2024 Q3 - Ken Entenmann

Welcome to Quarterly Market Insights, a special series part of CenterState CEO's podcast Talk CNY, presented by NBT Bank. This quarterly series will provide a data-driven economic analysis and how it could impact you and your business. So we're entering into the fourth quarter, wrapping up the third quarter. We've got a lot that we're going to cover today, but this time of year, particularly in this year itself, there's one thing top of mind for a lot of people as it relates to the economy and that's the elections. And so you and I were talking a little bit in preparation for this about what impact an election can or cannot have on the economy. So, I wanted to just ask your opinion as it relates to what we have in front of us and what do you think is going to be the net result of the next few weeks leading up to the election and then obviously post-election. A lot of energy goes into presidential elections and people get very emotional. The reality is for the financial markets, they rarely have a major impact. And for the economy, if you think of that, the economy being this $24 trillion behemoth, it is the proverbial battleship that is very difficult to shift in the short run. So there's always debates about different policies, but generally it takes a really long fuse for policies to have an impact. And the other thing that's important, and especially in presidential election cycles, it's all about who wins the White House. But a much bigger part of that is who controls Congress. And this election I think is going to be very, very interesting because obviously we have a very tight race for the presidency between Donald Trump and Kamala Harris. But also you can't get much closer to even the Senate's 51 - 49 in favor of the Democrats right now. And I think the House has three or four seats on the Republican side. So you look at the iterations of those three things, it's really important to see what that ultimate outcome is. It's not just the presidency and who's in the White House, but whether the party has total control or if it's split government. And generally speaking, split government has a "do no harm" thing because it's very difficult as we've experienced over the last two years, very difficult to do anything major

When you have split Congress and the White House split in some form or another. So it'll be interesting, but I caution people, especially, I heard one celebrity talking about liquidating their portfolio if one of the candidates get in. I urge people do not liquidate your portfolio. It just doesn't have that material impact in the short run.

And I have people that I've talked to that I've heard horror stories about in the past election didn't go the way that they wanted or the way that they thought it should. And they did the same thing. They liquidated their portfolio and four years later they're in not a better place than they would've been had they just been in the market and rode it out. And so I think it's really important for our listeners to hear that in terms of the market moves slower than you anticipate, and it's part of the reason why we've never really gotten deep into this conversation, but it's part of the reason why day trading is not necessarily a sustainable practice because you're really needing to look at this from the long-term perspective. But we are starting to see some changes. We're starting to see some shifts in the market. We just recently had a lowering of the interest rate and we're seeing some data to support that. So what are we seeing with this battleship, this 24 trillion battleship and where it's going from your perspective?

Well, it's kind of interesting from a political standpoint, depending on which side of the aisle you stand on, it's either the worst economy in the history of the world or it's the best economy in the history of the world. And the answer is it's neither. It's really a pretty average economy. Just recently, the Fed Atlanta now index, which measures tri to forecast keep the GDP growth for the third quarter up to date, they just increase their forecast for the third quarter to 3%. Whether that materializes or not, they're generally pretty close. So let's see, let's trim it back and call it two and a half. That's kind of above trend. So it's not horrible. It's not growing at three 4%, which we declare would be declared as great. So we're kind of in an economy. The concern is the economy is clearly slowing. So we've seen a recent tick up in unemployment, which has caught the attention of the Federal Reserve. And on the other side, the other side of the Fed's mandate is inflation. And we have seen a continuation of a trend, although that trend has slowed inflation, if we measure it by the consumer price index peaked I think in June of 22 at 9.2%, it's now running around three.

So it's come down materially. And the combination of a slightly rising unemployment rate with continuing slowing of inflation basically gave the Fed the green light to cut interest rates for the first time since 2021. So we are now in a rate-cutting cycle, but it kind of says, well, if things were great, we wouldn't be cutting interest rates. So that kind of indicates that maybe things are slowing a little bit, but we have a fairly average economy right now. It's not great, but it's not horrible.

Right. It's interesting just to reflect back nine months ago as we were ending 2023 and starting 2024, we were having a lot of debate about the rate and when it was going to get cut and were we going to see a recession or a soft landing or whatever it might be. And I know that hindsight is always 2020, but at that point it looked like your foresight was because you talked about there being one, maybe two rate cuts in 2024, not the three to five or three to four that people were anticipating. And so that was the first that we had seen all year. We talked a lot about how inflation being sticky was the reason why we didn't see it early on. And the jobs data and the spending and all of that was still very strong throughout the first half of the year despite all of that. So it's really just been kind of through the summer and into the third quarter here where we're starting to see some of that indicators that are causing that drop. I was surprised, candidly, I'll say that it went a full half a point. There's some conversation about whether or not that was or wasn't political, but the reality of it is I think the numbers kind of play out. And like you said, it's an average economy.

Well, I listened to Fed Chair Powell speak after the decision last week, and sometimes I wish I studied English instead of finance and economics being an English major and playing with words. But the words they used were recalibrating. But I think if we go back over a year or so, and I think our conversations reflect this, the world has been calling for a recession for a good two years now. And I believe that because of COVID, because of the zero-rate interest-rate policy, the normal economic reaction to rising rates was muted this cycle.

Because everybody, whether they were a business, member of CenterState CEO or an individual was able to refinance their debt to pay down their debt with various government programs, PPP on the commercial side, numerous stimulus checks on the individual side, corporations and people took that opportunity to deleverage their balance sheet and they did it at extraordinary low rates. So if you think of the individual refinanced their mortgage at three a year or so ago, the fact that the Fed raised rates so strongly really didn't have an impact. They were still saving close on average about a thousand dollars a month in mortgage payments. So they're kind of sitting pretty and had that excess capacity. So throughout it all, the expectation was that consumers were going to clam up due to high rates. And I just don't think that sensitivity was quite normal. And so we are still faced with an economy that has fairly robust consumer spending and that's what's carrying the day.

Yeah, it's interesting because I think there's always the carry on effect for activities. And so you're right, that ability to refinance and to stay at that 3% mortgage or get to a 3% mortgage was incredible, but I think that's also having a downstream ripple effect on another piece of information we wanted to talk about. And that is we talk about the consumer price index, which is where the inflation piece comes from. There's actually a big piece of that that's tied to shelter cost or housing, isn't it?

Yeah. So if you look at the consumer price index itself, roughly about 23% of that number is shelter cost. And the way that it manifested not to get too technical is implied rents. And they typically lag the market both going up and coming down. And so there was this expectation by economists that CPI would come down dramatically due to implied rents. But we've talked on this podcast numerous times about the shortage of single family homes throughout the country, and I think we'll talk about this a little bit, but with Micron coming, the shortage here in the central New York market is really pronounced and hopefully the Micron full effect will occur. So interestingly, the implied shelter numbers haven't come down as quickly as economists expected. And in many cases you're seeing prices particularly for single family homes due to the shortage go up. But also that lock-in effect where the person with the 3% mortgage is not upgrading so that there's a shortage of single family homes. And because there's a shortage of single family homes, people are forced to stay in there, rented shelter. And generally it's when you have turnover in rental properties that the rental costs change. So I just think it's an abnormal marketplace in shelter and I think it's going to take time to fix. And Syracuse in particular, given the prospects for the Micron project, it's going to be a big issue for our community

For sure. And I think it's really important to note that this is a challenge that's being faced nationally, right? Correct. The lack of supply, the consistent increase or lack of a return to what pre-COVID rent rates were is just all over the place. But we're feeling it really very sharply here in this market in part because we were already doing very well going into COVID. We had a big jump in terms of the demand for housing during COVID as a second tier city where a lot of the major markets were moving to because of remote work. And so we had all of these factors and then add on top of that, you now get into an environment where people know that there's even more growth coming. We recently, we've been talking about the need for, we've been using the Micron numbers of their economic impact.

We've been saying, oh, 2,500 housing units a year is what we need to be building. And two years ago that number was 700. Last year that number was 300. I'm using round terms this year, it's looking like it's going to return to 700. So it's slightly better, but still nowhere near that 2,500, the problem's actually even a little worse than we anticipated recently a consultant this HRNA has been working with New York State and came out with a regional market study and basically what they've said is we need to create 16 to 18,000 units of housing in this community by 2028. And so that is even a bigger jump than that 2,500 units per year. I think it's interesting, this would be purely speculation, but I'm curious to your thoughts on it, the Fed's kind of going that whole half a point when you recognize that mortgage cost, that ability to refinance or purchase a new home being such a big part of both CPI with those higher rates, but also the supply problem, that almost feels to me like a little bit of an acknowledgement around that.

I think the Fed cutting interest rates by 50 basis points, and it was kind of a 50 50 expectation between 25 and 50. So I don't know that it was a great shock.

I was surprised by it. But the rates coming down, and I think it's important for the people watching this, I don't anticipate long-term interest rates to drop the Federal Reserve when they control the Fed funds rate. So when they announce they're cutting rates on fed funds, that is an overnight rate. It is a short-term interest rate. But then when you look at auto loans, they're three years on average. When you look at commercial loans five to seven, 10 years maybe, and you look at mortgages 15, 20, 30 years, those longer-term rates are more driven by the 10 year treasury than they are the fed funds. And what we've seen, and it's just been a week, is that short-term rates have come down, but long-term rates have held pretty steady.

So I would caution folks not to expect a dramatic decrease in long-term rates. And on the housing front - I think we'll get a little bit of relief. So I'm not arguing the 30-year mortgage rate is somewhere around six and a quarter, give or take right now. Can it go to five and three quarters or five and a half maybe? Do I think it's going to go back to three? I highly doubt it. So I think people need to manage their expectations there. Given the shortage of housing, I don't think it pays to wait, so to speak, because the idea that prices are going to go materially lower from here given that the statistics you just shared is unlikely. And therefore I think you're going to have a very challenged market and we have to build our way out of it. And I think where our elected officials can really help is there is just a labyrinth of rules and regulations on the village, the town, the county, the state, federal rules, environmental rules, all of these rules and regulations make it really difficult to stick a shovel in the ground.

And when you're looking at the numbers that are implied by this Micron expansion, you can't wait six months or a year to get permits to build a housing development. So I think we could use some help from our elected officials on that.

Absolutely. And I think the reality of it is, is that at this juncture, supply and demand economics are going to take effect. And if supply isn't increasing and we know the demand is going to increase, you know what that does to the price curve, it's just going to make it more and more expensive and maybe even take more and more of our community out of the opportunity to own a home, which is as the best way for any household to generate equity and wealth. And so we need to make sure that we're focusing on how do we solve that problem. And one of it, as you said, is build prices are also going to go up no matter what we do. If we brought in 10,000 units a year for the next couple of years, we're probably still going to see an increase. We're seeing higher rates.

And so the cost is going to be higher. At some point that curve switches back and you bring in more supply than is meeting the demand. And so we could in theory, build to a lower price point, but our expectation is that it's not likely in our future. And so how quickly we build is really an indicator of how affordable or how much more affordable our housing is going to be able to be for the people in this community and the people that are moving here. And so it's a big challenge for us as a community. It's a big challenge for us as an organization. And I'll just reemphasize your point, it is absolutely incumbent upon our elected officials, and I'm really speaking to our local leadership at the town and the village level and where the county and state can support that, you have to do a better job.

We've mentioned this statistic before, and we're not going to solve this problem by building only single family. We have to build it all. But right now, outside of the city of Syracuse, I said the statistic for, I'm going to say it again, only 1% of the urbanized land in Onondaga County. So that's land you can build housing in. It's not agricultural or industrial is zoned to do multifamily as of right. Meaning in order to do multifamily anywhere else, you have to get special use permits and variances. And it's a process that takes six to 12 months. And as you said, that's just not feasible. So I think I'll look directly at the viewers and the listeners and say, we really need everyone's support in thinking about how we can solve this problem and evaluate where you want growth in your community and recognize that terms like affordable housing is not a negative thing.

I mean, when you look at the rents around affordable housing in AMI, you're talking about nurses and firefighters and teachers that are looking at these homes and these housing units. And so we just need to do a better job of educating ourselves around those opportunities and what we're looking to do. So you got a huge challenge as it relates to that. I think we're definitely seeing some of the stuff we were expecting and waiting on six months ago is starting to continue to come to fruition. So that begs the next question - what are you looking for in the last quarter of 2024? What are some of the things you're keeping an eye on? What are some of your expectations, if you will, as it relates to finishing out this year?

Well, I think it's a function of gauging, if the economy is indeed slowing, how much it's slowing. I don't think you can rule out a recession. I don't think it's likely in the next three months, but there are plenty of things to worry about. The geopolitical risks, which we've talked about, whether it's the Middle East, whether it's Russia, Ukraine, tensions in the South Pacific, they're real and they're not going away. And I would argue they're perhaps getting worse. So far they've been fairly well contained and that's a good thing, but I don't think it takes a wild imagination to see how any of those things could materialize into much bigger problems. And the way that typically manifests itself is through energy prices.

I think we've gotten a bit of a free pass on energy prices because China's been so sick, in terms of economically sick. Today, China announced a broad array of stimulus packages. So maybe China's economy can revise itself, but that would mean even more competitive demand for some scarce resources. And so, I don't think we're out of the woods when it comes to inflation. I don't think we're out of the woods in terms of a possible recession, but I think it's pretty small. And the reason for that is both corporations and consumers are pretty good. Their balance sheets have been refinanced. They've extended their debt. So I think that buys us a lot of time. And even the unemployment number. So the Fed basically said, we're confident enough that inflation is slow to a point where it's going to continue. Now we're going to focus on unemployment. And the unemployment rate's gone from three and a half to roughly 4.2, give or take. And so that's clearly an uptick in unemployment. So that's something to look at. However, I do think the majority of that uptick is because of immigration.

So legal immigration has kind of returned to pre-COVID levels. It kind of shut down for an extended period of time and took a while to revamp. So legal immigration is back to normal levels. And obviously we have illegal immigration in this country as well, and those immigrants are entering the workforce and as they enter the workforce, they increase the size of the workforce and it has an upward impact on the unemployment rate. So I think that's what's happening. And so while an unemployment rate of 3.5 to 4.2 is certainly something to watch, I think the bulk of that is because more people are returning to the workforce, both people who may have had excess savings and support that's being exhausted and now it's time to get back to work or immigrants coming into our economy. I'm not so sure that's a bad thing for the economy. It's good because personally, I live in Auburn. I drive 690 down to the Post-Standard building and there is a gigantic sign on 690 New York State advertising for plow drivers. That's not a sick economy.

And I see help wanted signs everywhere I turn still. So, while the Fed, I think is justified in cutting rates, again, I'm surprised they did 50, but nonetheless, that's already baked into the cake. But they're going to be watching the employment market, and that's what I think we should be watching. Most importantly, I think the election will create some headlines, but again, in the short run, it generally does not impact the economy or the financial markets in a material way. So I think it's really the employment that tug of war, the Fed's dual mandate of maximize employment and control inflation. That's where the action is with the Fed. And right now the market is forecasting two additional rate cuts, one in November at their next meeting and then one in December, there's a healthy debate, whether it'll be another 50, another 25, two 25's. I think we'll have a bunch more data both on the employment front, any inflation front that will guide the Fed that way. So I think you will have lower interest rates on the front end of the curve and on the margin that will be helpful. But because of that, because of the strong consumer, the balance sheets, an unemployment rate at 4.2 and oh my God, we're complaining about 4.2 historically, that's a really strong number. I don't think we're going to crash into a recession. I think it would take a macro event like perhaps an expansion of war or something like that. So I think we're going to be in this 2 percentage type GDP growth, which isn't great, but it's still pretty good by historic standards. So I don't expect a lot of dramatic change in the fourth quarter. And I think it would take a very serious, rapid and serious deterioration in the employment figures to push us towards recession. And I don't see that happening in the next quarter.

And I think it's important to remind folks too, if they've forgotten, we've talked about it before, but an unemployment number is really a formula of how many people are actually in the market looking for work versus how many are working. Correct. And what we saw post-COVID is as that number continued to drop, we also saw a huge decrease in the labor force participation rate, which is how much of your population is actively either employed or looking for employment. And I think what you're saying is we're seeing a significant, or we're seeing an increase again in that labor force participation rate, more people looking for work, more people in the workforce. So that's having that impact potentially on the unemployment number. There's a good correlation there, and the demographics on that are going to continue, right. Absolutely.

So one of the drivers of reducing the participation rate during COVID was baby boomers retiring. And as we've talked in the past, we expected them to come back. It turns out retirement's pretty fun and they're not. So you have that decrease in the workforce due to baby boomers, and we're just scratching the surface there. So that trend is not going away. It may slow, it may speed up, who knows. But we got this 20 year baby boom generation that, I'm 61. I'm technically born in 63, technically the last year or maybe 64 is included in some numbers the last year of baby boom, baby boomers. And I'm still four or five years away from retirement. I hope anyway. And so that trend is going to continue. And then you bring in the immigration numbers, and there's a lot of political debate about it, but one of the things that made our economy, the US economy so dynamic over the last a hundred years is that we've had relatively open immigration policies. So I'm a big fan of methodical immigration, and you're starting to see that increase, but they're going to work in tandem and we need to replace those. So I think that's a big factor in terms of where our economy goes in the future.

And I think we've talked about it before, right? We're talking about the national economy and the macro side of it, and then we've got the micro side of it here in Central New York where that 2% growth number, probably not what we're going to experience here. All things that we know panning out, if they happen, it's going to be a much more significant rate than that. Our employment is now lower than the national average, which had not been the case. If you think for decades, we were always a point above or even four or five points above depending or percentage points above, depending upon where, what community we're looking at. And so we have a need now to think about some of those. What are the things that are done nationally to solve some of these challenges, and how do we create a catalyst for them here in the region to build more housing, to attract more immigrants, to grow our workforce, to figure out better pathways for workforce development opportunities? And that's the joy I will say, of doing this work is the opportunity to lean into it. But all of these national and global factors still impact us, but then we also have to look at it from the regional standpoint and say, okay, what are our unique circumstances and how do we navigate that?

Yeah, and I think the Syracuse MSA was a beneficiary of COVID as people moved back home out of the big cities, that trend has kind of stuck with us a little bit. So that's a great thing. And now we have Micron and we have that kind of return to a more reasonable life balance. So I think it's a fabulous opportunity for upstate New York writ large to grow our economy and to right size things. I think we shared in our prep for this. I'm sitting in my office and CNBC comes on and says, Syracuse is the hottest housing market in the United States.

Yep.

It's inconceivable. We could have said that even just a year or two ago. Absolutely. And so it speaks to the growth that we're experiencing in this community, and it's great reason for optimism.

For sure.

And I think we're all really looking forward to the challenges ahead and the opportunities, right? I mean, it's unlike anything we've experienced before. And we encourage our members to take advantage of that and see ways in which they can grow, but also keep in mind the global and national factors that are going to influence those things.

Absolutely.

Ken, thank you so much. Always a pleasure. Looking forward to our next episode where we wrap up 2024 and look ahead to 2025.

It's great to be here. Thank you for having me, and always fun. Alright.

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