As 2022 comes to a close, there is much concern that world economies may experience a recession in 2023. There are a host of worrisome economic indicators that appear to be trending in this direction.
Inflationary Forces
The large government Covid relief payments created inflationary effects. The shift from on-site to stay-at-home workers triggered a transition to buying goods versus services. It also produced supply chain disruptions and more inflationary pressure. The war in Ukraine and Russia’s use of food and energy as economic levers, have precipitated spikes in the cost of these essential goods. Consumers have been feeling the effects for months of high prices for food and energy. Food banks are receiving record numbers of visits, a clear sign that many consumers are having trouble making ends meet.
Rising interest rates have pushed up the cost of consumer loans and mortgages. Up until a few months ago, real estate prices, whether for purchases or rentals, had been spiking in many areas. According to a recent Zillow report, “affordability is the biggest stumbling block for buyers. A monthly mortgage payment on a purchase of a typical house in the U.S., even when putting 20% down, was $1,910 in October. That’s a 77% jump year over year and a 107% increase – nearly $1,000 – from 2019. Monthly payment figures are even higher when using the more common 5% down payment, and when including taxes and insurance.
The share of income spent on monthly mortgage payments has risen from 27.7% in February to 37.3% in October – well above a previous peak of 35% in 2006. Housing payments are considered to be a financial burden when they exceed 30% of a household’s income.
Layoffs and Hiring Freezes
The worries of a 2023 recession have triggered layoff notices and hiring freezes. As of mid-November, more than 85,000 workers in the U.S. tech sector have been laid off in mass job cuts so far in 2022, according to a Crunchbase News tally. Major companies such as Alphabet (10,000), Amazon (10,000), Carvana (4000), Cisco (4100), Meta (11,000), Tencent (5500), and Twitter (3700) have all announced significant staff reductions. Many other companies that are smaller in size have made similar announcements. In a recent Intellizence report, large layoffs have been announced in other companies and industries such as Ford (8,000), Office Depot (13,100), 3M Company (4,600), Walt Disney (32,200), Westjet (3333), and MGM Resorts International (18,000). These are all possible signs that a recession is on the way.
Moderating Forces
The typical U.S. home value was nearly flat from September to October (+0.1%), as buyers and sellers potentially settled on a new market equilibrium. The Zillow Observed Rent Index showed a slight 0.1% decrease from September to October, ending a two-year rent growth streak. The decline is a small step toward normalcy, reminding us of the October declines seen from 2017 through 2020. Typical U.S. rent is now $2,040, up 9.6% since last October and nearly 27% since 2019.
Paul Krugman, the Nobel prize winning economist, suggested in a New York Times article last week that this might reflect the shift to remote work now being largely complete, and the release of more rental units, meaning supply has caught up with demand and rents are starting to normalize. Krugman noted that shelter makes up more than 30% of the Consumer Price Index, and 40% of core CPI, which excludes food and energy. As a result, slower rental growth could reduce inflation significantly.
Inflation soared to a 40-year high of 9.1% in July and remained close to 8% in October. The Federal Reserve has responded by hiking interest rates from almost zero in March to a range of 3.75% and 4% to cool the economy and curb price increases.
Krugman recently suggested that underlying US inflation may have already cooled to 4%. He warned that higher mortgage rates threaten to tank the housing market, and a strong US dollar could hammer demand for exports, resulting in a painful recession. He cautioned that the Fed may be going overboard with its rate hikes, putting the US at risk of an unnecessarily steep downturn. With rental growth appearing to be tapering off, this further supports that view.
Global food prices steadied in October, as supply disruptions wrought by the war in Ukraine were partly offset by slowing demand for staples. Good weather has bolstered supplies of crops like barley, and soaring inflation is curbing trade of goods from cheese to pork. That has helped buffer supply shocks from the Black Sea and brought a monthly food-cost index from the United Nations 0.1% lower in October, holding at its lowest since January.
Canadian food prices provided a small measure of good news in October’s report. It’s not that shopping in a grocery store was any more affordable. It wasn’t, as prices rose 10.1 per cent last month, but the rate of price increase slowed slightly from September when they rose 10.3 per cent.
Freight Transport Activity is Moderating
A recent TCI Business Capital report noted that the four elements that affect the trucking market are softening. They show inbound container shipments are down. load volume is down, truck capacity is up, and fuel prices are up. On November 14th, Cass Information Systems published their Transportation Index Report for October. Their Truckload Linehaul Index, which measures truckload rates, continues to decline from the peak in early 2022.
We may be looking at a “Pasta Bowl Recession”
This is prompting forecasters to reduce their financial projections for 2023. Many economists are expecting economic growth to slow in 2023, but they can’t agree on whether we’ll enter an official recession or not. Some analysts estimate economic growth in 2023 will be slightly positive, at 0.1%, while others are predicting a growth rate of -0.4%. Evan Armstrong, President of Armstrong Associates, a 3PL consulting services organization, predicted last week during a Stifel webinar that 3PL revenues will drop from $375.9 billion in 2022 to $3.25 billion in 2023, a 12.9% decline for an industry that has been on a very positive growth track for many years.
Economists have been reluctant to use the “R” word since consumer confidence has been resilient and unemployment has remained low. With so many job vacancies, there is a question as to how many of the people laid off will find employment with other firms.
It is possible that we may avoid a recession altogether. The unemployment rate in the US increased by 0.2 percentage point to 3.7 percent in October 2022, up from September's 29-month low of 3.5 percent and slightly above market expectations of 3.6 percent. The unemployment rate in Canada was at 5.2% in October of 2022, unchanged from the prior month and beating market estimates of 5.3%, signaling that the Canadian labor market remains tight.
Recently a new term has been coined to describe the type of recession we may face, the “pasta bowl recession”. The name has been developed to reflect that the recession may be like a pasta bowl, long but shallow. Because of the mixed economic data, this description suggests that if we do go into a recession, it will probably last a reasonable length of time, but that it won’t be that severe. Krugman says the drop in inflation means a soft landing of the economy is 'increasingly plausible'. We will soon find out.
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