By Daniel McGarvey, Portfolio Analyst
On November, 18, 2022, Stonebridge Financial Group was pleased to once again host noted economist Anirban Basu at events in Harrisburg and Lancaster as he presented an update on the economy. Here are 10 key takeaways from his presentation.
- The Federal Reserve should not have been surprised by this bout of excess inflation
The Fed insisted for months that inflation was transitory and kept stimulating the economy for too long. Our recovery from the pandemic was massive, and our economy has never been able to handle that level of growth and demand formation without inflationary pressure. Inflation is now at four-decade highs and could remain stubbornly high into 2023 due to policy errors.
- Money supply has shot up dramatically
Money supply growth can lead to both economic growth and price growth, and it has more significantly driven price growth because it has risen concurrently with significant supply shortages. The Fed is now having to pump the brakes because inflation can be quite corrosive, especially to lower-income consumers.
- Job openings abound
There are approximately two job openings for every unemployed American, and young men especially don’t participate in the labor force as much as they used to. The scarcity of workers and resulting higher wages add to inflationary pressures.
- Americans want remote work
According to surveys, 68% of Americans would choose remote work over in-office work, and 74% believe that companies not offering that flexibility will lose major talent. Since many companies can’t offer remote work, they must pay more to retain talent. Worker productivity has also been decreasing in 2022, while employers are paying more, which is inflationary.
- Pennsylvania has not recovered all the jobs lost over the pandemic
Pennsylvania employment is 1.6% lower than in February 2020, even though the national total has increased 0.4%. Pennsylvania was not as aggressive as states like Texas or Florida in keeping the economy open, and as such, we are still recovering. However, employment in the Harrisburg area has grown 3%, mostly in the trade, transportation and utilities sectors.
- Consumers have fought through inflation
There can’t be a recession without the consumer participating, and consumers are still spending aggressively. Retail sales are up 32% since the pandemic began, airfare is up 43%, and we’re buying just as much gas as last year despite higher prices. Consumers are staring inflation in the face and spending right through it, and the Fed will need to see that trend slow down before pivoting its policy.
- Home prices are struggling to come down
It was surprising how much home prices took off during a pandemic, with price charts looking similar to the chart for money supply. However, this should not be a repeat of the housing crisis, largely due to the absence of flawed lending. If there is a disequilibrium in the market, it’s that there aren’t enough houses available for sale. The lack of inventory limits how much prices can fall.
- Certain real estate segments are in better shape than others
The apartment market should stand well even in a recession, largely because home prices and mortgage rates make home ownership less affordable, and residential building permits for single-unit homes are lagging permits for apartments. Vacancies have been increasing for segments like malls and hotels, however, due to behavioral changes from the pandemic. Commercial real estate segments may not fare as well in a recession, and there has been little sign of economic recovery in commercial building construction.
- A recession in 2023 is probable
The Fed is aiming for a soft landing, but it has a poor record of meeting that goal. The economy will likely remain unbalanced as the supply-side recovery continues to be hampered by issues like the Ukraine/Russia situation, China’s disruptions and the European energy crisis. The recession would likely begin in the first half of 2023.
- Even without a deep recession, there will be pressure on asset values
The Fed will keep fighting to get inflation down to 2%, but that could take some time, and interest rates should continue to increase. As such, overweighting high-growth assets or real estate may be premature at this point.
Daniel is a Portfolio Analyst at Stonebridge Financial Group and works on portfolio analysis and other related tasks. When away from the office, Daniel spends his time playing guitar, reading, and exploring the outdoors.