“Everything we look at says that we’re probably going into very slow growth in 2024 – probably not a recession,” said Dan North, a senior economist for North America at Allianz Trade, an insurance and business intelligence company specializing in trade credit insurance, cash flow protection and trade risk insights.
Interestingly enough, North began his presentation during a webinar presented by Controllers Council, by saying, “There are a lot of positives working for our economy at the moment” because data shows that:
- Right now, consumers are still spending and have the income to power it, and
- For now, the labor market and services sector are resilient. Unemployment is at 3.7% and most of the 22 million jobs that were lost during COVID have since been recovered, North said. Also, the Manufacturing ISM Report on Business indicates the services sector has remained in expansion mode since 2022.
So why all the talk about recession?
Something that could influence if what’s coming will be a full-on recession or a less severe economic slowdown is the battle over the federal budget and the national debt, with a looming March 8 deadline for holding off a government shutdown.
According to North, Congress is arguing about the wrong thing and they’re missing the big picture because the debate is over defense and discretionary spending, and nobody is mentioning reform of the spending involved with the 65% of the budget earmarked for programs like Social Security, Medicare, Medicaid and income security.
The reason for that, he said, is that politicians who seriously talk about messing with Social Security tend to not stay in office long.
Meanwhile, figures from the Congressional Budget Office indicate that the budget’s “mandatory spending” portion really ramped up during the pandemic and hasn’t come back down. North sounded concerned about the government’s interest payments increasingly taking up a bigger slice of the budget pie and a possible 183% debt-to-GDP ratio 30 years into the future. He likened it to what would happen if the size of your mortgage eclipsed your income.
“I’m not a doomsday guy,” he said, suggesting that a tax hike would be necessary to fund the seemingly untouchable two-thirds of the budget. “You can sustain high debt levels indefinitely. … Japan, right now, has a debt ratio that’s over 200%. It’s a trade-off. The more debt you have, the slower the growth.”
The inflation factor
What will definitely influence whether we’re heading toward a recession or an economic slowdown is inflation and what the Federal Reserve does. Things are still expensive – that’s not your imagination. That’s because inflation is cumulative and all the aggressive interest rate hikes will take three to five quarters (not months) from the time they were implemented to have an impact.
The headline consumer price index, which peaked at 9.1 in 2022, is now 3.1, which gave North “some degree of confidence.”
The Fed’s been closely tracking the core personal consumption expenditures price index, with a goal of bringing it down to 2%. Annually, it’s been 3.2% year over year. However, North’s analysis of recent quarter over quarter trends put that figure at a much better 2.2%, and at 1.9% when filtered by the most recent six-month increments.
“We think the Fed is probably not going to cut (interest rates) till the middle of this year. The markets tend to think it’s going to be as early as March. We think that’s much too soon,” he said, predicting four rate cuts this year, which will have a 100-basis-point impact.
What could speed that up is if bankruptcies brought on by inflation and high interest rates reach a certain point.
Some business sectors are in recession
While North declared us “over the inflation hump,” in the meantime, interest rate hikes have put the housing market, manufacturing and freight hauling in recession mode:
Housing: Mortgage financing rates have soared, averaging around 7.4% right now. Existing home sales are down 37% since December 2021 (when the first rate hike happened) and home prices are about 30% above what they were before COVID. “It’s going to take a while for the housing market to recover,” he said.
Manufacturing: Of course, buying machinery or vehicles is a bear because of the cost of borrowing money to pay for them. Orders of new core durable goods fell to 2% year over year since December 2021. And in the past three months, 64% of all industrial production sub-industries have been performing in the negative year over year.
Freight hauling: Trucking expenditures fell by a dramatic 28% since December 2021 and import shipping container volumes are down 16.5% year over year.
It should also be noted that consumer confidence is the second lowest it’s been in the last 56 years, and the labor market is showing signs of decay. Job growth was at 1.8% in December. “How can that be? You just grew 200,000 jobs in the last month. And my response is: That’s the way it works,” said North, adding that job losses don’t start happening until a recession starts.
Why the slowdown isn’t quite here yet
Besides the three- to five-quarter lag time on the interest rate hikes noticeably bringing down inflation, “Congress continues to spend more money and this has really stymied what the Fed’s trying to do. Congress is (fanning the flames) of inflation, while the Fed’s trying to put them out,” North said.
In addition, the Fed announced it was leaving the current federal funds rate, which helps set interest rates for loans throughout the economy, unchanged at 5.25% to 5.5%. According to North, that’s not quite recession territory yet.
Another big reason the economic slowdown hasn’t happened: If you’re like a lot of your peers, you smartly took on fixed-rate debt when the rates were close to 0% during the pandemic. Therefore, interest rates won’t hurt you unless you need to refinance.
