The chief investment officer for a Central Illinois bank said Tuesday he does not see a significant recession arriving until late this year or early next.
During an economic briefing for the community held at Illinois Wesleyan University, Zach Hillard, head of Busey Bank's wealth management division, said the national workforce remains down by three million people from pre-pandemic employment. The unemployment rate is low. And there are more than 11.4 million job openings. Hillard says that landscape will cushion the effect of a recession as businesses react.
"It's going to be really tough even if business does slow down for them to lay off a significant portion of their staff as we've seen in past recessions. They need to keep that business going. That could be good news as we see a slowdown in the economy," said Hillard.
Hillard said wage growth is helping consumers offset the effect of inflation. Personal debt is also 40% lower than it was heading into the last recession, which he believes should prevent some forced sales of homes at fire sale prices.
“We do expect a recession. And I think that while it's not intentional, the Fed is leading us in that direction."Zach Hillard from Busey Bank
The National Bureau of Economic Research defines a recession as a "significant decline in economic activity lasting more than a few months." Hillard said others have defined it as two consecutive quarters of negative GDP growth. Last year the economy grew by 5.5%, far above the two-decade average of about 2%. The first quarter performance was -1.5%, said Hillard.
That continues to temper last year’s optimism when businesses and individuals were sitting on a lot of cash that could be invested and turn into economic growth, said Hillard. Even if negative GDP repeats next quarter Hillard said most Americans won't notice much until late this year or early next.
"We think we are a ways off from true recession; when people are really feeling the impact by job loss, having to liquidate homes and assets to help support themselves," said Hillard.
Even if the economy tanks enough to promote home liquidations, Hillard said Americans are better situated today than they were in 2008-09.
“If you look across 20 of the major metro areas in the U.S., the average house value increased by 21%. So, again, all these do provide some support to consumers,” said Hillard.
Hillard said a significant driver of the negative first quarter is the fact the dollar is strong and foreign goods are priced attractively while there is less overseas demand for American-made goods, in part because of those higher prices. The war in Ukraine has also suppressed consumer demand in Europe. Shutdowns of cities in China for COVID contributed. Those factors created a large trade deficit, Hillard said.
But he said longer term, drivers of the economy still "tend to look quite good."
Consumer spending drives about 70% of the U.S. economy. The next largest component is business spending and investment, around 18-19%.
“Today we're sitting at consumer cash levels of over $1.4 trillion. That's above the cash levels we saw at the peak of the Great Recession or the financial crisis back in 2008. In 2009, consumers became very conservative, started hoarding cash, waiting, and allowing that cash to help them weather the storm. And that's what we see today,” said Hillard. “And that's somewhat good news, because it provides a lot of continued spending power by the consumer going forward.”
Those that are employed are seeing wages grow meaningfully, an average of 6%.
“Annualized, that's the highest wage growth we've seen since 1997. “I think consumers still have that ability to spend although they're having a hard time keeping up with inflation,” said Hillard.
He said businesses are stable as well.
“We're still seeing robust demand within manufacturing and services. This points to the economy still being in a fairly good spot. We have more room. We're not on the on the cusp of a significant decline within those areas. Although we do expect to see a slowdown, business, businesses seem to be doing quite, good,” said Hillard.
Leading economic indicators
He noted leading economic indicators are in positive territory despite some threats and challenges from inflation and higher interest rates.
The latest consumer price index (CPI) report last week showed inflation in May rose 8.6% year over year. Back in March the CPI showed inflation at 8.5%. In April it dropped to 8.3%. A lot of economists had hoped inflation had peaked. Hillard said those numbers show that is not the case.
He said he expects inflation to be "quite persistent," based on producer prices, what manufacturers pay for raw materials for unfinished goods they'll finish off and sell to consumers.
“Inflation on the producer side is pushing 16%, which shows that a lot of manufacturers and a lot of retailers haven't yet pushed a lot of those price increases off to consumers,” said Hillard.
In May inflation was broad-based across all categories and all areas of the economy, not just a spike in one particular area such as energy prices.
“If you look at food prices, energy, shelter, I think shelter is important. It makes up about a third of the Consumer Price Index report. And that tends to lag. You can't increase rents on a monthly basis. It tends to be annual. And we're just now starting to see shelter costs really pick up,” said Hillard.
It’s well accepted both in the financial sector and by statements from the Federal Reserve that interest rates will continue to rise. On a 30-year mortgage, Hillard said 6% is coming which hasn’t been seen in more than a decade.
“When you look at the Fed and their ability to raise rates to control inflation, while keeping the economy out of recession, and maintaining a strong jobs market they don't have a great track record of really doing so. And that's what they're trying to thread this needle right now,” said Hillard.
He said based on interest rate patterns, consumer spending, and corporate balance sheets leading up to past recessions, he believes that a near-term recession would be shallower than average.
“We do expect a recession. And I think that while it's not intentional, the Fed is leading us in that direction,” said Hillard.
Even in that case, Central Illinois may fare better than the national average with the addition of new jobs at Rivian, Ferrero, a carbon capture startup in Decatur, and growth in other places in the region. That’s the reading of Fed numbers from St. Louis, according to Patrick Hoban, the director of the Bloomington-Normal Economic Development Council.
“Our regional numbers right now are outpacing everybody else in central Illinois. Wage rate rises are actually outpacing inflation as a whole,” said Hoban.
