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US Economy Continues To Ignore Forecasts For Recession |
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FORECASTS & TRENDS E-LETTER US Economy Continues To Ignore Forecasts For Recession IN THIS ISSUE: 1. Overview – On The Economy, A Recession & The Fed 2. Economy Continues To Ignore Forecasts For Recession 3. Fed’s “GDPNow” Shows Economy Growing By 2.5% 4. Fed Continues Hiking Rates Despite Bank Failures 5. US Has A Serious Labor Shortage – What’s Causing It? Overview – On The Economy, A Recession & The Fed No single event or report over the last week jumped out at me as a topic I should concentrate on today, so we’ll touch on several bases in what should make for an interesting letter. We’ll start with the US economy which continues to hold up better than many forecasters predicted for this year – still no recession in sight. US Economy Continues To Ignore Forecasts For Recession Plenty of forecasters continue to predict a US recession this year, but the economy just isn’t cooperating. The labor market remains extremely strong with the lowest unemployment rate in 50 years at 3.6%. The Commerce Department reported last week that Gross Domestic Product rose at an annual rate of 2.6% in the 4Q of last year. For all of 2022, GDP rose 2.1%. While a reading of 2.1% could certainly be stronger, when coupled with the strongest labor market in a half century, it is a very solid number.
Consumer confidence in the US economy ticked up in March, despite the recent turmoil in the banking industry, according to the latest report from the Conference Board. The business group’s Consumer Confidence Index increased to 104.2 in March from an upwardly revised reading of 103.4 the month before. The pre-report consensus was for a reading of 101, so the report was much better than expected. Consumer spending makes up over two-thirds of gross domestic product, and growth has continued to be solid so far this year. Households boosted their spending by a seasonally adjusted 0.2% in February from the prior month, the Commerce Department reported last week. That followed a higher than expected 2% increase in January. Households continue to feel the tailwind from strong gains in wages and salaries last year, fueled by strong labor demand, and continue to dip into excess savings accumulated during the pandemic for additional spending firepower. Clearly, there are questions about what the economy will do in 2023, but I continue to see no reason to assume we are headed into a recession. Atlanta Fed’s “GDPNow” Shows Economy Growing By 2.5% The Federal Reserve Bank of Atlanta produces the most up-to-date forecast of US economic growth, and it is showing the economy growing at a modest clip in the 1Q of 2023. The Atlanta Fed’s latest “GDPNow” report shows the economy growing at an annual rate of 1.7% at the end of March.
As you can see, the while the latest GDPNow forecast has come down since March, the estimate is still higher than the latest average forecast from leading “Blue Chip” economic forecasters who are predicting growth of less than 1% for this year. This is not unusual. Fed Continues Hiking Rates Despite Bank Failures Last week the Fed raised its benchmark overnight interest rate by a quarter of a percentage point, but indicated it was considering pausing further increases in borrowing costs in a nod to financial market turmoil and the surprise failure of two regional banks. The US central bank has hiked its policy rate by 475 basis points since last March from the near-zero level to the current 4.75%-5.00% range. There are widespread calls for the Fed to end its interest rate hiking cycle, especially in light of the recent bank failures. But these calls did not stop the Fed from raising rates again at its latest policy meeting. I still look for the Fed to raise short-term interest rates a couple more times this year in its quest to get inflation under control. While the Consumer Price Index has fallen from its peak of 9.1% last year to an annual rate of 6.0% in February, it is still far above the Fed’s stated target of 2% for inflation. If I’m right and the Fed raises short-term rates a couple more times in the months just ahead, that could be enough to slow the economy to a near-zero rate of growth in the second half of this year. I’m not saying that is the most likely scenario, but it is a possibility with the Fed determined to get inflation under control. But even then, it does not mean we are doomed to a recession in the second half of this year. Obviously, a recession is a possibility, we’ll just have to wait and see, but I don’t think we should assume that is the most likely outcome. The economy could continue to surprise on the upside, especially if consumer spending remains strong. US Has A Serious Labor Shortage – What’s Causing It? Shifting gears, millions of workers of various ages have yet to return to the workforce after the onset of the COVID pandemic, a trend that could complicate the Federal Reserve’s efforts to tamp down inflation. The Bank of America Institute, a think tank that draws on Bank of America data, found that more than two million workers should have come back to the labor force since the onset of the pandemic but haven’t. Many are older workers who retired early, but there are also plenty of millennials and Gen Xers in the mix. “When you don't have enough workers, you’ve got to raise wages right to attract talent,” said Bank of America Institute economist Anna Zhou. “Whether they will come back will be a critical component to see whether labor supply picks up in the U.S.” According to the Bank of America report, the missing workers are a mix of older generations and those in their prime working years:
The report says high costs for caregiving, migration trends and long-COVID could be pushing people to leave the workforce behind. ? Caregiving: About 7% of respondents to the Census Bureau’s latest Household Pulse Survey said they would not be returning to work because of caregiving, with 5% looking after children and 2% looking after elderly people. ? Migration trends: States with large cities with a high cost of living like New York and California are seeing workers leave for more affordable states like Florida. Zhou said those workers might have enough money saved up to work less or stop working altogether. ? Health issues and other factors: An estimated 24% of people infected with COVID-19 have experienced “long COVID,” according to a report from the Minneapolis Fed last year, and about a quarter of those workers said the illness is impacting their ability to work. Long COVID is a strain of the disease which can last months or even years. Millions of Men Are Leaving The Workforce: Why? Wanted: millions of male workers in their prime working years. According to the Labor Department, there are at least six million working age men who are not in the labor force today.
A big reason many employers are still struggling to find qualified job candidates is that the share of Americans working or looking for jobs is at 62.4%, well below its pre-pandemic level of 63.4%. Most of this shortfall in labor force participation can be traced to people 55 and older – men and women alike who retired early during COVID-19 in response to a layoff, to minimize health risks or for other reasons. Yet a less publicized factor is that men ages 25 to 54 have been dropping out of the workforce for decades. This slide intensified during the health crisis and has yet to fully recover despite record job growth over the past two years. Determining reasons for leaving the labor force is not easy, as the data depends heavily on surveys and on extrapolation. Many researchers assume so many men are leaving the workforce because they choose to be “stay-at-home Dads” who want to care for their children. Yet according to the Census Bureau, less than 250,000 men in recent years left the labor force in order to care for children full time. This is only a tiny fraction of the total number of parents who leave the labor force to be stay-at-home parents. That leaves more than six million men who have left the labor force for some other reason. One of the big reasons, I believe, was that in 2020 and 2021, Washington pulled out all the monetary and fiscal stops to avoid an economic collapse in the face of the pandemic. Those interventions may indeed have forestalled a global depression. But they also inadvertently disincentivized work in America as never before — far beyond what any public health rationale could possibly have warranted, especially for working-age men. America’s COVID-era economy is a study in unintended consequences of massive government action. Ironically, thanks to full-throttle transfer payments funded by borrowed public money, disposable income in America spiked in 2020 and 2021, actually reaching previously unattained heights despite the COVID recession. This may be the only “national economic crisis” in history in which purchasing power rose. Thanks to Washington’s emergency relief transfers, in fact, Americans had more money in their pockets during the pandemic emergency years than they cared to spend. Thus, we saw a jaw-dropping, totally unforeseen, doubling of personal savings rates during a time of national economic crisis. It was in this very unusual environment that a higher percentage of working age males elected to drop out of the labor force and stay at home. It remains to be seen if this trend will continue or if the percentage of males in the workforce will go back to historical levels in the years just ahead. It's an interesting question, but I’ll leave it there for today. Very best regards,
Gary D. Halbert SPECIAL ARTICLES Are We Headed For A Recession Or Not? Fed Hikes Rates Despite Concerns Over Banking Crisis Gary's Between the Lines column:
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