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Wells Fargo Economist Predicts Normalization Is Coming

At Nationwide Marketing Group’s 59th PrimeTime event in Orlando this week, Wells Fargo Economist Charlie Dougherty shared several interesting insights into the housing market, inflation and the supply chain.

Here are a few highlights from the presentation: 

  1. If and When Will Inflation Cool Down? 

First, he said Inflation is by far the biggest problem holding down the economy right now. And unfortunately, inflation is starting to broaden out a little bit, so it’s not just durable goods, but now services as well.

That’s not good for the economy, according to Dougherty, and it’s especially not good for the long-term health of the economy. 

“So that’s why the Federal Reserve was trying to slow down the economy, take some wind out of the sails of consumer spending,” he said. “That way, inflation can come back down to more normal levels or levels that we would normally expect to see.”

Inflation is running at over 9%, and though Dougherty said it looks to be cooling down he says we’re gonna be in an inflationary environment for some time to come. 

“One of the reasons things are starting to look better is because the Federal Reserve is starting to lift interest rates, tap the brakes on the economy, and realign supply and demand, he says. “We’ve had very, very strong demand, constrained supply, we’re all familiar with that. You need to bring that back into balance. And the way you do that is by lifting interest rates.”

He says the Federal Reserve has been very aggressive in lifting rates so far this year .

“If you’ve been paying attention, they’ve gone up markedly — we expect interest rates would probably go up even more, until inflation shows signs of materially slowing down,” he explains. “What we want to see is inflation in the 2-3% range.”

That means the Federal Reserve, unfortunately, is going to have to lift interest rates even more, and there may even be another hike coming.

“Maybe two or three more hikes coming,” he says “The good news is because inflation is starting to rollover, we’re actually forecasting the Fed to cut rates later next year. 

  1. How’s the Housing Market?

“Interest rates are headed higher, and what’s one of the most interest rate-sensitive parts of the economy?” he asked. “The housing market. We’ve seen a pullback in housing activity, and that ranges from home sales to homebuilder confidence to new housing starts. 

But he said you also have to remember where we’ve been over the past year — when there were record levels of activity across the board. And that goes the same for the housing market.

“Mortgage rates essentially doubled since the start of this year — they went above 6%. Now they’re back in the 5% range, but they’re still higher than at any point over the past few years. So that has essentially tapped the brakes for new home construction,” he explained.

“What we’ve seen over the past year was probably unsustainable, especially in housing,” he continued. “So with higher rates, affordability is more of a concern. And we’re seeing buyer traffic pull back a little bit, but the overall pace of activity looks to be sort of settling around levels that we saw in 2019, which was a very strong year. 

Another factor in housing is the demographic makeup of people buying houses. Right now we have more folks between the ages of 25 and 35 than we’ve ever had in this country. 

“And that age cohort is exactly when you get married, you have kids, and you buy your first home,” Dougherty said. “I think housing is going to hold up just because of the demographic situation that we find ourselves in, and that’s going to last for the next five years.” 

  1. How Is The Supply Chain Looking?

“It’s still a messy situation, and it’ll probably remain a little bit messy for the foreseeable future, but things are getting better,” Dougherty said. “We’ve probably moved past the worst of the supply chain crisis.”

One data point he thinks really captures everything that happened during the pandemic is the decrease in container ships at the ports off the coast of Southern California. 

“To me, that tells me that supply chains are starting to normalize,” he says. “And it’s not just that, we look at a number of different indicators. For example, the cost it takes to ship from Shanghai to Los Angeles has come down though it is still significantly higher than 2019. That also tells me things are getting better with the supply chain.” 

Overall, Dougherty said it’s going to be a while until everything is fully normalized, but he says things are on the right track and things are getting better. 

“We’re moving past the worst of it, but it’s probably going to be a messy situation for the foreseeable future,” he adds. 

Also read: In Stock and Ready to Rock: A Closer Look at Nationwide’s Centerpoint Tool

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