The Buffalo Niagara region never managed to bounce all the way back from the Covid recession – and now the recovery is heading toward more trouble.
Inflation is soaring, forcing consumers to pay more from the gas station to the grocery store.
Interest rates are rising, making it more expensive for consumers and businesses to borrow, and squeezing home buyers already scrambling to pay record-high prices in a tight market.
Those are powerful headwinds – and they are both hitting consumers whose spending accounts for roughly 70% of all economic activity. If consumers cut back – and it’s almost certain that they will because their wages aren’t keeping pace with inflation – it means that the Buffalo Niagara recovery is likely to pause – or even take a few steps back.
So far that hasn’t happened. Job growth has been slow but steady throughout the first five months of this year. But time may be running out on the recovery.
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“We are in a clear spot now, but ahead of us is a torrential downpour,” said Julie Anna Golebiewski, a Canisius College economist. “I would think it will come in the next two or three months.”
And that means the region is heading into the current period of economic uncertainty from a position of weakness. We never recovered about 5% of the jobs that were lost during a Covid-related recession that hit the Buffalo Niagara region especially hard because of the steep losses to its tourism and hospitality sectors.
That’s different from the rest of the country, which on the whole managed to regain all but about 1% of its lost jobs. So essentially, the country is starting this potential downturn from nearly where it was before the recession. That is not really a cushion, but it’s better than starting to fall back down into the economic hole before you even get close to the top, as we are doing here.
So far, the job market is holding up, with five straight months of modest job gains and an unemployment rate that’s below 4%.
“You still have employers who are desperate for workers,” said Timothy Glass, the State Labor Department’s regional economist in Buffalo.
But soaring prices and rising interest rates are starting to take a toll.
Consumers already are taking it on the chin.
Gas prices have jumped by around $1.45 a gallon locally since the beginning of the year. That’s an extra $21.75 on a 15-gallon fill-up. Do that every week, and higher gas prices will cost an extra $1,131 over the course of a year – and that assumes that gas prices don’t keep rising as analysts predict.
Grocery prices are surging, too. The price of food purchased to eat at home has jumped by almost 12% over the past year. Of course, you already know that if you’ve recently bought a dozen eggs – their price is up 32% over the past year, while milk costs 16% more and poultry prices are 17% higher.
All of that matters because consumers only have so much money to spend. Wages have started to rise – average hourly earnings have been growing at a better than 5% annual pace over the past three months – but that’s not good enough to keep up with inflation at 8.6% in May. Factor in the rise in consumer prices, and our paychecks actually are worth about 3% less than they were a year ago.
In other words, we’re taking a pay cut, too.
For many consumers, that means cutting back where they can. Eating in more. Buying less expensive products. Cutting back on entertainment.
“That money has to come from somewhere,” Golebiewski said.
Those are the most immediate signs of concern. But there are other shifts taking place that will take longer to have an impact – most notably the rise in interest rates.
Already, mortgage rates have jumped by nearly 3 percentage points, and that’s putting pressure on the budgets of would-be buyers who are still scrambling to find homes to buy in a market where good ones are hard to find.
With the average rate on a 30-year mortgage up to 5.78% from 3.1% at the end of last year, the payment on a $200,000 loan has jumped by $316 a month.
So far, that hasn’t stopped buyers from buying. Median sale prices locally are up 16.5% over the past year and aren’t showing any signs of slowing, according to May sales data from the Buffalo Niagara Association of Realtors.
That could be because buyers – and sellers – are expecting the market to cool in the coming months as the rise in mortgage rates takes hold. Sellers may be scrambling to sell – the 8% rise in new listings during May was the biggest one-month increase in the past year. And buyers may be scrambling to buy – homes sold in May went for an average of 9.5% more than their most recent asking price – the biggest premium ever. The average home sold in just 22 days – four days faster than last May.
During the Great Recession more than a decade ago, the region’s low – and generally stagnant – housing market helped it weather the downturn better than the rest of the country. This time, our home prices have been soaring, too, but they are still cheaper than the average US market. That means the rise in mortgage rates is less costly here, and potentially less frothy.
“We may not be hit as hard as other places simply because our housing prices are cheaper,” said Fred Floss, a SUNY Buffalo State economist.
Floss thinks we could be in a recession by this fall. Golebiewski thinks the downturn could come a little sooner. Regardless, recessions typically take a steep toll on the Buffalo Niagara region. We tend to start declining sooner, fall deeper and take longer to recover, Floss noted.
And that’s why the headwinds of soaring prices and rising rates is so concerning.
“I don’t think we’ve really seen the impact of those yet,” Golebiewski said. “I think they’re coming.”