The U.S. economy is headed for a slowdown—but whether it will be a “soft landing” or a full-blown recession remains to be seen, according to Fifth Third Bank Chief Market Strategist Tom Jalics.
“The economy is going to slow pretty significantly, we think, from here,” Jalics said Monday at IBJ’s 2023 Economic Forecast event, held at the Westin Indianapolis downtown. “We think it’s literally a toss-up, a coin flip, whether in the next six months we go into a recession.”
Current economic conditions of very low unemployment, high inflation and rising interest rates all indicate that the U.S. economy is “very late in this economic cycle” and due for a slowdown, Jalics said.
While noting that economic forecasts are not always accurate, Jalics said various economic indicators offer reasons for both optimism and pessimism.
Inflation is a key concern, Jalics said. The Federal Reserve has aggressively raised interest rates this year, yet inflation remains high.
Gross domestic purchases prices, the prices of goods and services purchased by U.S. residents, increased 4.6 percent in the third quarter after increasing 8.5 percent in the second quarter, according to the Bureau of Economic Analysis. Excluding food and energy, prices increased 4.8 percent after increasing 6.9 percent.
If the Federal Reserve can’t bring inflation under control, Jalics said, the U.S. economy is likely headed toward a recession rather than a milder slowdown. “In three to six months, either inflation is going to break or the economy is going to break.”
Another issue affecting inflation rates, Jalics said, is America’s ongoing labor shortage. Currently, he said, there are 10.5 million job openings nationwide, but only 5.5 million job seekers. “There aren’t enough folks out there looking for work relative to the openings that we have.”
The current unemployment rate is 3.7%, Jalics said, which is the lowest it’s been since 1969, with the exception of a short-term blip in February 2020.
A tight labor market tends to drive up inflation, Jalics said, because it causes employers to raise wages in hopes of luring workers. And when a company’s labor costs go up, it may raise the price of its goods and services in response.
The lack of workers poses an ongoing challenge because it’s related to longer-term U.S. fertility trends, Jalics said. He pointed to statistics showing that the U.S. birth rate has been declining in recent years. The replacement rate—the number of births per female needed to keep the population steady—is 2.1. The U.S. birth rate has been below that since 2008 and currently stands at 1.64.
That said, Jalics said he believes inflation has peaked, and he offered several reasons why it could continue to fall.
The West Coast port backups and supply-chain issues of last year have improved significantly, he said, and shipping rates have also declined.
Gas prices have also declined in recent months, meaning that fuel costs are not as large a contributor to inflation as they had been previously.
And, with the exception of automobiles, retail inventories are high right now. Major retailers including Walmart, Target and Kohl’s have all spoken publicly about the fact that they overbought in anticipation of consumer demand that has not been as high as expected. This, Jalics said, likely means shoppers will find good deals as retailers reduce prices to move excess merchandise.
Other positives: Consumer debt payments as a percentage of disposable income are relatively low, at 9.58% as of the second quarter. As a comparison, this figure was 13.11% at the start of the Great Recession. And there’s currently $4.58 trillion held in money market funds, as compared with an average of $2.04 trillion in 2018-2019.
These factors, plus the low unemployment rate, mean that consumers are in better shape to weather a slowdown than they have been in previous cycles, Jalics said.