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- Someone once said things are getting better and better, worse and worse, faster and faster.

I'm Chris William and welcome again to the most widely watched program on Carolina business policy and public affairs seen every week across The Carolinas for more than three decades now.

And that feeling of activity and excitement also squares somewhat with this idea of people being uneasy and even a bit on edge about the economy, and their professional life.

And as we head into the summer, how does that square against our summer plans and our fun?

Well, we'll try to unpack that and we will start this week's discussion with our panel that can help us understand that better right now.

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On this edition of Carolina Business Review, Brent Christensen from the Greensboro Chamber of Commerce, Dr. Joseph Von Nessen from the Moore School of Business, University of South Carolina, and Laura Ullrich, from the Federal Reserve Bank of Richmond.

(upbeat music) - Welcome again to our program.

Good to have you back in the studio, Joey.

Laura, we've had you virtual.

- Yeah.

- But not really here, so welcome.

- Right, thanks.

- You are really here, right?

- Yes.

- This is not a 3D.

(Joseph and Brent laugh) And Brent, welcome from Greensboro.

Good to have you.

- Thank you, thank you.

- You get the first pitch, Dr. Ullrich.

So talking to a economist, somebody said, well, the ayes have it.

And that means inflation and interest rates, surprise, surprise.

What do you think?

What is going on?

(Joey laughs) I mean, what is the sense that everyone is so anxious about rising rates?

We knew it was coming, so why is it driving our dialogue right now?

- Well, first of all I think, we just haven't had rates increasing for a while, right?

And really if you think about it historically, rates have been very low for a very long time at this point, really since the great recession.

Right, so I think part of it is just kind of our cultural norm now.

But with inflation, inflation is something that, when we have inflation, we're gonna hear a lot about it because people notice it pretty, pretty quickly, right?

They notice if all of a sudden their grocery store bill is higher, or if it costs more to fill up the pump.

And right now we're seeing energy cost is so high, food cost is going up, and so it's something that people are gonna kind of naturally become uneasy with.

Plus you have to realize and think about, we have several generations of folks who've never seen inflation this high.

And so this is a new thing for a lot of adults now, too, in the US.

So I think it's clear from the action the Federal Open Market Committee took this week, and the actions that their last meeting, that they're moving forward pretty aggressively to address it.

But I'm not surprised that it has people feeling uneasy.

- Joey, what's your take as the other economist, "formal economist" on the panel?

- Well, I think two things.

Number one, the economy right now is strong at the national level and in The Carolinas.

And we certainly see that in South Carolina where I am in.

In Columbia, we see most economic metrics that have either mostly or fully recovered from the pandemic related losses from February to April of 2020.

So that's where we are now, and as we move forward, the Fed does have some wiggle room, I think, to raise rates without necessarily causing a recession.

But they're walking a fine line, and the way you can see that is if you look at the job openings rate right now, which is at an all time high, everyone is hiring.

And if there is a downturn, first, employers are going to basically take the help wanted signs out of the window before they lay workers off.

So the difference between where our job openings rate is today versus where it normally would be, with three and a half percent unemployment, which is where things stand today.

That's the wiggle room that the Fed has to raise rates before we begin to see layoffs in a more significant recession period.

- Brent, you're an economic development professional.

I mean, you know something about the things we're talking about.

Do you get the sense that we are hitting some type of plateau before we go up again?

Or is there some anxiety that, well, this is pre-recession?

- Well, first of all, I am the least educated panelist, so thank you for identifying me as that.

But, in terms of economic development activity, there has been no slowdown at this point.

And the enemy of that is really when we start to have a lot of unknowns in the world.

Any sort of, in terms of where am I gonna get my employees, what are energy costs gonna be, supply chain issues have been a big issue going forward.

So we're seeing a lot of big projects in both North and South Carolina, but they continue to move.

As a matter of fact, on my way here, I got a call from a consultant saying, "Can you find us another mega site, because we think we've got another project coming down the pike?"

So it hasn't really ratcheted anything back in terms of economic development, but you can see some of those limiting factors perhaps coming down the pike in supply chain and labor force, and those sort of items.

- Yeah, I remind people of this all the time because I'm the Regional Economist for North and South Carolina, and I often think about what would my job be like right now if I was the regional economist for Illinois, California even, right?

I mean, The Carolinas, as Joey mentioned too, it's a great place to be for many reasons, right?

And we've always had a high quality of life, lower cost of living, even with the way housing prices and land prices have gone up, that's still the case, right?

If companies are comparing The Carolinas to a lot of other parts of the country, it's still a good place to be from a financial point of view and from a point of view of finding employment.

And so I find myself frequently saying to people, we have to remember that we're in a great part of the country right now.

Things might be, if you talk to an economic developer in some other parts of the country, you might get a slightly different story's.

- That's a fair story.

You're gonna hear all economic developers though, talk about the labor force issues, all of them.

If anybody tells you they've got a great labor force to sell right now, they're lying to you.

- Brent, we've been talking about it on this program for years, and while it's become, some will call it a crisis, but is it really?

Because if everyone has the same problem, it's just an issue to solve, but what it's a fairly level playing field, so, I get it.

Joey as you said, there are a lot of help wanted signs out there still, but there's always a lot of help wanted signs.

So is that really a headline anymore?

- Well, I think it is from a business perspective because businesses need to realize this is a long term challenge that they're going to face and they're gonna have to adjust.

The way I think about it is if you look at the baby boomers, who are now retiring, they were born over a long period of time, basically 20 years.

And they turned 65, roughly between 2010 and 2030.

That's the projection.

And so what we saw, was in 2010, rather than the first baby boomers retiring in a steady fashion, because of the 2008 financial crisis, many of them saw their 401(k)s diminished significantly for a number of years, so they had to keep working.

And then we moved to 2020 and a lot of people, a lot of baby boomers were saying, the stock market is doing well, and I'm concerned about getting sick and I'm now going to retire.

So this 20 year period of baby boomer retirements was basically compressed into a 10 year period or less.

And so we're faced with this major change in a very short period of time, that is likely to last going forward.

And I think businesses need to be prepared to adjust and just to realize this is not a COVID related problem only.

- Yeah, I agree.

I agree with that a thousand percent and the Federal Reserve Bank of St. Louis has done an estimate that there were 2.6 million extra baby boomer retirements, because of what Joey's mentioned.

And so if you look at the employment numbers and labor force participation numbers, it really where you see the large differences is in that over age 65 group.

And so that shifts the entire labor force, right?

You have people moving into different positions and there's gaps across the labor force.

Now, a lot of times we notice the help wanted signs in leisure and hospitality businesses and businesses.

We might frequent day in and day out physically, but we don't think as much about the internal job shortages, labor shortage there might be in accounting and finance departments at the same corporations that are having shortages of cashiers, right?

But we are seeing that kind of across the board, there are big labor issues.

And to Joey's point, this is a long term demographic shift.

And so there just simply aren't as many people to replace the baby boomers.

- But again, even that, in Brent coming in, that hasn't stopped North Carolina.

- It has not, it has not.

- Or South Carolina, but my point is, so again, is this a headline or is this just something that's gonna be one of those endemic items that we just have to live with- - It's something that every economic development organization is going to have to solve for in any way that they shape or form, and they can.

It's really kind of two sides of the same coin.

When we talked about the workforce, you're gonna have to solve it by attracting more folks into your community that have the skills and the credentials that are gonna be needed to fill those jobs.

And then you're gonna have to train the folks who are already in your community to have those skills and have those credentials.

And it's gonna have to be an all of the above strategy for increasing your labor force and increasing those skills, and the communities and the states that do that the best will be the big winners in economic development.

- Let me take a sidebar with you just a second here and put you on the spot just for a second.

How does Greensboro, how does the Triad, not the triangle of course and people will know the difference, become competitive with already is substantial, the Charlotte region, the Triangle, the Charleston region, the Mountains, Greenville, Spartanburg, how do you start?

And this is not the right way to say, Brent, but how do you start to get your traction again?

Not that you're not competitive, but how do you get to that point where you start running neck and neck with those regions?

- Yeah, and I think it's already started.

It took a little while.

The age old saying that when opportunity comes along, it's too late to prepare.

We've been preparing for years and now are seeing the successes for that.

And a lot of that is, again, going back to that labor force, making sure that our college students, 'cause we have a strong number of college students in the Triad, we don't necessarily get the full credit for that because we've got some neighbors on either side that have the reputation for being college towns.

It's keeping more of those college students in Greensboro and in the Triad as they graduate, and it's really attracting folks.

We're a great location in North Carolina with a great quality of life, in many cases, a lower cost of living than others.

And so when I hear some of my younger friends and millennials and including my son, who's 24 years old say, "Well, I'll never be able to afford a house now, with the way housing prices have gone."

Well, in Greensboro and Winston-Salem and High point, and the Triad, you can afford a house.

You can have that high quality of life that we so enjoy in The Carolinas at an affordable rate.

- Well, let's talk about that for a second.

Housing, affordable housing.

The real asset prices, when do they stop?

Or when do they slow down?

- I think we're already seeing it slow down, because, part of that is because mortgage rates are going up and so it's becoming more expensive per dollar borrowed, right, to purchase a house.

So I think we're already seeing it slow down.

I think it's hard to know when it stops in places like Greenville, South Carolina or Charlotte or Raleigh, because as we mentioned before, that differential between what it costs to live and/or operate a business in some other cities and what it costs to buy a house here or operate a business here, there's still a gap, right?

So that gap has narrowed some, but I think it's hard to know when they stop going up.

But I do think we're starting to see it level out a bit.

- And the other side of the coin there is inventory as well, which has been so low in many markets, and Charleston is the best example there.

So that's been putting pressure on prices as well, in addition to the demand side.

So even if demand begins to come back or come back down, which we are seeing already this year, supply levels are still low, inventory levels are low and the supply chain shortages are exacerbating that challenge too.

- So what's the domino to fall, Joey, if inventory for houses stay tight?

What's the next domino to fall?

What gives?

- Well, I think it's looking at the pace of interest rates, what pace they rise at and how that impacts mortgage interest rates.

Because I think construction this year, that's one of the challenges that they will face.

They are more likely to face the brunt of these interest rate hikes at least early on relative to other sectors, just because of the rise and rates that we're seeing and the impact on affordability, which has already taken a hit because prices have been appreciating so rapidly.

- So affordable houses and affordable housing is part of the equation in any urban core.

Brent, how do you make sure housing and affordable housing stay part of that when these runaway real asset prices?

And how do you make sure it's not just a single transaction?

Affordable housing in place, the first person that owns that gets to sell it at a much higher price.

- Right.

- What goes on with that?

- Well, and that's all part of the community formula, right, for economic development.

And if we're gonna attract more people to our community, that's just gonna exacerbate a housing cost.

- Exactly.

- So you've gotta make sure that you're zoning and your long range planning documents and everything is working on a government basis to make sure that builders have the ability to build houses, apartments.

Again, another, I hate to keep saying all of the above solution, but in all of the above solution, I remember millennials said they didn't wanna own houses at one point, right.

And all of a sudden they've grown up and they do.

And so here we are, facing a younger generation that is now engaged and is in the housing market as well.

That has exacerbated the problem as well.

But you've gotta look, and we are in the Triad starting to look more at, okay, we've gotten these big wins, we've gotten the Toyota and the Boom Supersonic, and we're gonna have to attract more people to the community.

And that means, not only do we have to find more industrial properties and more commercial properties, which we've been focused on, but now we also need to be looking at more housing properties as well.

And how do we make it easier for those houses to come online?

- And people are moving here.

So we see that- - Immigration.

- That more people are gonna be moving to the Southeastern United States over the next 20 years in any other region of the country, which is great news for demand overall.

But it gets back to exacerbating or creating these housing challenges that we're talking about.

- So does the immigration, Laura this question's for you.

- Yeah.

- Does the in migration bail us out for any bad mistake or policy that we may do?

- Not necessarily, 'cause it depends on who's moving in.

So if we have a migration that's predominantly retirees, then that's not gonna help the labor force in the same way as it will, if it's younger families.

And that actually I think gets back to the housing issue because a lot of times we talk about affordable housing and thinking about affordable housing, but one of the things we've been talking about a lot at the Richmond fed is workforce housing, which is families that typically, affordable housing typically families make under 60% of Area Median Income.

- And what is it generally?

Not to put you on the spot, but 60% of Area Median Income tends to be- - It totally depends, it totally depends.

So if you think about, I can't think of, I don't know of exact numbers by market.

- Okay.

- But if you look at workforce housing, which is 60%-120%, I know that that normally, houses in that range need to be below about $250,000-$300,000 to be affordable, to be affordable.

And in a lot of markets, there are no houses.

Go on Zillow right now to Charleston in the county and look for a house.

- Yeah, very, very hard.

- Not even in Dorchester, not even further out.

- Right, so I don't know the exact number, but I do know that 250 -300 is what workforce housing tends to be, need to be, and so even that range.

So then you're looking at people, everybody's making more, less than 120% of Area Median Income are really struggling in terms of finding homes they can afford, and that makes it more difficult to attract younger families.

- And there are some government entities that will actually incentivize and help with down payments and interest buy downs and that sort of thing.

as part of the economic development for people who will qualify for workforce housing.

- Yeah, but it's difficult sometimes because a lot of people that make that 60 to 120, they're not used to going to the government or to organizations for help.

Right, they're not people that have gotten benefits from the government before, and so sometimes the take up rates on those programs aren't as high as you would expect because they're just not used to seeking assistance.

- There's some pride involved, they don't know where to go.

- They don't know where to go, they don't expect it.

- They'll target them to first responders, so that you have some traction from governmental employees because of that issue.

They work for the government, so they get an opportunity to engage with the government and those things.

- Last year, not a surprise you, and the year before, record amounts of liquidity from the government, printing money, right, 5 trillion plus 5 trillion.

Where is all that liquidity now?

It's still out there, isn't it, Joey?

And where is it gonna show up?

- Well, it has showed up in disposable income being at historic highs.

Last year in 2021, it was about 25% above norms, which is just staggering to think about.

Savings rates were high, and that was having a result, we saw a big boom in consumer spending and durable good spending, especially.

And we've seen it track very closely as disposable income has come back down, savings rates have come back down as the federal stimulus has waned.

We've begun to see consumer spending come back down in line with that, which is one of the reasons why we anticipate this slow down later in the year, because consumer spending is falling right in line.

As these dollars are spent and we don't have the dual sources of income, both from wages and from this federal stimulus, it's now down to the labor market.

So it gets us more in a sustainable, more long run sustainable period of growth, once we see this pullback.

- There's still a significant amount of money that's out there too, that you're not thinking a lot of times.

I think it's difficult to know the exact percentage.

But a lot of times when we think about the stimulus, we think about stimulus checks, but then there were also things like the PPP money that went to businesses, which a lot of that actually went to households, right?

"Cause this households that run businesses and the child tax credit, prepayments that came last year.

So there really was a tremendous amount of money that entered the economy.

And like Joey said, with savings rates going up.

real disposable income in, well, disposable income, really in nominal terms increasing.

But many of those families have now spit down those savings.

So if you look at the lower income families that received that money, there's not a lot of that money left, but there's still a lot of money out there that went to higher income families through, maybe not through that direct stimulus check, but through some of these other programs that were a part of the stimulus packages.

- So Brent, as you've heard your two bookends here talking about the liquidity issue, how do you figure out how to get city planners, city mothers, city fathers, and not just Greensboro-High point-Winston-Salem, but the leadership that you interact with in North Carolina economic development circles to figure out a plan based on all of these things that it's salient and it's doable?

And you know that you can build a plan that you can execute on, besides just saying and I'm not being flipping about this, but North Carolina has had a bunch of short term big wins.

- Right.

- But what about five years?

What about 10 years?

And are we gonna go through our seed capital here with all this liquidity and try to plan that, when it's not gonna be spent the way?

- Yeah, and part of it is again looking long term, right?

So a lot of these ARPA funds that are still in government coffers, what are we going to do to make sure that the things we're investing in with those ARPA funds are not short term things, but long term things as we see these economic development successes?

One of the things we worry about is, where's the next site, right?

I mean, we're running low on inventory statewide and probably in South Carolina as well.

Right, I mean, on my way here talking to a consultant, we've got another megasite project.

Do you have another megasite in North Carolina?

- Who is it?

What's her name?

(Brent and Laura laugh) - Wish I could tell you, he wouldn't tell me.

(Chris laughs) So, and quite frankly, that's usually the way it goes.

- [Chris] Yeah, I know.

- But we need to make sure that we're looking long term at a number of these things, and not just perversely spending those funds, and building long term plans.

In Greensboro we've got a 2040 plan that we just went through, that talks about transportation and housing and economic development, and prioritizing investments along those lines.

It's sometimes easy as we know for politicians to, especially when there's money in their hands.

to give it to people and programs that might help them politically.

It's harder for them to stick to those long term priorities and goals and put that money in those buckets.

- So, let's talk politics.

I know the Fed loves this.

(Laura and Brent laughs) - However, we do have a midterm election this year.

We do have a lot of competing policies and politics going on.

How do you think it looks next year?

For whatever happens, what do you think monetary policy will look like?

What do you think public policy or fiscal policy will look like?

What do you think happens in 2023 now?

- So, if you read the statement that FOMC released a couple days ago now, as we sit here, they're pretty clear that they raised rates, federal funds rate, 50 basis points, and then it says, and they anticipate that further increases will be needed.

I think, oftentimes we get asked the question, how many?

- Yeah, of course.

- And I think the response to that is it depends on how inflation responds.

There's some economists that think inflation is now peaked, but that of course doesn't mean prices are going to go down necessarily, right.

It's just that relative increase month over month might begin to decline, so I think that it's pretty clear that the FOMC expects to raise rates quite a bit more, but we're still at very low federal funds rate from a historical standpoint.

We're now at 0.75 to 1% range.

Also though, the federal reserve and the FOMC in their statement released that they're gonna start bringing the balance sheet down.

And so that will continue over the next couple of years as well.

They ran the balance sheet up during COVID, and they had already brought it down some prior to that time from what happened for the greater recession, so now they're gonna bring it down again.

And that it's to the tune of about, I think, 95 billion a year, so that's gonna be pretty significant.

- But that'll be, and not to interrupt you Laura, but with interest rates rising, the debt service on that becomes greater, doesn't it?

Doesn't that become a bigger bugaboo somewhere in the mix?

- So this is just, they're gonna allow things to roll off that have expired.

So in the statement, they have a separate statement they release that people can look at online that explains how they're gonna do it.

And what they do is when the bonds that they own reach maturity or the mortgage bank securities reach maturity, typically they reinvest that money.

And so they're just not gonna reinvest all.

- We have a minute left, Joey, same question I asked Laura.

- I would say that generally speaking, we see more Americans now being affected by inflation.

So it's much more of a concern now than perhaps it was last year among more people, because inflation is greatly outpacing wage growth in The Carolinas and across the US.

So on the fiscal side, there may be more priorities towards limiting additional stimulus of any kind fund, additional funds going out into the economy.

Again, trying to pull back this overheated economy right now and get that inflation rate back down.

- Do you think even in your, it's not fair to say it this way, but do you think inflation could go meaningfully higher?

Is that a real concern for you?

- Well, we're not out of the woods yet.

I think it could go up before it comes back down.

I think the ideal situation is where we'd see inflation a bit lower than 8.5% by the end of the year without the US economy going into recession.

- Thank you.

You guys are great champs for being here, and thank you for being in the studio, this is very exciting.

- Thank you, great to be here to see you.

- [Chris] Brent, welcome, please come back.

- Thank you, anytime, just invite me.

Be excited to be back.

- Laura, I'm glad to have you in the studio.

- It's great to be here, thanks.

- Thank you for watching our program.

If you have any questions or comments, we always like to hear those.

Any comments, carolinabusinessreview.org, goodnight.

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