's a consensus in this age when there's so much artisanship and we're so polarized over many things.

There was a surprising amount of agreement that the government is really needed now in a major way to keep this economy humming.

But 2022, it's gonna be much more difficult because we know the fiscal stimulus is pretty much over it, at least the massive fiscal stimulus with the checks and everything.

And then they extended unemployment benefits and so forth.

That's winding down.

And then it's the, well, we'll talk about it.

Then there's the monetary policy.

It's not gonna be the same in 2022 as it was in 2021.

It's gonna be a huge debate over how to taper, how many interest rate increases we're gonna see.

And so, it's gonna be quite a different year.

- Frank?

- [Frank] Right, well, with respect to COVID, of course, that's very unpredictable, but I think what guided us in the past was a lot of the policy issues was the lockdown.

In the absence of a lockdown, we may not see the same kind of dramatic changes that were precipitated by that.

In other words, if a new COVID virus variant comes out and all we really have to do is just wear masks, then the economy can keep humming along.

But the policy issue is if we're gonna have a lockdown, that's gonna create a major issue in terms of labor markets, supply chain, the whole kit-and-caboodle, so to speak.

So that's really the unknown that John is talking about.

We just don't know what that policy response is going to be because we don't know how bad the next wave is going to be.

And that's just a real difficult thing.

Now, as far as the supply chain goes, you know, I've got a good analogy on this.

If you ever drive down I-26 and you see a traffic accident, you've got about five miles of cars backed up.

It's incredible that when they clear the accident, all those cars don't move at once.

It takes a good hour or so before they finally, you know, goes through and the supply chain's gonna be like that for quite some time, I think.

- Sarah, let me bring it back to you on this idea, as you all have talked about, and maybe it's not fair, but the softer science, the psychology of it, the behavioral economics of it.

We like a good drama and not to diminish, of course, the morbidity and the mortality of what this pandemic has brought.

But we do like drama in some ways.

When does COVID or the pandemic, best way to say it, fatigue start to wear off and when do we really start looking forward, getting back to some normalization without being moved by emotional headlines?

- Well, I think we've already seen a good deal of COVID fatigue.

And I think with each successive wave that we've had, you see the impact to the economy lessen, in part because businesses are getting better at adapting and keeping customers safe, and people are figuring out their own ways to stay safe as they go out and engage.

But I think we've already seen that to some extent.

And I think, you know, given that we are heading or are in the midst of cold season, I think, you know, the next couple months could still be a little bit hairy, but I think sort of like we saw last year when you had not just the vaccines rolling out, but you had nicer weather where you could get outside, and people just ready to re-engage.

I think we will see a notable shift in activity that'll probably come around the spring and the look more like the pandemic is in the rear view mirror, even if we ended up with what looks likely to be an endemic COVID scenario.

- One of the big questions is, you know, and John asked you to weight in on this one and start the dialogue around real assets, real estate, commercial, residential.

If you own a home or if you own some property, you feel pretty flushed.

(male panelist laughs) As you well know, there's a thing called the wealth effect.

So how much higher?

When do real estate prices stabilize, and what do you think will affect them one way or another?

- Well, again, I go back to what was something I said in the last show.

We talked about what is really driving this inflation, particularly in the last several months.

I don't think a lot of that's gonna go away in 2022.

I don't think there's gonna be a resurgence and home building that's gonna somehow or other, even if the economy slows down.

And I think everybody's forecasting that the economy's gonna slow down in 2022.

We're not gonna have the big five and a half, six and a half percent growth that we had in 2021.

It's probably gonna be more like three to three and a half percent in 2022.

I don't really see much happening on the supply chain and supply side, as it relates to assets, particularly houses and used cars.

I don't think those things are going away.

- Yeah, if I could just add to that.

I mean, it's really housing, it's supply and demand, and there's been this big demand.

Supply can't respond that quickly, so prices are gonna go up.

Although I believe in 2022, they're gonna abate, but I just wanna make one other point.

It's very uneven across different demographic groups and across different regions as to who benefits from this housing price appreciation.

Some regions, for example, even within the Carolinas, have done exceedingly well; Charleston, Charlotte, Raleigh, Columbia, less so.

So not everybody is experiencing the same wealth effect as others.

But the other thing is demographics.

You know, houses don't appreciate in poor neighborhoods.

They appreciate much more in the wealthy neighborhoods.

So the rich are getting richer as a result of this.

And the real benefits of all this wealth appreciation have gone primarily to the top 10%, if not top 1% of our population.

Most people are not feeling this.

90% of the population is not benefiting that much.

- Go ahead.

- Demographics, I'd like to point this out 'cause when I looked at the students that are graduating, I keep pointing out to them that they've got historically low mortgage rates.

Why aren't they buying houses at age 26?

Well, it's because the labor market is so fluid.

They're not gonna lock into a house.

They're perfectly happy to rent because they don't know how long they're gonna be in that region or that particular job.

So I think we've got a fluid, a more dynamic labor force that also precludes buying some of these houses.

So as a result, rental rates are changing and apartment construction is booming, at least in the Charleston metropolitan area, it is booming.

So I think there's a shift on that also.

As Doug and his report last week noted, South Carolina has been a beneficiary of in migration.

And that's also driving up housing prices 'cause these people are moving in with sales from previous houses, and they have assets.

- They're mostly retired.

They're older people over 55.

- Right, which is changing our labor market scenario too.

So, you know, as John pointed out that we don't focus enough on demographics, typically, in our analysis.

- Let me ask you something, Sarah, and then John, I wanna come to you and we'll start unpacking this idea about labor markets and what hybrid working models may look like, but Sarah, with the cheap cost of money, low interest rates, and it gives anyone who has credit has the ability to use that loan or use leverage.

Someone said in some dialogue recently that this could be a debt trap.

In other words, we take out a line of credit.

We borrow against it at a very low cost.

We buy an asset, whether it's a car, whether it's renovation, whether it's a house, and then rates go up and with the amount of people that have taken out loans with the idea that this is cheap money, is it something we can get caught into?

Is that a fair way to call it, a debt trap?

- Well, I think you have to look at the duration and whether that is fixed.

So from the perspective of taking out a mortgage at these very low rates then, but it's a fixed mortgage.

Okay, that's less of an issue.

I think, where would you potentially see problems with rates rising and why, you know, when you look at the inflation backdrop and you perhaps prognosticate about why isn't the Fed likely to raise rates faster is because there is a lotta debt in the system.

And, you know, particularly when you get into, you know, corporate debt, a lot of that's actually floating too.

And so there's a lot of questions between that.

And also just that federal government debt is, you know, how much can can rates actually rise before the interest burden does get more prohibitive and create larger problems.

It's still not very known.

It's gonna be something that the Fed's gonna have to test to some extent.

And that's why they're likely to move slowly in terms of interest rates, I expect, later this year.

- From the C-suite of Fortune 500 companies to the smallest businesses in the Carolinas, John, you know, that the big debate, the big unknown at this point is what the workforce is gonna look like a year or two and five years from now.

And I mean, look like when it comes to where are they gonna be located?

How do they work?

How do they interact?

We are in the midst of a hybrid model.

How do you think this unfolds the next couple of years?

- Well, I think there is one known in this area, and that is that labor force is going to be stagnant or shrink over the next decade.

That's a given, unless we can entice the older baby boomers once they retire, to come back in the labor force.

The age groups that are replacing the baby boomers are smaller.

And that's number one.

And number two, historically younger folks have a lower labor force participation rate than the older folks, the baby boomers did.

So the millennials, the Xs, the Ys, they all have lower labor force participation rates than the baby boomers did.

So businesses are gonna have to be aware of this.

And on two fronts, they're going to have to create work environments that are conducive to this younger generation.

And I think that anybody that dismisses out a hand, a hybrid work is going to suffer labor problems.

I think most organizations are now looking at a hybrid where you work some time in the office, depending on the organization.

It may be everybody comes in the same day, but I think for most part, it's a different, maybe one day everybody's there, but on the other days, it's sort of a random thing, and they get to make their own schedules.

I think that's the future.

We saw that work.

I mean, let's be realistic about it.

A lotta folks work from home, in the last 18 months.

And I sure as heck haven't seen any productivity levels going down.

So, you know, if you're working on a computer, it's pretty easy to figure out whether or not you're productive.

- Oh, two on an unintended consequences.

This is for any of y'all in the panel here.

Two unintended consequences are, you've got business owners, you've got chief execs, you've got managers thinking about, "Well, do I need to have a different compensation plan?"

That's the first one as you all know.

And then the second part of this is, again, the animal spirit of competitiveness in the workplace.

If you've got a remote worker who's meeting with those that are in the office remotely, then you've got one feeling possibly at a disadvantage because they don't have the same working environment, eyeball to eyeball so anyone unpack those two challenges?

- Well, I'm not too sure I can do that, but I wanna bring something else on a side note before I lose track of my thought, and that is, notice what we're talking about.

We're talking about a certain class of worker.

There are a lotta people who cannot work remotely, plumbers, electricians.

They can't do it, factory workers.

So we're actually talking about a very narrow group of people that are one, highly educated, highly mobile, and do this, and so, back to your question though, working at home works real well for some people, but what if you've got other family considerations?

Your work environment could be substantially different.

So it may not be as effective for you.

And you may be at a disadvantage 'cause you're not having that coffee room chat with somebody about issues.

And that becomes an interesting problem on how to work out the hybrid issue, but I'd like to re-emphasize that it's not available to everyone.

- Doug, Sarah, what do you think?

- That's exactly right.

I agree with Frank.

I mean, we know a lot of people love this hybrid model now, and they wanna continue, if they can do it.

I think that is going to be true for a lot of office work.

People with college degrees, advanced degrees are the ones that benefit from that.

Those with a high school education or lower, those are the ones in the service jobs, You have to do face-to-face.

They can't go to a hybrid model, remote work, but it's a challenge for the businesses now.

I've been hearing from, for example, restaurants.

I mean, they're desperate now.

They're actually thinking of automation.

(chuckles) They're the ones on the front lines of this.

They can't find workers.

So they're looking for ways that they can increase productivity or keep productivity without having hire as many workers.

And in fact, that's what we've seen is a restaurant and leisure and hospitality employment is still by far the one that's been hit the hardest.

It's down below where it was pre-pandemic.

I don't know if it'll ever come back, but how they're gonna make those adjustments, we're gonna see starting in 2022.

- Sarah, will this force dialogue around changing compensation?

- It certainly has been in terms of what it's taking to were workers back to the job sites.

So we see wages in the leisure and hospitality sectors up more than 12% over the past year, but also we're seeing some pretty strong wage growth across the board, even among those office workers as we we've talked about.

There's a lot of resorting going on, people rethinking about what they want out of a job, opportunities opening up as we do see this turnover, and we do see this job switching.

And so, that's putting wage pressures across the board.

So it's not just, you know, those lower pay, in-person sectors that have perhaps been competing most against the unemployment benefits as well as that in-person work.

But it's broader than that.

- John, do you have an opinion on the compensation issue, the debate?

- Yeah, I think this is good.

I mean, look, it's simple supply.

We teach it in Principles 101.

It's simple supply and demand.

- Right.

- The economy is doing well for a variety of reasons, but a lot of it's stimulus.

And a lot of it's deficit spending on the federal government, so the demand is there.

And we are going to be experiencing labor shortages.

There's no question about that.

So how do you get rid of 'em?

You raise wages.

- So that's gonna be the story in 2022.

Watch what happens to wages.

- Which will then drive inflation.

- Hush, Frank, hush.

(men laugh) - I didn't mean to cut Frank off, please.

- You can, it's okay.

That's the only way you're gonna get in, Sarah, you know that.

- I was gonna say, but also what happens to productivity?

So, you know, talking about automation in the restaurant sector, but that is a way that businesses can afford to pay their workers more with perhaps taking some of the edge off in inflation and not seeing those labor costs fully passed on to consumers.

So that's also gonna be something very important to watch ahead.

- Okay, but just... Go ahead.

- My gut feeling on this is we're gonna have rising interest rates, and we're gonna have rising inflation, just because I've been predicting both for the last 10 years, and I'm going to get it right one year.

And this was the first year (men laugh) at our board of economic advisors meeting when I low-balled it all and said, "You know what, now it's going to happen."

And I really do think that we're gonna see that.

- Really, so Frank, you're sensing a wage price spiral this year?

- At your traditional Keynesian wage price spiral.

- Would you say a spiral?

I mean, that sounds pretty dramatic.

Would you say it's gonna be a spiral?

- I would add one more factor in this.

(clears throat) Last show we talked about demand, pull, cost, push inflation.

(clears throat) Those have both happened in 2021.

There's no question.

I believe it's been a sequence, but here's the other thing.

There's also another part of inflation.

That's inflationary expectations.

And we're starting to see firms raise prices, not because they have supply chain problems or labor problems, or because they have excess demand.

They're raising prices because they can because people expect it, and it's not gonna really affect their market share.

And I think we're gonna see a lot of that in 2022 as well.

- Is there any dark horse expectation that we think inflation is going to be a couple of things, stronger even than the most strident forecasts, and longer, not transitory, but longer?

Anyone?

- So I think in order for inflation to beat what a lot of forecasters are penciling in and for the year ahead, I think you do need that wage price spiral to take a hold, and bear in mind, this does not have to be 1970s inflation or wages to push inflation up either, but further from here, or at least keep it higher than what I think a lot of people are forecasting and certainly over what the Fed expects.

I think you would also see probably supply chains remain gummed up.

So the fact that even if you have good spending slowing it's tough for these supply networks to dig out, even inventories relative to sales, you know, at decade lows.

There's a lot of restocking that has to be done.

So you could do some upside surprises there.

Alternatively though, we have seen inflation being driven by a couple of big sectors in particular.

You know, as I've spoken before, it's broad, but you know, things like autos have been a huge force.

If you do see that supply come back faster, you could get some pretty sizable drops in just the autos component.

And that could bring down inflation faster than expected too or you see market share battles pick up again, as you do see consumer spending slows.

So there's a lotta factors that could pull it in either direction.

- Do you think, Sarah, could it bring down inflation or erase inflationary gains?

- In terms of?

- Auto, in service any goods or service?

Do you think that's an option, or is inflation gonna be a pretty tough tide to beat this year?

- I mean, inflation, I think is going to remain elevated this year.

So we're looking for consumer price inflation towards the end of next year, roughly three and a half, 4%.

So even as we have at moderating from, you know, the six plus percent that we're seeing now, it's still likely to remain uncomfortable for consumers and policymakers.

- Okay, we've got two minutes left.

I wanna take a quick look at infrastructure, and a sub group of infrastructure around broadband in North Carolina, in South Carolina.

Let's start with South Carolina.

Palmetto State has earmarked about 43 million initially for broadband coming out of the most recent budget.

In North Carolina, it's a billion.

Made a big commitment.

We'll see how they deploy that.

But to any of you, how important is it to get broadband deployed as soon as possible?

- Absolutely essential.

It is the number one infrastructure piece that we really need to be looking at.

We talked earlier in the show about hybrid work.

This opens up a wide range of job opportunities for rural folks.

You can't get there without high-speed internet.

And there's a lota parts of both states that aren't served at the level that needs to be.

- I would agree, high-speed internet's important, but in the infrastructure bills, and South Carolina's committed to this is improving our roads, our bridges, our basic infrastructure; it's very important.

We're gonna have five, $6 billion, and the economy this year, I believe we're gonna see more investment on the private sector side as they respond to the constraints on the supply side and have to expand capacity, but we need infrastructure to make that happen as well.

We hear lots of businesses complaining about the infrastructure, that we're not gonna invest unless they have an improved infrastructure.

So that, along with broadband, I mean, that's good news going into 2022 - Yeah.

- that we're gonna have this infrastructure improvement.

It'll take some years for that to be completed.

- [Chris] Frank?

- Well, I'm concerned with the other issues we've discussed, and that is labor shortages and supply bottlenecks.

I mean, it's great to talk about an infrastructure bill and start spending.

And actually, I'm not too sure where they're gonna get the people to start doing this January, February, March of this year.

So when are they actually gonna be able to put the asphalt on the pavement and do the construction?

And so, and this hits Doug real well, hard because of Malfunction Junction in Columbia, which is slated to be a massive multi-year project.

- 10 years.

- 10 years, and good luck finding the rebar for it and the concrete and the people in the next two to three.

So that's my concern on all of that.

It's great that we have that, but I'm not too sure that we can actually deliver what the expectations are.

- Doug, did you have a quick comment?

- No, I agree with that.

I mean, this is one of those things you can't automate very well.

We can have robots, you know, repaving these roads and fixing the bridges.

So it goes back to the labor shortage issue that we've been talking about.

- Okay, all right.

That's the last word.

Doug, thank you.

Sarah, thank you.

John, as always, Frank, as always.

We greatly appreciate you all doing this, and this is a fun dialogue and thanks for your insight.

Until next week, I'm Chris William.

Happy Holidays, Happy New Year.

And thank you again for joining us, good night.

- [Narrator] Major funding for "Carolina Business Review" provided by High Point University; Martin Marietta, Colonial Life, the Duke Endowment, Sonoco, Blue Cross Blue Shield of South Carolina; and by viewers like you.

Thank you.

(triumphant music)