Related Links

• A Look at the Carolinas Economy
• Bank Leaders Visit Northeastern North Carolina
• Intersecting Costs: Housing and Transportation in the Rural Fifth District

Transcript

Tim Sablik: Hello, and welcome to Speaking of the Economy. I'm your host, Tim Sablik, a senior economics writer at the Richmond Fed.

My guest today is Matt Martin. Matt is a vice president and the regional executive for the Charlotte branch of the Richmond Fed, where he leads our outreach efforts across North and South Carolina. Matt, welcome back to the show.

Matt Martin: Happy to be here, Tim.

Sablik: Today's conversation is part of a series of interviews I'll be doing with the Richmond Fed's regional executives on the state of our local economy. The regional executives are in regular contact with businesses and local leaders, which allows them to hear what is happening on the ground before it shows up in the national datasets.

Matt, could you start by giving us a broad overview of the biggest concerns you're hearing from your contacts in the Carolinas?

Martin: Sure. Right now, we are seeing somewhat slower demand growth. I'm going to say that as opposed to outright declining demand, and that's except for sectors like housing and perhaps auto sales.

Interestingly, in some of the fastest growing markets in the Carolinas — places like Raleigh, Charleston, Charlotte and probably some others — this is almost seen as a welcome relief. I've had several contacts tell me that growth finally feels more normal and that they can deal with the pace of activity, whereas previously it was just so frantic. They were fatigued from the pace.

Housing is the most obvious sector seeing some declining activity. I had a conversation with a real estate broker who told me — a month or two ago, already — that instead of 15 offers after one weekend on the market, homes are now just getting five. And I think activity has slowed further recent weeks since I talked to him. Inventories of homes on the market seem very low still and I think we're only just beginning to see an impact on home price growth in a lot of these markets.

Sablik: Have you seen the slowdown in demand starting to show up in, say, businesses' bottom lines or maybe the prices that they're charging for goods and services?

Martin: Not a whole lot yet, but I think this is fairly nuanced. In some cases, businesses are seeing costs still go up and they're going to try and pass those along as best they can. But I've also heard from some — and I should note that this is mostly in the business-to-business world, so not necessarily consumer-facing businesses — that even if their costs are coming down to some degree, their profit margins have been eroded over the last year or so. They're going to try and keep prices up as long as they can and try and get back to a level of profitability that they had, say, pre-COVID times.

Sablik: Obviously, the other big economic story that everyone is talking about these days is inflation. You mentioned some slowdown in growth, which is welcome and could help combat that higher inflation that we've been seeing.

But some have also raised the specter of stagflation from the 1970s, fears that we could end up in a situation of both slow growth and high inflation. Have the businesses and households that you've been talking to said anything about this?

Martin: Yes, they have.

Paradoxically, smaller towns might see slower growth and still have households that are harder hit by inflation. I take this from a couple of trips to parts of eastern North Carolina this year. It's clear to me that the employers in these areas — particularly the larger employers — pull from large, multi-county geographies, so their employees are coming in from many different places. As some of our own research has shown — and I'm thinking specifically of an early May Regional Matters post — rural residents already tend to spend more on transportation. Higher gas costs right now make that worse if they're commuting considerable distances to go to work in the smaller town areas.

Sablik: Right. We can definitely put a link up to that Regional Matters post in the show notes.

There's a lot of talk about recession. We're recording this on July 28, the day that the second quarter GDP numbers came out which seemed to be showing negative growth for a second quarter. Certainly, the pessimism of households and businesses is reflected in a number of surveys.

At the same time, there are some positive signs still in the economy. The labor market seems fairly strong and demand, like you said, is slowing but not falling off a cliff. How are you navigating these conflicting signals?

Martin: Yeah, this is a tough one. There are some indications — and I don't want to overstate it — that businesses and households are starting to behave as if a recession is coming.

I don't really want to wade into the whole, "Can we talk ourselves into a recession?" discussion. I think some of these changes in behavior are notable right now, but they're not necessarily widespread.

To give a couple of examples, on the consumer side, one homebuilder told me that even some cash buyers are sitting out the housing market right now, waiting for home prices to fall. You can certainly see how higher mortgage rates might squeeze some buyers out of the market. But you would think that would make it easier for cash buyers to step in and find that home, especially compared to the example I gave earlier when 15 offers would come in over one weekend. So that's one change.

On the business side, there's a lot more talk recently — particularly on the commercial real estate side — about projects where a business has gone into "wait and see" mode, when previously they were gung-ho on the project. And you see that in some business investment projects as well.

Sablik: Right. Another of the big economic stories from earlier this year and into the previous year was regarding labor shortages. The story was that businesses couldn't find enough workers fast enough to keep up with demand. Is that still the case, or has the labor market cooled off along with the rest of demand?

Martin: It's largely still the case. When I talk to business leaders in the Carolinas, labor is still hard to find for many of them. That remains one of the first things that businesses bring up as an issue. However, it does seem to have improved to some degree.

It's kind of a weird time for labor markets. I hear a lot of reports about firms doing mid-year wage adjustments. Maybe they call them COLA adjustments, cost of living adjustments. But then I also hear reports that wage and other demands for new hires in some professions and industries are more reasonable now than they were a couple of months ago. So, that's an interesting comparison. But with all that said, I think [for] firms that have been aggressive in raising wages before now, workers are more readily available for them, while firms that haven't moved as aggressively are still playing catch up and they're still finding it hard to find workers.

Sablik: Gotcha. What other stories or data points are you going to be keeping an eye on for the second half of this year?

Martin: Well, there's a few to keep track of, for sure, given some potential changes. Here are three that I'm following.

Demand growth is one for sure. I think it'd be interesting to follow up with those who have welcomed slower growth to this point — because they couldn't keep up with the really frantic pace of growth — to see if they remain sanguine or if at some point they get worried that demand has slowed too much. That's sort of heading to the recession kind of situation.

Housing markets will also be high on my list of things to watch. When you look across the Carolinas, we have a number of urban areas that have seen very strong population growth — mostly in-migration from other states — and we aren't building enough housing in those markets to match that population growth. What happens if homebuilders start to slow down?

Finally, I will be tracking how quickly or slowly changes in demand — assuming demand growth might slow further — pass through to supply chain improvements and eventually prices. Already, I'm hearing a lot about falling commodity prices. You can see that in the market data. But it's not really showing up yet in commercial real estate projects, for example, and I suspect that might change as we go forward.

Sablik: Gotcha. Matt, thanks very much for taking the time to talk with me today and share your insights about what you've been hearing from your conversations throughout our regional economy.

Martin: Thanks, happy to do it.

Sablik: I'll take this opportunity to remind our listeners to stay tuned to the month of August for all my conversations with the regional executives.