2026 Q1 - Ken Entenmann

Welcome to Quarterly Market Insights. I'm Jared Shepard, Director of Planning and Research at CenterState CEO, in for Kevin Schwab. Today I'm speaking with Ken Entenmann, Chief Economist at NBT Bank. Hi, Ken. Thank you for joining us.

Great to be here. Thank you.

So as we head into Q2 of this year, we're seeing a continuation of last year's narrative of uncertainty. Your last podcast here, you talked about 2025 being the year of great distortions. Resilient was your economic word for the year last year. So what are you seeing so far in 2026, and what's changed and what's different?

Well, I kind of chuckle a little bit when people talk about uncertainty because I don't recall other parts of my 40-year career where things were perfectly crystal clear. So things are always uncertain. This year, some of the uncertainty from last year, particularly most recently, the Supreme Court decision on tariffs has brought tariffs back into the forefront. I think AI has become much more prominent. It's clear that the technology is very powerful, but it's creating an incredible amount of uncertainty in the business world. Not only is it just the hyperscale is the amount they're investing and whether there'll actually be a return on investment, but really in the last couple of weeks, the focus has become more on, is it going to eliminate tens and thousands of jobs? So those are the two big uncertainties that I think are playing. The political environment is still very divisive.

Midterm elections are not far away, and that will start in earnest in a month or two. That's going to create some uncertainty on the policy front. So there's always uncertainty, but I think just like last year, our economy has demonstrated tremendous resilience. And as we sit here today, if I were to provide kind of consensus estimates for the big four stats that I look at, GDP growth between two and a half, 3%, unemployment, the rate is currently 4.4%. It looks to be consistent around there, give or take. The inflation rate is two and a half to three. The consensus is for that to trend towards the Fed's target of 2%. And I think really important, particularly for the lower income categories that have been the focus of the K-shaped economy, wages are forecasted to grow above 3%. If we can get inflation to two and wages are growing at three, that would be really powerful. So when I look at those statistics, that's a really good economic backdrop as we enter into 2026. And then lastly, corporate earnings in 2026, were up 13%. The first quarter earning season, or the fourth quarter earning season, we're kind of in the midst of right now, but really strong momentum there. And when I look at the consensus estimates for corporate earnings in 2026, it's once again, double digit, 10 to 15% growth. So by and large, while there's a lot of noise and there's a lot of negativity, the hard economic data provides for a really sound economic backdrop.

Yeah. The underlying ... We're going to continue to hear similar narratives.

Of course.

But the underlying hard data shows that it's turbulence and what we're going into is tremendous foundation to start off. Do you want to start with GDP? That's the biggest indicator.

So probably you mentioned the last year being the year of distortion and GDP was grossly distorted last year. The first quarter was negative, but that was incredibly distorted by the tariffs. So we all know that April 2nd was Liberation Day. So what happened in the first quarter of last year, everybody who imported anything, imported everything they needed. So that distorted the GDP number to be negative. But then in the second quarter, it reversed completely out. But then when we look at the GDP for the entire year, the third and fourth quarter were very strong or the third quarter was very strong.

Was that four and a half percent of us?

Yeah, it was 4.8, I believe. And then we just got the fourth quarter number and was very disappointing at 1.4%. But again, when you subtract out some of the noise, we had the government shutdown. And depending on who you ask, somewhere around one and a half percent of GDP was taken off by the government shutdown. So if I take the 1.4 that was reported, add back the 1.5 for the longest government shutdown, 40-something days, but the impact of that means we're running it around 3% growth, which is pretty darn solid.

Yeah. I like getting into the GDP formula. I think that's helpful as well, and particularly the C for consumption.

Yeah. So we have to go back to macroeconomics class, which I'm sure most people don't want to do.

I insist they do.

But the basic formula from kind of day one of macroeconomics is C+ I plus G. And it stands for consumption, which is the individual, the consumer. Investment, which is a pretty good proxy for business investment and G for government. And then there's this tiny little remnant on the side called net exports, which involves imports and exports. That's typically negative because we historically have imported more than we export. The important thing for people to recognize is the C, the consumption part, is about 70 to 75% of total economic activity. So we can talk about business investment in government and DOGE and whether government's growing. And even we can talk about tariffs, but 70% depends on consumption. That's why for me, the most important statistic I look at is the unemployment rate. And because when you look at deep, dark recessions and you go back in time, it is almost always, whether there's a chicken and egg, but there's a serious deterioration in the labor market.

Yeah, before consumers start-

Yeah. And that's what forces consumers to pack up. And what I think is really kind of fascinating is all of the consumer soft data. So I compare it to soft data or soft ice cream versus hard ice cream. Soft data are surveys. And when you go to the consumer and say, how do you feel? They are miserable.

Yeah.

Absolutely miserably because we have divisive politics and we have war in the Middle East and we have war in Ukraine-

So the sentiment index is down.

So, whether it's a CEO sentiment, the University of Michigan sentiment, consumer confidence, everybody's horribly negative, but I laugh because it's kind of like, I'm answering this survey and I'm really negative, but I got to go because I'm going on a cruise. And so the C is such a big part of the C+I+G formula, and the American consumer has been consuming like crazy. I continue to think that's going to remain because for the, and this gets to the K-shaped economy, but for the majority of Americans, their balance sheet is incredibly strong because we've had an 87% increase in the S&P 500 over the last three years.

Home prices in the NBT footprint, which is largely New England, are up 41% in the last five years. And those are the two big assets that people have. And that's driving a really big wealth effect. The K-shaped part of it is the people who are in the bottom rungs of the income strata; they don't typically own their house, they don't typically own big investment portfolios, so they're not benefiting from it. So that inflation impact is clearly disproportionately hard on them, but the majority of Americans are in really good shape. And as long as the wealth effect continues, and what typically chips away at it is when we start to have big layoffs.

So getting back to looking at the labor markets as a leading indicator on consumption, one of the things I'm hearing economists talk about, start to get a grip on is that we have a labor market that is possibly or structurally acting differently than it has in the past in a low hire, low fire environment. So maybe even last year, one read on jobs in the U.S. overall is practically it netted out to almost no jobs. That still seems to be structurally different than losing jobs still. So it seems that even with that friction, I've quoted before Paul Donovan at UBS who loves to say that you never want to bet against the hedonism of the American consumer. We're still chugging along.

But jobs are what fuel that consumption and-

Do we need more jobs, I guess is-

So obviously you want to grow jobs. That's the best case scenario. I would suggest, and again, it gets back to the whole concept of distortion. We're only four or five years outside of COVID, and COVID blew up the employment market. It just changed the rules of the game, whether we talk about work at home, people migrating from different parts of the country, it's changed the rules of the game. The second thing that's happened, and politically you could be on either side of this, but the changes of immigration policy is really significant. And then lastly,

And I joke with people when I do public presentations, we're getting old. As a society, we have this big baby boom generation moving into retirement, they're generally pretty wealthy, the wealthiest retirement age group in the history of our economy, and they are really spending like crazy. So that's really good. But what does that do? The combination of an older workforce, low fertility rates, so there are more deaths than there are births, so that means our population is going down, immigration has gone down, and that changes the employment statistics because the unemployment rate is essentially how many people of working age divided by the size of the labor force? Well, if I don't have big inputs coming in from immigration and I have a negative birth to death rate, that denominator is going down and the net result is it doesn't take as many new jobs to just stay stable.

And I think the low hire, that partly explains the low hire. The low fire part is, I think, more important in that it's when you start to see major layoffs and kind of structural layoffs that the C starts to deteriorate.

So the fact that I am not leaving my job and going to get a better one, which is nice, that's true right now, but from a consumption standpoint, it's when people start losing their job that people batten down the hatches. There's kind of a carryover effect where the old joke, a recession is when my neighbor loses a job, a depression is when I lose it, but there's a carry-on. When you start to see massive layoffs, that's when the C part of the equation starts to deteriorate. And as of today, we haven't seen it. Small businesses still, their number one problem is finding qualified workers. And so I look at, are we in a situation where employment's going to deteriorate rapidly when small business, which is the backbone of our economy, is struggling to find new workers. That tells me that we have a ways to go before employment becomes so problematic that the C ... consumption, yeah.

One last hit on consumption is the $65 million question of the tax refund season. Wherever we are with consumption now, is that going to have a good impact on sentiment, but certainly it's going to go back into the economy. Is that a stimulus type effect that we should think about because it's-

Yeah, I think I would describe it as a wind at the back of the economy. Yeah. I think the average tax refund is typically around $3,000. They're talking about each family getting a thousand to $1,200. Historically, that money is spent. And so maybe this time is different, but you would expect that people would go and spend that money. And it's a huge number measured in billions of dollars that you can't help but think it's going to be a stimulus for the overall economic activity.

Okay. Another topic you brought up early on that's factoring into the economic discussion, if not into the economic reality is tariffs.

Yep. So I think people need to put tariffs in perspective, and it gets back to this C+I+ G. The United States economy is approaching $30 trillion. Allow me to use that as a round number. $30 trillion economy, we import $3 trillion. So it's 10% of overall economic activity. And despite all the market fury surrounding, we’re debating on whether the effective tariff rate is 15% or 13% on $3 trillion on a $30 trillion economy. So when you ask me, so there's a very healthy debate to be had with tariffs, but I think people have to keep it in perspective. It's on a very tiny sliver of our economy, and I am far more concerned of sustaining the consumer and the 70% than I am the net export import, the C+/I plus G mine plus or minus. It's a very tiny fraction of the economy. So it's a very big political football. I get it. It garners a lot of headlines on the margin. I think tariffs are a negative for overall the economy, but it's on such a tiny sliver that I think the headlines are far greater than what the actual impact is.

And the impact horizon is probably longer than certainly a news cycle.

Yeah. Well, yeah. And so I think, so you'll hear economists and politicians say that tariffs are effectively attacks on individuals, and economically that bears out. That's certainly the short-term impact. The long-term impact is, I do believe there's a good argument to be made that President Trump has used these tariffs to try to level the playing field for U.S. businesses. And there's no doubt the evidence is clear that the free and fair playing trading was stacked against the United States. You could debate whether tariffs are the right tool to fix it, but it's an attempt to level the global trading environment. In the long run, even though tariffs are clearly a negative in the short run, if tariffs result in a more level playing field for U.S. businesses, that's a good result that may come in the short term cost of a little bit higher prices

Today. Another current topic, for a few years we've been using AI to help with our emails and make memes. Seems like in the last few days really, a huge shift in at least the perception of its impact, some impacts in the markets about how it might be displacing technologies. We're talking again about jobs and productivity. Where do you cut through some of that noise? Again, is there a short-term impact horizon for that, or are we looking past a couple years before this starts?

Yeah. I think the narrative that came out in the Cerulli Paper is kind of a worst-case scenario, and there are mass layoffs all over the place. I am going to kind of stick with what history teaches us is that whenever you get this great innovative technology, there's always dislocations and jobs are eliminated and always happens. But I don't think we sit here worrying about the fact that we don't have any more blacksmiths or we don't have any more telephone switchboard operators or we don't have any more typewriter repair people. All those people lost jobs because of technology. I still think it remains to be seen what AI ultimately is. I think the likelihood that it results in 20 or 30% unemployment rate because there's this mass ... It's

Not

The way the economy works because if I'm a company that's going to use AI to lay off 20% of my workforce, I still need somebody to buy my product. And if everybody's laid off, there's not enough money to do it. So it just isn't the way it works. And for every telephone switchboard operator job that goes away, there is a new job that gets created. And that's been the history of the world where the innovation increases productivity. Yes, listen, if you were a switchboard operator and you lost your ... Yeah. I get it. It's painful and that will happen, but from an economy at large, new technology increases productivity, that makes the economy grow and just about everybody benefits from it.

So I think the last week or so, starting last Friday with the Cerulli Paper has got AI eliminating just huge troughs of jobs. That may happen. But again, when we look back ... So if you take the personal computer, which was invented in 1979, I graduated from Cornell in 1985, and that was the first year we had the MacLab at Mann Library. So it took five or six years just to get on a college campus, let alone into everybody's household. So the impact of these great new innovations, whether you're talking about aviation or automobiles or personal computers, the internet, mobile phones, you go through, the impact takes typically decades... And here, because we have such a hyperactive media now and media coming from all sources, not just your traditional sources, I think you get these kind of swings in sentiment. The reality is, and could this time be different? Absolutely. But history tells us that great innovation leads to a bigger economy, a faster growing economy, more jobs, not less. I continue to believe that AI will do that, not without its dislocations, but I think the full-term impact of that is going to be measured in years and decades, not the next three

Months. How about short-term on software stocks? Is there a changing perspective on that going on right now?

Well, so AI in general is making coding easier, right? So it certainly reflects on some of those software stocks that maybe I can do it myself, but as somebody at NBT, when I do my expense report, I go into SAP's Concur, and I can tell you that I am not going to be programmed enough, a good enough programmer, even using AI, that I'm going to be replacing Concur from my expense report. Maybe in a couple of years, NBT Bank or your local business will have a couple of programmers doing some internal program, but I don't see us giving up on Microsoft Office next week. And so I thought that the reaction of some of the software stocks where their market caps have been cut in half, some of them may in fact go become the next blacksmith. There's no doubt about that, but the idea that the whole software industry has become obsolete overnight, I think is a little overwrought.

Yeah. Okay, great. So lastly, a couple hits on what's going on locally, financial conditions, the biggest news, and I think the local economy certainly is the groundbreaking that Micron undertook this year. One of the things that we're paying a lot of attention to is how we see residential development go up in advance of that. We've been tracking the pipeline that's taking place. We're looking at $420 million of residential and construction right now, another 2.8 billion in reviews or approval out of a total $5 billion residential pipeline. And I would guess that a few years ago, those numbers would have many fewer zeros and maybe fewer commas as well. So any thoughts about what's next? First

And foremost, when you look to Washington and you think of the divisive political environment, it's really good to know that Micron's already been through that process. And so the funding is going to be there. So whereas you have a lot of other projects that have been announced and proposed, but that could be a situation where the ... So I think Micron's here, right? And the fact that we've stuck shovels in the ground is really encouraging. When I look at the local economy, and I think this is true for the majority of upstate, our unemployment rates lower than the national average, our home prices, and this might be fueled by greater demand due to Micron, are up considerably. I read an article of paper, Syracuse, New York is in the top 10 real estate markets in the country.

So I think there's an awful lot to be optimistic about our local economy, particularly here in the CenterState footprint. And I can tell you our bank's experience, and you just drive down the road to Malta where Global Foundries has their chip plant. The road coming from, if you drive 87 trying to cut across to 90, was a farm road. It is six to 10 miles of condos and residents, development, strip malls, banks, haircutting salons. It's astounding what the impact of that GlobalFoundries had in Malta. And we've had similar experience at NBT if we go down in Poughkeepsie where IBM is in Albany and the fact that I think the majority of the uncertainty about whether Micron was going to happen, all of that regulatory approval, environmental, that's all behind us now.

I was just in Arizona for a week of vacation, and I visited my sister-in-law, and I haven't been there in two and a half years. And right as I got off the highway, about 40 miles south of Phoenix, there's a battery plant that is ginormous. It wasn't there three years ago. And then you look at all of the development, there's home development. So a Micron-type facility is just enormous. And the fact that it's happening, I can't help believe that it's going to be really powerful. And I do think just the arduous process of regulatory view, getting all the politicians together to form this, I think that spills over into, okay, and particularly in Onondaga, we need to have housing developments and we can't ... So historically, there was this reticence, well, how are you going to use the land and what about water and what about ... Well, now it's like, we have to do this.

And it seems to me that there's less regulatory hurdles to that kind of development. I just think it bodes incredibly well for our upstate economy for the next ... I mean, it's going to take four or five years to get that to full development and hopefully there'll be even more, right? Yeah.

And we're seeing that enthusiasm. Yeah.

So I guess my caution of viewers is just there's a lot of negativity in the world, try to separate the noise out. And when you look at the underlying economic fundamentals on a national level, they're really solid. And when you come down to the local level, they're even better. So I think there's great room for optimism.

Terrific. That's a great place to land on.

Always happy to end on optimism.

Well, thank you for having me.

You're welcome. Thank you.