Chief Economist, U.S Chamber of Commerce
December 16, 2022
The U.S. Chamber of Commerce recently convened its Chief Economists Committee to discuss members’ outlooks for the economy in 2023. The committee consists of chief economists from member businesses and helps the Chamber formulate economic policies and analysis.
A Mild But Short Recession is Likely in 2023
The consensus among Committee Members is that the U.S. will experience a mild but short recession in the middle of 2023 caused by consumer and business spending falling because of rising interest rates. Further contributing to the downturn would be consumers finally exhausting historic savings built up during the COVID-19 pandemic, meaning they would no longer have that source of money to keep spending at pace with inflation.
Businesses Less Likely to Pass Along Price Increases to Consumers
RSM’s Chief Economist Joe Brusuelas noted that businesses are finding it increasingly difficult to pass along higher prices for their inputs to customers through price increases. This was made clear in the RSM-U.S. Chamber of Commerce U.S. Middle Market Business Index:
This will likely mean shrinking profit margins for businesses.
How Businesses and Families Will Weather the Downturn
Although we are likely to have a mild recession, there is always pain caused by a decline in the economy. Members pointed out this will likely be the first recession in memory where there will be no extra assistance, other than automatic stabilizers, from fiscal or monetary policy.
Congress sending recession relief to families and the Federal Reserve loosening monetary policy would both make inflation worse, and hence be self-defeating. Families and businesses will have to weather the economic downturn with the resources already available to them.
The Fed’s Role
Members of the committee also agreed that inflation will come down significantly next year. They see the Federal Reserve’s anti-inflationary policies curbing demand and tightening financial conditions enough to start bringing prices down much closer to the Fed’s 2% inflation target over the course of 2023.
Other Economic Issues to Watch
Other economic issues noted in the meeting that bear watching in the year ahead:
Worker Shortages Still Matter
We have more than 3.3 million workers missing from the labor force based on labor force participation rates and 4.3 million more job openings than unemployed workers. Businesses are still struggling to get the workers they need, even while inflation receives most of the attention from policymakers. Committee members highlighted the ongoing problem:
- The food service industry is still short about 300,000 workers.
There is a massive shortage of skilled workers, including in fields such as auto mechanics. This, in turn, creates issues for a variety of industries reliant on these skilled trade workers.
Consumers are still spending
Consumers still have buying power because wages are rising, albeit less than inflation, but they have savings and available credit to fill the gap. However, those savings are dwindling, and available credit is shrinking, which is why many economists see a recession coming.
Other interesting observations by the Committee Members on spending include:
- Consumers are-- as expected coming out of the pandemic-- shifting their spending from goods to experiences.
- Inflation is driving down how much consumers are buying, but they are spending more in total dollars. For instance, they are buying fewer items when they go to a quick service restaurant, foregoing things like an extra bag of chips or fries, but because of higher prices, they are still spending more per visit than they did before the pandemic.
Flexible work and alternative forms of income are changing the economy
As inflation remains a problem, people are turning towards alternative forms of income to help make ends meet. This rise in gig work and other forms of alternative income earning are changing how our economy operates and contributing to the worker shortage.
With flexible work arrangements, workers are looking to boost their incomes in the face of high interest rates, lower savings, and inflation, including by participating in “shift-share” work where businesses hire temporary hourly workers on short notice.
Homeowners are increasingly looking to use their homes to earn additional income. For instance, bookings through Airbnb are up and homeowners are using this added source of income to keep up with rising home prices.
More than two million people are earning more than $100,000 a year as influencers. These people are most likely not working traditional full-time jobs and thus “absent” from the workforce as we previously conceived it.
We are not out of the woods on energy
Gas prices have fallen recently, however Committee economists see energy prices rising again, particularly for heating.
For example, New England is likely to see shortages and much higher prices for natural gas and home heating oil.
We’re beginning to see the effects of Europe ending the importation of Russian oil and natural gas. We do not know the full consequences of this yet.
The Strategic Petroleum Reserve (SPR) is low which means there likely are not enough reserves available for release into the market to help alleviate high prices should oil and gas spike again.
The Bottom Line and The Good News
The U.S. economy is in for a bumpy 2023. Businesses should be prepared, and as always, also be prepared for those unexpected events that come out of nowhere.
The good news is that 2022 is shaping to end strong, with growth in the fourth quarter projected to perhaps be over 2%. And the economy is on sound footing once the volatility caused by high inflation ends.
About the authors
Curtis Dubay is Chief Economist, Economic Policy Division at the U.S. Chamber of Commerce. He heads the Chamber’s research on the U.S. and global economies.