Economist: Recession possible due to hot spending, inflation

Sage Policy Group CEO Anirban Basu points that a low office vacancy rate and attempts to outspend inflation – and savings – cause economists to still worry about a potential recession. | DBT PHOTO BY KATIE TABELING

WILMINGTON —  Last year, Sage Policy Group CEO Anirban Basu warned Delaware business leaders that despite a strong labor market, an economic recession was still on the horizon and people should expect a mild downturn.

But as the year came and went with the United States economy growing 3.3% and with thousands of jobs added to the workforce, Basu said on Feb.6 the recession is still coming — it’ll just be a year off.

With interest rates set around 5.25% to end 2023; mortgage applications down 80% from the peak set two years ago; the glut of new homes added to market at record highs; building activity slowing for other projects; inverted yields on long and short term bonds; the low national office vacancy rates and the maturing commercial real estate loans were all warning signs that the recession is down the road, Basu said at the annual economic summit for the New Castle County Chamber of Commerce at the Riverfront Room near the Riverfront Hyatt Place.

“The point I’m trying to stress is that the consumer has been the lead engine of job and economic growth,” Basu said. “But can the engine continue to perform the way it has? My suspicion is maybe not.”

While the Federal Reserve has left the nation’s benchmark interest rates in the range of 5.25% to 5.5% since July, the economy has still been churning ahead thanks to blockbuster spending in the second half of the year and low unemployment. Basu’s research found about 9 million job openings in America in 2023 — and another 353,000 jobs in January alone.

Basu, a Baltimore-area economist that often makes localized predictions for states, counties and trades, also noted that New Castle County alone added 18,000 jobs between February 2020 and December 2023. That reflects a 3.3% growth rate, slightly better than the national average.

“Delaware is one of the strongest economies now in the mid-Atlantic, with more fully-recovered jobs than the jobs lost,” he  said. “It’s also a much more diversified economy and better positioned for its own future than where it was in 2013 and 2014.”

But what troubled him the most was the fact that despite inflation causing housing and energy costs to rise, Basu said that nothing was slowing down the spending. Wages increased year-over-year 4.5% across the country, and despite the constant worry about inflation and its real impact on housing and energy costs, people were spending more than they were saving.

Shelter costs alone spiked 19% between May 2020 and December 2023, compared to food costs at 21% and clothing at 10%. Energy saw the largest jump at 47%. 

“You can understand why an economist has been so surprised by how much the consumers are spending, because when boarding costs go up, you’d expect people to borrow less credit cards, because interest rates took off, causing Americans to burn more cash,” he said.

Consumers acculated $2.1 trillion in savings during the COVID-19 pandemic and are ready to spend it. By now, $1.9 trillion has been spent. Basu noted there are also tightening standards for issuing credit cards, signaling lenders are becoming more cautious to issue lines of spending.

“While the spending has been great for the economy in the near term, it creates some issues moving forward,” Basu said.

Credit card debt held nationwide is at $1.13 trillion, and the number of American consumers that can’t pay off the debt is growing with each passing day. 

Delinquency rates on credit cards and auto loans are also on the rise, with both hovering around 6% that have a balance of more than 30 days that have gone unpaid. And with the Fed adjusting the bank lending rate, that can cause these balances to snowball.

The other major sign of a pending recession was the housing market. With a 30-year mortgage rate holding at 6.63%, Basu said that many Millennial and Generation Z consumers find that untenable and take themselves out of the market.

“When someone is applying for a mortgage, it’s a signal they’re willing to come to the table [for that investment,] and when you’re sitting in a home with a 2% interest rate, you’re not going anywhere,” he said. “There are so many existing homes built for sale, there’s this unmet demand – and the people who are buying are wealthy so the 6.63% rate doesn’t bother them.”