Q&A with Dr. Devrim Yaman: A 360-degree view of the economy
Dr. Devrim Yaman, associate dean for undergraduate programs and professor of finance, gives us her take on many of the topics that are grabbing our attention—both in news headlines and in our homes.
Inflation is the highest it has been in 40 years. What do you project we will see in the coming months with the Fed raising interest rates?
The annual inflation rate, as measured by the Consumer Price Index, rose to 8.5% in March. This is the highest rate we have seen since December 1981. A consistently low inflation rate is a sign of stability in the economy. Many countries have experienced high inflation rates for several years where prices rose swiftly, and money became worthless overnight. We do not want this to happen in the U.S.
When the Fed increases interest rates, borrowing becomes more expensive for consumers and companies. I expect the rise in interest rates to lead to lower demand for goods and services, and hopefully match the low levels of supply we are seeing due to the lingering effects of the pandemic. With the decline in demand, businesses will have to cut their prices in order to attract customers. The increase in interest rates may also result in lower home prices and declines in stock market prices due to higher borrowing costs, as well as lower wages.
Do you expect we can bring inflation under control without sending the economy into recession?
The increase in interest rates should help with the demand side of the equation for a balanced economy. However, the Fed has no control over the supply side, including the supply chain and production problems, as well as geopolitical turmoil. The balance between the demand and supply will determine where we end up with the economy. Setting expectations is key as we move forward in the coming months. Therefore, statements from Fed officials giving confidence to consumers and businesses about the direction of the economy are critical. At this point, the job market is pretty strong, with job openings exceeding the number of available workers. This should decrease the probability of a recession.
The U.S. and other NATO countries have imposed sanctions on Russia. Can you speak to what those sanctions mean for Russia in terms of overall impact and other implications?
There has been a decline in foreign orders in Russia due to the sanctions, and this has led to falling manufacturing output and employment rates. Many countries are also banning Russian fossil fuel and coal imports, decreasing these major revenue sources for this economy. As a result, the gross domestic product of Russia is expected to decline severely this year and possibly next year. There is a shortage of everyday items, contributing to the high inflation rate the country is experiencing and making it difficult for the Russian people to afford basic necessities. Since Russia is an important exporter of major commodities, the sanctions and the resulting economic decline in Russia is likely to have ripple effects around the world. Consequently, there is a risk of higher inflation and lower growth in the world economy.
Ukraine and Russia are exporters of many things like wheat, neon and others that are key parts of supply chain for the world’s food supply and manufacturing operations. What impact do you expect in terms of the availability of different commodities/raw materials throughout the war?
The Russian invasion of Ukraine came about at a time when the world economy was already vulnerable due to high energy and food prices. Recently, there has been a decline in the stocks of goods in many exporting countries; lower food supplies due to last summer’s droughts; and high demand for imports from China. Exacerbating these factors, the Russian invasion disrupted the exports from the Black Sea region, resulting in market volatility. The uncertainty the war has created is forcing many countries to ban their exports, leading to shortages of these products and thereby increasing commodity prices in the world even further. Unfortunately, poorer nations will feel the impact of these changes more, as the low-income households in these countries spend a larger portion of their income on food and energy.
What other supply chain/demand issues do you think we should keep our eye on and why?
The demand for e-commerce was straining supply chains even before the pandemic. With e-commerce on the rise, companies not only need to ship their products from factories to warehouses, but retailers also need to ship these products to the homes of consumers. Coupled with the pandemic-induced shipping challenges, I expect the global supply chain issues to continue for many years to come. The solution to these problems lies in the careful evaluation of the technology and existing supply chain models, then making the necessary investments.
Oil and gas prices are higher than average, what impacts do you see from this?
The impact of the rise in oil and gas prices is not limited to the spike in the cost of heating our homes or our car rides to work. This price increase will eventually raise home prices as the cost of running the equipment to build homes and the shipment cost of raw materials will go up. Food prices should also go up as it will cost more to run farm equipment and deliver the food to grocery stores. As gas prices rise, people may choose public transportation as it is cheaper; opt for local stores rather than online shopping to save on delivery costs; and opt for fewer vacations as airline tickets cost more.
The increase in the cost of basic consumer goods will affect vulnerable populations the most as these costs constitute a larger percentage of their household budgets. The way to protect our citizens from soaring oil prices, while preserving our environment, is to switch to using clean energy and vehicles that can run on renewable energy. We can accomplish this switch by investing in infrastructure for renewable energy.
As we emerge from the pandemic, what do you expect in terms of the economy and any key impacts in different industries?
Unfortunately, many of the effects of the pandemic have been more pervasive than we had projected. I expect many aspects of the post-pandemic economy to shift to a “new normal” rather than going back to the pre-pandemic levels.
The product shortages consumers experienced will likely encourage companies to rely on shorter supply chains and keep larger inventories. In the labor market, I expect remote work to continue to be a part of the economy. During the pandemic, we realized that we can perform many aspects of our jobs effectively from home. We already experienced that the learning curve can be steep for some positions and also benefited from the improved work-life balance. Post-pandemic, we still need to work on effective employee onboarding and ways to share sensitive information in the virtual work environment. I also expect to see more automation in industries with many customer-facing employees such as food service, banks and retail stores.
What trends do you see in the real estate market going forward?
As more people work from home, there should be more demand for housing, keeping home prices high, while the demand for office space should go down. The low interest rates have compounded the housing shortage, but as the Fed increases interest rates this effect should subside. Widespread homeownership and high demand for homes stimulate economic growth, so it is important to remove barriers and improve access to credit for more inclusive home ownership.
Is there anything else you would like to add?
The pandemic has reminded us that we live in an interconnected world where we depend on others in our community and other countries in the world. Scientists discovered effective vaccines that saved lives, healthcare professionals provided treatments when we were sick, and grocery store employees provided the food we needed even at the height of the pandemic. Many of the shortages we are experiencing are due to the fact that the products we use in our daily lives and many of the raw materials used in the goods we produce locally come from international markets.
The health and economic prosperity of the people around the world affects our families here at home. This is one more reason to care about the well-being of others in the world, to reach out, and to collaborate. I believe the education we provide at the Haworth College of Business, focusing on ethical business practices and global citizenry, will enable our students to contribute immensely to the post-pandemic world!