Brice Wallace
The signs all point in one direction: A recession is coming.
That’s the thinking of a prominent economist and researcher who recently spoke at an economic look-ahead gathering in Ogden.
Among those signs are the national unemployment rate nudging up, according to Brian Smedley, chief economist and head of macroeconomic and investment research at Guggenheim Partners.
“There’s often very little lag between the time the unemployment ticks up a little bit, like only three- or four-tenths [of a percent], and when a recessionary period is defined,” Smedley said at the 2023 Economic Forecast, presented by the Ogden-Weber Chamber of Commerce and Bank of Utah.
“Looking at the level of unemployment is a little bit deceptive because, yes, the job market is very healthy, but that actually indicates that recession risk is higher on a go-forward basis than it would be if the unemployment rate were 5, 6, 7 percent.”
Armed with a bevy of PowerPoint slides, Smedley showed that since 1990, rises in inflation have accompanied recessions, and since 1948, low unemployment rates have preceded recessions nearly a dozen times.
“Every time the unemployment rate has risen by a percentage point or even less, that’s always happened when we’re in a recession,” Smedley said. “This implies to us that even though the Fed certainly doesn’t come out and say, ‘We want to push the economy into a downturn because we want to control inflation,’ it’s pretty clear that that is the way they’re thinking about the situation.”
Smedley is not alone in predicting a recession. The Kiplinger Letter says a recession is now more likely than not and that the unemployment rate will increase moderately. A quarterly survey undertaken by the Philadelphia Fed showing the probability of contraction in real GDP in the next four quarters indicates that, since the 1960s, economic forecasters have never been so confident in a recession.
Guggenheim’s own models, with six- and 12-month horizons, also indicate a recession starting this year. “This is not iron-clad, but it does give us, among other signals, some confidence that recession risk is higher,” Smedley said.
Also, the Federal Reserve’s forecasts imply a recession is the base case, he added.
More recessionary predictors are elements of the leading economic index (LEI). Housing starts, the shape of the yield curve and manufacturing “tend to be first movers when the economy is decelerating and then typically the labor market and inflation will often move later in the cycle,” Smedley said, adding that the LEI has moved “well into contraction territory.”
“In the data we have for the last 50 years, we’ve never had that kind of drop in the LEI that hasn’t ended in a recession,” he said. “We’ve made a lot of firsts, we’ve broken a lot of models, if you will, in the last few years with the pandemic, so, again, there’s no certainty in this business, but it does suggest that we’re likely to see the unemployment rate rise.”
The demand for labor remains “extremely robust,” with about two jobs available for every unemployed person. “This is putting upward pressure on wages because … companies are competing for a scarce pool of workers,” he said.
But wage growth has moderated recently.
“We have seen several indications in the past three to six months that wages have started to cool even though the unemployment rate keeps going down. If that persists, that would be a very encouraging sign. … The question is, can that wage trend come all the way back to where the Fed wants to see it without the unemployment rate rising, without a recession? We don’t think that’s going to be the case. We think if the job market continues to be hot, the unemployment rate is beginning to fall, it’s going to keep wages and underlying inflation above the level the Fed is comfortable with.”
A possible economic trouble spot is the debt ceiling fight in Congress. With a divided government, that fight could last until about mid-year and could lead to fiscal tightening and hurt growth.
Smedley was asked if an unresolved debt limit could cripple the economy. “Absolutely, I think that’s the key risk,” he said.
“It raises uncertainty among individuals and families, it raises uncertainty for businesses, for our trade partners and for the markets. I think we probably will go down to the wire because both sides of the political aisle feel that they can gain something out of this political battle, to be honest,” Smedley said.
“I think the Democrats relish calling the Republicans crazy arsonists and Republicans like calling Democrats big spenders that have caused a lot of inflation. To a certain extent, both sides, I think, are going to drag this out, unfortunately.”