The Federal Reserve Board next meets at the end of January (1/31-2/1). The Fed is expected to raise the key federal funds rate to 5.1% in 2023. This is a 0.75% increase from where we are today. The most likely course of action is for the Fed to raise rates at the January/February Meeting by 0.50% points and then 0.25% in the March meeting. After that, the Fed will most likely “stand pat” for the remainder of the year, neither raising nor lowering rates.
While many economists and business leaders disagree on the breadth and depth of an upcoming recession they do agree that one is coming. Based on the underlying strength of the US economy and strong labor market (currently there are 1.7 unemployed people for every job opening) I believe any recession will be mild when compared to the likes of the recessions of 2007-2009, 2001 and 1990.
Most politicians, as well as the Fed, don’t want to publicly acknowledge the fact a recession is the most direct way to finally conquer inflation. During recessionary environments, consumers cut non-essential spending in a dramatic fashion, wage growth slows or in some cases reverses, and large ticket durable good orders slide. All these actions work together to bring prices down, what we call dis-inflation. Inflation is the result of too many dollars chasing too few goods. In a recession the “too many dollars” part of the equation disappears.
Many pundits talk about the inevitable sharp increase in unemployment that will result from an upcoming recession. However, I would argue there will be no “significant” increase in unemployment when compared to previous recessions. Based on year over year data from the Bureau of Labor Statistics (BLS):
“From the third quarter of 2021 to the third quarter of 2022, nonfarm business labor productivity decreased 1.3 percent, reflecting a 2.1-percent increase in output and a 3.4-percent increase in hours worked. This follows over-the-year decreases in labor productivity of 0.4 percent in the first quarter of 2022 and 2.1 percent in the second quarter of 2022”.1
Those statistics can indicate a softening in the demand for goods and services. However, it also shows there is room for productivity improvement. According to the BLS, labor productivity improved a revised 0.8% in the third quarter of 2023 v. the second quarter. I believe this points to underlying strength in the labor market that will act as a “shock-absorber” to an upcoming recession later this year. While unemployment is sure to rise I don’t foresee a major surge in unemployment therefore the recession will be relatively mild and short-lived.
Sierra Pacific Financial Advisors is hosting a complimentary webinar on Thursday, January 26th at 1:00 pm. The registration link is below. We invite you to join us along with Bryce Gill an economist at First Trust. Please follow this registration link: SPFA – Complimentary 2023 Economic Outlook and Forecast.
 Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, Nonfarm business productivity down 1.3 percent from third quarter 2021 to third quarter 2022 at https://www.bls.gov/opub/ted/2022/nonfarm-business-productivity-down-1-3-percent-from-third-quarter-2021-to-third-quarter-2022.htm (visited January 12, 2023).