WILMINGTON – As inflation continues to sit above 8% and the Federal Reserve continues to hike its benchmark interest rate, many business owners are beginning to come to terms with the fact that a recession is nearing.
According to Andrew Patterson, a senior economist at investment giant Vanguard, that economic downturn is likely to strike in the summer of 2023, after consumers have exhausted some remaining historically high levels of savings spurred in part by recent wage gains and COVID-era government aid. He provided the firm’s prognostication during a New Castle County Chamber of Commerce luncheon on Monday.
Although a recession is “very likely,” Patterson said it isn’t likely to be like the one experienced by the United States in 2008-09.
“We don’t see those same types of conditions in play today,” he said, referring to the fallout of the financial crisis that precipitated that recession. “So, if you’re looking for some sort of historic precedent for the recession in 2023, I would look back to something more akin to what we went through back in 2001.”
Although the United States saw gross domestic product increase 2.6% in the third quarter after two quarters of losses, Patterson said that “under the hood” the data may not be as rosy as the Biden administration would like to portray. He explained that the growth was driven largely by international trade, a factor that doesn’t typically impact American GDP.
“There wasn’t an increase in exports or increasing global demand, but actually it was a significant fall in imports, signaling a lack of demand here in the United States,” he said, noting that imbalance reflects as a positive in the report.
Meanwhile, a more nuanced data point of final sales to domestic producers, or purely sales to consumers, businesses and the government that use a given product, have fallen for three consecutive quarters, Patterson said.
“That’s not necessarily an optimistic sign for GDP growth going forward, but something that we unfortunately need to see if inflation is to come down,” he said.
Although global challenges like the war in Ukraine and the continuing supply chain disruptions will make economic recovery more difficult, Patterson credited the Fed with “a reasonably good job” in terms of its policy and communication in the last six months.
“The Fed has quite a bit of wood to chop, and they continue to make progress in terms of their goal to bring inflation back down to 2%,” he said, correctly opining that another 75 basis-point hike was coming just days before the Fed did so Wednesday. “It is going to be a long and bumpy road to get to [2% inflation]. We’re not talking in terms of weeks and months, we’re talking years for them to make meaningful progress, but we believe that they are headed in the right direction.”
Vanguard anticipates the Fed to continue raising its benchmark rate until it hits between 4.5% and 5%, or 50 to 100 basis points higher than its current 3.75% to 4% range.
Considering the most recent data, Patterson said Vanguard is expecting national unemployment rates to rise to about 5%, or an increase of 1.5 percentage points from current levels, but it won’t be near double-digit rates seen during the Great Recession. That rise in unemployment will temper hiring and wage gains seen by workers over the last year, Patterson said.
“It is going to be a painful downturn for households and businesses, we don’t belittle that by any means, but there is reason for optimism [for controlling inflation],” he added.
