The 2023 Economy: Are We in a Recession?
Normally in this column we write about topics specific to the Pension Trust and your Retirement Plan. But some of the interesting things we get to see while managing the $1.6 billion in investments for the SLOCPT are the economic commentaries from a lot of great sources. We thought we might share a few snippets of what we have been seeing lately on the topic of the economy in 2023. And banks – can’t forget the banks – we’ll touch on those as well.
What is a recession?
An economic recession is a period of declining economic activity. There is not a single measure of when recessions start and end, but they are generally last 6 months or more and have declining GDP and increasing unemployment.
Is the US economy headed for a recession in 2023 or 2024?
The US is not in a recession at the moment, GDP is still growing, and unemployment is at near-record lows of around 3.6%. Many, but not all, economists are apprehensive about a mild and short recession starting in 2023-2024 as a result of increasing interest rates to fight inflation. The underlying strength in the US economy is good so it is unlikely that the next recession will look anything like the Global Financial Crisis Recession of 2007-2009.
Who is the “Fed” and why did they just make it more expensive for me to buy a house?
The Federal Reserve – the “Fed” – is the Central Bank of the US charged with regulating monetary conditions and interest rates. The Fed has the dual mandate of stable prices and low unemployment.
A little inflation around 3% or less is good for the economy. When inflation is higher than it should be the Fed works to cool-off economic activity to lower inflation. The Fed’s main tool to fight inflation is to increase short-term interest rates to make it more expensive for individuals and businesses to borrow money which in turn means they spend less. This is why the Fed has rapidly increased short term interest rates from 0% to near 5% in the last year. This in turn increases the interest rate on longer-term borrowings – including the rates on mortgage loans.
A 30-year fixed rate mortgage was as low as 2.75% at the end of 2020. As of today, it is likely to have a 6.50% or higher rate. A 30 year loan on a $500,000 amount financed in late 2020 might have had a payment of about $2,100/month. That same loan now might have a payment over $3,100/month. Ouch!
Will inflation subside?
Inflation on a year-over-year change measure had reached about 9% in 2022, but has moderated to the low 6% range of late. Economists and the bond markets expect inflation to decline further to under 3% by late 2024. This in turn gives the Fed reasons to eventually lower interest rates, but don’t hold your breath for that just yet…
What is the jobs situation?
With unemployment at only 3.6%, many more open jobs than job-seekers, and healthy growth in new jobs, the jobs market remains strong. For some time, the US has had a shortage of employees which simplistic commentators ascribe to “no one wants to work anymore”. Actually, the labor force participation rate of prime-working-age adults (ages 25-54) has bounced back to its pre-pandemic level above 80%. However, the over-age-54 labor force is still below its pre-pandemic level as many aging Baby-Boomers took 2020-2022 as a good time to retire.
Why are consumers so confusing?
Perceptions of economic conditions frequently are more pessimistic than individuals’ actual circumstances. As most consumers feel comfortable in their personal financial position they have tended to spend more (fueling inflation) and save less (reflecting less insecurity). Surveys of consumer opinions declined precipitously in mid-2022, yet personal spending levels on goods and services stayed strong. This disconnect between consumer perceptions and their actual behavior (worried, but still spending a lot) is a significant puzzle to economists.
What could go wrong?
Many economists forecast a “soft-landing” for the US economy with GDP growth still positive (but slowing), inflation moderating and unemployment increasing only small amounts. It is also possible to have a “hard-landing” for the economy if consumers buckle under higher interest rates and significantly slow their spending.
Of course, there are always shocks that can happen to hurt the economy. Geopolitical shocks, political dysfunction leading to debt defaults, etc. are always a. Always something to worry about…
What in the world is happening to banks?
What did Silicon Valley Bank do wrong?
On March 10th the US was suddenly worried about bank failures. A bank failure happens through a “bank run” where depositors all want their money back, but most of the bank’s assets are out in the form of loans.
Silicon Valley Bank (SVB) was the 16th largest bank in the US and had a high-risk bank strategy. SVB had mostly large business depositors who are quick to pull their deposits if they fear problems. SVB had high quality loans, mostly to tech sector companies, and a large portfolio of safe government bonds. But because interest rates have rapidly risen, the market value of SVB’s bonds fell – a lot. This created fears of SVB being insolvent, so depositors bailed out at the speed of the internet.
California bank regulators seized SVB mid-morning on March 10th (usually they wait until the bank closes on a Friday) and the FDIC took charge. To calm growing fears of bank insolvency the Fed, the US Treasury and the FDIC decided to insure not just the normal $250k of balances per customer, but their total deposits above that amount as well.
Does the SVB and other bank failures impact me?
Nope! Unless some of you keep more than $250,000 in your bank or credit union, you are well-protected. The Federal Deposit Insurance Corporation insures bank deposits up to $250k and the National Credit Union Association insures the same for credit union depositors. That’s why the FDIC and the NCUA were created – to protect individuals so they don’t feel they have to rush to the bank to get their money out before it fails.
