During the Minnesota Chamber of Commerce’s 2023 Economic Summit on Thursday, Wells Fargo’s senior economist, Charlie Dougherty, said the U.S. economy’s fundamental parts, the businesses and consumers, have weathered the worst of inflation but that another economic specter looms.

Inflation has hit businesses and consumers hard, he said. Businesses are facing higher input costs and pricier wages for labor. Consumers are putting up more dollars for raising costs of goods and services. But inflation has gone from 9% to around 4%.

However, come the second or third quarter of 2024, consumers and businesses will need to weather another problem, according to Dougherty: an economic recession.

Doughtery said the recession is going to be mild, calling it a “tightening of the belt,” a “normal part of the economy,” and that the recession will be likely necessary for the inflation rate to reach 2%.

“Going from 9% to 4%, that was always going to be easy,” he said. “Going forward to where it needs to be, that’s the challenge. The last mile of the race is always the hardest, and that’s certainly true in the battle against inflation.”

He said that once Jerome Powell, the chair of the Federal Reserve, sees that inflation is “durably” back at 2%, the Fed will start cutting interest rates. Once interest rates come down, or once people in the financial markets expect them to drop, they will also start pricing rates down.

Interest rates, Dougherty said, have had a significant impact on the commercial real estate market, causing transaction volumes to be down around 70%. In an interview with Finance & Commerce, Dougherty said while the root cause for the slowdown in transactions is high interest rates, another problem plaguing commercial real estate is conflicting valuations of property.

“If you’re a property owner, you think that the building is worth X, if you’re trying to buy a property, you probably think it’s worth a lot lower,” he said. “This wide discrepancy between perceptions of value is causing a lot of transactions to not take place.”

He said he thinks the Federal Reserve will cut rates in 2024 and as a result there will be an increase in activity.

Minnesota’s No. 1 economic issue to tackle is slow population growth, Dougherty said. This will present a problem for both the residential and commercial real estate.

“If population growth is slowing or even contracting,” he said, “it’s hard to convince investors to come build things under that situation.”

Building is what Minnesota needs, Dougherty said, as the residential real estate market sees increasing prices alongside low supply.

Also speaking at the summit was the U.S. Chamber of Commerce’s chief policy officer, Neil Bradley, who spoke of the dangers of altering antitrust policies.

In his speech, Bradley mentioned Federal Trade Commission Chair Lina Khan, Assistant Attorney General for the Antitrust Division Jonathan Kanter, former White House adviser Tim Wu, and Republican presidential candidate Vivek Ramaswamy as examples of proponents of more aggressive antitrust policies.

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