Published in Economic Development

U.S. economic resilience bodes well for ‘soft landing’ in case of mild recession 

BY Monday, December 26, 2022 12:19pm

Economists expect the U.S. to dip into a mild recession around mid-2023, as higher interest rates intended to bring down inflation drag on the economy.

The Federal Reserve Open Market Committee recently implemented the seventh interest rate hike of the year, a 0.5-point increase that came a day after data indicated that the Consumer Price Index eased a bit in November to a 7.1-percent annualized rate, down from a prior 7.7 percent.

The latest FOMC increase followed four straight interest rate hikes of 0.75 points each.

Rising interest rates throughout the year have slowed the economy, although a continued strong jobs market and consumer spending have generally led economists to forecast a mild recession in 2023, as opposed to a deeper downturn.

“It will be a modest recession” in the second half of 2023, Jeff Korzenik, chief investment strategist for Fifth Third Bank, said during this month’s annual economic outlook hosted by The Right Place Inc. in Grand Rapids.

“We will not have the big dislocation in the economy that you typically associate with a big recession,” Korzenik said. “We simply have too much momentum in the labor market. We’re adding 200,000 to 300,000 jobs every month and it takes a longer period of erosion before you actually get into recession.”

Korzenik believes there remains a “very distinct possibility, perhaps a 40 percent possibility, that we get some kind of soft landing” for the U.S. economy and avoid recession, he said.

“There is some cause to believe that inflation will break before the economy, but it gets a lot stickier when you start to get into some of the details,” he said.

For instance, Korzenik cited expectations for transportation and housing costs to trend downward, while new vehicle prices will continue to stay elevated. He’s also “really concerned” about wage inflation from an acute labor shortage, as employers raise compensation well above recent norms to attract and retain workers.

Across the nation, there are roughly 10 million open jobs, with only 6 million people actively seeking employment. Wage inflation has been running at a nationwide average of about 5 percent, more than twice the rate of productivity gains, Korzenik said.

“That’s too high. That’s inconsistent with getting to the Fed’s goal of 2 percent inflation,” he said. “If we go into a recession, it will be because we can’t seem to get our hands around the labor issue. This labor issue is truly extraordinary.”

The University of Michigan’s Research Seminar in Quantitative Economics expects a “very mild recession,” said Don Grimes, a regional economic specialist. Grimes predicts the U.S. economy will ease into recession in the second half of 2023, with full-year Real GDP growth of 0.5 percent, followed by 0.8 percent in 2024.

The new year will begin with 0.3-percent Real GDP growth in the first six months of 2023, according to the University of Michigan’s latest economic outlook. Real GDP then shrinks 0.8 percent for the second half of the year.

The U.S. should then return to 0.8-percent Real GDP growth for all of 2024 as the Federal Reserve eases monetary policy, according to the University of Michigan outlook.

Outlooks that several economists submitted to the Federal Reserve Bank of Chicago project a median of 0.6-percent growth in Real GDP between the fourth quarter of 2022 and the fourth quarter of 2023.

“The big question for the coming year is will inflation come down, as we’re all hoping it does, so that the Fed won’t have to put the brakes harder on the economy,” Thom Walstrom, a senior business economist with the Federal Reserve Bank of Chicago, said in a recent economic outlook symposium.

“The least rosy forecast, according to our forecasters, is for at most a mild recession” in 2023, Walstrom said. “The median forecast is for what I would call a ‘soft landing.’”

In an updated U.S. outlook issued last week, Comerica Inc. economists predicted Real GDP would shrink 0.2 percent for 2023, then grow 1.3 percent in 2024. Comerica expects Real GDP to remain flat for the fourth quarter of 2022, then decline 1.8 percent and 1.4 percent in the first and second quarters of next year, respectively. Real GDP growth should return in the third quarter and get to 1.8 percent a year from now, according to the Comerica outlook.

As well, Comerica expects that wage growth “will likely slow to a rate in line with the pre-pandemic trend” by the end of 2023. Comerica pegs the chance of a recession occurring by the end of next years as “a four in five proposition.”

Economic outlooks also predict that inflation and the CPI will moderate during 2023. The University of Michigan predicts core inflation will register 6.2 percent for 2022, and ease to 4.3 percent in 2023 and 2.5 percent in 2024.

An outlook the FOMC issued after last week’s latest interest rate hike projects that core inflation — which excludes volatile food and energy prices — could dip from an expected 4.5 percent this year to 3.5 percent in 2023.

Given the continued job growth, the “tremendous strength” in the financial system, consumer spending that remains solid, and high savings rates, the U.S. economy is “just not as exposed as you typically would be” from rising interest rates, Korzenik said.

“We would argue that the economy has more resiliency than we normally would have and that gives us time,” he said, noting the question remains whether that resiliency will give the economy enough time to tackle inflation without falling into a recession. 

“It’s a different kind of cycle, (and) that gives you more resiliency,” Korzenik said. 

Wells Fargo also predicts that inflation should ease with a 4.1 percent Consumer Price Index in 2023 and 2.7 percent in 2024. The Producer Price Index, estimated to finish 2022 at 9.9 percent, will decline to 3.9 percent in 2023, and ease further in 2024 to 2.4 percent, according to Wells Fargo.

The Federal Reserve Bank of Chicago expects “a pretty substantial slowdown in inflation,” Walstrom said. Economists who submitted outlooks to the Chicago Fed predicted a median 4.4 percent CPI.

“We need inflation to slow down, or else the Fed is going to be forced to keep raising rates,” Walstrom said. “If inflation doesn’t come in as expected, it’s going to have to slow it further, and that’s where this ‘harder landing’ is coming from in the forecast from folks.”

The FOMC throughout 2022 has been “on the warpath” against inflation and increased rates at “unprecedented speed,” Korzenik said.

“Some of this is because the Fed fell behind in fighting inflation,” he said.

In a statement following last week’s interest rate increase, the FOMC said that “ongoing increases” in interest rates “will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

Comerica’s outlook expects the FOMC “will probably make two final rate hikes of a quarter percentage point each in early 2023” and tag inflation will “probably slow to under 5 percent by next spring.”

Read 2483 times Last modified on Tuesday, 10 January 2023 13:18