Idaho economist: Strong labor market propping up economy

POST FALLS — The Federal Reserve is expected to begin announcing rate cuts today for the first time in five years.

"This is a really big deal because interest rates have been abnormally high by our recent standards," said Sam Wolkenhauer, the Idaho Department of Labor's North Idaho economist.

"We're essentially in the late process of trying to bring about the soft landing where we can bring inflation down without triggering a recession, so it's kind of like this nice, controlled deceleration of the economy," he said.

Whether rates are cut by a quarter of a percentage point or a half of a percentage point will determine much in terms of how happy the market is, he said.

The important thing is the Federal Reserve feels the country is in a position where it can begin easing up on inflation, which is nearing the Fed's target, Wolkenhauer said.

"We feel that we have really turned the corner on the inflationary story and rates can begin to come down," he said.

However, as rates are brought down, the critical question is: "Will the economy normalize before a recession occurs?"

Wolkenhauer delivered an economic update Tuesday during the Post Falls Chamber of Commerce's monthly Connect4Lunch at Prairie Falls Golf Club.

Through it all, he said households have been resilient and continuing to spend money despite high prices.

He said the economic concept of "supply and demand" — which says when prices rise, consumers are expected to spend less — is becoming obsolete because Americans have continued to spend more in the face of rising costs.

Spending was pulled back during the COVID-19 pandemic in 2020, he said.

"We were buying Pelotons, toilet paper, bottled water, not a whole lot else," Wolkenhauer said.

Post-pandemic spending spiked even as prices rose.

"Consumers did not dial back their spending, and that's a major reason why we haven't seen a recession yet," Wolkenhauer said. "That pretty strong consumer spending is holding the economy up."

But where are people getting extra money?

Wolkenhauer said initially, stimulus checks were an early source of pandemic-era funding. When that source was depleted, consumers turned to credit cards.

"Credit card debt in the United States has been rising very, very quickly in recent years," he said, noting that many people used stimulus money to pay their credit card bills, but that reprieve was short-lived.

Revolving consumer debt in the U.S. is now well more than $1 trillion, Wolkenhauer reported.

While non-housing debt is at an all-time high, default rates are fairly stable, Wolkenhauer said.

"We have a little puzzle to unwind here, and the answer seems to be that we're actually OK right now because of one very important fact: Everybody has a job," he said.

The high employment rate allows people to pay bills and avoid financial delinquencies.

"The picture of the American economy that emerges is one where people are really being squeezed by higher prices. They are responding to higher prices not by spending less but by borrowing more," Wolkenhauer said. "As long as everybody has a job, we can continue to motor along like this."

He said the labor market is truly what is sustaining the economy.

People may be alarmed by what appears to be a slowdown in job growth, Wolkenhauer said, but the labor market is not deteriorating. It is stabilizing after the pandemic.

Kootenai County has not added any jobs since October 2023; employment has not grown but has remained stable.

Wolkenhauer said people voluntarily quitting their jobs because they feel they have options is a sign of a labor market's strength.

"That has also been in decline, an indicator that perhaps workers are starting to feel the labor market is softer than it was," he said.

Wage growth, which grew around 7-8% per year after the pandemic, has since slowed to about 4% year over year. This is another indicator of a softening labor market and cause for concern, Wolkenhauer said.

He said the median home in Idaho is more expensive than the national median while the median income is lower than the national median.

"Home prices in Idaho have recently run between seven and nine times the state's median income," he said. "If you look at the long-run average from the '60s through the late '90s, nationally that ratio was about 2.7.

"The median home should be roughly three times the median annual household income, and in Idaho we were running close to nine there last year," Wolkenhauer said. "Home prices in Idaho continue to be a problem and unaffordable for many, many families in Idaho."

On the positive side, he said rental markets have diverged from purchase markets over the past few years. Normally these prices track together.

"People panic when they hear this comparison, but the last time the divergence between rents and buyer prices was this large was in Quarter 3 of 2007," he said. "Clearly there's some sort of dysfunction in the housing market."

Renters are getting relief because of the backlog of multi-family construction, which ramped up over the past few years.

"For really the first time in decades we have more multi-family units under construction than single-family," he said. "Your sense that there's been a lot of apartment construction is correct."