The U.S. economy is driven by an outsized portion of consumer consumption — 70% to be exact. So even the smallest drop in the nation’s consumers purchasing goods and services is quickly noticeable. Monitoring consumer spending is by far the most accurate way to determine the economy’s performance.
Spending was on a tear in 2022, consumers went out to restaurants, took vacations, and purchased all types of household items. Any pullback can prompt layoffs in retail, restaurants, and businesses dependent on consumers opening their wallets.
North Carolina now hosts a number of Amazon distribution facilities; a decline in shipments could easily set off layoffs at those facilities.
Consumer pricing can have a chilling effect on consumption. Inflation is a silent thief adversely impacting low- to middle-income families. When inflationary pressures set in, prices for ordinary goods can jump quickly, resulting in consumers pulling back on purchases. When consumers lack confidence, spending turns downward, negatively impacting growth.
The consumer price index is a scientific measurement of prices for goods and services across the broader economy — and currently it’s up 6.5%. Food and energy prices are pushing up the index, but foreign conflicts, pandemic-induced supply chain disruptions, and worker shortages are underlying factors that could moderate in 2023. Rent prices will further rise as higher interest rates push out homebuyers.
When prices rise too quickly, consumers buying power suffer, consumption falls, and growth stagnates. Despite a higher than normal price environment, consumers have found ways to consume, either using cash reserves or tapping credit options.
Interest rates rising too
Higher interest rates restrict consumers from borrowing and making large ticket purchases such as cars, homes, and appliances. Any pullback in these areas will slow economic growth swiftly.
Federal Reserve officials fearing runaway inflation have raised interest rates eight times with the potential for at least two more rate hikes in 2023. Current rates are 4.50-4.75% and increases will continue until the Fed sees a marked reduction in inflation nearer to its 2% target.
Inflation will be significantly lower by the second half of 2023, setting the stage for falling interest rates and the beginning of a new economic cycle.
Keep an eye on housing
Home sales and corresponding prices are important to watch because they give a peek into household wealth creation. Rising home sale prices mean owners retain more equity upon the sale of their most important asset, which boosts confidence and can lead to higher consumption. Furthermore the housing market is where the Federal Reserve can have the greatest impact through interest rate adjustments. Virtually every component of home sales — land development, home construction and sales — relies on low interest rates
Sales and prices are stabilizing nationally, which is appropriate for a market fueled by emotion, cheap rates, and supply/demand imbalances. Nationwide home sales retreated for the eleventh consecutive month in December 2022. Typical sale price for a single family home is around $371,000 nationally, but closer to $292,000 in North Carolina.
Affordable housing, lower cost of living, and higher quality of life, along with strong private-sector job growth, continues to greatly benefit the Tarheel State. A solid foundation in North Carolina’s economy will allow us to avoid setbacks happening in the macro economy.
Shortage of labor despite tech layoffs
High unemployment and low labor participation rates create a drag on the economy. Employment continues to be extremely tight, currently at 3.4%, companies are struggling to find talent for available positions. Corporate finances are in good shape, and employers will shun excessive layoffs to avoid losing employees in a tight market for skilled labor.
North Carolina is underperforming the broader labor market with a 3.9% unemployment rate – which is still lower than the long term average of 5.77%. The state’s employment outlook should remain stable considering the long list of private companies deciding to move into North Carolina. Gov. Roy Cooper announced 28,690 new jobs in 2022.
Recent headlines drew concern with mass layoffs from major technology companies; tech jobs account for around 20% of the entire labor market. But despite the layoffs, unemployment in the technology job market decreased to 1.5%. This is good news for North Carolina, where the economy continues shifting away from manufacturing to technology, data storage, and FinTech.
The other positive sign is the massive layoffs in technology have not spread to other industries and thus far appear to be constrained to large tech companies. Market observers are nervous the layoffs may result in “contagion” — setting off a recession.
However labor participation at 62.4% remains below pre-pandemic levels of 63.3%. Of course this gap may reflect a structural issue in the labor market driven by workers shifting from traditional jobs to more contract work. Not to mention COVID triggered many to retire early, downsize, or withdraw from the broader jobs market.
Wage growth continues
Wages have been increasing at a record pace to help workers keep up with inflation and to recruit and retain workers amid one of the tightest labor markets since 1969. The Fed is hoping companies will slow the growth of wage increases, so they can slow the pace and size of its rate hikes, and inflation will cool without triggering a recession. Most recently, average hourly earnings rose by 9 cents, to $32.82, but that’s a 53% decline in the pace of wage growth from one year earlier.
Diagnosis: A mild recession short term and national debt risk long term
Sharply higher interest rates, declining home prices, falling retail sales, and higher unemployment will present headwinds for the U.S. economy in 2023. I predict this will result in less economic growth and lead the economy into recession. Household balance sheets have low leverage and that should allow consumers to maintain strong purchasing power, so any downturn will be mild.
The largest challenge on the U.S. economy’s horizon is the national debt. Lawmakers unable to agree on effective fiscal policy have stood by and watched the debt grow to $31 trillion, which is around 140% of GDP.
The U.S. Treasury has benefited from low borrowing rates for the past two decades, but if those rates were to increase just slightly, the higher carrying costs will crowd out much needed investments for critical areas — national defense, public safety, healthcare, transportation, and entitlement programs.
The 10-year U.S. Treasury yield has averaged 2.2% over the past decade but could rise to 3% in 2023.
North Carolina is host to military bases, federal installations, and large numbers of federal retirees, all reliant on money from Washington. The North Carolina General Assembly is also weighing the option of expanding Medicaid with a federal promise of perpetual subsidies to fund the scheme. In reality we have to seriously question whether Uncle Sam will be able to keep paying its bills.