Many people might feel disgusted when they spot the price of a box of butter, a bag of salad or, frankly, just about anything else at the supermarket. But generally, many can keep spending, especially if they’ve gotten a raise at work or they’re fortunate enough to have some cash sitting on the sidelines.

Yet make no mistake, plenty of people are on edge as they see inflation soar, jobs get cut at some major companies and some homes for sale sit a bit longer on the market than they did just months ago.

Much like an executive from Grand Rapids-based office furniture maker Steelcase expressed in an earnings call in September, everyone senses “dark clouds on the horizon related to the economy.” Steelcase eliminated 180 salaried jobs this fall.

The clouds — and a crush of bitter cold air in mid-October — do make one wonder if just throwing on a coat and tugging up the collar will be enough to stay comfortable.

As the Federal Reserve pushes interest rates higher and higher, it seems to many as if a recession is inevitable — if one isn’t already here. Higher interest rates weigh on economic growth. Construction on new homes in the U.S., for example, fell 8% in September from August.

Yet, a few remain optimistic and continue to say that while the U.S. economy is likely to slow down, a recession isn’t a done deal in 2023.

Recession risks climb for 2023
“Risks are elevated but it isn’t certain that we will get a recession sometime over the next year; year and a half or so,” said PNC Bank chief economist Gus Faucher.

Faucher, who spoke Tuesday to private banking clients gathered for a luncheon at The Community House in Birmingham, puts the probability of a recession in 2023 at around 45%.

“The biggest risk,” he told me in an interview, “is that either the Fed makes a mistake and tightens rates, raises rates, too much or there is no alternative but to raise rates and cause what would hopefully be a mild recession to bring inflation back down.”

Inflation, Faucher said, has proven stubborn and spread to more areas of the economy, including services. “That does raise concerns that the only way to get inflation under control is through a recession. We don’t like to see that obviously.”

What’s working in our favor: Many consumers — but certainly not all — continue to have extra cash in savings that built up during the pandemic after the federal government rolled out financial relief, including stimulus checks. While prices are higher, many can continue to spend by tapping into savings or some of the wage gains they saw in 2021 and 2022.

Levels of debt for consumers, relative to income, remain relatively low, Faucher said. “Consumers do have the ability to borrow to finance some of their spending.”

The labor market, Faucher said, “continues to do very well.”

“We’re still adding 300,000 jobs per month. The unemployment rate is at a 50-year low. Wage growth is very good,” he said. “That means more jobs, higher income, more consumer spending.”

“Things are generally going well in the economy but people are very nervous about the outlook over the next couple of years,” Faucher said.

That’s true, he said, even though many businesses are seeing stronger demand and feeling good about their own economic conditions.

“We are not in recession in the United States now,” Faucher said.

Interest rates keep heading higher
Economic anxiety, though, is ratcheting up as many doubt that the Federal Reserve will be able to pull off getting inflation under control and engineering a soft, painless landing for the U.S. economy.
The Federal Reserve began raising short-term interest rates in March and has announced a rate hike at each of it four policy meetings since then.

The Fed’s next meeting is Nov. 1 and Nov. 2 and the last meeting for 2022 is scheduled for Dec. 13 and Dec. 14.

Faucher projects that the November rate hike would be 75 percentage points. December’s rate hike could add another 50 basis points to short-term rates.

The Fed’s target range for the federal funds rate was 0% to 0.25% at the start of 2022. Rates fell to these lows as Fed policy makers attempted to skirt a long-running, deep-seated recession in 2020 once the COVID-19 pandemic hit.

As inflation built, the Fed aimed to cool down an overheated economy and raise rates. Short term rates have since moved up significantly, ending at a target range of 3% to 3.25% at the Fed’s last meeting in September.

Another two more rate hikes, based on Faucher’s forecast, could put the target range at 4.25% to 4.5% by the end of 2022.
Mark Zandi, chief economist for Moody’s, sees a similar path for Fed rate hikes this year and expects another quarter point hike in late January, too.

Then, Zandi said, the Fed could put a pause on rate hikes to make sure that job and wage growth are slowing and inflation more broadly is headed back to the Fed’s 2% target.
“If so, then this will be the end of the rate hikes, and the economy has a reasonable chance of avoiding recession,” Zandi said. “However, if inflation isn’t moving in the right direction, the Fed will raise rates further and the economy will go into recession by the end of 2023.”

Zandi puts the odds of a recession in 2023 at “close to even.”

“But even if the economy doesn’t suffer a recession, it will be a difficult year for the economy, with still high inflation, much less job growth and higher unemployment, and weak stock and house prices,” Zandi forecasted.

Inflation rose by 8.2% year-over-year in September; and rose 0.4% on a month-to-month basis September after only rising 0.1% in August.

Gabriel Ehrlich, director of the University of Michigan’s Research Seminar in Quantitative Economics, said the data is clear that we’re not in a recession based on the numbers through the third quarter of 2022.

That’s in spite of the two consecutive quarters of negative real growth for the nation’s gross domestic product at the start of the year, he said. Five of the six monthly indicators tracked by the National Bureau of Economic Research, which makes the official call on recessions, have grown so far this year.

The odds in favor of a recession are going up, though, Ehrlich said, putting the chance of a recession in 2023 or early 2024 at roughly 66%.

What’s most likely, he said, is that the U.S. experiences “a mild recession in 2023 as the Fed hits the brakes to bring inflation under control.”
Even if a recession occurs, Ehrlich said, the unemployment rate isn’t likely to skyrocket but instead could top out around 5% or lower. The U.S. unemployment rate was 3.5% in September.

To avoid a recession, he said, inflation will need to show clear signs of coming back down relatively quickly.

“My sense is that slowdowns in leading indicators won’t suffice,” Ehrlich said, “and that the Fed wants to see officially reported inflation slow down materially before it begins to take its foot off the brakes of monetary policy.”

Job picture, auto outlook remains good
Zandi agrees that the U.S. economy has not entered into recession already, thanks to a strong jobs picture.

“The economy is creating lots of jobs, and unemployment is low and falling,” Zandi said. “The currently very strong job market is not consistent with an economy in recession.”

Faucher notes: “When workers do lose their jobs, they’re easily able to find new ones.”

Still, some big companies are cutting back and job losses are unsettling for individuals as more cuts end up in the headlines.

Steelcase cut about 8% of the company’s salaried positions throughout its North America core and corporate functions, eliminating approximately 180 salaried positions by mid-October, according to Katie Woodruff, director of marketing communications.

“These actions are expected to reduce our planned spending by approximately $20 million on an annualized basis,” she said.
Employees received a severance package and other benefits to support them as they looked for new employment.

In mid-October, Microsoft confirmed that it would cut nearly 1,000 jobs.

In August, Ford Motor Co. reduced its salaried workforce by 2,000 and agency employees by 1,000 in the US, Canada and India. Severance packages also were given.

The outlook for the auto industry, Faucher said, remains solid because there’s the likelihood that as supply chain issues get resolved more people will end up buying new cars and trucks.

A positive development in 2023, he said, will be the need to replace older cars that people had been hanging onto.

A recession, mild or not, could cut into any upbeat forecasts. Those taking out auto loans typically are facing higher payments and interest rates than a year ago. The average rate for a new five-year car loan is 5.56% now, compared with 3.89% a year ago, according to data.

“We think higher rates are already limiting used vehicle sales,” said Jonathan Smoke, chief economist for Cox Automotive.
Subprime buyers, who have low credit scores and pay the highest interest rates when they take out a loan to buy a car, are the most rate sensitive. “Those buyers have collapsed in new, but with tight supply, it’s not yet evident,” Smoke said.

“Our forecasts suggests a recession would cause another decline in new vehicle sales in 2023, but if we can avoid the recession, we’re poised to start a slow multiyear recovery as supply chain issues slowly abate.”

Smoke is estimating the odds for a recession next year at 50-50.

“It’s a forecaster’s nightmare. The coin toss mainly hinges on how high rates get, but odds have grown since the September Fed meeting and could very well go above 50% by their November meeting in less than two weeks,” Smoke said.

The contract talks with the Detroit 3 automakers will take place in 2023, as the current contract expires next September.

Housing is getting hit
The shift in the winds for housing in many communities looks much more troubling already.

“The pandemic-induced bubble in housing is bursting,” wrote KPMG economist Yelena Maleyev.

The Mortgage Bankers Association said mortgage applications dropped for four months, reaching the lowest level since 1997. The 30-year fixed mortgage rate hit 6.94% — the highest level since 2002, according to the group. Refinancing fell dramatically and new home purchase activity for mortgages is down significantly.

PNC expects further declines in homebuilding through the rest of this year and into 2023.

“Homebuilding activity continues to contract as higher mortgage rates weigh on the industry,” according to a PNC economic report. “The interest rate on a typical 30-year mortgage, which was below 3% as recently as a year ago, is now almost 7%. This has made purchasing a new home much more expensive.”

But Faucher said mortgage rates should peak soon, and then fall in 2023 on expectations for eventual Fed rate cuts, slower inflation, and weaker growth. He estimates that mortgage rates might settle back into the 5% range.

Could a recession be mild?

When it comes to recession forecasts, not everyone is as optimistic. The Wall Street Journal’s survey of economists now puts the probability of a recession in the next 12 months at 63%, up from 49% in the July survey. It is the first time the survey put the probability above 50% since July 2020.

Fitch Ratings stated on Tuesday that it expects the U.S. to fall into a recession in the spring of 2023, or the second quarter. The downturn is expected to be “relatively mild by historical standards,” possibly something similar to the 1990-1991 recession. That recession followed a rapid Fed tightening in 1989-1990.

The National Bureau of Economic Research tells the world when U.S. recessions begin and end. Those calls often come well after the recession started. The economists look for a significant decline in activity that isn’t just in one industry but instead spread across the economy.

The last U.S. recession arose during the start of the pandemic in early 2020. That recession lasted just two months in 2020, the shortest in history, according to the official economic tracking committee.

Shopping malls and factories across the country went dark and the nation’s gross domestic product plummeted by nearly 31.4% in the second quarter of 2020. But aggressive stimulus packages that rolled out of Washington quickly led to a dramatic rebound in many areas and boosted the nation’s output dramatically.

This year continued supply chain disruptions relating to the pandemic contributed to high inflation and put the global economy at risk. Inflation has been more persistent than many anticipated.

The Dow Jones Industrial Average was down nearly 17% through Tuesday from the peak of 36,799.65 points hit on Jan. 4, 2022.

Prices at the gas pump have pulled back since hitting a record $5.22 a gallon in Michigan in June 2022, according to AAA. But drivers are paying more than a year ago.

Michigan drivers were paying $4.21 a gallon an average as of Monday — up 40 cents a gallon from the same time in September and 90 cents a gallon from the same time in 2021, according to AAA.

Zandi said the potential for another spike in oil prices remains high given increasing sanctions on Russian oil and OPEC’s decision to cut their oil production.

“Much of the rest of the global economy is struggling more than the U.S., and this reverberates back on us through a widening trade deficit and less global travel to the U.S.,” Zandi said.

Many fear that a recession that’s in the cards in Europe could spread to the U.S.

Wage gains, of course, aren’t keeping up with inflation. And consumers who suspect that trouble could be ahead aren’t likely to rush out and make big purchases, if they don’t need to do so. Things could be touch-and-go for a while — keeping many wondering what’s next.