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Are we coming out of the COVID-19 Tunnel? The numbers a looking up, but we warn, one month doesn't make a trend. The team covers Inflation, CPI, Ukraine, Supply Chain and Housing Bubbles.
Additional Economic Insights beyond the Newsletter.
James McCafferty: Welcome to another riveting episode of after office hours, the puget sound economic forecaster today is April 13 2022. It continues to be an exciting time to be an economist, we are now a month out from the publication of our march forecast and there are a lot of things to talk through from getting from that publication to stay. Before diving into current economic thoughts let's see who's here today, my name is James McCafferty and I serve as the general manager and publisher for the newsletter. But it's a team that makes that newsletter happen every quarter for outside partners that are centers on research, though.
James McCafferty: Dr Hart Hodges is an economics, Professor here at Western Washington university heart writes the regional forecast article and will occasionally contribute other articles, based on the topics. Heart and I both co-direct the Center for economic and business, research at Western.
James McCafferty: Bethany King is our research economist and works with the switches and dials and many of our models, while providing a wide array of insights into the forecast. Bethany writes, many of the articles each quarter, as well as the monthly updates for our digital subscribers.
James McCafferty: Audrey Barber is our center's graduate assistant as she nears completion of her MBA program. She's been with us for several years and has contributed many articles to the forecaster as well as playing a key role in several of our research projects.
James McCafferty: let's start today was not obvious place the news has been filled the forecast and suggestions of weather will see a renewed surge a covid 19. Bethany I have two questions on this front first do we expect another big wave or does this potentially play out differently, and second, what does this mean from a forecast perspective.
Bethany King: Well, so, Europe is currently going through a second omicron wave now, the US has not necessarily expected to go through a second wave, but that still is possible. Now one thing we have to think about is that our case counts are increasingly unreliable, because many states... we're lucky here in Washington, where we still have free testing, but, most people in the US are not getting free testing so. Those case counts are going to get increasingly unreliable as as we continue forward but either way we don't expect more huge impact on the economy. At least in the US. A lot of states are sort of done with coveid and done restricting things but that doesn't mean that there aren't still impacts. We can definitely see in our quarter for data and starting to see or quarter one data, the impacts that the all Omicron wave has had. So we're, not forgetting about covid, it's still having impacts, but we're not going to expect another huge wave in the US and we're not going to expect another another huge impact.
Bethany King: Now, abroad, for example in China there's still massive impacts from Covid, this is still huge lockdowns still huge supply chain disruptions do to covid, so that is still happening that is still on our radar. Now, how this impacts forecasting so with any time series forecast the future the past matters for the future forecast so. The past data that we have where say that delta variant in the summer brought down many of our economic variables, that is built into the forecast now. So all of those impacts from COVID because COVID isn't a variable in our model they're still going to have impacts, as we move forward so we're going to need to keep that in mind as we move into the future, that our forecast is considering those past impacts without a real variable to explain them.
James McCafferty: That sounds really promising Bethany and you know I heard in the news this last week about Pittsburgh, going back to indoor mass mandates because of rising cases we've seen studies. Looking at sewer data, which has been become more reliable as a tell than the testing data, as you mentioned, because people aren't taking those tests, the sewer data has shown increases. With the latest variance so there's a lot to we keep coming back to this covid discussion in our office, because it matters, because how people feel about covid matters and speaking of how people feel Hart the obvious place to start here is inflation and the risk of recession. Inflation seems to just be going and going and going we just saw some new numbers this week right it just kind of keeps going i'm reading more headlines that say, maybe we have a growing risk recession or others keep talking about a soft landing. What are you thoughts.
Hart Hodges: yeah but but I get to ask Bethany a question first because, she said yeah we're not not thinking about ongoing problems with covid. Didn't we say that last summer and last fall and...
Bethany King: Yeah I have, I have a slide show where I said, this is probably the last big wave during Delta, so that I went back and checked in to updatet and I was like oops. So we keep saying there's not they're not expecting another big wave in the US, but we keep expecting things...
Hart Hodges: Okay hello, I hope, you're right, this time. James you were asking about inflation and recessions. You sound like you were describing inflation as the energizer bunny is it just going to keep going and going and going and... I'm going to say something between I hope not, and I don't think so. You know inside a little bit like drone Pal right that inflation is transitory and it's been funny if you look at the graphs of what they predicted for inflation a year and a half ago for today. And how many times they've had to revise up their forecasts for inflation and they've been low every time, even though they've been constantly revising up the forecast. So inflation has been running just hotter and hotter and it's based a little bit on what Bethany was just saying right, because with covid people switched to buying stuff you're not going out to eat you're not going to movies you're not and some of the service sector spending travel and leisure fell off, but people had money from all the stimulus money so they were they were buying things, shoes, men's apparel went NUTS, used cars are the poster child. That created a lot of issues with supply chain, not the least of which was clogged ports.
Hart Hodges: You know, but if I order something because i've got customers that want to buy it and they're willing to pay up, because they have the cash you've got some some curious inflation, you've got people buying and stores can't get what they want to people are bidding up the price of what is available that's part of the inflation story. But James, you asked how long is it going to last, what do we think going forward what happens when these stores, who have ordered as much stuff as they can order and maybe too much, because Bethany comes in and orders something so I placed an order it doesn't come in, I place another order Audrey comes in and says hey I want to buy something I place an order nothing comes in place another order at some point I'm going to have too much stuff. My inventories are going to be too high and we actually saw last last winter right inventory starting to build for certain items. So I guess i'm describing a bit of a boomerang effect in the supply side, and you might see some actual price competition deflationary pressures in some areas and that's what the Fed has been thinking, they will see.
James McCafferty: You know Hart, you and I have talked about and we've shared this data in the previous editions of the forecaster about how much retail square footage there is in the United States in comparison to other countries and it's it's phenomenally more. And we so we've talked about there, there may be every alignment within the retail space and, within that all lump restaurants in and those kinds of places as well. As consumer opinion changes on what they want to buy how they want to buy it, but also the cost models change because there's wages rise some business models have to shift. Audrey you've been working a lot in the retail space and and looking at consumer type information, what can you add into this discussion about inflation.
Audrey Barber: Inflation is currently at a 40 year high at 8.5% through march of 2020 but the three year long term consumer expectations for inflation actually just fell to 3.7%, however, when your expectations are still high for inflation and there's really no question as to why. As supply chain disruptions haven't quite been untangled and the war in Ukraine has risen, the cost of a lot of goods.
Hart Hodges: Audrey it is that untangling is exactly what the Fed has been looking at and last year they felt the untangling was going to happen fairly quickly, so they didn't need to act quickly. They knew they wanted to raise rates just a little bit to try to move interest rates back up to sort of normal neutral, you can pick your word but they didn't think they were going to have an inflation mess on their hands, because that that untangling was going to happen relatively quickly and in a relatively orderly fashion it hasn't and i'm sitting here saying it might I think it will. I might be wrong, so we get is is there going to be another wave of covid. You know it's all tied together in that if there's no not another wave of covid, if consumers can get back to spending money on services and less on goods, the demand comes down the untangling happens and inflation is not as big of a problem going forward. Some people think we actually peaked in March, we're hopeful. Now we've had some wages move up wholesale prices have moved up inflation is not going away as a problem immediately it just should fade as a big challenge. And it has made people talk about recessions and you mentioned that James.
Hart Hodges: You know that's hard to imagine recession in 22 given the strength of the Labor market, given that there's still money to be spent, and so on, but we've got some some challenges some from Ukraine you mentioned readjustments on the retail side a possibly more expensive format right. that are going to pose a number of challenges that that could all collide in 2023.
James McCafferty: You know there's an old joke about 3 handed economist, so I feel pretty comfortable dropping this joke here and saying we have to talk about Ukraine right we have three things that we want to talk about on the front end of this today, and so you bring up Ukraine and the disruptions been huge the global market. Can you talk a little more, about how a war in Ukraine impacts our region both short and long term.
Hart Hodges: Our region, puget sound region, some directly. I'm going to be vague because I don't know which businesses have direct ties, because they export to import from Russia, Ukraine. You can think oil. The West Coast does where has historically gotten oil a little bit of oil from from Russia right is the West Coast oil markets gasoline markets are not connected by pipeline to the Midwest and east. And so yeah right there's some Oil prices but not a huge effect it's partly it's sentiment, it's concern, disruption in other supply chains that are going to take some time to sort out, foodstuffs, grains, specific commodities, nickel, palladium, where where there were measurable amount comes from the parts of Russia and Ukraine. And you're going to have to source them from Canada, Brazil, Australia. That's going to take time, same sort of problems we've had that have been inflationary in the past year so right.
James McCafferty: You're making a really good point, though, that I think a lot gets lost, sometimes in that in the bumper sticker conversations about how we're going to, we're going to source more things locally or within our own country and we're going to do we're going to shorten supply chains. Globalization is deflationary and it's, in economic terms, and so, as we do shorten those supply chains and we and we change how things are sourced that's kind of just add more fire to the inflation pile right?
Hart Hodges: yeah I mean the disruptions and the reworking of supply chain does does add some fire to the inflation stories, I think. If everything else was held constant you'd say that the changes you just described you're going to be inflationary. But I think you've got a number of changes with a number of goods right the core inflation measured by the CPI was not that bad in March right you had the headline CPI with with energy and food was what was was really high and I guess what i'm saying is there are some changes under way for. Used car prices coming down, chips being more available, coming down, so there's some things on the inflation side that are coming down and you've got these other fires that you're just describing. I'm thinking on balance inflation subsides of bit, by summer. We're still nowhere near the 2% that the Fed wants, but it does come down, maybe. You're adding in another storyline because you also mentioned the retail space right there there's some things going on culturally, not just the United States, but less globalization less openness that's all going to be a bit more expensive. Then on the retail side changing retail models, less square footage in stores, different type of ordering, also could be a little bit more expensive but that's going to take a long time that's that's not measured in months. It's actually a story on NPR this morning right that healthcare is taking over some dead malls right here you're you're seeing some adjustments in terms of retail square footage and what's happening to some of some of that space, whether it's going to office, affordable housing, but healthcare as well, you're seeing those changes around us all the time we just don't talk about it very much they're they're happening slowly, so they don't make the news.
James McCafferty: it's the scale and the speed I think that's got most people unsettled right and I mean we are humans and humans don't like change and so we've got a lot of structural changes happening very quickly. All being caused by naturally occurring phenomenon but it's happening at a faster pace. That brings me to thinking about real estate and construction. And, of course, when we talk about real estate construction it gets complicated because we're talking about residential and we're talking about commercial so let's start with residential for a minute. Because i've seen news out talking about how we're forming a bubble and housing Bethany what are your thoughts?
Bethany King: Well, I feel like we've talked about there being a housing bubble in the past, and I think a lot of people, a lot of people remember 2008 and a lot of people are scared of there being a housing bubble. I don't really see a big nationwide 2008 housing bubble happening again. Now there might be some pockets of different areas where we're seeing real estate bubbles that's the sort of bubble that typically happens, and we can certainly be seeing that in certain areas like. What i'm thinking is Boise places that just absolutely exploded over over the pandemic with these houses going for insane values and now they're starting to fall back down so we might be seeing bubbles in certain areas, but are we seeing a huge nationwide bubble I think probably not. More in residential markets we're actually seeing a little bit of cooling off. But that's also pretty common for the winter period so we're seeing more like 3% growth rates, instead of over 5% house price growth rates. so a little bit of cooling off whether or not that continues into the summer we'll see we don't expect house prices to come crashing down or anything like that, but we'll see if this like winter slowdown continues.
Bethany King: we're still seeing supply of houses being extremely low, but we're mostly keeping an eye on those mortgage rates, because, as those start to creep up, we might be seeing people offering less we won't be seeing those crazy 20 K over asking anymore, now that loans are a little bit more expensive so that's, the main thing we're keeping an eye on, but are we seeing a bubble Probably not.
James McCafferty: there's some fascinating stuff yesterday shoreline the city of shoreline came out and said they're there they're looking at some proposals to greet densify residential zoning inside the city of shoreline so that's still still a proposal as of today, so we don't know where that's going to go but we've seen the same kinds of proposals other places that are looking at basically, abolishing R1 zoning which is your single family home and allowing that the the town homes and apartment buildings to built pretty much anywhere to allow that density, so it's really fun to watch right as as construction costs and people's ability to pay for housing change those kinds of solutions come important.
Bethany King: Exactly and that's sort of what we're seeing now actually is we've had this housing boom happening for the past year. But construction was just not keeping up and so now we're actually starting to see that construction pick up again, so our housing or housing starts and our housing permits are actually really picking up now. Now that we have less supply constraints and things like that we're actually seeing those that home construction matching that housing boom.
James McCafferty: So this morning Bethany I saw some data coming out about the number of commercial leases that are up for renewal in the next few years it's pretty pretty large amount of square footage that's coming up for renewal what's your thoughts around commercial real estate.
Bethany King: So what we're seeing is that the return to in person commercial real estate that sort of stopped. We saw vacancies rise rapidly at the start of the pandemic, of course, and then we saw them fall back down around this summer. Summer 2021 and they haven't really fallen more sense than, especially when we're looking in Seattle commercial vacancy rates are hovering at about 10% and they have been for the past year, so we're gonna have we're gonna have people start looking at changing that commercial real estate into residential real estate more addressing some of that. That constraint in the housing market and residential housing and in using that baking commercial space to address that problem and make those make those profits there.
James McCafferty: sounds it sounds like that will be a space really to watch it or see how this kind of morphs out people modify the behaviors. We spent some time recently in some public parks that we've done addressing employment people have a lot of questions around employment. We've talked about full employment and low unemployment rates so right now that the data says that we are above full employment, so we have more people working and we probably should. which of course is inflationary just adding more back to our inflationary fire and and we've had this really low in Employment rates as well, we have low work workforce participation rate that's slowly rising we've talked about wage pressures and Labor force participation. Hart, I'm curious for you with all of these different things that we talked about around employment what really stands out to you when thinking about employment and where we're headed in the next year or two.
Hart Hodges: James I don't know how to answer that question because I don't think there's any one thing that stands out. There is an article this morning that Washington state farreies is having a shortage they're having trouble finding workers to staff, the fairies in you know that says oh we're having a shortage or there this unprecedented problems. And it's not just one thing we've got folks that are not committing to jobs, because they want to know how many days they have to go to the office, where they can live we've got people that are staying home, taking care of people with covid or have covid. There's a small group of especially middle aged men that are a little bit older, who are slow to come back to the to the Labor force. In part, because they have money they may have been thinking about retiring early right you've got all of these factors, so I can't just say one thing stands out.
Hart Hodges: Maybe it's your comment, a few minutes ago about speed and scale right all of these things hitting at once and and all of them, causing a mix of problems, it makes it look like there's just a complete mess and the Labor market I don't think there is, I think the Labor markets functioning fine when you look at the various incentives that people have or the challenges that they've got. As we, as we look ahead I do think we have important conversations about lack of wage growth in certain sectors income inequality it's really going to be part of our discussion of unemployment for a while. How do employers look for work, excuse me, look for workers. How do they decided somebody qualified. I think the way it's been so easy for so many years for me to have a bad ad to try to hire somebody for $13 an hour and I find them! That's the surprising thing more than what's what's going on today, right? Because you're going to have to rethink. How do I attract somebody they've had they've had a couple of years to and some extra money to think about retraining, to think about what they want to do? There's actually some I think in the long run very positive disruption or churning in the Labor market it's just not fun to experience the churning, especially when you're the employer who can't find everyone right right away. I think we're going to see people coming out of retirement as covid fades. I'm still hoping Bethany is right, you have more people coming off of the sidelines, I think things smooth out in the Labor market, but I hope we get in the next year or 3-6 months. But I hope we keep talking about the important bigger picture things that were really accentuated with with a covid and the challenges over the past couple of years. Does that make sense?
James McCafferty: It does and it's such an interesting topic. Bethany i'm curious from your perspective right, so you talked about at generations hart, you talked about how different people have different different perceptions of of kind of the Labor market Bethany from your seat, both as an economist and as a as a person in the workforce, what do you see what stands out to you when you look at the employment data?
Bethany King: I think one of the most interesting things that i've seen is the number of people coming out of retirement. So early in the pandemic, when we were first talking about this great resignation, we saw this data on the percentage of people that were coming out of the workforce and they said permanently they said they were retired, and that was some 30% of them. I think that's the most interesting thing is that people were confident in leaving the workforce, they were confident in their ability to retire and now they're coming back out and part of that is due to inflation. Right having inflation be higher than usual now your retirement fund is worth less it doesn't go as far so now, people are coming out of retirement going back into the workforce so that's that's more my economists take, I guess, and then.
Bethany King: yeah going off of what hart said this this whole situation has I think really put the power in into the hands of the worker having that Labor shortage, it is a good thing for our economy, I think. Putting power more on the side of the worker normally what has happened is the employer has the power If I if I don't hire you I can hire someone else and for the worker it's if I don't get this job I can't pay my rent. Right, so now it being the opposite way we're able to talk about things like income and wages and income inequality and things like that and giving that worker a little bit more power, so I do, I agree with hart that this is sort of a good thing. More of that pressure upward pressure on wages at the bottom end.
James McCafferty: So Audrey as someone who's going to be entering the workforce in the next year right i'm assuming we can't figure out a way to just keep you forever, but as someone who is going to enter the workforce, what What stands out to you as you think about this, and as you think about your cohort of graduate students will cut what's your conversations in that look like regarding the Labor market.
Audrey Barber: Well, the thing that i'm find the most interesting and relatable is how many people are switching career paths after the start of the pandemic in 2020 and sort of the mismatch between the demand for certain jobs from the employer standpoint, and then the demand for certain careers from the employee standpoint. So what i've noticed in my cohort is a lot of discussion about self employment and people wanting to work for themselves and be their own bosses and I think that really connects to the bigger conversation of workers rights and the kind of jobs that we have and the demands from employers in terms of hours and how much people are getting paid.
Hart Hodges: I think how much people are getting paid matters! James knows, i'm fascinated by Doug the Pug. Just what's happening with your ability to make money with YouTube or on other platforms and Audrey you were saying that people want to work for themselves and set their own out. You know they're there are people that aren't looking for work, but it's, not because they resigned it's because they're doing quite well without a traditional job and you know, from a data perspective I would love to see how many people that really is, and what's going on. I don't have a good feel for it, I'm just like Doug, he makes a lot of money, I mean, especially for a pug.
James McCafferty: i'm not sure how to transition from Doug the Pug here Bethany, but we're gonna do our best here. Bethany we create monthly updates, which are available to our online subscribers and you put those together and when should be going up here fairly soon what Should I be looking forward to reading about.
Bethany King: So I do want to also remind everyone that we also have the real estate index, which also goes out on the 25th of this month, but we've got those two monthly updates every month on the 15th. So what we're actually looking at for those who have read the quarter for report, it was not looking too good but this month, things are looking up a little bit more so that's what we're looking forward to this month is our economic data is actually looking a little bit stronger now as you've come out of that Omicron crisis. Things are starting to look up a little bit more so so that's fantastic we've got some discussion about Boeing and things happening in Boeing, which is pretty exciting. But we want to keep in mind this, this is just one month of things looking up a little bit and one one month it's it's not a trend yet.
James McCafferty: Good that's a fair point and good reminder one month, does not make a trend. Well, this brings us to a close of this edition of after office hours with the puget sound economic forecaster. We do encourage you to follow us on social media to have a front row seat of reading over our shoulders on daily basis and to learn about other ways to connect with us. You can always reach us via our website that's the br ww.edu or by email at cvr@ww.edu with questions comments or if you're interested in having us come speak at your event. After office hours with the puget sound economic forecaster is a production of the Center for economic and business, research and Western Washington university. We really want to extend our thanks and appreciation to Jill Poon our producer with KDMC she does make us sound a lot better than we sound when we record this live. To learn more about the topics discussed today, please visit us at economic forecaster calm and subscribe to our quarterly news newsletter. Subscribe to after office hours with puget sound economic forecaster on Google podcasts spotify tune in transistor or wherever you happen to listen to podcasts. From all of us at Western Washington University, have a great day and be sure to do your part, to keep our region in the fast lane.