A recession is coming: What does that mean and how did we get here?

Don’t be afraid of the big bad recession. That was the core message that Jay Bryson, managing director and chief economist for Wells Fargo, had for the crowd at the Greater Lehigh Valley Chamber of Commerce Economic Outlook 2003. 

As the featured speaker at the event, Bryson said a downturn in the economy is nearly certain, calling the likelihood of a recession a two in three chance, but it won’t be a bad one. 

He said when people hear the word recession they panic because they think about the most recent pandemic, which was brought about as a result of the COVID-19 pandemic shutdown or the recession that came after the housing bubble burst in 2008-2009. 

But he said those were very different scenarios, both of which came about because of dramatic unforeseen events. 

“This will likely be a modest business cycle downturn, not a financial crisis,” he said. “The fundamentals of the economy are pretty strong right now.” 

Bryson is predicting two or three quarters of economic contraction, which he described as a mild recession. 

Likely scenarios include a slight uptick in unemployment – possibly to around 5% — but nothing dramatic. 

He noted that currently the unemployment rate nationally is around 3.5% and in Pennsylvania it’s around 4% so it won’t be a big upset. 

To help forestall, or at least lessen the impact of a recession, he expects the Federal Reserve will likely raise interest rates, probably starting at its next meeting on Feb 1.   

More hikes are also expected and could raise the core interest rate as much as 75 basis points by midyear. 

Again, he emphasized that all is just speculation on his part. 

“The one thing that is certain is that they’re not going to be bringing them down anytime soon,” he said. 

While the aim of the Fed raising interest rates is to ward off a recession, Bryson did say that they are negatively impacting the economy in some ways. He said housing starts are down dramatically right now, mostly because of the effect of the higher interest rates. 

Also, he noted that there has been a contraction of spending in the manufacturing sector and industrial production is also down because of higher prices and interest. 

So, what brought the economy to the brink of a recession? 

Bryson said several factors have contributed to the current economic situation. 

Wage pressure brought about by low unemployment, inflation and a drop in consumer spending on goods have all been factors. 

Bryson said wage pressure has been one of the contributing factors to inflation, and economists are looking for a moderation in labor costs to address that. 

Inflation has impacted the economy in a number of ways. Consumer good spending is down. While the inflation rate is currently somewhere between 6% and 7% right now – down from its June high of about 9% — higher costs mean people can buy less. 

He noted that the Fed likes to see inflation closer to 2%. 

But inflation isn’t the only culprit in the decrease in consumer spending.  

He said during the pandemic shutdown people were stuck at home and bought more goods than they would have normally, or sooner that they would have. 

“There’s only so many basketball hoops for the kids that you can buy,” he said, and that previous spending is eating into current spending habits. 

Meanwhile, he said, spending on core services is up. People are taking the money they’re not spending on goods and spending it on experiences. 

Still, he said there has been an erosion of consumer purchasing power and people are getting less for the same amount of money. 

That being said, consumer prices are actually going down right now. He said the supply chains have pretty much returned to normal and the lowered demand have both contributed to a slight decline in prices. 

However, the cost of core services is up because of increased demand and labor costs. 

The consumers are being impacted by the higher prices. 

“Peoples’ savings are at an all-time low,” Bryson said. “They’re not socking away as much as they normally do.” 

At the same time, he said credit card debt has increased to a rate that isn’t sustainable. 

Looking to the future, Bryson said he sees brighter days ahead.  

While the next few quarters may still see higher inflation and interest rates, he believes that by 2024 inflation will start going down and consumer spending will return to more traditional patterns.