Economy performing better than perception, Fed official says at Hoover Economic Summit

There’s a lot of talk that the United States is barreling toward a recession, but the reality is that the economy is actually doing pretty good, an official with the Birmingham branch of the Federal Reserve Bank of Atlanta said at an economic summit at the Hoover Public Library today.

“I don’t know if there has ever been a bigger gap between sentiment and performance in terms of the economy right now,” said Anoop Mishra, a vice president and regional executive for the Federal Reserve in Birmingham.

The Federal Reserve is not forecasting a recession this year in terms of gross domestic product, Mishra said. Instead, it looks like there will be flat growth of an estimated .5% for the rest of this year, he said.

That’s not the 2-3% GDP growth that people like to see, but it’s also not a recession, Mishra said.

Unemployment is expected to rise a bit more from 3.4% to the mid-4% range, but the inflation rate is expected to drop from 5.5 or 6% to 3.5 or 4% by the end of the year, he said. Interest rates also likely won’t rise much more, he said.

The federal funds rate — the rate set by the Federal Reserve at which commercial banks borrow and lend their extra reserves to one another overnight — has risen quickly from 0% in March 2022 to 5% today but likely won’t go higher than 5.25% if it rises at all, Mishra said.

And with the general state of the economy, that little increase may not have much of an impact on other interest rates, he said.

The No. 1 responsibility of the Federal Reserve is to manage inflation because high inflation rates have dire consequences for the economy, Mishra said.

Consumer demand is what is holding the economy together right now, he said.

“We’ve seen consumers be pretty resilient, even in the face of a lot of pressures, namely inflation,” Mishra said.

While consumers today generally say they’re not happy with the economy right now, they have continued to spend money, he said. During the COVID-19 pandemic, Americans as a whole increased their savings, in part thanks to stimulus payments, he said.

But today, consumers are spending more than they’re bringing in, which is not sustainable, he said. “We’re effectively running on fumes right now.”

The question is how long consumers can sustain that spending, Mishra said.

About 70% of economic growth the past two years hasn’t been because of increased transactions, but instead increased prices for goods and services, he said, but “what we’re starting to see is a greater consumer sensitivity to increased prices.”

The good news for consumers is that the price of goods or the rate of increase in the price of goods, which escalated so much in recent years, already has started to come down, he said. What’s hitting consumers more in the pocketbook now is the cost of services, he said.

A wild card is the cost of oil and gasoline, over which the Federal Reserve has no control and which doesn’t seem to follow any kind of business cycle, Mishra said.

HOOVER TRENDS

Tina Bolt, the chief financial officer for the city of Hoover, said she has been surprised at how strong the economy in Hoover has continued to perform. While there was some slowdown from record years of revenues in 2021 and 2022 to the beginning of fiscal 2023, Christmas sales at the end of calendar 2022 came in strong, leaving the city government with a $33 million surplus at the end of February, Bolt said.

She’s still expecting a slowdown at some point, but revenues and consumer spending in Hoover have held up very well, she said.

These years of record revenue and belt-tightening on expenses have allowed the city government to strengthen its reserves to the point the city has six months’ worth of operating expenses in reserve, plus additional money in a budget stabilization fund, Bolt said.

The Hoover City Council in February voted to borrow $85 million for three big projects but was able to keep the city’s annual debt payments at almost the same level they were in 2015, Bolt said.

LABOR FORCE TRENDS

Mishra said more businesses these days seem concerned about the labor shortage than rising inflation. Employers are having a hard time finding qualified people who have the skills they need, he said.

Two personnel experts shared with today’s summit audience about the struggles that employers are facing.

Kristin Costanzo, the chief human resources executive for the Ascenscion/St. Vincent’s Health System, said hospitals and health care companies in recent years found themselves paying highly inflated wages for nurses and other staff due to shortages.

Ascension/St. Vincent’s finally decided it could no longer pay those rates and cut back on premiums being offered for travel and temporary workers, Costanzo said. It was scary because Ascension was the first in the Birmingham area to cut wages, but others have followed suit, providing some relief, she said.

Staying competitive with pay has become more difficult because younger workers today are more willing to talk to one another about how much money they make than older generations, Costanzo said.

Heather Brothers New, corporate director of communications for Lyons & Co. in Gadsden, which serves as an off-site human resources department for other companies, said one of the big problems is the aging of the workforce. Baby boomers are getting to that retirement age, and lower fertility rates and immigration rates have affected the number of people available to replace them, New said.

Mishra, in an interview after today’s summit, said a lot of people blame the COVID-19 pandemic for today’s labor shortages but said the workforce challenges of today would have happened with or without the pandemic.

The pandemic did, however, exacerbate the problem because many people who were near retirement when it hit decided to go ahead and retire rather than deal with all the changes and challenges that came with remote and hybrid work structures, Mishra said.

Companies today also are having to offer different types of incentives to attract and retain workers, Costanzo and New said.

Some workers want to work remotely, while others are more interested in having more time off or relaxed dress codes, New said. The desires of Millennials and Gen Z are different than those of baby boomers or Gen X, Costanzo said. The younger generation also seems more interested in having fun activities for themselves and coworkers to share, New said.

The 2023 Hoover Economic Summit was organized by the Hoover Area Chamber of Commerce.