The chief economist for PNC Bank said relief is coming to the stalled housing construction sector in Central Illinois and wage growth will start to make up for lost buying power caused by inflation.
By the end of the year, the Federal Reserve will have cut the interest rate a full point, and Gus Faucher said he expects another full point reduction by the middle of next year that could enliven the housing sector.
"This doesn't mean that we're going to see a huge rebound in the area, but it will provide some support. I would expect conditions in the industry to be significantly better a year from now than they are currently," said Faucher, who was in Bloomington for an economic briefing.
Faucher said prices for construction materials have come down after a huge pandemic-related spike. That helps, too. He said there's still a construction sector labor shortage, though.
The Bloomington-Normal and Peoria areas have had lower wage growth than average, but that is picking up to national averages, said Faucher.
“The area has seen some slower wage growth recently ... I do think that we will see a bit stronger wage growth,” he said. "We're seeing wages go up about 3.5% a year or so. Inflation is below 3%, so we are seeing real wages rising."
He acknowledged there is a lot of ground to make up from past inflation, noting prices are 20%-25% higher than they were before the pandemic.
“I do think that we will see workers gradually get ahead over the next couple of years,” said Faucher.
Faucher also sees potential improvement in the agriculture sector in Central Illinois, even though farmland sale prices were flat to down slightly in the northern two-thirds of the state during the first half of the year, and commodities prices have drifted even lower over the last month.
"I'm encouraged by the fact we're starting to see some stimulus measures from China so that should support global ag demand. That should be good news for commodity prices and good news for farm values," said Faucher.
U.S. farmers have lost some market share in China to South American producers and production in South American nations is rising. Yet, Faucheris optimistic the increased supply will not keep commodities prices low over the long term.
“We continue to see incomes rise throughout the world," he said. "That's bolstering demand for agricultural commodities, for proteins, and so I think that rising global economic growth will benefit the central Illinois economy. It's not going to be an even process. It's going to take some time. But I do think that rising global incomes are a general benefit to agriculture and to Central Illinois in particular.”
He said the region is closely tied to the global economy and trade is another area that should be monitored as a future indicator, while the country also should think about ways to strengthen trade ties and the global economy.
“There's been a bit of a decoupling from the United States and China from other nations and China. Some of that has come from China. Some of that has come from the US. Some of that has come from Europe. But I think over the longer run, the global economy benefits from stronger trade ties from between China and the United States and Western Europe. And I need to, we need to think about ways that we can rebuild trust there,” said Faucher.
Stronger global ties also result in winners and losers in the U.S., he acknowledged.
“We can enjoy benefits from trade as a society, in lower prices for some goods, and increased exports of some goods and services, but there are people who are hit by that. That has been a significant problem in Central Illinois, and we've seen the ramifications of that in our political system. We need to think about how we can make sure that everyone benefits from trade. I think closing ourselves off from trade does not help our economy over the longer run,” said Faucher.
Immigration
And immigration is not just an issue at the southern border. He watches population trends in the Midwest.
“Over the long run, an economy can only grow if there are more workers in it. Central Illinois, like the Midwest in general, tends to see weak population growth. But, you know, building those population gains is ... that's going to be important for long run economic growth in Central Illinois and Bloomington Normal,” said Faucher.
Some analysts have suggested a significant part of the healthy economic growth in the last few years in the region and the nation has come from employment of the higher-than-usual influx of immigrants. Faucher agreed immigration has played a noticeable part of the present economic expansion.
“We don't have good data on that, but job growth in the recovery from the pandemic has been much stronger than people were expecting and a large part of that, I think, has been immigrants coming into the country. Immigration has historically been a source of economic growth for the United States," said Faucher.
"I think we need to think about immigration reform so that we can bring in people who have the skills that we want in the economy, whether that's in Central Illinois or whether it's nationally, and make sure people who are working under the table are brought into the system.”
The EV market/the deficit
The higher interest rate climate has slowed the rate of growth of electric vehicle sales in the nation. Without addressing Rivian’s prospects specifically, Faucher said lower rates will benefit the EV industry over the next couple years.
“One of the reasons the Fed cuts interest rates is to support growth in big ticket items like cars, where borrowing costs are tied closely to what the Fed does …Then we continue to see support for the industry from the federal government. Obviously that depends on the election, but I do think the opportunities for the electric vehicle industry are going to be pretty solid over the next few years, regardless of [the] administration,” said Faucher.
He also said the nation is due for a conversation about how to reduce the federal budget deficit and national debt. The Trump administration tax cuts caused the federal budget deficit to rise substantially, as did the Biden administration stimulus spending to spur pandemic recovery. The national debt is now around 120% of the gross domestic product. Yet the nation hasn't had a prolonged moment of attention to the deficit and debt since, say, the Clinton administration.
“I do think we need to start making decisions about what our priorities are in terms of spending and how much we're willing to pay in taxes to fund them," said Faucher. "I am concerned not that we're going to face a fiscal crisis, but that high debt over the long run, we're talking decades, could impinge on long run economic growth, and that means fewer opportunities for our children.”
While the U.S. may have debt that is 120% of GDP, he noted that Japan’s ratio is even worse at 200%
“I don't see a fiscal crisis in the United States any time in the next few decades,” said Faucher. “We still have a lot of advantages. We have a strong rule of law, we have an independent central bank. We have a very long track record of success. Government debt remains the gold standard for financial markets,” said Faucher.
He said the nation does not necessarily need to make big changes to retirement programs that affect people who are 65 now, but leaders do need to think about what benefits to provide people now in their 40s and 50s when they retire in 15-20 years.
