By All Indications

Bob Nakosteen calls it a ‘calm slowdown.’

That phrase is synonymous with ‘soft landing,’ and that’s what he’s projecting for the last quarter and change in 2024 at a time when there are mounting questions about the economy, what’s happening — or not happening — and whether we might actually be hearing and using the dreaded ‘R’ word either later this year or early next.

Nakosteen, the semi-retired professor of Economics at the Isenberg School of Management at UMass Amherst (he’s still teaching several courses a semester), said the country isn’t really close to being in a recession when it comes to the technical definition of the term — two consecutive quarters of negative GDP — but people like to toss out that word whenever things start to slow down. And in many ways, they have.

Indeed, the most recent jobs reports have not been as robust as in previous months; the housing market remains … not at a standstill, but in a real slump induced by higher interest rates; the stock market took a sharp nosedive at the start of August (but has recovered nicely); and, while inflation has trended downward, the cost of food, energy, and other items remains high enough to make it a top issue in the presidential election.

All this has led many economists (Nakosteen is one of them), politicians, and, yes, area business owners to speculate that the Fed has, indeed, waited too long to lower interest rates, and thus, in its efforts to tame inflation by cooling the economy, it has cooled it too much.

That ‘too much’ part is certainly a matter of opinion, said Nakosteen, who told BusinessWest that, while things have slowed somewhat since earlier this year, the economy remains robust by many yardsticks.

“This is not breaking news, but the economy has held up really well in spite of a lot of pressure, especially from a rapidly rising interest-rate environment. The consumer has really rolled with the punches.”

“The economic numbers don’t look bad at all,” he said. “The labor market has weakened a little bit, but it’s not weak; it’s just not as strong as it had been. And most of the other indicators are strong, including GNP. It’s about where it had been, and in some ways, it’s above trendline. The last report was about 2.3% annualized growth; when you put all the pieces together, that’s above trendline. It doesn’t sound all that strong, but 2.3% is not bad in the current environment.”

Matt Sosik, president and CEO of bankESB, was in general agreement on those points, noting that, given the sharp rise in interest rates, consumers — and the economy in general — have performed better than might be expected.

Matt Sosik wonders about the impact of mounting pressure on consumers, as evidenced by rising credit-card balances and loan delinquencies.

“This is not breaking news, but the economy has held up really well in spite of a lot of pressure, especially from a rapidly rising interest-rate environment,” he said, adding quickly that huge federal deficits are essentially “subsidizing GDP,” as he put it, thanks to stimulus money that is still being spent. “The consumer has really rolled with the punches.”

That said, he wonders for how much longer this will be true, noting mounting pressure on consumers, as evidenced by rising credit-card balances and delinquencies in paying those balances, mortgages, and car loans (more on that later).

Overall, many business owners have been in somewhat of a holding pattern, said Ken Vincunas, president of Agawam-based Development Associates, noting this sentiment refers to decisions about investments in real estate — either building something new or simply buying something — but also business decisions in general.

Many are waiting to see what happens with interest rates, but some are also waiting for the November election, the outcome of which may impact what happens with those rates and the economy in general.

“Everyone is holding their breath and waiting to see what will happen in November,” Vincunas said. “That’s the big wild card right now.”

For this issue, BusinessWest takes an in-depth look at the economy as the three-quarter pole approaches, what might happen the rest of this year and beyond, and the factors that will likely determine which way the arrows will be pointing as we move into 2025.

On-the-money Analysis

Nakosteen said the market’s pronounced dip early last month — there was a drop of nearly 10% — was interpreted widely as commentary on a weakening economy.

He didn’t see it that way — “I just interpreted it as people sold stocks because people were selling stocks” — and the market’s rebound (it had recovered most all of what was lost by press time with this issue) would seem to validate that opinion.

Bob Nakosteen

“For at least seven or eight months, I’ve heard that the Fed should be lowering interest rates right now because higher interest rates are really going to drag down the economy. They haven’t. They may still, but they haven’t yet.”

He acknowledged that the economy has slowed somewhat, but, again, most indicators would show that it is still strong, especially when one considers the many factors impacting it, most notably interest rates.

Indeed, while he thinks the Fed should have lowered interest rates months ago — because it takes months for a rate drop to trickle down, if you will — he believes the Fed “got away with it,” as he put it.

“For at least seven or eight months, I’ve heard that the Fed should be lowering interest rates right now because higher interest rates are really going to drag down the economy,” Nakosteen said. “They haven’t. They may still, but they haven’t yet.”

Sosik didn’t use those words, but he was in general agreement that, despite some strong headwinds, the economy remains solid mostly because consumers, by and large, have continued to spend.

However, there are signs that spending is slowing and that consumers are now increasingly burdened by their previous spending.

“When you look at the number of people who are maxed out on their credit cards, for example, credit-card delinquency rates, student-loan delinquency rates … these are all examples of metrics that are not trending in the right direction,” he said. “And they imply that consumers are pretty stretched.

“Whether they’re at the end of their ropes as a group is not clear,” Sosik went on. “I’m not saying that a consumer-driven recession is around the corner, but there are a lot of factors indicating that the consumer is stretched out pretty far.”

Overall, though, that same consumer is still hanging in, he continued, adding that, historically, this is the case until there are cracks in the labor market, which have not appeared yet.

Ken Vincunas says many business owners are hitting pause until they see what happens with interest rates — and the November election.

“If we see those, and you have unemployment rising with an already stretched-out consumer, then that would be a perfect storm,” he said, adding that he’s not predicting that such a storm will develop.

Vincunas is among those who believes the Fed hasn’t gotten away with it, and that higher interest rates are taking their toll on business overall, but especially in commercial real estate. He noted that higher rates are leaving those facing loan-rate renewals with potentially huge bumps in operating costs.

“The window for their renewals could be five years, and five years ago, people might have thought they were in good shape,” he explained. “But now, they have to face that eventuality, and everyone is holding their breath to see if Trump can get elected and if he can bring interest rates down.”

Meanwhile, these higher rates are prompting more to lease rather than buy and for those thinking about buying or perhaps building new to hit pause and see what happens — in November and with interest rates.

Points of Interest

One of the key indicators of a slowing economy is the housing market, which has slowed considerably in 2024 — from a sales-volume perspective because of interest rates, which are keeping many people in their current homes, and overall due to a persistent lack of inventory that has kept prices high and the homes that do come on the market moving quickly.

“People are not buying new homes, so that slows down the demand for new construction,” Nakosteen said. “And they’re not selling their homes, which diminishes supply, so it’s a really interesting phenomenon we’re seeing right now in housing.”

Peter Ruffin, current president of the Realtor Assoc. of Pioneer Valley, acknowledged that this has been a slower year, sales-wise, than previous years, although he views steady (if not rising) values, especially in communities like Springfield, as an overall sign of strength within the market.

And also a reason why homeowners should maybe rethink that strategy of staying put until interest rates come down.

“When you look at the number of people who are maxed out on their credit cards, for example, credit-card delinquency rates, student-loan delinquency rates … these are all examples of metrics that are not trending in the right direction. And they imply that consumers are pretty stretched.”

“You can refinance your interest rate down the road, but you’re never going to get a second chance at price,” he said. “And prices are going to continue to go up.”

And while higher interest rates are keeping some in their homes when they might be trading up or down, and thus putting more homes on the market, he blames the overall lack of inventory on a lack of building, a problem he hopes can be addressed by the Affordable Homes Act recently signed into law by Gov. Maura Healey.

“We haven’t built enough houses in Massachusetts, period,” Ruffin told BusinessWest. “And it’s housing of all sorts, and that’s what we need to fix for the long term.”

Meanwhile, some homeowners, like business owners, are somewhat reluctant to move forward in an election year like this one, he said, not knowing who will be in the White House and what will happen next.

Which brings us back to the phrases ‘soft landing’ and ‘calm slowdown,’ and whether this is where the economy is headed.

They both indicate a slowing of the economy but not a dip into negative GDP territory, said Nakosteen, who said he dislikes making projections, but, when pressed, made one when it comes to the balance of 2024 and likely beyond.

“Maybe we see a 1% or 1.5% rise in GDP, and maybe unemployment rises a few more tenths,” he said, adding that at least one economist was projecting that, to fully tame inflation down to 2% or 3%, the Fed would have to take steps that would take unemployment rates into the 6% to 7% range.

Instead, it’s just over 4%, a rise, and a number, that Nakosteen said is “the very definition of a soft landing.”

The questions to be answered concern just how soft and whether it stays soft, said those we spoke with, noting that consumer spending will be the key factor, as it usually is.

“When you read anecdotes from corporate offices, especially consumer product companies, they say there’s a real weakening in consumer demand,” Nakosteen noted. “You don’t see it in the numbers — you don’t see it in retail sales or other measures of consumption — but there are a lot of companies that feel a weaking of demand for their products at the retail level.”

These include McDonald’s (which reported its first worldwide sales drop in four years in late July) and other fast-food providers, which have hinted strongly that the increases in prices they’ve instituted, forced by the higher costs of labor, food, and energy, have taken their toll. They’re responding with value meals and specials, but overall, the restaurant sector, one of the bellwethers of consumer sentiment and the economy on the whole, is seeing a decline in business.

Sosik acknowledged that this sector and other pockets of the economy may be experiencing some slowing, but, overall, what he senses is that consumers are still spending — if not on Quarter Pounders or Frosties, then on something else.

And as long as that continues, he and others said, the economy should continue to hang in, and the ‘R’ word can be avoided.