THE RECESSION THAT WASN’T, The Mid-2023 Assessment

By Dr. Mark Schniepp

The long expected recession in 2023 is late. Or at least it remains out of site. Not only are current conditions unsupportive of recession, the still hot labor market is going to extend the current expansion through the summer and likely through much of the fall.

With the unemployment rate at 3.6 percent and 10 million job openings unfilled, it’s hard to imagine that economic turmoil, malaise, or stagnation is here or right around the corner. Conditions would have to turn quickly for a widespread notion of economic misery to prevail any time soon.

The sharpest increase in interest rates in 40 years, the excessively inverted yield curve, growing more excessive by the week, and the dismal ratings in American polls regarding government leadership and the direction of the country have not tipped over the U.S. economy.

Surprisingly, despite mortgage rates hovering near their peak for the cycle, new home sales in May were at their highest level in 14 months.  Recent price declines have helped to increase sales. But now even home prices are reversing again, with a number of price indices rising in March, April, and May.

Fed chair Jerome Powell said last week that he expects further interest rate increases, likely at the next Federal Open Market Committee in July.

Even without more rate hikes, there is little doubt that recessionary risks have risen this year, but as they do, firms continue to hire, households continue to spend, and the economy continues to grow.

The current level of consumer pessimism is consistent with past periods of economic recession, but that pessimism is not deepening. . . In fact, the consumer sentiment index rose 5 points in June and is 14 points higher than a year ago.  The labor market’s persistent strength is an encouraging sign that is leading to an uptick in optimism.

We’ve had two positive growth quarters this year so far (both at about 2.0 percent), with some momentum building as we head into the third quarter. Inflation reports have consistently been lower every month for a year now.

While most economists have stubbornly not changed their position on recession in 2023, it’s no longer a foregone conclusion, and consumer expectations of recession are abating though their spending has become more cautious.

We expect real consumer spending growth to remain modest through the summer and then slowly gather momentum in the fall. On the plus side, the few remaining drags from supply constraints are dissipating, inflation will continue to slow, and jobs will remain plentiful.

This mid-year assessment generally reports that the economy has heroically avoided recession so far, and there is now a rising chance that recession could be averted in 2023. But we are not out of the woods.  Two more rate hikes threatened by the Fed could be a tipping point.

That said, growth will remain modest so don’t expect much overall improvement in the economy until late 2024 or early 2025. At that time, we expect declining interest rates and a housing sector that will have turned around. Inflation has a chance  to be under 3.0 percent by then but this will depend largely on the profligate spending behavior of Congress which will require some meaningful restraint.

It was Milton Friedman who said: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

The federal debt continues to rise as Congress spends trillions and trillions of dollars on pet projects including IRS agents, climate change bills, student loan forgiveness (despite the recent Supreme Court ruling), and the war in Ukraine. And now that the federal debt limit has no upper bound until it’s revisited in 2025, we will incur higher levels of debt, higher interest rates, and slower growth.

Written by Dr. Mark Schniepp

Dr. Mark Schniepp is a VCTF Board Member and Economic Advisor. Dr. Schniepp is currently Director of the California Economic Forecast in Santa Barbara. The Company prepares forecasts and commentary on the regional economies of California.