CONCORD, NH — A federal banking official gave members of the Senate and House Ways and Means committees a briefing on the causes of inflation with most of the trends appearing positive.
The one continuing negative, Jason Hwang, senior vice president of the Federal Home Loan Bank of Boston, told the lawmakers is the tight job market here and across the country.
The lawmakers also heard from representatives of the Business and Industry Association and the New Hampshire Association of Realtors who noted the challenges of a tight labor market and how the lack of affordable housing impacts the state’s economy.
The target of the Federal Reserve is to bring the inflation rate down to about 2 percent from its high of 9.1 percent in June. Inflation stood at 6.5 percent in December.
The federal reserve expects the rate to reach 5 percent by June and then go down significantly in the second half of the year to about 2.5 percent, Hwang said.
“The question is if we have to go through a big recession to get there,” he said. “Everyone hopes not, but there is a 50-50 chance there will be, but if there is one, it could be a shallow one.”
He said everyone is focused on the tight labor market, but hopefully the demand will come down a little without unemployment going up.
He said there are six areas that drive inflation:
- COVID restrictions resulted in supply chain bottlenecks;
- War in Ukraine led to surge in energy and commodity prices;
- Relaxation of COVID restrictions led to surge in demand for travel/transportation;
- Household savings surged during pandemic aided by federal stimulus;
- Home prices rose dramatically during the pandemic;
- Significant labor shortage across industries is leading to wage growth.
Inflation is a global problem, he said, driven by supply chain stoppages and higher energy and food costs driven by the War in Ukraine.
In the United States he said more than 100 container ships were waiting to enter the Port of Los Angeles, which is critical for commerce, and the wait disrupted the supply chain, but that bottleneck is nearly back to normal.
The war in Ukraine caused both energy prices and food prices to surge, as Russia is a major oil and gas-producing country and Ukraine produces wheat and corn.
Since its peak, the price of gasoline and other fossil fuel products have come down considerably, Hwang noted, and the price of electricity has also come down from its peak but severe weather could impact that.
The price of wheat has decreased and corn has stabilized.
Hwang noted food accounts for about 13 percent of a family’s spending and energy about 9 percent, while housing costs are about one-third of all spending, and transportation about 7 percent.
The price of housing increased sharply during the pandemic as urban dwellers sought places in rural areas and he noted the prices of used and new cars both increased substantially as well.
Housing is still much higher than it was before the pandemic but has slowed slightly, and the prices of used cars have come down while new cars are now increasing at their more normal rate, he said.
Consumers had a significant amount of savings at $2.3 trillion due to the pandemic with the shutdown, caution about the future and the influx of federal stimulus money, he said.
When restrictions were lifted the money, which is mostly held by high-wage earners, helped fuel a surge in demand for travel and consumer spending, he said.
Hwang said the estimated spending rate is about $100 billion a month, which would drain the pandemic savings by the end of the year.
While most of the drivers causing inflation are heading in a positive direction, “one area of concern is the labor market which is very, very tight and out of balance,” Hwang said.
There are many more positions open than workers to fill them, he noted, and if that continues and businesses have to increase wages that will be passed on to consumers and contribute to inflation.
Representatives of the Business and Industry Association said the pandemic has made some substantial changes in the workplace, and there are several key areas of concern.
Michael Skelton, president and CEO of the BIA, told lawmakers, members cite three core topics that need to be addressed.
The first is workforce availability, he said, noting all business sectors continue to struggle to obtain workers and that is tied to housing affordability.
Many workers cannot find housing and have to travel long distances to a job, he noted, and now it is extremely difficult for first-time home buyers to get into the market.
And the third is energy costs in New England. Manufacturers are the most cost-sensitive and also need a reliable source, he said. “Right now there is a lot of volatility,” Skelton said.
Steve Duprey, the owner of property management and development businesses in Concord, told the lawmakers the returns they are seeing now in the rooms and meals tax is probably about as good as they will see going forward.
“Business travel has forever changed in New Hampshire,” Duprey said, noting more business is done over Zoom now than ever before.
He said the hospitality industry catering to the business traveler has not come back to pre-pandemic levels although the tourist areas have.
Duprey, who owns several hotels in Concord, said he did not open his newest hotel for 15 months after it was finished, and was unable to hire enough staff to open all the rooms when he did.
And he said security costs are another issue as they eat into the profits for protection.
And he also mentioned the affordability and access to housing for his workers noting construction costs have gone up substantially since the recession for all types of construction from residential units to commercial space.
Brien Murphy of Boyce Highlands, a wood finishing company that produces molding, urged lawmakers to consider adding more trade schools with two-year programs.
There is a stigma perpetrated by high school guidance counselors for students to be successful they need a four-year college degree, Murphy told lawmakers.
A student going through a two-year trade program can earn from $60,000 to $80,000 a year and doesn’t leave school with $100,000 or $200,000 in debt, Murphy said.
He said Florida has a very good trade program, and he suggested New Hampshire could create one that subsidizes or completely pays for the program if the student agrees to remain in New Hampshire.
“There are tremendous opportunities in trades here and nationally,” Murphy said, noting his operations are down 14 employees and he has had to turn to automation when he would rather have a trained workforce.
Both Murphy and Duprey said they have had to offer more services to employees and pay more attention to their personal situations like a sick child at home.
Sen. Cindy Rosenwald, D-Nashua, noted the day before they heard that younger women with children are staying out of the workforce because childcare is so hard to access.
Skelton said after business owners talk about the shortage of workers, they also bring up housing issues and then child care.
He noted the child care center where his children go sent a letter home saying if parents are thinking about having another child they should know the waiting spot for a child is 16 months.
Representatives of the Association of Realtors said the market has cooled but is still red hot with very low inventory and prices well above what many people can afford to enter the market.
While homes used to be on the market for three or four months before they sold, now it is about a month or less, said Ben Cushing, the president of NH Association of Realtors.
He said a lot of people want to move into his hometown of New London, but the entry-level price is about $500,000 when it was $250,000 to $300,000 not that long ago.
“That hurts a lot of people who want to move to New London,” he said, “it is hard for them to get in.”
When the pandemic began, a lot of young people wanted to move into New Hampshire and were paying $600,000 and $700,000 in cash for a home where they could work from, he said.
“When you see new residential buildings happening throughout the state,” Cushing said, “I think we’re moving in the right direction, but we’re not seeing a lot of that.”
He said in the Upper Valley, there are a lot of medical professionals accepting high-paying jobs, but can’t find housing, and have to drive an hour or an hour-and-a-half for work.
Inventory for December was 1,500 homes, while in 2015 it was 15,000, he noted.
Bob Quinn, CEO of the NH Association of Realtors, said while the market is cooling off “it is still red hot,” making it more and more difficult for people to qualify for home mortgages.
What they are seeing in market values and sales is not just brought on by the pandemic but began about a decade ago, Quinn said, but was accelerated by the pandemic.
He noted that New Hampshire always used to have an advantage because prices were lower here than in Massachusetts, but the prices in Rockingham County are the same as they are in northeastern Massachusetts.
“The difficulty finding workers is tied directly to the lack of housing options,” Quinn said, “it is a restraint on New Hampshire’s economy and we need to work together to try to find solutions.”
Chris Norwood, public policy committee chair for the association who deals in commercial real estate, said while some commercial property is losing value like large facilities with significant office space, others like small business structures are not.
Sales have increased for smaller industrial buildings as well as shops for electricians and plumbers, he said.
“The largest single change we’ve seen in the last six months is the movement by investors away from real estate,” Norwood said.
He said sellers are still pricing their assets as if the interest rate were 3 percent when it is 7 percent.
The officials were asked if investors were buying property and then turning it into short-term rentals taking it off the market.
Quinn said the state ranks 50th in investor-owned property which happens more in places like Texas or Florida where prices are lower.
The House Ways and Means Committee will meet later this month again with many of the people who presented information to the two committees as work begins on crafting the next two-year budget package.
