Texas Border Business
Over the past few years, costs of living have increased significantly faster than wages, thus creating a major affordability problem for millions of Americans. It is a hot-button campaign topic at present, but the real issue is much more visceral. It is multifaceted, and solutions won’t be simple. Let’s briefly explore how we arrived at this point.
The affordability issue at its current level of urgency has its origins in the later stages of the pandemic. As things opened up, consumers who had received cash infusions from various programs and stimulus efforts were eager to spend. This pent-up demand occurred while supply chains were disrupted, sending prices skyrocketing (which is inevitable when demand far outstrips supply). As a result, inflation was rampant at about 9%.
Inflation moderated due to aggressive monetary policy (interest rate increases) and the opening of supply chains, but only to around 3%. While certainly an improvement, it did not significantly alleviate the affordability situation; a reduction in the rate of inflation is nonetheless an increase in the already-elevated prices.
Other factors have compounded the problem. Tariffs have raised prices on many consumer goods, as well as inputs to the production of many others. Our analysis indicated a cost per household of about $1,500 per year. Because the tariffs fell disproportionately on steel, aluminum, lumber, and other inputs, they also put upward pressure on housing prices.
Immigration policies have created substantial worker shortages in several key sectors, especially construction (which affects housing costs) and agriculture (which affects food costs). Higher construction costs, together with an increasing number of major climate events (such as storms, floods, and wildfires) have resulted in significant increases in insurance rates, further eroding housing affordability.
Beyond these challenges is the situation in the Middle East, which has significantly raised energy prices and transportation costs. It has also created added geopolitical uncertainty, putting upward pressure on long-term interest rates (which, in turn, raises mortgage costs).
The Texas economy has been hit harder in some ways, as the nation’s top state for international trade activity and as an importer of labor. These effects are partially offset by the facts that (1) our baseline cost of living is somewhat below the national average and (2) the average cost of gasoline and diesel, though elevated, remains less than most parts of the country. Texas also has a high percentage of low-wage workers, which exacerbates the consequences.
A combination of forces created something of a perfect storm. Although wages have increased, they have not kept pace with the cost of living. Coupled with the rising cost of health care (and health insurance) and other items, it’s no surprise that affordability is garnering a lot of attention. Stay safe!
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Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com), which has served the needs of more than 3,000 clients over the past four decades.
