‘We’ve turned the corner’
OCEAN CITY — “It does appear that we’ve turned a corner in regards to the Fed and their lengthy battle to bring down inflation,” Gregory Matuson told a room full of business owners Jan. 18 at the Flanders Hotel.
The Ocean City Regional Chamber of Commerce hosted the president and CEO of Sturdy Savings Bank during its membership breakfast.
Matuson said a recent national survey found most business owners believe their companies will grow stronger this year along with the overall economy.
“That’s pretty positive,” he said, noting they felt the greatest challenges include inflation, interest rates and supply chain issues.
But he said he feels the Federal Reserve has struck an effective balance.
“They’ve introduced what seems to be a perfect median here of higher rates and still good economic activity,” he said.
Bill McMahon III, president of the Ocean City Regional Chamber of Commerce, introduced Matuson, who took a look back at 2023, noting global events, national economic factors and regional and local economic factors, and provided a look ahead at 2024.
He said high inflation has been harming the economy, telling an anecdote about buying movie tickets for his family. Having managed several movie theaters in the city, he was shocked at the price of nearly $65. His daughter asked how much tickets were when he managed theaters about 30 years ago. He said a matinee ticket was $3.25, which has increased fivefold.
Likewise, he said, gasoline prices have risen from about $1 per gallon when he started driving to more than $3 now, a threefold increase.
“Inflation is a unique and interesting thing but not the same across all products,” he said.
Matuson started his presentation looking globally and then focused more regionally and locally.
He said geopolitical issues and the uncertainty they bring, as well as national issues such as the immigration crisis at the southern border and dysfunction in Congress, will affect the economy.
“This is the most unstable things have been in a very long time,” he said, listing wars in Ukraine and the Middle East that have caused a “devastating humanitarian crisis and loss of life.”
He said the United States has provided more than $100 billion in financial support for weapons and machinery.
“The environment that we are operating within, especially in the Middle East, is very unstable at this point and could be a situation where it broadens out,” Matuson said
Likewise, he said, political issues in the United States such as the congressional power divide, deficits, immigration and the likelihood of continuing gridlock leading up to the presidential election will further disrupt the economy.
“There is a clear lack of leadership and policy in regards to immigration, especially at the southern border,” Matuson said.
Another factor is the divided control of Congress and its inability to govern.
Matuson said there is likely to be uncertainty regarding the political environment amid a presidential election year.
“The tone and rhetoric we are seeing coming out of Washington from both sides is not normal and a little more troubling than in the past,” he said.
He showed a graph displaying the U.S. debt level and its escalation from zero in the 1970s to more than $36 trillion today and another showing its growth through the presidencies of George H.W. Bush, Bill Clinton, George W. Bush, Barack Obama, Donald Trump and Joe Biden.
“One thing they are really good at is spending everyone’s money,” he said, noting “shocking deficits.”
Matuson said the last time revenue exceeded expenditures was during the Clinton administration.
Wars begun during George W. Bush’s presidency continued through the Obama administration.
“Trump ended those but enacted huge tax cuts,” Matuson said. “There is no fiscal restraint in Washington, with debt levels that we have never seen in history.”
Immigration is another factor that could swing the economy.
Another graph showed apprehensions and expulsions at the southern border increased dramatically from 2020 to 2021 and continued climbing in 2022 and 2023.
“It ebbs and flows, but at this point we have broken all of the molds in terms of number of folks coming in at the southern border,” Matuson said.
He noted the facilities cannot handle the overwhelming numbers and migrants are being bused to cities around the country.
“I’m not sure how this immigration situation gets resolved, but if it continues to go in the way it has gone under Democratic presidents, I’m not really sure this issue gets resolved in a meaningful way,” Matuson said.
Factors affecting the U.S. economy include inflation, interest rates, a regional banking crisis, escalated mortgage rates and the stock market.
The Consumer Price Index indicates inflation of about 4 percent.
Matuson said inflation drives up interest rates, and the main cause of inflation over the past few years is the COVID-19 pandemic, which had a significant effect on the economy with supply chain issues coupled with increased stimulus money that resulted in a $6 trillion response.
He said the Fed prefers inflation of about 2 percent per year but COVID pushed some facets as high as 8 percent, levels not seen since the 1980s.
Matuson said the Fed raises interest rates to combat high inflation. The Federal Funds Rate, how much banks pay to borrow money from each other, serves as a benchmark that affects numerous other borrowing, directly affecting loan rates, mortgage rates, credit card rates and home equity loans.
He said the Fed largely ignored inflation for some time, saying it was transitory, “but it turned out not to be transitory.”
Starting in 2022, he said, the Fed made an unprecedented increase in the Funds Rate in an extremely short period of time, causing extreme stress on economy in an effort to slow inflation.
It took a lot of banks by surprise, resulting in some regional banks failing because they ran out of money.
“It’s not something I expected my first year as president of a bank,” he said.
Matuson said short-term interest rates dropped from 2.5 percent in 2019 to nearly zero from 2020 to 2022, but then shot up to a peak of 8 percent.
“We are seeing some relief in the mortgage market, as far as rates being down,” Matuson said.
In the meantime, the Stock Market soared throughout 2023, with all three major indexes ending the year up by 14 percent (S&P 500), 24 percent (DOW) and 43 percent (NASDAQ).
He said inflation kept falling through most of 2023 and consumers kept spending even though the increases the Fed were enacting were expected to slow spending. There was a big rally in November when it became clear the Fed was probably done raising rates for a bit, he said.
“Surprisingly, the geopolitical events haven’t really impacted the Stock Market, which continues to be surprising with wars on multiple fronts,” he said.
Outlook for 2024
Matuson said the Fed has indicated it’s likely to keep lowering rates, and he expects it to do so sooner rather than later because it would “steer away from moving rates right before the election.”
He thinks 30-year mortgage rates will hover between 6 percent and 7 percent and “we have seen the highs and they are probably behind us.”
He said the stock market will continue to be volatile, noting it has not started the year off well, but thinks that it ultimately will end the year higher than it started.
Housing volume will stay in the low range in terms of sales as rates remain at the higher end and prices will remain high.
Wildcards include the global geopolitical issues, Matuson said, noting his concern about “stability in the world order,” the number of wars and likelihood that the U.S. will get involved.
“I think that’s the one significant uncertainty that could drag us in one direction or the other,” he said.
Likewise, the presidential election could have a dramatic effect.
“This one feels different to me,” he said. “Nobody wants either candidate that we have.”
He said dysfunction and divisiveness leads to economic uncertainty, noting Trump is under indictment and people feel Biden doesn’t have the mental capacity to continue.
By CRAIG D. SCHENCK/Sentinel staff