Economic Forecast: Recession Predicted, But Experts Expect Minimal Effect on South CarolinaFeb 21, 2023 09:17AM ● By C. Grant Jackson
With a chance that the state and the nation could slip into a recession sometime in 2023, South Carolina’s economy continues to do well and any impact is expected to be mild. Meanwhile, one of the biggest worries for South Carolina employers in 2023 is finding workers.
The consensus among most economists is that there is a greater than 50 percent chance of a recession for the state and the nation in 2023, according to Joseph Von Nessen, a research economist at USC’s Darla Moore School of Business. Von Nessen and USC economist Doug Woodward presented their views during USC’s 42nd Annual Economic Outlook Conference in early December.
Scott Baier, chair of the Department of Economics at Clemson University, is slightly more optimistic, seeing only a 30 to 40 percent chance of a recession in 2023 or 2024.
Recession fears are being driven by persistently high inflation and rising interest rates. High inflation has been the result of a “significant supply and demand imbalance across the U.S. and in South Carolina,” Von Nessen said. “The U.S. saw an infusion of cash in the form of $6 trillion in Covid 19-related federal stimulus during 2020 and 2021,” Von Nessen said. “The resulting spike in consumer demand is what has generated most of the high inflation we have been observing.” Likening it to the economy drinking a Red Bull, Von Nessen said “2023 will be the year where we come down from this ‘caffeine high’ and recalibrate.”
Much of that recalibration is coming via the Federal Reserve, which has been steadily raising interest rates, and is expected to continue to do so in an effort to bring inflation down.
Baier thinks the Fed will continue to raise rates in the near future, but then take a pause to gauge the effect of the prior rate hikes.
But despite inflation and rising interest rates, South Carolina is in a good position to weather a recession, and the economists see the state’s economy, barring any unforeseen events, continuing to grow for years to come. “Our outlook, like the weather, is cloudy right now with chance of showers, but we don’t predict any hurricane – an economic hurricane – headed our way,” Woodward said.
Baier agrees that South Carolina has been on the upside for the last few years, and he expects that to continue. But like the USC economists, he sees “a big cloud of uncertainty, and part of that is due to inflation and how the Fed deals with inflation.”
But, “as we look ahead, South Carolina’s economy is in very good shape,” said Von Nessen. The state saw strong employment gains across most industry sectors and most regions in 2022, “and as of this past summer, we have recovered all the jobs that were lost in 2020.’’
And not just recovered the job losses, but Von Nessen notes that employment levels in the state “are about 2.2 percent above where they were in February of 2020, meaning that we now have more people working in South Carolina than at any point in in the state’s history.”
Bob Morgan, president and CEO of the South Carolina Chamber of Commerce, says that finding workers is the biggest challenge for his members.
The state chamber surveyed 900 businesses between August and October of last year, and Morgan said while there was pessimism about the direction of the U.S. economy, there was optimism about South Carolina. “But they’re nervous. They’re nervous about inflation. They’re nervous about supply chain. And they’re nervous about workforce. Workforce, continues to be the No. 1 challenge,” he said.
Coming out of the pandemic, finding workers has become increasingly difficult because of a smaller labor pool. If you compare 2022 to 2019, Von Nessen said, “we would expect to have about 80,000 more people in the labor force than we do, because so many people have exited and our labor force participation rate has gone down.”
According to Von Nessen, about 60 percent of those who have left the labor force are over the age of 55. “So they are effectively people – baby boomers – who are looking to retire or probably retired,” and are not looking to rejoin the labor force.
Baier notes that nationwide the labor shortage is mostly with 25- to 34-year-olds. “That age group seems to be, for whatever reason, disengaged in the labor market, and they’re not coming back or maybe they’re doing part-time jobs or have become members of the gig economy.”
In fact, the November 2022 employment statistics from the S.C. Department of Employment and Workforce show that almost half – 43.6 percent – of South Carolinians eligible to work aren’t seeking jobs.
The state’s low employment rate and lack of available workers is forcing companies to change hiring practices. Morgan said he is aware of an IT firm in Spartanburg “whose jobs are work-from-home jobs, and they’ve quit recruiting in South Carolina altogether.” The state’s unemployment rate is so low that the firm is going to states with higher unemployment rates “and saying you don’t have to move, but you can work for this company that’s based in South Carolina,” Morgan said. He notes that technology has made that kind of remote work possible.
The jobs recovery from the pandemic extends to most regions, Von Nessen said. Charleston, Myrtle Beach, and the Upstate have seen the most employment gains since 2020, he said, That’s been due largely to growth both in manufacturing and the housing industry and more generally because of the “durable goods bubble that has really formed over the past two years,” Von Nessen said. Consumer spending gravitated toward goods and away from services as people stayed home and were socially distanced in 2020 and 2021.
But that created a pent-up demand for services, Von Nessen said, and “the goods-to-services spending ratio is still in the process of shifting back toward pre-pandemic norms.” As that consumer spending pendulum swings back toward services it will have an impact on the workforce creating more opportunities in sectors such as leisure and hospitality, and the need for more workers. That will add to the strength of the state’s economy, even as manufacturing continues to lead the way toward more growth in 2023.
South Carolina’s job outlook is so strong that Van Nessen is projecting what he calls a “jobful recession” for 2023. While recessions often result in high unemployment, Von Nessen doesn’t expect that to happen in 2023, and that is one of the reasons why any recession is likely to be relatively mild.
Morgan points to four numbers that he says tell the story of where South Carolina’s economy ended 2022 and where it is going in 2023: economic investment, jobs added, jobs not filled, and population growth.
South Carolina had a record $10 billion in announced economic investment in 2022. Much of that investment has come as the automotive industry switches to electric vehicles. In October, the state announced an expansion of the BMW Plant in Spartanburg that includes a $1.7 billion battery assembly plant in Woodruff. In early December Envision AECS, a Japanese electric battery technology company, announced an $810 million investment in a battery cell plant for Florence County. Later in December, Berkeley County announced a state record $3.5 billion investment by Redwood Materials Inc, another battery recycling company. And the pace does not seem to be slowing. Richland County is expected to announce a $323 million manufacturing plant by an unnamed maker of electric battery components.
Along with those announcements comes 13,000 new jobs, Morgan said. And Clemson’s Baier says he expects South Carolina to continue to see positive employment growth for at least the first six months of 2023. That’s why he doesn’t think the state is likely to slip into a recession. “I think the employment numbers will still be positive for some period of time.”
But along with growing the number of jobs in the state, Morgan also points to the need to fill job vacancies. “We still have 100,000 jobs that are unfilled,” Morgan said, “and that is a bit more sobering.” One way to address that, he suggests, is through immigration. “Our country really needs to get serious about immigration reform,” he said. “There are people around the world who would love to come to the U.S. and help fill some of these 100,000 plus jobs right here in South Carolina, some of which require high skills, some of which don’t. But we need immigration reform that of course protects and secures our borders, but also allows those who want to come here to work to do so.”
The state has seen not only employment growth, but also population growth as well, and Morgan and the economists point to that growth as an economic strength.
“Census data has just come out, and we’re the third-fastest-growing state in terms of percentage of population,” Morgan said. “So we’re clearly a destination, not just for jobs and capital investment, but also for people who are voting with their feet to come to the Sunbelt.”
The Southeast is “a place where people will continue to want to move and will continue to be a place where businesses want to locate,” Baier said.
“In some ways we could argue that the pandemic has strengthened our economy,” said USC’s Woodward. “We have been recognized now as a good quality of life, a good place to live, low cost of living with natural amenities, and we’re tracking a lot of people into the state as a result of that.”