By John Connaughton, PhD, S. Alan McKnight, Jr., CFA, Richard Moody, and Andrea Smith for the Charlotte Business Journal

It’s an economy increasingly defined by opportunities and optimism. But, to be fair, the optimism is pretty cautious at the moment.

After a presidential election, regardless of who wins, there’s often a pickup in the stock market because there’s greater clarity about what investors and businesses can expect in the next few years. At a recent economic forum hosted by the Charlotte Business Journal and Regions Bank, panelists agreed a recession is not entirely off the table in 2025. But the chances for one are pretty low.

“The National Bureau of Economic Research tracks six economic indicators that they use to determine if and when a recession begins. When you look at each of those right now, none of them are trending down,” says John Connaughton, professor of financial economics with the UNC Charlotte Belk College of Business. “It’s not very likely that we’re going to have a recession this year or next year.”

Joining Connaughton in the wide-ranging discussion about economic trends were Alan McKnight, chief investment officer for Regions, and Richard Moody, Regions’ chief economist. Andrea Smith, interim president and CEO of CLT Alliance and former Bank of America executive, moderated the discussion.

On how 2024 evolved

Just as predictions about a recession never materialized, expectations for when the Federal Reserve would begin to influence interest rates defied expectations in 2024.

“I think a lot of us came into the year thinking March or May would be the likely starting point and they didn’t actually start until September,” Moody says. At its September meeting, the Federal Reserve Board lowered the federal funds rate by 50 basis points. The Fed is expected to lower rates another 50 basis points before the year’s end.

McKnight concurred that a year ago, markets were anticipating an impending recession, though he says Regions’ economists didn’t agree.

“We just felt the economy was more resilient and more stable than people had anticipated,” McKnight says. Markets climbed in 2023 and continued to go higher in 2024. “As long as we don’t have some sort of exogenous shock, we think the markets can actually do pretty well now — nothing like we had this year, 23% in the equity markets on top of double-digits last year — but it can still perform pretty well.”

Connaughton puts recession chances at 20%. More than a recession, Connaughton says he worries about a return of inflation, adding that the Fed let inflation grow to 7% before acting.

While the Consumer Price Index has fallen to 2.9% and is still trending down, Connaughton says much of the downward pressure is from falling energy prices. Core CPI has remained elevated.

The reacceleration of inflation in early 2024 surprised many economists. What happens in the next few months will also be hard to predict after the strike among Boeing mechanics and the impact of two deadly hurricanes, which dampened jobs numbers and made it harder to tell where the economy is headed.

At the same time, the election’s outcome — and not just for president — will provide some clarity on the policy front.

“A lot of companies have been in a waiting game, deferring capital spending and putting hiring on hold,” Moody says.

The Republicans’ sweep also influences future regulatory action.

Moody sees the economy normalizing to a more typical 2% growth rate after the policy response to the pandemic, which caused significant inflation.

On employment numbers

There’s general consensus the Fed will lower the federal funds rate 25 basis points in November and do the same again in December, mostly as a way to recalibrate policy instead of fend off recession or prop up the economy.

A bigger indicator of how 2025 will go will be seen with employment, McKnight says. As is often the case ahead of presidential elections, companies had paused hiring.

“If we were to start hearing these companies are getting to the actual layoff process, that would be a negative sign,” McKnight says. “We don’t see that, but that would be concerning.”

Moody agrees that the pace of job growth has slowed.

“We dropped over 20 million jobs in two months, March and April 2020, and it took time to bring all those jobs back,” Moody says. “So, we are past that point so it always made sense that the pace of hiring would slow.”

If employers start to let employees go because they perceive softening demand for their products or services, that would change Regions’ outlook on the broader economy, he says.

On inflation risk

Connaughton reflected on inflation in the 1970s and his opinion that the Fed did a poor job at that time getting ahead of inflation growth.

“I am very concerned this current Fed is going to blow it, quite frankly,” Connaughton says.

Likewise, Connaughton says he’s concerned about the 2017 tax cuts, which are set to expire at the end of 2025. If the cuts expire, average taxpayers won’t feel much change, Connaughton says, but the corporate tax rate will go from 21% to 35%.

“I don’t think it matters who gets elected, I don’t think those tax cuts are going to get renewed,” Connaughton says.

McKnight agrees the corporate tax rate could be problematic, but he thinks some extension of the corporate tax rate cut is possible.

“Markets do best when it’s divided government because not much changes,” McKnight says. “My view is that something will get done to try to minimize the impact of that because no one wants to take the economy over the cliff.”

McKnight agrees the potential for resurging inflation is the bigger risk to the economy.

And while the rate of inflation has dropped from 9% in June of 2022 to near 3% today, prices did not come back down. That’s the pain that consumers continue to feel.

“Consumer confidence levels are basically at levels consistent with recession,” Moody says. “Inflation slowing from 9% to 3% doesn’t mean prices are falling. It just means they’re rising at a slower rate.”

Lower-to middle-income households are struggling with necessities like food, energy, shelter and clothing. Aggregate numbers look good, Moody says, but lower-to middle-income households are frustrated.

On the horizon for central banks

Around the world, central banks have started cutting interest rates, with some cutting earlier than the Federal Reserve and more aggressively.

“Our economic fundamentals here in the States are stronger than they are in most other industrialized countries,” Moody says. “The Eurozone is kind of teetering on the brink of growth or recession.”

Most other nations are more worried about lagging growth than inflation.

Despite lowering interest rates here, mortgage rates have not dropped, demonstrating that this important metric for the housing market is more closely tied to 10-year Treasury yields than to the federal funds rate.

Longer yield rates are the result of stronger economic data, the possibility of the inflationary pressures likely to accompany a second Trump term, and concerns about the nation’s fiscal path, Connaughton says.

The national deficit for 2024 was $1.8 trillion, in a year in which revenue grew by over 10%.

“And if you go back to the policy, we’re going to cut taxes on anything and everything and spend more on anything and everything; it’s not a recipe for fiscal discipline,” Connaughton says.

On strong stock market performance

The stock market has been on a tear this year, up 23% by late October. Panelists say they think those sorts of returns likely will not continue.

McKnight says Regions believes equities will continue to do well, but expects returns in the mid to high single digits.

“It’s all based on the ability of companies to generate earnings,” he says.

McKnight pointed out that the blockbuster performance of tech stocks in 2024 is nothing like the tech stocks that burst in the 2000 dotcom bust.

When you look at the balance sheets of Apple and Alphabet and Meta, it’s a sea change,” McKnight says. “How many folks would rather own an Apple bond because of the strength of the balance sheet than a U.S. Treasury?”

Panelists were less optimistic about foreign markets being a place for investments. Moody says China looks less likely to grow.

“Throwing more monetary stimulus at an economy that’s awash in debt is probably never a good recipe,” Moody says of China. The reason oil prices are lower in the U.S. is because China has less demand. India has surpassed China with the largest population in the world.

On AI’s impact on the economy

So far, tools such as ChatGPT are augmenting work to create efficiency and productivity but not radically changing how work gets done, McKnight says.

“We don’t see yet where it’s going to be causing widespread job losses. It is going to be an evolution, and automation more broadly is going to be a greater issue,” McKnight says.

Population trends indicate that automation will become more necessary for economic growth, Moody says. Automation will enhance people’s abilities to do their jobs, not steal it.

Connaughton says he’s not yet worried about them taking over.

“As someone who grades AI-generated papers from time to time, this stuff is so bad right now that it’s not hard to pick it out,” Connaughton says.

On construction activity and costs

Housing has become unaffordable for many, though homeowners have been pleased with how their assets have gained value. The only way to make housing more affordable is to increase the number being built. Builders are confronted with higher materials costs and a shortage of labor.

“For over a decade we have been under-constructing single-family homes,” Moody says, putting the deficit at nearly 2 million single-family homes. Higher interest rates combined with higher home prices will continue to impede the housing market.

On North Carolina’s economy

Connaughton, who directs the North Carolina Economic Forecast, expected the devastation from September’s Hurricane Helene in western North Carolina to have an impact on October employment numbers and on the state’s overall economy.

“We are going to have a big problem in Western North Carolina with a lot of small businesses going out of business,” Connaughton says. Because the damage was predominantly caused by flooding and 98% of those affected did not have flood insurance, they will have to rely on state or federal funding to rebuild.

“I don’t see the rebuild coming, particularly for those small, mom-and-pop businesses,” he said.

John Connaughton, PhD, is the Director of the NC Economic Forecast at the Belk College of Business, UNC Charlotte; S. Alan McKnight, Jr., CFA is the Executive Vice President/CIO of Regions Financial Corporation; Richard Moody is the Senior Vice President and Chief Economist of Regions Financial Corporation; and Andrea Smith is the Interim President & CEO of the Charlotte Regional Business Alliance.

The preceding article originally appeared on November 29, 2024 at the Charlotte Business Journal’s website and is made available here for educational purposes only. This constitutes a ‘fair use’ of any such copyrighted material as provided for in Title 17 U.S.C. section 106A-117 of the U.S. Copyright Law.