By David Caraviello

The Federal Reserve has raised interest rates 11 times since March of 2022, an effort to staunch inflation that has real-world effects in the form of mortgage rates that recently hit a 23-year high. 

And while central bankers wait and watch for signs of an improving economy, consumers are coming to grips with a new reality—one in which the days of nearly-free borrowing seem long gone.

“Consumers and businesses are having to adjust to a higher-rate environment. And we do think that higher interest rates are going to be with us for a little bit longer,” Leslie Preston, managing director and senior economist at TD Economics, said Oct. 18, 2023, at an economic forecast hosted by TD Bank in Charleston.

“For people under the age of 45, the interest rates they’ve seen for the past 10 or 11 years—we don’t expect to return to those very low rates.”

Preston’s message was “higher, for longer”—as in, get used to the reality of higher interest rates. The Fed hikes are most readily reflected in elevated mortgage rates like that of the 30-year fixed, which on Sept. 28 stood at 7.57 percent, the highest it’s been since 7.65 in December of 2000. 

That’s a long way from the mortgage rates in the 2s and 3s that defined much of the past decade, a rise that has added thousands to the cost of home-buying in the process.

Preston said TD Economics expects the Fed to raise rates one more time, likely in December, “before a prolonged pause.” The U.S. annual inflation rate stood at 3.7 percent for the 12 months ending in September, down significantly from the 40-year high of 9.1 percent in June of 2022. 

The Fed wants to get that figure down to 2 percent, and uses interest rate hikes as a blunt tool to try and curb personal spending.

“It's not easy to bring inflation down, like what the Fed has been doing,” Preston said. “There's an anecdote that the Fed central bankers’ job is, when the party gets going and it's at its peak, to take the punchbowl away. And if you're at that party and enjoying it, nobody likes that. So it's not going to be easy. But it is important. High inflation has a lot of damaging effects on the economy. So it is important to bring inflation back down to a lower and more stable, predictable level.”

Financial cushions wearing away

To this point, though, personal spending has remained resilient despite the fusillade of rate hikes enacted by the Fed over the past 18 months. Year-over-year consumer spending in the U.S. rose more than 4 percent in the first quarter of 2023, according to TD Economics, and was forecast to make a similar gain in the third quarter. 

After that, though, it’s expected to fall off a cliff: TD forecasts personal spending growth at just 1 percent in the fourth quarter of 2023, and less than that in the opening quarter of next year.

“The consumer is increasingly tapped out, and facing higher interest rates,” Preston said. “We have seen purchases of a lot of interest-sensitive durables weaken. We've still seen strength in services, but we do think we're in for a period of softness.”

The financial cushion that many families built up during the pandemic—through reduced spending on things like vacations, or the receipt of federal stimulus checks—appears to be eroding, Preston added. 

That’s reflected in card spending on food and retail goods, which has been in a gradual decline over the past three months. And personal consumption inflation, which reflects changes in the prices of goods and services, has dropped from 3.8 percent to 2.2 over the past three months.

Those are all signs that the measures the Fed is taking to reduce inflation are working. “The U.S. isn’t alone—this is a global phenomenon, which makes it more difficult. The Fed does have its work cut out for it,” Preston said. “But we are seeing progress, which is encouraging.”

Indeed, in the effort to push inflation down to that 2 percent benchmark, “data in the past few months has been overwhelmingly positive,” Christopher J. Waller, a member of the Federal Reserve Board of Governors, said Oct. 18, 2023, in a speech to the European Economics and Financial Center in London. 

“There has been continued, gradual progress in lowering inflation, and moderation in wage growth. This is great news, and while I tend to be an optimist, things are looking a little too good to be true.”

The continued resilience of consumer spending in the wake of interest rate hikes has been a surprise, Wallen added. September marked the sixth consecutive month of increased retail sales, according to figures from the U.S. Department of Commerce. And the continued escalation of U.S. housing prices means inflation in that sector is not easing at the same rate as in others.

“While there is some basis for expecting that inflation will continue to fall, let me remind you, as I have done repeatedly, that we have seen a string of good inflation reports evaporate multiple times in the recent past,” Wallen said. “So I will be watching the next several reports for clearer indications that inflation is on a trajectory to 2 percent.”

Speaking Oct. 17, 2023, at a real estate roundtable in Washington, Tom Barkin, president of the Federal Reserve Bank of Richmond, said he’s seeing a softening in many areas—banks stepping back from riskier investments, construction backlogs being worked down, workers getting easier to find in some areas of the labor market. 

The question, he added, is whether that trend feeds through to inflation, and gets the nation closer to that goal of 2 percent. 

“We are walking a fine line,” Barkin said. “If we under-correct, inflation reemerges. If we overcorrect, we do unnecessary damage to the economy. And even the best policy has the potential to be waylaid by external events, as we’ve been reminded with the recent news from the Middle East.”

Strong growth fundamentals in S.C.

While South Carolina is not immune to the factors influencing the U.S. economy at large, Preston said she believes growth fundamentals are “very strong” in the Palmetto State relative to the Eastern Seaboard at large. 

That’s due in part to explosive population growth: South Carolina had the sixth-largest population change among all states from 2020 to 2021, adding 59,976 residents over that span, according to the S.C. Revenue and Fiscal Affairs Office.

And unlike some other Southern states which attract primarily retirees, Preston said most of those transplants to South Carolina are coming to find work, particularly in the booming advanced manufacturing sector. 

South Carolina’s labor force has grown 5.7 percent since the start of the pandemic, according to TD Economics, compared with 4.6 percent in North Carolina, 1.7 percent on the East Coast, and 2.1 percent in the U.S. at large.

And yet, the state still needs more workers: for every job searcher in South Carolina, there are just over two openings, Preston added, compared to a ratio of 1-to-1.5 in the nation as a whole.

 “Even despite that very healthy growth in workers, there hasn’t been much easing of the South Carolina labor market,” Preston said. “The U.S. has come down a little bit, and we’re seeing some weakness in some of the Mid-Atlantic states, but clearly that labor demand in South Carolina is quite strong.”

The effect of higher mortgage rates leads fewer potential home sellers to put their houses on the market, but the new home sector in South Carolina is standing firm, which is evident in housing permits that have approached the 20,000 mark over the second half of 2023.     

And while home price escalations in South Carolina have flattened out to mirror the nation as a whole, Palmetto State home prices remain in plus territory—at least, for now.

“Affordability is becoming a real challenge in the state,” Preston said. “We do expect what with slower growth next year in the U.S. economy, and interest rates remaining higher for longer, that we will see some weakness in house prices in South Carolina.”