As countries continue to emerge from the health and financial crisis caused by the global COVID-19 pandemic, the U.S. economy is a top-of-mind topic. Fortunately, Regions has resident professionals on hand to work with company leadership, as well as bankers and teams across the bank, to provide information about economic conditions throughout our footprint, the country and the world.
Chief Economist Richard Moody and Senior Economist Greg McAtee, part of the Treasury group in Finance, deliver critical data and insights that help inform strategic decisions. As expected, they’re extremely busy and in high demand these days, but Richard took a few minutes to answer some questions about what he’s seeing in the pandemic recovery.
First, tell us about the work you and your team do and who primarily you work with in the bank?
The Economics Division’s role is to be a resource to senior management, associates in the various lines of business, and Regions’ clients. We provide data, analysis and forecasts to help these stakeholders interpret constantly evolving economic conditions, map out the most likely path for the economy, and identify and understand the potential risks to the economic outlook. We also maintain a presence in print and broadcast media and provide a regular flow of written commentary and analysis.
What specific activities does your team participate in and how does your involvement impact business decisions and strategy?
An important function includes designing alternative economic scenarios and running them through our forecasting models on national, state and metro area levels. These are used in processes such as internal strategic planning and regulatory filings. This has always been an important element of our work, but it took on added importance during the pandemic. At the depths of the pandemic, we were able to design and run a number of alternative scenarios that helped business groups and senior management assess the potential implications of different economic outcomes during those highly uncertain times.
The economy is opening up and pandemic restrictions are being lifted. Recovery from the recession seems to be moving fast but with some segments of the economy faring better than others. What positive signs are you seeing?
The policy response to the pandemic was quick in coming and unprecedented in scope. Considerable financial support for households has left the level of personal saving well above pre-pandemic levels, and the unexpected strength of house prices and equities has contributed to a significant increase in household net worth.
Business investment has been notably strong over the past several quarters, and residential construction and sales have been stronger than any of us would have dared to imagine at the onset of the pandemic.
Some households continue to face challenges related to their health and/or financial situation, and not all small businesses survived the pandemic. But on the whole, the aggressive response to the pandemic has left household finances in a much better place than if the relief had not been available.
What are the challenges in this recovery?
While the demand side of the economy is recovering at a robust rate, the supply side simply has not been able to keep pace. Global supply chains and transportation networks were effectively shut down at the onset of the pandemic, and the uneven pace of recovery and uneven pace of progress against the COVID-19 virus internationally pose ongoing challenges. In short, production levels are lower and delivery times are longer at a time when we are seeing a vigorous rebound in demand, and U.S. firms are being impacted. At the same time, labor shortages have held down the pace of recovery in nonfarm employment while pushing wages much higher.
One consequence of the demand/supply imbalance is that inflation has accelerated. According to the Consumer Price Index, inflation hit 5.0 percent in May. While we do not expect inflation to remain this high, we do think it could remain well above the Federal Reserve’s 2.0 percent target rate for some time, at least until global supply chain/logistics bottlenecks begin to ease and growth in labor costs begins to moderate.
Speaking of rapidly rising prices, what’s up with housing? Other than prices, that is.
Housing is another example of the supply side not being able to keep pace with the demand side. Keep in mind that even prior to the pandemic the housing market was chronically undersupplied, which was supporting faster growth in house prices than would otherwise have been the case.
With mortgage interest rates falling to record lows during the pandemic and more people wanting to move away from crowded urban cores, the demand for housing increased markedly, further exacerbating the existing supply/demand imbalance.
One consequence is that we’re seeing double-digit rates of house price appreciation, which seems to trigger comparisons to housing market conditions leading up to the Great Financial Crisis (GFC). While that is understandable, given how that episode ended, other than double-digit house price appreciation there are no parallels between now and then. Relative to the pre-GFC period, the credit quality of mortgage borrowers is much higher, equity positions are much stronger, and, as I mentioned, the market is badly undersupplied as opposed to being significantly oversupplied leading up to the GFC. So, no, the housing market is not a bubble, and we expect that over the second half of this year we’ll see some relief on the supply side while demand eases, which should result in a meaningful deceleration in the rate of house price appreciation.