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Economist to MSOs: Economy is fine, U.S. led to believe it isn’t

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Market Trends
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According to Christopher Thornberg, economist and Beacon Economics founding partner, the societal narrative stemming from comments by the federal government doesn’t match the reality of the state of the U.S. economy as a whole, including the automotive industry.

“The economy is fine. It’s our heads that need fixing,” he said.

Thornberg was the keynote speaker at this year’s MSO Symposium on Monday during the SEMA Show in Las Vegas.

While the fear of a recession has loomed across the nation during and post-pandemic, Thornberg said the threat of it never actually existed. Instead, the economy is expected to slow and credit debt to tighten. Despite the supply chain having recovered, it’s still widely believed that many of the problems in the automotive and collision repair industries are the result of supply chain hiccups, he added.

The real issue, based on Thornberg’s observations and research, is more demand than supply driving up costs, such as a limited number of new cars making it to market, which he noted served as leverage for the United Auto Workers (UAW) union in its strike against the Detroit 3. After six weeks, tentative agreements were reached with General Motors, Stellantis, and Ford on Monday.

One of the biggest issues that contributed to the current inflation is the $5 trillion put into the economy through stimulus payments during the height of the COVID-19 pandemic. Thornberg said that equates to five times the amount of actual gross domestic product loss. Simply put, more wealth equals more demand and higher prices.

“As a result of that, $5 trillion turned into one of the greatest surges of money supply growth the nation has ever seen,” he said. “Now, what happens when you throw a lot of money at the economy in very short order? …The first thing that happens is money illusion. People feel rich… you invest and you spend. By investing, asset prices go up, and, of course, interest rates come down. By spending, the economy takes off. In other words, it’s a wonderful world. The problem is it’s an illusion. Real wealth is driven by the ability for an economy to produce goods and services.

“Inflation, this kind of abuse of the monetary system, always creates winners and losers. When you think about winners and losers, you immediately start thinking about some sort of political issue, political strife. Sure enough, we’re seeing that today; financial risks increase, which means there’s less investment, economic growth slows, [and] the economy becomes brittle. In other words, it’s something that you really don’t want to do. It doesn’t help things… $5 trillion of quantitative easing turned into about $35 trillion of brand-new household net worth. That is a 30% increase in three years, an insane amount of new money.”

As for job openings and the technician shortage, Thornberg said there are one-and-a-half openings for every person looking for employment in the U.S. But the reason repair facilities are having a hard time finding technicians to hire is because everyone is having that issue.

“There are simply not enough people in this economy,” he said. “When you talk about economic realities versus social narratives, this has been discussed by demographers for decades… The unemployment rate nationally is running at about 3.9%. The job openings rate has cooled from about 7% down to 5.8%. Keep this in mind though, this is still higher than at any point prior to the pandemic. In other words, those labor markets are still very, very tight and of course, the impact on the tight labor market is that wage growth is very solid. Real wage growth has bounced back up running about 3% on a year-over-year basis.”

Backing up what TechForce Foundation, I-CAR, and Collision Engineering have said contributes to the tech shortage — a surge in retirement — Thornberg noted a sharp drop in employment growth in 2020, calling it the “Great Retirement.”

“A couple of million people decided to retire,” he said. “That’s what took it from [an] economic narrative or economic reality and put it into the social narrative. All those people suddenly disappeared from the labor force and now we’re scrambling to find people. Now, one of the upsides of a tight labor market is rising wages and we have seen rising wages over the past bunch of years as a result of these, particularly by the way, for lower-skilled, lower-paid workers.”

Wage increases in that demographic spiked from about 2.5% in April 2020 to 3.5% in January 2021, he said.

Specific to auto repair, revenue has continued to climb from 2009 through Q4 2022 from $20 billion to over $4o billion, in tandem with repair costs from March 2021 through November 2022 when prices surged 11%.

General repair as well as body, glass, and paint sectors saw a significant dip in employment in January 2020 of around 50,000 each compared to January 2019, according to Thornberg’s data. At the same time, annual wage growth stayed at around 3% in general repair and body, glass and paint until Q2 2020 when wage growth decreased by 1% to over 2%, respectively. By Q1 2021, wage growth started to improve, returning to 2019 levels with a couple more dips along the way.

By Q3 2022, general repair wage growth reached 9% and body, glass, and paint reached 12%, according to Thornberg.

Thornberg contends that inflation can’t last much longer and is now driven by inflation expectations.

“There are people out there who think that we have inflation simply because we expect inflation,” he said. “Overall inflation levels are still running about 3%. But you know, here’s the answer. Who cares? The economy is doing great. Consumers are fine. People are spending money.

“Who cares? Well, the problem is this guy cares — Jerome Powell. The Federal Reserve’s narrative is simple. The U.S. inflation is due to some exogenous shock, remember the supply chain issue, but now it’s being driven by expectations. Now that it’s in the system, we expect it. That’s why it’s continuing. It sounds crazy but that is what they believe. They also believe something else. They believe inflation is really bad for American households. Despite, again, all you have to do is walk out on the Vegas Strip and see how busy it is to recognize how it’s not bad for American households.”

The Fed’s response: panic over full employment causing a negative impact on price and panic over price stability negatively impacting the credit system, Thornberg added.

So what’s ahead?

Thornberg predicts for 2024 that inflation will stay above target as the Fed continues to tighten causing public deficits to remain unsustainable, asset prices likely to sag again, and economic growth to slow. He forecasts GDP growth to be 1.8% and the unemployment rate to remain at 3.9%.

For more information or to request a custom forecast from Thornberg, visit the Beacon Economics website.


Featured image: Christopher Thornberg, economist and Beacon Economics founding partner speaks during the 2023 MSO Symposium in Las Vegas on Oct. 30. (Lurah Lowery/Repairer Driven News)

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