Savannah Chamber

10 4 households have locked in historically low mortgage rates, but payments for higher property taxes and home insurance will offset some of benefit of lower payments on principal and interest. Less positively, wealth-effect spending turned negative in 2022 and will remain negative in 2023. In the wake of the pandemic-recession, the global savings glut caused the prices of almost all types of assets to be bid up substantially. By early 2022, many assets were substantially overvalued, including housing. Although people currently put a higher priority on home ownership than prior to the pandemic, the runup in home prices almost certainly exceeded the increased utility of the home. US homes are overvalued. Home prices will decline moderately in 2023. The price decline will not be too steep because there's considerable upside potential for housing due to the recent shift in consumer preferences favoring home ownerships, household formation, the limited supply of homes for sale, and the paucity of new homes in the construction pipeline. Nonetheless, lower prices for homes will contribute to decreases in households' net worth. By any historical measure, bonds and equities are very richly valued. Bond prices probably will weaken, and equity markets remain vulnerable to correction. A sharper than expected reversal of wealth-effect spending is one concern for consumer spending in 2023. Growth in household wealth increased over 2009-21, exceeding income growth in most years. Household wealth decreased in 2022 and we expect it to decline in 2023. Nonetheless, due to large gains over the extended period, it would take a collapse in home prices and/or a major stock market reversal to produce a dramatic decline in consumer spending. In 2023, spending for services will increase faster than spending for goods. A rebalancing in the composition of consumer spending towards services and away from goods will continue. Nonetheless, pent up demand for services not purchased during the pandemic did not accumulate to the same degree that it did for durable goods due to the nature of services. Among services, providers of health care and education will see above average growth in spending. We believe that there is a strong possibility that the pandemic caused a structural shift in consumers' spending that favors goods over services. High-contact service businesses may never claim the percentage of GDP that they did prior to the pandemic. Full economic recovery for some types of service businesses therefore will take many years. A few service industries in decline prior to the pandemic may not fully recover (e.g., movie theatres). Sales of both durable and nondurable goods are expected to decrease, with spending for nondurables decreasing less than spending for durable goods. One exception will be vehicles. Because consumers were unable to buy what is not available, new vehicle sales in 2021-22 would have been significantly stronger if not for supply shortages. Therefore, we expect vehicle sales to rise in 2023. That's not typically the case during a recession. The expectation for higher vehicle sales reflects the release pent-up demand (e.g., deferred replacement needs) for new vehicles as supply constraints lessen. Pent up demand is substantial. People have not been able to replace older vehicles. In 2022, the average age of the vehicle fleet rose to a record 12.2 years. There are some additional factors that bode well for future vehicle sales. In post-pandemic America, people are less inclined to use public transportation – or ride share – and more inclined to use personally-owned vehicles. Similarly, car, light truck, and recreational vehicle sales will benefit from peoples' greater interest in traveling by car to destinations closer to home rather than to far-flung destinations by plane or cruise ship. Strong sales of boats, campers, and trailers support sales of trucks and other personal vehicles capable of towing heavy loads. In addition, stronger preferences for detached homes in the suburbs – or rural areas – over attached housing in, or near, city centers supports demand for new vehicles, especially light trucks. This sanguine outlook for sales of personal vehicles assumes that supply chain issues are partially, but not fully resolved.

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