Tom Barkin, President and CEO of The Federal Reserve of Richmond, gives an update on the state of the economy and what to expect moving forward; and USC’s Moore School of Business research economist, Joey Von Nessen, discusses how it affects South Carolina.
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Gavin Jackson: Welcome to This Week in South Carolina. I'm Gavin Jackson. With the major announcement of Scout Motors locating its headquarters in the Midlands. We talk with USC'S Darla Moore School of Business Research economist Joey Von Nessen, about the growing business of electric cars in our state. But first last week, we sat down with the CEO of the Federal Reserve Bank of Richmond, Tom Barkin to discuss the state of our regional economy, And what to expect in the immediate future. Tom, thanks for joining us.
Tom Barkin, Federal Reserve Bank of Richmond: Great to be with you.
Gavin Jackson: So Tom, you're over the Federal Reserve Bank of Richmond, kind of just tell us a little bit about what that entails briefly. And what you're seeing economically within our region right now.
Tom Barkin, Federal Reserve Bank of Richmond: Okay, so the Federal Reserve Bank of Richmond, oversees a district that includes South And North Carolina, Virginia, Maryland, DC, And most of West Virginia. We're responsible for monetary policy, which we'll probably talk about a bit. But also we oversee the banks in this district, And we operate the payment function, Ach, cash processing, the wire transfer system. And then we in Richmond, have a special obligation, which is we take technology for the Federal Reserve System. So that's the Federal Reserve Bank on monetary policy. I serve on the FOMC, which is the chief monetary policy body. And so when I'm doing that, I try to spend most of my time outside of Richmond in places like South Carolina trying to understand what's happening in the economy. What am I seeing right now? It's a pretty interesting And complicated time, I'd say, a month ago, it was very clear what was happening in the economy, which was that monetary policy was having an effect. Demand was cooling, the labor market was softening inflation, was coming down. The data we've gotten over the last three weeks, though, suggests a very opposite point of view, the January numbers for consumer spending were quite strong. The January jobs number was incredibly high. And January, inflation seemed to come back. And so we're in one of these points in the economy where being on the ground really helps because the data used to say X and now the data is starting to say Y we're trying to figure out what's going on.
Gavin Jackson: And we can talk more about that too. And I want to ask you about this Wall Street Journal article that I read the other day where the lead was, the next economic downturn has become the most anticipated recession in US history. It keeps getting postponed. What do you make of that? What do you see when we talk about the potential for a recession this year? It's something that a lot of folks were calling for last year. But then we see this economic data coming out in January, like you were saying, how does this all mesh together?
Tom Barkin, Federal Reserve Bank of Richmond: Well, when inflation goes up, the Federal Reserve needs to do what Congress asked us to do, which is to raise rates to do something about inflation. And historically, when you raise rates, that often slows the economy And can lead to a recession. And so when people start predicting a recession, it's based on I'll call it that kind of history. If you, though, reflected where we are, though, we're in a very unique time. And that's because of the aftermath of this pandemic. I often say the pandemic is still with us not luckily, from a health standpoint, but from an economy standpoint. And so there was a lot of fiscal stimulus put into the economy. Workers still have more than a trillion dollars of excess savings that they didn't have before the pandemic that's still being spent. The the scars of having had to struggle to hire workers are still with firms, and so even if their demand softens a bit, they're not that quick to lay people off because they don't know for sure that they'll be able to rehire them. Supply chains have gotten a lot better. But yeah, there's still challenges of getting chips into cars. If you're trying to get cabinets for your house or switch gear for a facility, it's very hard to find certain things that's still there, the Ukrainian war is still pressuring commodity prices, China is only now reopening after its own COVID bout. And so there's just a lot of these COVID era dynamics that are still with us. And I think they're keeping the economy moving, even though we haven't seen even though rates have been increasing.
Gavin Jackson: So I mean, is there ever gonna be a time where we see, I mean, I guess maybe not because things need to settle down before we see what the economy could do when it comes to a recession. But there's so many factors at play that like I said, we're kind of moving forward regardless.
Tom Barkin, Federal Reserve Bank of Richmond: Yeah, you can never say you will or won't have a recession. It's kind of a challenge to ever make that forecast, a reminder that the last several recessions in this country have come from 911, or the pandemic or the financial crisis, things come weighing in from left field And that can always, that can always happen, but I do think the word to focus on in terms of the economy is normalization. We were not in a normal situation during the pandemic, as people rotated from services to goods And then back to services as people stayed home And didn't participate in the workforce as all this stimulus hit, And we're not in a normal situation now for the reasons that I outlined, so we just have to get back to normal, And then we'll see where the economy is.
Gavin Jackson: We're taping this on March 8th. So before the upcoming FOMC meeting, like we're talking about, we haven't seen new data come out yet for unemployment or CPI. But you know, currently, what you're seeing if we can talk about that how you think the current numbers And might lay into what might happen at that meeting, when it comes to raising rates. Obviously, we heard from the Fed Chairman Jerome Powell this week, And before Congress talking about how the need to raise rates will continue. What do you make of that? Where do you see things going at this point on March 8th?
Tom Barkin, Federal Reserve Bank of Richmond: So you're asking me to forecast the fee as please, when your viewers will already know what actually happened? That seems like a dangerous move. So I don't know what I don't know what the data is going to say, coming in. But I'll take a risk. And I'll tell you, you know what I think And then we'll see. You know, let me start on the demand side. I think that I've said the January demand numbers were quite strong. I'm not confident that's going to continue, I see much more of a gradual normalization path than a really strong accelerating demand. And part of it is I think a lot of the strong demand in January, has a story behind it. The weather was very good. In January, these numbers are seasonally adjusted. And the last two January's have been COVID influenced. So I think the seasonal adjustments probably helped. And then I'll also say that the Christmas season is now longer than it used to be. And all gift card spending, for example shows up when you actually redeem the gift card. And a lot of that happened in January. So I may be wrong, I think we're gonna go back to the demand signals that we were seeing beforehand, but we'll see. on the employment side, same thing seasonal adjustments really matter. Usually, we lose almost 3 million workers in January because the retail trade lays off the workers who were doing the Christmas season, this year, we only lost two And a half million. Now, maybe losing fewer means we grew half a million, which is what the numbers would show you. But I kind of think what it means is that people don't want to lay off workers that they fought really hard to find. And of course, the weather was warm, And people were shopping. So we'll see. But I think again, on the labor side, we're going to see much more normalization than we saw in January. The part I'm concerned about And probably the least confidence in my forecast is on inflation. And so we'll get a CPI next Wednesday. Your viewers already know what that is. I don't know what it is. But my instinct is that there's going to be more persistence And inflation than we would want. And if that's the case, then the Fed needs to do what we need to do.
Gavin Jackson: And Tom, when we talk about inflation, how do we know when it's becoming entrenched? What are the indicators? We've seen it declined over the past year. of course you guys are pretty stubborn, though. But what do you what do you look at what we're talking about entrenchment for inflation, And how you can really tackle that.
Tom Barkin, Federal Reserve Bank of Richmond: So I look at the range. And so you mentioned core CPI, which takes up food And energy. I also tried to look at median, And CPI or if if I'm getting technical, there's a measure called trim demean CPI that takes out the 25th. That leaves only the 25th to 75th percentile in the middle. But I tried to look at the range of it, what percent of the commodities in that basket are above our target is a pretty good way to look at it. And inflation is definitely persisted. It's definitely broadened. And when you say entrenched, right, that's a word that suggests it's a immovable I don't think inflation's And immovable, but what I do think is that, if you're a business for the last 30 years, you've known that you couldn't increase price, over the last two years, you've known you could increase price. And if you're a business who just increased price successfully, you found an elasticity you didn't know existed, you found a profit driver that you didn't have before. And you're not convinced that you can still do that in the future. It's not entrenched in that way. But you're not willing to back off of that until either your customers or competitors, your competitors convince you, you have to. And so the way I think about it is we expanded the range of possibilities, And the companies in the sector are going to have to narrow their focus back toward the 2% inflation that we've had historically, that'll just take some time.
Gavin Jackson: And when we talk about forecasting, And we talked about inflation, And we talked about combating that, obviously through raising rates, you know, originally was supposed to be about five to 5.5%. This year for interest rates going up. It's expected to go I guess, maybe higher than that. Now, after what we heard from Fed Chair Powell. What do you think we could see in terms of interest rates this year?
Tom Barkin, Federal Reserve Bank of Richmond: It totally depends on what happens to inflation. I mean, my I think I said this in a speech the other day, but if inflation continues to endure, then we have to do more on the right side, but nobody's rooting for that. And if inflation you know, decides to come back down onto our target, then we'd have to do less, I think it completely comes down to what happens to inflation.
Gavin Jackson: But you have to push forward. You can't be you know, here And there has to be strong response to inflation at this point, I don't think hope is a very good strategy. And I think if inflation stays elevated, the American people expect us to do something about it And doing something about it And involves using the one big tool we have at our disposal, which is interest rates. So Tom, when we talk about challenges, obviously, you're talking about high inflation rates, you're talking about high interest rates, that really pinches the consumer on both sides. Right. So what are the challenges that we're seeing when it comes to consumers, And then also the labor market when it comes to employers what they're looking for? Because it's a very interesting time when we look at some of these factors.
Tom Barkin, Federal Reserve Bank of Richmond: So the one thing I'd say we've all rediscovered, And we could have had an intellectual debate about inflation 10 years ago, but no one really remembered it very well. Today, we all have inflation very clear in our minds. And what we've decided is that we hate it. Right? People find it confusing. I mean, when do you invest? When do you save? Where do you invest? People find it exhausting. It takes energy to shop around for a better price takes energy to convince your customers to take a higher price. And I think it just fundamentally feels unfair to people, if your boss gives you a raise, you finally feel that your worth has been recognized. And then you go to the gas pump, And you say somebody's arbitrarily taking it away. So I think people really dislike inflation, by the way, it hits those with least money the most, because they spend the highest percentage of what they earn. And so everybody wants us to get rid of inflation, the experience of the 70s is pretty clear. If you worry too much about the collateral damage that's done when you try to take care of inflation, then And you back off, that inflation will come back even stronger than next time, which means you'll have to do more, which means you have to cause even more damage, And nobody wants to do that. So the way I think about it is Be firm, be aggressive, do what you need to get rid of inflation today, get convinced that it's actually gone. And then And only then do you back off. And we may or may not see a labor market impact on that. So far, you know, unemployment is at 3.4%. That's the 53 year low. The last time it was lower than 3.4% was 1951. And so we're not in a situation where we're raising rates And people are losing jobs, we're in a situation where the job market is incredibly tight, And inflation is too high. And so to me, as a policymaker, that feels like a pretty straightforward decision.
Gavin Jackson: I was gonna say you're talking about collateral damage for time with the labor market, but then you look at places like South Carolina within your region within your purview. And you see that we created what 14,000 new jobs last year, there's plenty more on tap this year, we're talking about billions of dollars in new investment. So are we insulated in a way that if we do see some some big interest rate increases this year that employers see, we'll be able to hold on to all of these jobs, people will be able to hold on to these jobs?
Tom Barkin, Federal Reserve Bank of Richmond: Well, South Carolina has definitely thrived in the middle of this transition much more than most states. And that is, you've had workforce growth, you've had job growth. And there are a lot of states in this country that are nowhere near that kind of growth, And so good for South Carolina. I'll also say that, as I think about what might happen to the labor market, And I look at some of these layoffs that the tech firms have been doing lately, you know, I just note that if we do have a recession, I think it'll be a different kind of recession than the ones we're used to travel. And of course, South Carolina has a lot of travel And tourism is doing unbelievably well. And that's because a lot of people have a lot of money. As I talked about earlier, manufacturing is doing very well, South Carolina has a lot of manufacturing. And that's, I think, because of the transition how people spend that happened during COVID. And so if you think this is a hospitality recession, where jobs are still very short, where people were still very short of workers, if you think it's a manufacturing recession, like less than I don't think that's what we're likely to have the layoffs we've had so far have been disproportionately professionals. And of course, South Carolina, like everywhere else has a lot of professionals. But you know, unemployment for people with a college degree, for example, is 2%, lower than 3.4%? Nationally, this is just a segment that reports relatively seamlessly. And so my hope is, if we do have impact on the labor market, that impact will be in a different sector than we're used to in a sector that is much more resilient than some of these other sectors we've had historically.
Gavin Jackson: Tom, we have about two minutes left, I just want to ask you, you know, we're here at a conference, you're talking to a lot of nonprofits, you're talking about what it's like in the workforce here in South Carolina. Tell me more as to what you see that needs to be done to improve the workforce here in the state. Obviously, education is a big issue. Childcare is an issue. What are you talking to employers about? What are you hearing from employers about what they need to do to increase the number of workers here?
Tom Barkin, Federal Reserve Bank of Richmond: Yeah, so jobs, I mean, workers are tight everywhere, the labor markets very, very, very tight. As I said earlier, South Carolina has done a great job of creating a value proposition for people to move in. One of the interesting opportunities for South Carolina is participation. So unemployment is very low. Participation is also very low. And so this idea of how do you get more people into the workplace is a very powerful notion. It's good for those people. Obviously, it's good for the state, it's good for the businesses in the state. And so I think there's a lot of alignment, that if you can move participation, that's a win win win, you know, what does it take to move participation? Obviously, education matters, that prepares people for the workforce. I think partnerships like the many that are in South Carolina, I'm thinking of the continuum And Lake City, but Greenville Tech does it too, And many others, where corporations, and community college's work together to create clear And firm pathways for people to enter the workforce. That's another transportation of being able to get two jobs, and then I think one that's really gotten exposed during COVID is childcare, and importantly, it's a sector that still has four or 500,000 fewer workers than it did before COVID. And I think, frankly, most of the people taking care of the kids are spouses or grandparents. And those people by taking care of the kids are now out of the workforce. So if we could build a healthier industry, corporations will have to invest in And I think that'll be good for participation, which would be good for the workforce, which would be good for the corporation.
Gavin Jackson: Lot of things at play there. And one last question I'll ask you just about is China And the role that we're seeing the Chinese threat playing within not just our country, but around the world. And we've talked about manufacturing, talking about reshoring jobs, especially in light of the pandemic, you have a lot of ports in your district, including the Port of Charleston down here. Tell me what you're seeing when it comes to reshoring manufacturing, And maybe the need to do more of that or less of that what you're seeing in the district.
Tom Barkin, Federal Reserve Bank of Richmond: Anyone who has a manufacturing presence in China is stopping And saying is this smart. And it's hard to move manufacturing, you've invested a lot in the Chinese manufacturing is very good And very low cost. But people are saying I've at least got to diversify. A lot of that diversification is going to Cambodia or Malaysia, or Vietnam. A lot of it's going to Mexico. I don't think a ton of it's yet coming to the states. And it's the same topic that I was talking about with the nonprofits today. It's hard to open a new plant if you're not confident you can get workers. And so I do think there's huge potential for this country if we can supply more workers to attract more employers, including some of these reshores. But as I talked to people considering reshoring, with the exception of some defense related industries And some healthcare related industries, I'm not hearing as much on our shores, because they're just not confident they can get workers.
Gavin Jackson: Gotcha. Going back to that workforce challenge, a lot of challenges to go. We'll be watching this entire year. Tom Barkin, thank you very much for joining us.
Tom Barkin, Federal Reserve Bank of Richmond: No, thank you for having me.
Gavin Jackson: Joining me now to continue our talk about the economy is Dr. Joy Von Nessen. He's a research economist at the University of South Carolina Darla Moore School of Business, Joey, welcome back.
Joey Von Nessen, USC Darla Moore School of Business: Thank you, Gavin. Always a pleasure to be here.
Gavin Jackson: Well, Joey, we were, we're almost through the first quarter of 2023. And we last spoke to you in December of 2022, when you've released your economic outlook for the year, And I want to ask you just how you see things shaping up right now. I know your big message. At the end of the year for 2023 was recalibration. Are we seeing that play out right now? What's it looking like three months into the year. We are we're seeing a recalibration, we're still very much in progress with that recalibration, we're not out of the woods yet, interest rates are continuing to rise. And that's helping inflation. But inflation has also been somewhat stubborn. It's coming down, but not quite at the rate that we had hoped. So as we look forward, we're anticipating more interest rate hikes this year. And we will see what effect that has on on the economy. But overall, I would say the economy in general, a good term to use is resilient. It's been very resilient and stable. In light of these rising interest rates, consumer spending has still been strong employment has still been very stable. So overall, we're still very much in that transition period. When we talk about the stubbornness of some of these things, we're talking about inflation being still so high, when we talk about inflation rates now probably could be raised even higher than expected, because of what we're seeing in the labor markets And such like that. How do you see all that playing out the fallout of this affecting South Carolina businesses And consumers as well? I mean, it's it could just really continue to pinch us as we continue to be pinched when it comes to prices.
Joey Von Nessen, USC Darla Moore School of Business: Yes, prices are still going up. We're seeing that effect across industries across markets. And we're seeing that in the labor market, especially with this ongoing labor shortage And that having an impact on businesses And in terms of their ability to find the workers that they need. We are still seeing a significant labor challenge. Pretty much across all industry sectors in South Carolina. Despite the fact that rates are going up, we've seen some pullback in hiring, but not a lot. So So still businesses are seeing high levels of demand still struggling to get the workers that they need. And so this is going to continue to be a challenge for businesses as we move forward into the into the spring months.
Gavin Jackson: And Joey, how do we get more of those workers into the workforce? I mean, we keep hearing about workforce development, maybe some realignments with some of the programs we already have in place in the state. But education is critical, especially when you talk about, you know, getting a workforce for I think we announced 14,000 jobs last year, we have some big announcements so far this year of they'll play out over the coming years. Are you seeing the Statehouse folks up there doing enough to make sure that we have a steady workforce to fill these jobs.
Joey Von Nessen, USC Darla Moore School of Business: So at the state level, we're seeing continued growth in many programs that South Carolina has been so successful with in the past, the technical college system, generally creating programs to help meet business needs directly. We have Apprenticeship Carolina And ReadySC a number of nationally recognized workforce programs. So I think part of the the solution here is to continue to build on the great programs that we've seen so far. But more generally, if we look at this labor force shortage as we move ahead, one of the goals of the Federal Reserve is to raise interest rates to the point where this is at least somewhat mitigated. So I think a good way to think about it is to consider it from the perspective of a business, an individual business right now, virtually all businesses And most industry sectors are seeing high levels of demand, And are looking for workers. And so in an ideal scenario, the the so called soft landing that the Fed is shooting for is a scenario in which those businesses don't see quite as much demand. So they don't need to hire as many new workers. But at the same time, the economy doesn't cool to the point where they actually have to lay any existing workers off. So if we can get to that middle ground, that would be a success story for 2023. And that's what the Fed is shooting for.
Gavin Jackson: Yeah. And they do have to be very strong, I guess, from what my understanding what these rates to really make sure that things get mitigated that these inflation gets pushed down to the point where it doesn't linger too much or kind of come back, right.
Joey Von Nessen, USC Darla Moore School of Business: Yes, because South Carolinians had been directly affected by high inflation. Most South Carolinians have seen a loss in purchasing power, because inflation has far exceeded wage growth over the past two years. So it's having having very practical implications. So this is an important priority for the Fed. Fed Chairman Jay Powell has made that clear that getting inflation down is is the top priority of the Fed. So they will continue to raise interest rates until we see more meaningful progress on the inflation front. And I don't think that's going to change.
Gavin Jackson: So layoffs, like you're saying, you're not too concerned that we'll see those layoffs play out in a big way down here in South Carolina, just because we have so many jobs, And that soft landing could be an actual, good, viable situation for us.
Joey Von Nessen, USC Darla Moore School of Business: I think it's certainly plausible. I think the probability of a recession sometime within the next 12 months is probably around 50%. Maybe a little bit less than that. And we'll see when we're taping this. We don't know, we don't have the February jobs report out yet. But what those data show will influence our, our, our probability for this for recession this year, depending on whether it's a strong or weak jobs report. But in general, we are moving in the right direction. We are seeing inflation come down. But it's it's going to take a bit longer than than anticipated. And we'll see how, again, we'll see how the new jobs data come out And affect that forecast.
Gavin Jackson: So some tricky economic news right there, Joey about some bright news that we've been seeing, you know, just kind of continue on And what the news that we saw coming out of the later part of 2022 with these jobs announcements here in South Carolina, specifically, especially in the electric vehicle industry, that sector of the automotive industry. We just saw a huge announcement for Scout motors here in Richland County, to the tune of $2 billion And several 1000 jobs. Some people have called this transformative, it will break they'll break ground in the middle this year, And they'll really go into production in the next coming years. Tell me what you think about this significance of this to have another huge automotive manufacturer relocate to the state.
Joey Von Nessen, USC Darla Moore School of Business: Well, this is extraordinarily significant for South Carolina, both for the state as a whole And for Richland County. It's the biggest economic development announcement that we've seen in Richland County's history. But more broadly, it also reflects that trend that South Carolina is effectively transitioning towards the production of electric vehicles in line with consumer demand. And we're seeing a rapid movement towards electric vehicles towards the consumption in China, in Europe And the United States. And this is becoming an important market component of the automotive sector. And so South Carolina has to pivot with this broader global industry trend. And the reason that's so important is because if we look backwards over the last several decades, the automotive industry has been one of the principal drivers of the state's economic growth. So it's very important that the state's automotive industry as a whole room flex And transitions with broader consumer demand as it shifts towards electric vehicles. And that way we can ensure that the growth in the coming decades is able to be as strong And as positive as we've seen in previous decades. And this announcement pretends good things for South Carolina because it shows that we are moving in that direction effectively.
Gavin Jackson: Gotcha. And with just a few seconds left, just tell me what big thing you're watching for through the rest of this year at this point?
Joey Von Nessen, USC Darla Moore School of Business: Well, the name of the game is still inflation that at the at the end of the day, that is still the biggest short run economic threat to South Carolina And to the US, because high inflation will continue to erode the purchasing power of South Carolinians And of most Americans until it gets down to a more reasonable level. So we need to keep our eye on that. And that's what the Fed is is doing with with raising rates And that will likely continue
Gavin Jackson: Gotcha. A lot to look forward to in 2023. That's Dr. Joey Von Nessen. He's a research economist at the University of South Carolina's Darla Moore School of Business, Joey Thanks as always.
Joey Von Nessen, USC Darla Moore School of Business: Thank you, Gavin. My pleasure.
Gavin Jackson: To stay up to date with the latest news throughout the week. Check out the South Carolina Lede. It's podcast that I host on Tuesdays And Saturdays that you can find on Southcarolinapublicradio.org or wherever you find podcasts. For South Carolina ETV, I'm Gavin Jackson. Be well, South Carolina.