The year ahead will be one of readjustment for the economy and the housing industry — and it might include a mild recession.
That’s according to research economist Joey Von Nessen with the University of South Carolina.
Von Nessen said supply chain constraints brought on by the COVID-19 pandemic and the influx of $6 trillion in government stimulus aid conspired to drive inflation to a 40-year high as consumers spent freely on a limited amount of goods during the past two years.
That led the Federal Reserve to raise interest rates six times this year to cool spending.
Research economist Joey Von Nessen of the University of South Carolina believes a recession in 2023 will be mild if there is a slowdown in economic activity brought on by the Federal Reserve’s pace of raising interest rates to cool the red-hot economy. File/Grace Beahm Alford/Staff
“It raises the cost of borrowing money, affecting consumers as a whole for homes, cars, appliances and credit cards,” Von Nessen said.
“Most economists believe there is a greater than 50 percent chance we will see a mild recession sometime in 2023,” he noted. “We expect a mild recession if we do see a recession next year.”
Von Nessen pointed out a reduction in economic activity is expected, but it should be nothing like that of 2008, when the housing market collapsed and triggered a deep, broad downturn.
Fourteen years ago, the misery index, a measure of consumer confidence, resulted from high unemployment and low inflation. This year, the opposite is true.
Because inflation is high and unemployment is low, Von Nessen said, “The Federal Reserve threw cold water on the red-hot economy. … We are coming off a caffeine high to a more normal condition.”
He equated the high rate of consumer spending to a speeding car.
In January, people spent wildly, going 100 mph. In November, spending dropped to 85 mph, which means it still has a way to go before reaching the magic 55 mph limit, he said.
That is likely to trigger another interest rate hike before year’s end. The last Fed meeting of 2022 is set for Dec. 13-14.
Along with high demand for limited goods is the robust labor market. In South Carolina, employment is 2 percent above the pre-pandemic peak, meaning more consumers have more money to spend, further contributing to inflation.
After the crash of 2008, it took six years for the state’s economy to recover job losses. After the coronavirus outbreak when unemployment peaked at 11.6 percent in April 2020, it took less than two years to reach pre-pandemic levels.
In September, the jobless rate had dropped to 3.2 percent across the Palmetto State, not far from the record 2.4 percent unemployment level in September 2019.
“Unemployment in South Carolina under 4 percent is highly unusual,” Von Nessen said. “This is a very strong labor market.”
By raising interest rates, the Fed believes overall spending will fall, resulting in less demand for goods and fewer job openings to bring the economy back into equilibrium.
“More and more employers are taking ‘Help Wanted’ signs out of windows,” Von Nessen said. “Job openings have turned because of the increase in interest rates.”
He also noted savings rates among households remain high but a pullback has started, signaling what is believed to be the beginning of less demand for consumer goods and a pivot to services instead, which should result in less upward price pressure on limited goods.
Higher borrowing costs are already affecting the housing market as mortgage interest rates have more than doubled since this time last year and home purchases are down considerably, falling to pre-pandemic levels from the frenetic pace during the health crisis.
The housing market, still woefully short of the number of homes needed to keep supply and demand in check because of underbuilding during the past decade, now faces strong headwinds.
Higher borrowing costs will limit the pool of buyers while those who locked in at lower interest rates may be less willing to sell since buying another home could be more expensive now.
Von Nessen dubbed the bidding-war pace of homebuying during the past two years “a bubble that was not sustainable.”
“We are getting back to levels of activity that are more sustainable,” he said. “It’s closer to a market equilibrium.”
Even with low inventory and elevated prices, Will Jenkinson with Carolina One New Homes said he believes the Charleston area’s housing market will remain healthy. He pointed to the region’s strong job market and attractiveness to newcomers as key drivers.
“We have a lot of the fundamentals in place,” he said.
As for rebalancing the economy, Von Nessen noted it could come down to a race between the lowering of inflation and the amount of money in people’s checking accounts.
Households could lose excess savings if inflation remains high since consumers won’t have extra money to spend. Inflation could fall faster than people’s ability to purchase goods.
“The winner,” Von Nessen said, “could determine whether we see a ‘soft landing'” that the Fed is trying to stick.
“I’m still very bullish on the long-term growth of South Carolina’s economy,” he said. “Demand is going to continue to be very strong, but there may be some turbulence ahead.”
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