We’re seeing public claims that a recession will not be that deep or prolonged, but there have also been large preemptive layoffs by big companies, suggesting major business employers are hunkering down for something more severe. Corporations also are reducing their earnings estimates.
How do you gauge the severity of a downturn? Retail sales are down nationwide, though up in Bloomington-Normal. Investment measures are down, the Dow alone 15%. Values of IRAs and retirement plans have fallen significantly. A debt-ceiling crisis is brewing. Consumer spending is down. Interest rates are up significantly.
Ajay Samant, dean of the Illinois State University College of Business, said those interest rates will affect car and home sales and there is some evidence that is beginning.
“If you put all this evidence together, it all points to a decline in economic activity, which is what a recession is,” said Samant.
But even with all that data, it's not clear how deep a potential trough might be, he said.
The CEO of Bank of America, Brian Moynihan, said at Davos recently that he predicts a mild downturn for a couple of quarters and then back to slightly up and then more normal in 2024 and 2025. He based that on current healthy consumer spending among higher earners, as opposed to lower spending among overall, despite inflation and continued relatively low unemployment.
Samant said those are not the only key indicators.
“Yes, high earners will continue to spend as they have. Those in lower income brackets are going to find an increasing part of their expenditure, their discretionary expenditure, is all on food and on other items which are necessities. They are going to curtail expenditures on other items. There are others, which are near impossible to predict at this point in time,” said Samant.
Federal government spending
The debt ceiling fight is, in part, about Republican Party desires to reduce federal spending and the size of the deficit. Some want deep cuts in the annual federal budget over the next decade. The federal government is a significant part of the economy. Samant said a drop in government spending would have some beneficial and some detrimental effects on the economy.
“With declining government spending, there is less need for the government to borrow more money, which lowers the national debt. It also has a downward effect on interest rates in the economy. That could be the positive side effect. On the negative side, a decline in government spending often impacts the most vulnerable sections of society, those who are the recipients of the bulk of government spending. It impacts their ability to make progress on social and economic fronts,” said Samant.
For instance, African Americans have about a 6% unemployment rate, nearly twice the overall average unemployment. He said they face a triple whammy.
“The recession will have the worst impact on the most underserved sections of society. It is they who will feel the brunt of the layoffs. It is they who will feel the brunt of the decline in government expenditure. And it is their services that would be impacted the most,” said Samant.
He said it does not bode well for spinoff effects like child poverty, crime rates, and educational attainment.
He said it is a challenging question for the Fed to calibrate the balance of pain with the goal of reducing inflation. They don’t know exactly when to stop raising interest rates, nor does anyone else.
“If they stop too soon, we run the risk of prolonged inflation, which does not do anybody any good, and certainly does not bode well for the economic growth of the country," said Samant. "On the other hand, if they persist in interest rate hikes at a time when the economy is not doing well, they run the risk of making the recession even deeper. My guess is that they would start to decrease the interest rate hikes at least the magnitude of the hikes. But the hikes would continue for some for some time. And it will continue to impact those sectors of the economy that are most dependent on borrowing, particularly the housing market."
The current Fed target is a return to 2% inflation. Historically, the average is higher than that. But Samant said 2% is the ideal rate of inflation. The actual inflation rate last year was 9%, he said. Inflation has begun to ebb, though remains above 6% in some segments of the economy. Samant said a reduction to 2% inflation within a year is ambitious.
“I would say that, yes, it can be done. But it may take a little more time,” said Samant. “It is a good goal for the economic growth of the economy over many, many years. In the short term, there will be pain.”
There have been a lot of layoffs in the tech sector — 150,000 last year, even before the nation has formally hit recession. This year, Amazon, Microsoft, Google, and Meta are all putting big chunks of workers on the streets. Samant said, though, it’s important to avoid generalizing to the whole economy just from tech sector evidence.
“During the COVID pandemic, it was the tech sector that really stepped up its hiring, because of the push for remote work and online services. The tech sector cannot continue to expand at that rate. There was probably some over hiring during the pandemic, and they are now beginning to realize that they've taken on more people than they should have, because the pandemic is over. The need for those kinds of online services and remote services is less,” said Samant.
Low interest rates fueled a lot of tech startups. He said business innovation may slow with higher rates. The impact of higher interest rates on small businesses may vary by sector, he said.
“Restaurants and so on would continue to do well … but hiking interest rates will not make things easier for anyone,” said Samant.
There was a huge COVID-caused infusion of cash to the economy to keep things stable.
“Some of it is still sloshing around the economy. That is what has contributed to high inflation. That is what the Fed is trying to mop up with its restrictive fiscal policy, and the Fed is succeeding,” said Samant.
The pandemic continues to transform the economy, though in long-lasting ways.
“More and more jobs will continue to be remote. And second, those who have access to technology will have a big advantage over those who do not, which once again, brings up the question of income equality and opportunity equality. That makes it worse, because technology is going to widen the gap between those who have access to it and those who do not,” said Samant.
He suggested there should be government intervention, through education, to mitigate tech-amplified inequities.
