Wanted: A return to normalcy
A Comprehensive Review of Regional Economics Normalization in Demand. There was strong consumer demand in the preceding two years. After the epidemic, Americans were eager to spend, and they did. Throughout the Southeast, REIN contacts reported earnings that broke records and challenges maintaining inventory levels. In 2023, demand was still high, although it was a little bit lower than in prior years. Contacts throughout the year told a similar story. Most businesses are not concerned about the measured slowdown in demand inside and across several industries. Contacts regarded this as a “normalisation,” realising that the boom over the preceding two years was unsustainable. Customers’ discretionary spending showed a particularly noticeable slowdown in demand. Consumers were reportedly trading down or looking for better deals, according to certain businesses. This tendency was particularly noticeable among consumers with low to moderate incomes.
Demand has moderated somewhat, according to several businesses, but there are variations between industries.
A Comprehensive Review of Regional Economics Normalization in Demand.There was a noticeable decline in demand for real estate. Both commercial and residential, a sector that is highly susceptible to interest rates. Real estate contacts reported a slowdown in the demand for hotel, office, industrial, single-family, and multifamily real estate. This trend is corroborated by statistics and reports available to the public. It is anticipated that the office sector of commercial real estate (CRE). That would continue to be weak through 2024 and beyond.
Demand is still growing in certain areas of the economy, especially those where government investment is involved, like infrastructure. Overall, in 2023, demand began to normalise and approach more prepandemic, sustainable levels.
Labor: Wage pressures and market tightness lessen
Early in 2023, reports on the state of the labor market resembled those from 2021 and 2022. According to contacts, there was still a shortage of workers, especially for specialized jobs. Because companies were finding it difficult to recruit and retain employees. Wage growth remained strong and above average year over year.
Contacts reported that wage pressure and the tight labor market were gradually lessening as the year went on. As the labor supply increased and the demand for production decreased in the second half of 2023. REIN contacts noted more and more that circumstances were becoming more lenient for a wider range of businesses, sectors, and positions.
Most of the people I spoke with said that hiring and keeping employees was simpler. In several instances, businesses overhired and sought to cut staff as the market declined. While some contacts did report layoffs, attrition was the main method used to accomplish this rightsizing. Some contacts experimented with lowering hours or enacting pay freezes as a means of cutting labor costs and forcing attrition. Particularly challenging hiring situations still exist in the healthcare industry and for positions needing specialized knowledge.
Wage gains in 2023 were usually lower than in 2022 and are predicted to be considerably lower in 2024. Furthermore, several contacts mentioned that unlike in other years they would not need to implement several off-cycle pay hikes in 2023, which frequently allowed them to fulfill labour budgets.
Prices and costs: Growth rates start to slow down.
While inflation was still high at the start of 2023, it was less than it had been for most of 2022. With the greatest rate of inflation in many years, 2022 saw robust demand and falling supply. The pandemic’s shutdowns caused supply chain disruptions, which persisted as manufacturers struggled to fulfill backlogs of orders and ports continued to be clogged. Meanwhile, because customers had extra money to spend, demand was high. Demand continued to exceed supply, resulting in inflation. In an attempt to rein in inflation, the Fed responded by raising interest rates sharply, beginning in the first half of 2022. Supply chains started to relax towards the end of 2022, and contacts reported more readily available commodities with shorter wait times. This reduced inflation as the gap between supply and demand shrank.
Businesses reported at the beginning of 2023 that the growth rates of input costs had started to slow down, mostly because of improvements in supply chains. The majority of the time, these lowering costs were not passed on to clients, and many businesses aggressively raised prices to preserve traditionally high profits in the face of strong demand. Nonetheless, there has been talk of higher price sensitivity in the consumer goods sector, especially when it comes to lower-class families’ discretionary spending.
The majority of businesses reported more noticeable drops in the growth rates of their overall operating expenses in the second quarter of 2023.
Specifically, the costs of products and containers decreased dramatically, which impacted the cost of acquiring commodities. A growing number of businesses were slowing down the rate at which they raised prices due to growing customer price sensitivity. Through contract negotiations, price sensitivity was more obvious in the business-to-business sector but also extended to the consumer sector. Many firms saw changes in their margins as prices and pricing power decreased, but even these companies frequently stated that their margins were greater than prepandemic levels. Inflation in the services sector remained high throughout the quarter, despite a significant slowdown in the goods sector of the economy.
Inflation on the goods side continues to decline in the second half of 2023 and is now spreading to the services sector. Many businesses still grow their pricing, although usually at a considerably slower rate. Some have altogether stopped raising their prices. For the first time in years, many firms that interact with customers are utilizing discounts and promotions.
Nonetheless, price growth is still high in other sectors, including infrastructure, where demand is still quite high. Many businesses can retain margins as a result of the sluggish rise of operational expenses and the waning pricing power of these businesses. One notable exception is insurance, where rate increases are still quite high, causing some businesses to either not insure completely or postpone or cancel projects due to the high cost.
Credit: Lenders adopt a more cautious stance
Financial institutions indicated that the loan market was tranquil at the start of 2023. Although consumer financing showed early symptoms of contraction, past-due amounts and delinquencies stayed below pre-pandemic levels.
Silicon Valley Bank (SVB) abruptly collapsed on March 10, 2023, after a run. The banking industry as well as the overall economy was shaken by this catastrophe. There was widespread fear in the immediate wake of SVB’s demise that other failures may be on the horizon. Even with a few minor setbacks, the majority of financial institutions managed to weather the storm.
Regulators and bankers, however, adopted a more cautious approach to lending due to worries about bank stability
This included raising loan underwriting criteria, reducing lending in high-risk industries, etc. To fight inflation, the Fed quickly increased interest rates at the same time, which made borrowing less appealing.
Many businesses could notto engage in the new project due to the lending retreat that intensified after SVB’s collapse since they had a lower chance of being granted loans, which came with more stringent requirements and higher interest rates. However, several businesses turned to other lenders, especially private equity, to finance projects when banks rejected themks or could not afford to do so.
As the year went on, the Fed kept raising interest rates, which increased the cost of lending
And banks continued to be cautious when issuing loans because of the growing economic uncertainties. Especially in faltering industries like real estate, banks refused to provide money.
A weakening economy has caused many private investors to become more cautious, as we have witnessed a retreat in private equity and alternative lending in recent months. The majority of businesses that make purchases in the present credit climate do so with cash and those that don’t are making relatively minor purchases.
Even if there aren’t many defaults right now, a lot of lenders are worried about commercial loans that need to be refinanced in the coming years. Some claim to be actively trying to create a strategy to prevent default with borrowers who could find it difficult to make payments at renewal.
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