01 May Economic Outlook
Where are we heading post pandemic? | by Chip Cooke
Let’s start off by noting I am not an economist by trade. Sure, I took the requisite classes in business school back in the late 1990s, but my knowledge, and what I am conveying to you, comes from independent sources far more versed than myself in this particular area. With that being said, I love numbers and trends. So why don’t we dive into both?
Part of my job is to understand the financial landscape of both the private and public sectors. What I have often found is that the government financial model generally lags the private sector by a number of years. As trends are absorbed in the private free market in one period the federal, state, and local governments may feel the pains and gains at some point in the near future. For conversation’s sake, let’s assume that lag occurs over a three-year period.
I’ll keep the numbers limited to a few key economic indicators that I believe to be relevant in influencing a government budget in the future. For this exercise, we’ll stick to inflation rates, mortgage interest rates, real estate appreciation, and averages around US household debt. As government revenues and services offered all may be affected by the above, I think this is a good place for us to start.
Anyone who reads the news or visits a grocery store on a regular basis has seen an increase in the cost of normal household items. Inflation, or as Merriam-Webster would define it, “A continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services.” On a trailing three-year basis, US inflation has risen an average of 6.5%. The last time we saw a higher inflation rate was in 1981 when it approached 8.92%. In 1979 and 1980 the rates were 13.3% and 12.5% respectively. So, what does that mean for government budgets? Goods and services become more expensive when procured and overall drain on what the state and local government can provide to its citizens. Likewise, the general taxpaying public has fewer disposable dollars for everyday purchases. As the sales tax is usually the number one source of revenue for any given state, you can see how this troubling trend will affect downstream revenues in future periods. I’d say we can chalk this one up as a “negative.”
Now, let’s look at the housing market and the associated values that eventually make up a bulk of local government revenues. During the pandemic interest rates on mortgages remained at post 2010 levels. An average 30-year fixed mortgage could still be obtained at 3.25%, when coupled with low inflation and generally higher wages after the 2008 collapse, creating a torrid housing market. Homes rarely lasted on the market more than a few hours as homeowners and specialized Real Estate Invest Trusts (REITs) took advantage of the buying opportunities all over the nation. Fast forward to 2023 and we are seeing rates now hovering in the 6.5% to 7% range, making those identical investments far less appealing. As long-range indicators see an overall correction of 15% in home prices through the end of the year, housing is returning to more normal appreciation levels. One saving grace may come in the timing of government revaluation cycles in certain parts of the country remaining appealing to buyers. Just recently, our home county of Mecklenburg completed its four-year revaluation with residential home values averaging a solid increase of 59%. Similar revals around the country should set rates for at least the next two to four years. The outlook on the housing market should be considered “neutral.”
Lastly, after inflation and wage concerns, personal debt needs to be addressed to understand gross receipts based revenues coming into state and local governments. As of 2023, the average US household debt is around $165,000 with an average increase of 6% per individual. Household bills now represent 42% of take-home salaries and 60% of American families live from paycheck-to-paycheck. If we think about this scenario from a sales tax perspective, I would have to think families will dedicate their individual earnings to housing, groceries, fuel, and variable interest rate debt first, and in that order. As these items typically carry the lowest sales tax rates, fewer taxes associated with consumer goods, vehicles, vacations, and entertainment will be considered by the average American. Unfortunately, I would have to think spending and gross receipts revenues will trend lower over the next few years.
I always want to end on a positive note if possible. I still believe deeply in the resilience and fortitude of the American individual. Do I think things will be lean for a few years? Yes. Do I think government budgets will be affected and have downstream issues for services provided? Yes, I do. But I also know that we have been through this before and always seem to come out stronger on the other side. If history repeats itself, we’ll be just fine.