The rapid rise in interest rates in the past year — and ongoing credit constraints — will help push the U.S. economy into a recession later this summer and Michigan won’t be able to skirt a downturn, predicted a popular bank economist.
“We’re not in a recession,” Stuart Hoffman, senior economic adviser for the PNC Financial Services Group, told me in an interview before speaking at the Detroit Economic Club on Thursday.
But Hoffman sees more challenges in the months ahead for consumers and businesses. He is forecasting a mild recession that might begin in the upcoming third quarter and run anywhere from six months to nine months sometime into 2024, which would be shorter than a more typical yearlong recession.
The U.S. jobless rate could climb to the 5% to 5.5% range, he said, up from 3.5% in March. The loss of jobs could be far less than a typical recession, though, where the jobless rate often soars to 8%. Michigan’s jobless rate, Hoffman said, could edge into the 5.5% to 6% range. Michigan’s unemployment rate was 4.3% in February, the latest data available.
Right now, we’re not seeing a widespread downturn. The U.S. economy, Hoffman said, likely grew in a respectable 2% range for the gross domestic product in the first quarter this year. The initial GDP numbers for the first quarter are scheduled to be released April 27 by the Bureau of Economic Analysis.
Significant downturns in some pockets, notably housing, are already taking place, he said.
More of his thoughts on what’s ahead:
Interest rates: In an effort to cool down inflation, Hoffman noted that the Federal Reserve raised interest rates from virtually zero to nearly 5% in just a year — one of the biggest and fastest rounds of rate hikes in history. As consumers and businesses pay more to borrow, higher rates will take a toll on interest-rate sensitive industries, such as housing and, eventually autos.
Rates are likely to remain high, he said, as the inflation fight continues.
Auto industry: The auto industry, Hoffman said, has continued to do well so far because of pent-up demand.
“You might have thought auto sales would already be down, but they’re not,” Hoffman said. Given the spike in auto loan rates, typically consumers would have pulled back on buying cars.
In the past few years, though, supply chain disruptions, including a microchip shortage, hurt auto production. Inventory shortages during the pandemic forced many buyers to postpone buying a new car but they’ve resumed shopping as more cars and trucks fill the lots in 2023.
“You go in and you say ‘I’d like to buy a car’ and they don’t say (now), ‘Well, I’ve got a green one over there. I’ve got a polka dot one over there. We’ve got one with three wheels over there. You can have any one of them,’ ” Hoffman said.
Now, he said, many dealers can actually say they have an inventory of a variety of models, styles and colors.
For the first half of this year, Hoffman said, pent-up demand could help shore up car and truck sales. Buying is likely to slow down in the months ahead as interest rates for car loans remain high, he said, and credit grows tighter for many consumers as lenders remain cautious.
Jobs: Hoffman is forecasting tougher times and job cuts for many industries ahead, including travel, tourism, finance, health care, government, aerospace and autos.
About 2 million to 2.5 million jobs could be lost nationwide during the recession, Hoffman said, pointing out that the job loss would be usually double that in a more typical recession.
The Federal Reserve: “The Fed probably has one last rate hike in store in May,” Hoffman said. He’s predicting a quarter-point rate hike at the next meeting of the Federal Reserve policy committee, which is scheduled for May 2 and May 3.
The target for the short-term, federal funds rate currently sits at a range of 4.75% to 5%.
The Federal Reserve raised rates nine times since March 2022 to drive up the cost of borrowing and cool down spending to address the worst inflation that consumers had experienced in decades.
Inflation: “Inflation is going to come down a lot,” Hoffman said.
If inflation comes down significantly by the end of this year, he said, the Fed would have the ability to start cutting rates in 2024, not this year.
The market, he said, is predicting that the Fed may be set for a round of rate cuts beginning in September or even in the summer.
“We think they’re early,” Hoffman told the Detroit Economic Club.
The latest news is that inflation in March grew at a smaller pace, showing the smallest 12-month increase since May 2021. Over the last 12 months through March, inflation rose 5%, according to the U.S. Bureau of Labor Statistics. Food rose 8.5% year over year; gasoline fell 17.4%.
Inflation peaked year-over-year at 9.1% last June — the largest increase in 40 years.
While the worst of inflation is behind us, Hoffman said, it’s still way too high for the Fed to begin cutting rates soon.
The Fed’s goal is to get inflation down to 2% over time, meaning the Fed may want higher interest rates to be with us for some time to cool down demand.
The Economy: Hoffman expects the gross domestic product to decline in the later half of 2023 but possibly by about 1% to 1.5% — about half the pain of a more typical recession.
The Federal Reserve seems to agree that a recession is ahead, too. The minutes of the Fed’s policy committee meeting in March, released Wednesday, indicated that the Fed’s staff sees the likelihood of a mild recession later this year. The fallout from the banking crisis, which includes tighter credit conditions for consumers and businesses, is expected to contribute to the slowdown.
The tumult began in early March with the failures of two banks, Silicon Valley Bank and New York-based Signature Bank.
Hoffman said the Fed and others did a great deal to restore confidence in the banking system so far.
He doesn’t expect Congress to roll out any stimulus packages or other programs that would combat the economic downturn. Some spending that is already in the pipeline, such as spending on infrastructure, will bolster the economy and jobs.
When rates start to come down and inflation starts to back off, he said, the auto industry and others will rebound and recharge economic growth.
Contact Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer.
Source: freep.com
