The Federal Reserve needs to clamp down on inflation now even if the cost is pushing the U.S. economy into a recession, UNC Charlotte economist John Connaughton says.
Speaking at the NC Chamber’s annual economic forecast, Connaughton said that without counting energy and food costs, the underlying inflation rate is about 3.5%, significantly higher than the Fed’s target of 2.0%.
This reflects things like the high cost of housing, which “is not going to go away any time soon,” he said.
He said curbing inflation is like herding cows — best done from out in front of the problem.
“This fight to get these inflation pressures down and get it out of the economy once and for all is very, very important,” Connaughton said. “And my estimation, it’s much more important than a soft landing.”
Connaughton was on a panel with Travis Clark and Laura Ullrich, economists respectively from Visa Inc. and the Richmond Federal Reserve.
Clark said the economy’s getting a boost currently from business and consumer buying that’s occurring on the assumption that incoming President Trump will act unilaterally to raise tariffs.
That’s giving the economy “GDP juice based on what people are anticipating,” he said.
So “you’re going to see in Q1 a large increase in business and spending and inventory contribution to growth, and it’s going to look great,” Clark said. “Wait ’til Q2 — because once we get in the second quarter, and the tariffs go into effect, they’re not going to be spending and you give back that growth later.”
Clark also said the economy has been “growing above potential,” which results in a combination of strong growth and higher inflation.
In 2025, he expects GDP growth “to be likely less explosive,” in the neighborhood of 2.4% year over year, which would still be “a little above potential.”
That would still take pressure off inflation, but another issue is the availability of labor.
The “main thing” that could bring back inflation, he said, is either a lack of strong growth in the labor force or worse, a contraction of it. Those “I think could bring back inflation and then could end up causing a recession,” he said.
To that point, Ullrich noted the uncertainty surrounding immigration policy.
“Over 7% of the workers the United States are undocumented immigrants,” he said. “There is the potential for there to be real impacts there in agriculture, in hospitality — leisure and hospitality — and in construction specifically.”
N.C. in the frame
Connaughton also warned that North Carolina faces some economic headwinds of its own this year thanks to the aftermath of Hurricane Helene.
The state’s growth centers remain the Triangle, Charlotte, Wilmington and Asheville, but Helene took the wind out of Asheville’s sails, he said.
“We were going like gangbusters the first three quarters a year, and then the fourth quarter really slowed down,” he said. “I don’t expect that slowdown to go away.”
Typically, a disaster causes drag in a region for a couple of quarters, and then for a year after that, “it’s gangbusters as people rebuild business and come back online,” he said.
“The problem here is, if you look at Western North Carolina, so much of the damage was rising water, and most of [the] people were not insured for that,” he added. “It’s not like the coast.”
But Clark said the overall aging of the country’s population is countervailing good news for the pharmaceutical sector that’s based in and around the Triangle. It “really is going to be a main driver of jobs and income growth for North Carolina,” he said.
The economists didn’t have the afternoon to themselves, as the NC Realtorsand the leaders of the Chamber and the N.C. Bankers Association also had their say.
Bankers Association President Peter Gwaltney said he’s “encouraged” by new Gov. Josh Stein’s early moves on hurricane relief, both in terms of the executive orders he’s issues and the people he’s hired to spearhead the work.
On the hiring front, Gwaltney singled out Stein’s choice of Jonathan Krebs to serve as his Western North Carolina Recovery adviser.
A former banker, Krebs has helped “state governments and municipalities to work with the federal government through disasters since [Hurricane] Katrina,” Gwaltney said.
“He’s bringing to us all the experience, all the mistakes made, all the lessons learned to help us do this the right way,” said Gwaltney, who led the Louisiana bankers’ trade group during the recovery from Katrina. “He also knows the people to contact and the buttons to push at the federal level.”
But Gwaltney said this state’s “greatest need is for patience.”
Though “no one wants to hear this,” after Katrina, it “took close to a decade to bring New Orleans back,” he said. “I don’t know if that’s how long it will take in Western North Carolina, but we need to be ready for a long slog, unfortunately.”