Transcript

Charles Gerena: I'm Charles Gerena, online editor for the Research Department at the Federal Reserve Bank of Richmond.

Thank you for listening to "Speaking of the Economy." You can find past episodes on the Richmond Fed's website or subscribe on Apple Podcasts.

A lot has happened in the economy in 2021, all under the cloud of a global pandemic. In today's episode, Andy Bauer, Matt Martin and Renee Haltom reflect on the past year, sharing what they have learned from their contacts about the national and regional economies that they follow. The Richmond Fed's three regional executives spoke at an online roundtable at the Community Bankers Forum on Nov. 9, 2021. The roundtable was moderated by Kartik Athreya, executive vice president and director of research. Their remarks have been edited for length and clarity.

Kartik Athreya: I want to pivot to getting at what you all are seeing out there right now so that our audience can get a sense of the world as you see it through the aggregation of your meetings.

Maybe I can start with Andy, since I haven't picked on you or called on you yet, to just say about, you know, what is it that you're seeing front and center. Then we can go to Matt and Renee after that.

Andy Bauer: Thanks, Kartik, and thanks for everybody for joining today.

When we go out and we talk to businesses and bankers, we're always looking for key themes. It's very interesting how those themes change over time. For some time, they've kind of solidified around three main issues.

One of the ones that you're hearing a lot, and I think it's become more of an issue as the year has gone on, is cost increases and inflation more broadly. We hear that and we see it in responses to our surveys, conversations with businesses [and] with bankers. We're hearing a lot about sharp increases in costs for key inputs. Businesses are saying that demand is very strong. There's a lot of disruptions to the supply chain, which is one of the other key themes, as well as an increase in uncertainty about a firm's ability to source inputs in a timely manner.

As a result of these factors, we're seeing some large and persistent increases in commodity and other input prices. What does that mean for prices that consumers face for goods and services? In some cases, due to these higher input prices and other costs — transportation costs, we hear a lot about — they've responded by raising prices for goods and services to consumers.

Athreya: Thanks, Andy.

I think the one thing that I wanted to just add on to what Andy was saying is that inflation is something that is top of mind, obviously. We're seeing that in things like supply chains.

There's good reason to think of the current environment as really reflecting a heavy rotation towards goods consumption. Again, this is something related to the pandemic, in the sense that services haven't all come back yet. Air travel and things like that haven't come back. Those of you who have exposure to travel and hospitality will understand this very well.

There's a lot of correction — correction is maybe not exactly the right word – but there's likely to be a very natural rotation back towards services later on that will make the kind of supply chain constraints that we're witnessing right now, hopefully, less severe. The time that that takes we don't quite know yet. That brings us right back to square one, which is hearing from you and others as to how the conditions are changing.

With that as background, Matt, what are you hearing lately on the economy?

Matt Martin: I was going to comment on the supply chain issue. I'm guessing our audience is probably familiar with all the dimensions of this.

Chips for cars and other applications is probably the headline, one that we see mentioned the most, but it's really become a wide-ranging issue across a lot of different inputs to production. If you talk to anybody that's building commercial real estate, they'll note that, right now, the shortages seem to be random. You don't know week to week what's going to be short, and that's really disruptive. I heard that one of the forklift manufacturers, they ran out of bolts, which seems like a very, very basic item, but it caused a stoppage in production.

I think where we are now, though, is very different from what we were hearing just a few months ago. Go back to the spring, maybe April-May timeframe. When we talked to businesses then, if they had any supply shortages — and there were enough out there — they had an expected date it would be resolved, and that was most likely going to be this fall. Obviously, that didn't happen in most cases.

I think the general sentiment now from businesses is we don't know exactly when this will be resolved, which suggests that resolution is far enough into the future that they can't foresee it. If you ask them to put a date on it, they'll probably say something like late 2022, maybe even later. I think that change over just a four- or five-month period has been pretty significant. Based on latest conversations, it does not seem to be abating at all at this point.

Athreya: Thanks, Matt.

Renee, maybe I'll ask you to comment a little bit about the labor side of things. We haven't talked much about that yet, and that's been a really wild feature of recent data.

Renee Haltom: Yeah, absolutely. And I would even say that the worker shortages are probably the biggest complaint of all that I hear from businesses. It's pretty significant. I know the bankers on the call today are familiar with that too as business leaders.

Of course, it's caused by all the reasons you hear about that are pretty clear to us all at this point. There's demands from childcare or eldercare. There's people still afraid of getting sick from the virus and holding back from for workforce for that reason. And then, of course, maybe the government benefits on the margin [are] making it easier for people to make different decisions about work versus leisure.

I'll share a few things that I think are newer trends that I'm hearing or go a bit beneath the headlines on worker shortages. One, you do hear a sense from a lot of businesses that the supply chain disruptions that Matt talked about are really labor shortages at the core, not everywhere but in a lot of cases. Figuring out this labor piece — how do we get people back into the workforce — is really critical to the overall economy.

The second thing that I'm hearing is businesses talking more about how they feel their workforce, the people that are no longer with them. People just seem to have taken a step back and reassessing life. Given that we've been through a global pandemic, maybe some people are thinking, "I don't know if I want to work this hard. Maybe I don't need to be a two-income family anymore. Or maybe I don't want to be in this sector. Maybe I want to be in a different sector." You're seeing some of that in the labor market churn data that we follow.

Finally, there has been an emerging sense — especially in the last couple of months — that we may be here for longer than expected in terms of the worker shortages. A lot of people expected workers to come back after the extended unemployment benefits ended and that didn't dramatically happen. We expected workers to come back when the school year started and that didn't really dramatically shift. So you're seeing this sense from employers saying, "Huh, maybe this isn't going to be a quick fix." That has felt like an emerging realization in the last couple of months.

I think a really interesting question going forward is going to be, number one, when do the workers really start to come back in high numbers? And then, two, to the extent that they don't come back quickly, how do businesses start thinking differently about the investments that they make? How do they think about investing in workforce development and building their own workforce or, instead, maybe automation on the other side of the spectrum? I think those are going to be some key things to watch in the next several months.

Athreya: Renee, thanks for laying that out.

Having heard about the description of the broader features of the economy, I want to ask our executives to say a little bit about their areas of expertise, their geographic areas of expertise. I can start with Matt to talk a little bit about what you've seen in the area in which you operate. And then we'd go to Andy after that. So go ahead, man.

Martin: Covering both North Carolina and South Carolina, there's been a significant difference in how these states have opened up in relation to COVID, with South Carolina being obviously an early mover. One of the key outcomes of that was, particularly as early as last summer, just watching what happened on the coast in particular. It was sort of open season. I vacation down that way myself. In June 2020, it was as if COVID had not happened. I think that made sense to some degree. People were not flying to destinations. They were staying put and [going to the beach] is an outdoor activity. The worker shortage issues that Renee talked about started to crop up in the hospitality and leisure industry last summer.

The other feature of the Carolinas is we are fairly manufacturing heavy. And so the cycles in COVID that have been associated with that have been pretty pronounced. If I think about where we are now, despite the chip shortage, activity and production — particularly for durable goods — and employment in those sectors seems to be pretty robust right now in the Carolinas. That might be helping to buoy those two states overall, which are doing fairly well relative to the U.S. economy.

Athreya: That's helpful.

Andy, any thoughts that you have?

Bauer: Yeah, there was some similar things that took place in West Virginia and parts of Maryland as well.

West Virginia is known for outdoor recreation. There [are] outdoor adventure companies — whitewater rafting, ATV trails. Those businesses that are part of those activities reported really good years ...

West Virginia also didn't really have much of a surge until the winter of 2020. COVID wasn't as prevalent in other areas of our district. Overall, the impact was muted. As a result, you still have those same impacted industries — restaurants, other in-person venues — but it was much more muted than in other parts.

In Maryland, [it was] the same thing. You had the Eastern Shore. The housing activity on the Eastern Shore was just tremendous from people looking for a vacation rental. People decided since schools weren't going to be in session to go ahead and move to the Eastern Shore. The housing market just took off in that area as well as in western Maryland where we've got a lot of recreation as well.

The outdoor recreation and tourist spots did very well in all those locations. The in-person, service sector activities — restaurants, entertainment — just like everywhere else in the country were hit particularly hard. In Maryland and District of Columbia, they're much more conservative with their health policy guidelines. I would say the restrictions are stronger and were in place for longer, so it impacted these sectors more so than other parts of the [Fifth] District.

Athreya: One thing I wanted to quickly allow for — I think we have the time. In all the time that you guys have been talking to so many different stakeholders in the economy, bankers and non-bankers, surely there were some memorable things that happened during COVID. Matt, maybe I'll turn it over to you to report on any anything that stuck out in your mind over the last year and a half or so.

Martin: Through this period — which has been unique, unprecedented, whatever words you want to throw at it — it's been fascinating to sit in these conversations and hear CEOs and other leaders talking with us in real time about their thinking, and being willing to bounce off us and for us to do the same on what may be happening on the ground. I think that shows some confidence that we're a good confidential thought partner and will give an honest read back to them.

Those expectations obviously have been all over the place. As we mentioned earlier, we thought this was going to be a two-week thing at first. We talked to CEOs then and they expected we'd skate through this, and then that got stretched out. Maybe our memories are short, but this time last year was pretty dire, right? Cases were up. We didn't have a vaccine yet. Everybody was expecting a pretty dismal start to 2021. By the time we got to January, that had flipped itself on its head.

Athreya: Thanks.

Andy, anything stand out in your mind in conversations you've had?

Bauer: When I think about that question, the first thing that really stands out is, going back to March, there was just a lot of really rough phone calls. We've just shut down the economy. What does that mean for your business?

[There was] a family business over 100 years old. At this point, with everything shut down, he's looking at the landscape, he doesn't think the business is going to make it. Or, at least, he doesn't see a path forward. And you can hear it in his voice. It's just a tough phone call.

But it was so helpful for us to have these kinds of phone calls because we need to know who's being impacted. Given where he is, what decisions is he making with respect to labor? What is he seeing with his order book? As those programs that ultimately saved his business got rolled out — PPP and other loan programs — how does that shape his expectations going forward on what he's going to do?

On the flip side, when you talk to him later and hear how things are going better, those phone calls are equally memorable.

More recently, some of the supply chain stories are just crazy, like Matt with the bolts. I've talked to somebody that just can't find outlets, so you've got a homebuilder who has his people going to Lowe's and other hardware stores throughout the area trying to find product.

What's really been remarkable to me also is the amount of people that are either delivering or receiving orders on allocation. They're spending a lot of the day calling up their customers saying, "I'm sorry, I just can't fill your order now. And I don't know when I'll be able to."

This has been such an extraordinary period for the economy. Being able to talk to people who were trying to navigate through it not only is it just memorable and interesting, it's hugely helpful for us to understand the landscape.