The coffee was strong and so was the forecast for the 2019 economy.

On January 30 more than 800 people attended the Charleston Trident Association of Realtors’ Economic Market Update breakfast. Joey Von Nessen, research economist with the University of South Carolina, gave his annual speech on the housing market and factors contributing to the state economy.

In South Carolina Von Nessen described an existing factor affecting the national economy: an “economic tug of war” between tariffs and the posture of the Federal Reserve. Currently, we are on the cusp of the tenth year of an economic expansion, which would be the longest expansion in history since World War II. Since the 1970s, there has been, on average, a 7 percent annual growth trend, and we have continued that trend. It is the longevity of this expansion which has created uncertainty in the market. There are other factors contributing to the uncertainty: new US tariffs, rising interest rates, the government shutdown, and slowing global markets.

One fact that could dismantle the uncertainty is although we have been in an economic expansion, the GDP growth has stayed below 3 percent until 2018. Three aspects that contribute to the GDP are on the up rise. Real personal consumption expenditures are seeing an uptick. This is a good metric into future demand, particularly the housing market. Real private non-residential fixed domestic investment has, in recent history, been a weak point, but we are in a temporary stimulus due to the 2018 tax cuts. Federal government total expenditures are also seeing an uptick. This bodes well for us locally as South Carolina benefits from military spending.

There are two negative factors contributing to the uncertainty. Real net exports have declined due to the 2018 tariffs and current trade negotiations. This has made the cost of goods more expensive for consumers. The global markets have slowed in the Eurozone and China. However, there is not significant variation based off prior years. The US economy is strong, but the question remains: Will the GDP be above 3 percent in 2019?

According to Von Nessen, the local economy is also strong overall. Employment growth, known as the best proxy for the state’s economy, has seen growth stay constant. There was 2 percent growth from 2017 to 2018. There is a “long run equilibrium” and we have not seen much deviation, which is sustainable. Trade, transportation and utilities, as well as the professional and business services sector, saw huge employment growth. Leisure and hospitality and the government sector saw some growth while education and health stayed about the same. Not surprisingly, construction and manufacturing saw a decrease. The tariffs have disproportionately affected the U.S., which does not help South Carolina, a manufacturing state.

The current “trade war,” if you will, started with the 2018 U.S. tariffs. The U.S. put a 10 percent tariff on $200 billion of Chinese goods, which included a lot of raw materials for the auto industry. Naturally, China retaliated and put duties on $110 billion of U.S. goods and 40 percent tariff on U.S. autos. This directly puts a price increase on manufacturing in South Carolina and puts pressure on demand. Every year, the auto industry creates 6,000 fewer jobs, blunting growth. Not only has there been an increase in production costs, but there is lower demand (-1.9 percent). If no deal is reached in the U.S. and China negotiations by March 2, the existing 10 percent tariff on Chinese goods will increase to 25 percent.

The USMCA (United States-Mexico-Canada Agreement), has the potential to benefit South Carolina’s auto sector. This came after these three countries reached a compromise after many years of discussions, which began after President Donald Trump worked on his campaign promise to renegotiate the NAFTA agreement. The deal agreement moves us away from export-oriented manufacturing, which makes the U.S. more competitive, particularly against Mexico. This is due to the requirement that 75 percent of a vehicle’s value must be produced in the U.S. and 40 percent of a vehicle must be made by workers earning at least $16 dollars an hour. According to Harald Kruger, the CEO of BMW, “[W]e will allocate more U.S. production for the U.S. market.”

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The housing market continues to be in strong in South Carolina. Von Nessen says the growth is a “temporary phenomenon, not a trend.” There was a combination of factors that slowed home sales toward the end of 2018: labor costs, lumber costs and interest rates. Labor costs are not a new factor, but lumber costs and interest rates were key factors in 2018. Luckily, interest rates have stabilized. The Federal Reserve recognized the uncertainty in the market and backed off increasing rates. Interest rates and lumber costs will not be as central in 2019 as they were in 2018. Job growth and income growth are on an upward tick, and both are indicators of demand. The South Carolina unemployment rate is currently at 3.3 percent with the U.S. at 3.9 percent. Average hourly earnings have been on a steady incline since 2011. South Carolina currently has more jobs available than bodies to fill them. This is positive for the housing market in 2019.

Another factor that positively affects the housing market is that growth in consumer spending will likely remain due to 80 percent of households seeing a tax reduction in 2018 and that gas prices have decreased. South Carolina sectors, such as wholesale trade, retail trade and leisure and hospitality have improved due to consumer spending. Charleston saw an increase in average annual hourly earnings by 3.1 percent. With that being said, the Charleston housing market did see a decrease in sales and housing inventory the past three months. According to Charleston Trident Association of Realtors (CTAR), Charleston felt the chill of the January government shutdown. However, CTAR President Edward Oswald stated that he feels “our market has been growing steadily for the last several years, so I believe we’ll see a return to ‘normal’ once we see more stability on the political front.”

So, what is the name of the game for 2019? This economic tug of war will come to a head as we watch if the Federal Reserve will stop raising rates and if we can come to an agreement on the ongoing trade and tariff negotiations. Economists expect solid and extensive growth in the U.S. and in South Carolina. The uncertainty will continue, but March 2 could be the decisive moment for trade policy.