Leading Factors of a Possible Recession: Materials, Labor, and Regulations

This past week the Vinyl Institute hosted a webinar entitled Vinyl Supply Chain Solutions: The Short and Long-term Economic impacts of Supply Chain Disruptions. This webinar featured the chief economist at the National Association of Manufacturers, Chad Moutray, and Senior Director of Research for the National Multifamily Housing Council, Chris Buren. They discussed the impacts of supply chain disruptions on the U.S. manufacturing and multifamily housing sectors.

Chad Moutray is the director of the Center for Manufacturing Research at the Manufacturing Institute, the social impact arm of the NAM, where he leads efforts to produce thought leadership, data, and analysis of relevance to business leaders in the sector.

Chris Bruen has studied and written on such issues as housing affordability, immigration, migration, household crowding, and apartment demand. Prior to joining the Council, Chris conducted research on the behavioral tendencies exhibited by option traders and served as a contributor to the Shanghai-based business publication, MorningWhistle.com, where he wrote on topics relating to Sino-American economic policy.

While both speakers focused on different aspects of the housing market, three things were the same. Materials, Labor, and Regulations are leading factors in a possible recession.

Click here to see the webinar. You can also download a copy of Dr. Moutray’s and Mr. Bruen’s slides.

With the current economic state of the US, many people are turning their focus toward a possible recession. Dr. Moutray gave a manufacturing economic update, discussing labor markets, consumer prices, and stricter regulations that could lead to a recession. Interest rates have been the highest they have ever been since 2007, and the treasury is currently at 4% which has people worrying about inflation and higher unemployment rates.

Dr. Moutray believes that demand needs to cool in order for us to control inflation. In relation to our industry, natural gas is in high demand. While the United States has a leg up on natural gas compared to other countries, our demand has skyrocketed. Dr. Moutray associates this demand with the war between Russia and Ukraine and the current energy markets in Europe. Due to Europe having some of its energy supply is cut off by Russia, we are helping to supply natural gas to Europe. By doing this, we are losing the natural gas production rates here at home, which is not helping to lower our demand rates causing a supply/demand imbalance.

While the labor market is continuing to grow, this will cause the fed to continue interest rates aggressively. We are above pre pandemic level of employment but finding workers is where the struggle occurs. The scramble for talent has caused a rate for higher wages. These higher wages now reach over $25 an hour in order to stay competitive. This causes concern for companies because with material prices not being produced at their normal speed, and prices continuing to rise for materials, it is challenging to afford the workers they need.

On top of production and labor issues, we are seeing new energy and production regulations in the states. Whether it is the EPA or OSHA producers are being heavily regulated causing slower production times.

Chris Buren spoke about how supply chain disruptions, along with other factors, such as onerous regulations, and a lack of available labor; are constraining the development of new multifamily housing causing affordability issues. These obstacles jeopardize our ability to build the 4.3 million new apartment homes NMHC & NAA research estimates are needed by 2035 to accommodate future demand and losses to the current stock.

Another pain point many builders are seeing is different regulations being imposed. Some of the regulations include:

• Inclusionary Zoning – a planning tool intended to ensure economic diversity and inclusivity in the housing market. Inclusionary zoning policies can include both mandatory requirements or voluntary incentives for the inclusion of affordable, deed-restricted housing units in new or renovated developments.

• Rent controls – government control and regulation of the amounts charged for rented housing.

Builders have said they are not inclined and will not build multi-housing families in areas that have these regulations. Around 87% of developers have stated that they avoid working in areas with rent control. By confronting these oppositions, developers are increasing their costs by 5.6% while also delaying the development of the properties.
These controls are causing a tight apartment market and more demand in the coming years.

 

If we cannot find a way to find more supply for these demands, whether it be material demand or housing demand, inflation will continue to rise. As Dr. Moutray said if we are not able to cool demand inflation will continue to rise. While it looks like a recession is inevitable, Dr. Moutray believes it should be short and not as rocky as people expect.