MNI INTERVIEW: Consumers Fret Over 2023 Recession-Conf. Board

U.S. consumers are expecting the economy to slip into recession this year, though labor market strength suggests the downturn may not be deep or long-lasting, Conference Board chief economist Dana Peterson told MNI.

Peterson said a drop in the Conference’s Board’s Expectations Index to below 80 for January “usually signals that consumers expect a recession within the next six to 12 months.”

While recent high-profile layoffs have been concentrated in industries like technology, finance and retail, consumers might be nervous about their own futures despite ongoing signs of broad labor market strength.

“People may be becoming more concerned about their own employment prospects and the state of their incomes in the future, should they become one of those people who are let go,” she said. The economy boasted another surprising surge in job growth in January, with more than half a million new positions created.

The job market’s strength means the Fed’s hoped-for soft landing scenario, while not easy to pull off, may actually be achievable.

“Even though we have a recession priced into our GDP forecast, we only have the unemployment rate rising by 1%, from 3-½ to 4-½, so you’re just going from a very tight labor market to a still-tight labor market,” said Peterson.

“You still have this astounding degree of hiring. It’s hard to imagine the labor market collapsing,” she added. “The fact that we have millions of baby boomers retiring means that we have these significant labor shortages in key sectors, especially sectors where people have to physically show up to work.” (See MNI INTERVIEW: US Labor Market Could Have Soft Landing-Paychex)

FED TO STAY THE COURSE

Peterson said despite recent progress on inflation, with key measures dropping steadily from summer highs, Fed officials like Chair Jerome Powell mean it when they tell skeptical markets that rates will stay at their peak levels through 2023.

The Conference Board’s measure of one-year inflation expectations climbed to 6.8% in January from 6.6% in December but was still down from a 7.9% peak in June.

“The Fed has told us it’s very much focused on what people call supercore inflation – basically core services inflation excluding housing – they really want to see those prices come off,” said Peterson. “They seem confident that rents, which are incredibly sticky, will start to come off,” Peterson said, adding though that she was less convinced housing inflation would ease.

The Fed is also focused on wage pressures, and Conference Board contacts suggest a worrisome degree of passthrough inflation.

“When we speak with executives, certainly in the U.S., they have no problem passing higher costs from inputs or wages to the customer, so I think that’s a meaningful aspect of inflation pressures,” she said.

She thinks markets are too sanguine about the prospect that the Fed will behave as it did in past recent downturns, reversing course on policy and cutting interest rates at the first sign of a slump.

“The Fed has been saying, no we’re not going to do that. Powell even said explicitly, we’re going to hike rates, he indicated another two times or so, and wherever we peak that’s where we’re going to stay for the rest of the year. That’s forward guidance. They’re not planning on cutting interest rates,” she said.

“I don't know if markets appreciate the degree to which the Fed is willing to allow ‘pain’ in order to achieve its objectives.”