SC, US economy and housing industry to undergo readjustment in 2023, economist says

The year ahead will be one of adjustment for the economy and the real estate industry – and may include a slight recession.

That was written by research economist Joey Von Nessen with the University of South Carolina.

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Von Nessen said supply constraints brought on by the COVID-19 pandemic and the influx of $6 billion in government stimulus aid had conspired to drive inflation to 40-year highs as consumers spent freely on a limited amount of goods over the past two years.

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That led the Federal Reserve to raise interest rates six times this year to cool spending.

Joey Von Nessen

Research economist Joey Von Nessen of the University of South Carolina believes the recession in 2023 will be smaller if there is a slowdown in economic activity brought about by the Federal Reserve’s pace of interest rate hikes to cool the overheated economy. File/Grace Beahm Alford/Staff

“It raises the cost of borrowing, affecting consumers across the board for mortgages, cars, appliances and credit cards,” Von Nessen said.

“Most economists believe there is a more than 50 percent chance we will see a recession sometime in 2023,” he said. “We expect a recession if we see a recession next year.”

Von Nessen indicated that a reduction in economic activity is expected, but it should not be something like 2008, when the housing market collapsed and caused a deep, wide decline.

Fourteen years ago, the poverty index, a measure of consumer confidence, was the result of high unemployment and low inflation. This year, not so.

Because inflation is high and unemployment is low, Von Nessen said, “The Federal Reserve is throwing cold water on the red economy. … We’re going from a caffeine high to a normal state.”

He equated the high rate of consumer spending with a racing car.

In January, people spend in the wild, traveling at 100 mph. In November, the rate dropped to 85 mph, which means there’s still a ways to go before reaching the magic 55 mph, he said.

Economic outlook: A slowdown is predicted but Charleston could feel the full impact

That is likely to trigger another interest rate hike before the end of the year. The Fed’s last meeting of 2022 is set for Dec. 13-14.

Along with high demand for goods is limited by a strong labor market. In South Carolina, employment is 2 percent above its pre-pandemic peak, meaning many consumers have more money to spend, further contributing to inflation.

After the 2008 crash, it took six years for the state’s economy to recover from job losses. After the outbreak of the coronavirus when unemployment rose by 11.6 percent in April 2020, it took less than two years to reach pre-pandemic levels.

In September, the unemployment rate fell to 3.2 percent across the Palmetto State, not far from the record 2.4 percent unemployment rate in September 2019.

Unemployment in South Carolina under 4 percent is very unusual, Von Nessen said. “This is a strong labor market.”

By raising interest rates, the Fed believes that aggregate spending will fall, resulting in lower demand for goods and fewer jobs to bring the economy back into equilibrium.

Imports of goods from the US are expected to decline as retailers come to store the holidays early

“More and more employers are putting ‘Help Wanted’ signs out their windows,” Von Nessen said. “Job openings have turned around because of rising interest rates.”

He also noted that household inventory remains high but a pullback has begun, indicating what is believed to be the beginning of lower demand for consumer goods and a pivot to services instead, which should result in downward price pressure on limited supplies.

The high cost of borrowing is already affecting the housing market as mortgage interest rates have doubled since this time last year and home purchases have fallen sharply, falling to pre-pandemic levels from a severe pace during the health crisis.

The housing market, still far short of the number of homes needed to keep up with supply and demand due to low construction over the past decade, is now facing strong headwinds.

Higher borrowing costs will reduce the number of buyers while those locked in with low interest rates may not want to sell because buying another home may be too expensive now.

Von Nessen called the pace of the housing boom over the past two years an “unsustainable bubble.”

“We are returning to stable activity levels,” he said. “It’s close to market equilibrium.”

Even with low inventory and high prices, Will Jenkinson with Carolina One New Homes said he believes the Charleston area housing market will remain healthy. He pointed to the region’s strong job market and the attraction of newcomers as key drivers.

Charleston home sales fall 32% in October amid rising mortgage costs, high inflation

“We have a lot of infrastructure,” he said.

In terms of economic reform, Von Nessen noted that there may be a race between lower inflation and the amount of money in people’s checking accounts.

Households can lose excess savings if inflation remains high as consumers have no extra money to spend. Inflation can fall faster than people’s purchasing power.

“The winner,” Von Nessen said, “may end up seeing a ‘soft landing'” the Fed is trying to stick to.

“I still have a big impact on the long-term growth of the South Carolina economy,” he said. “Demand will continue to be very strong, but there could be chaos ahead.”

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