Savannah Chamber

8 2 as inflation-adjusted sales slowed. Many employers realize that labor will be in short supply in the coming decade. We expect the economic downturn to be brief because inflation will slow enough for the Federal Reserve to stop hiking rates. We believe the federal funds target rate will peak at 4.75 to 5.0 percent, but it could go a bit higher if supply chain disruptions – especially in the energy markets – do not diminish as expected. The Federal Reserve will keep policy rates at that level until inflation moderates to about 3 percent in mid-2023. At that time, the incoming economic data will indicate that the US economy is in recession. Therefore, we expect the Federal Reserve to make it first rate cut in the second half of 2023. Shortly thereafter, the economic downturn ends and an upturn begins. As discussed, we expect the decline and recovery of US economic activity to be largely determined by the timing of Federal Reserve policy shifts. The Federal Reserve will strive to implement policies that rein in inflation while limiting damage to the economy. With its dual mandate in mind, we believe the Federal Reserve will be willing to tolerate 3 percent inflation. We believe the Federal Reserve will not tolerate the degree of economic damage that would result from raising policy interest rates high enough to achieve its explicit inflation target of 2 percent. If we are correct, the 2023 recession probably will last only two quarters – 2023:Q1 through 2023:Q2. Should the Federal Reserve insist on lowering inflation to its 2 percent target the US recession will be longer and more severe. Statistically, consumer spending is the main driver of the US economy. We expect inflation- adjusted consumer spending to decline through mid-2023. Similarly, we expect business's spending on equipment and intellectual property to decline in the first half of 2023, with spending on durable equipment declining more than spending on intellectual property. Housing is the most interest sensitive sector of the US economy. Housing will remain in recession longer than any other major economic sector. Housing activity will decline for over a year – from the second quarter of 2022 through the third quarter of 2023. Inventories are likely to decline from late 2022 through the third quarter of 2023. In contrast, government purchases and business' spending on nonresidential structures probably will increase throughout 2023, which will help ensure that the decline in overall US GDP is small. We do not expect another large federal fiscal stimulus package, but we expect spending by state and local governments to increase strongly. The government sector therefore will contribute to 2023 GDP growth. We expect the US economy to bottom out in mid-2023. The economic recovery will begin in the second half of 2023. Consumer spending will contribute significantly to GDP growth beginning in the third quarter of 2023. In the fourth quarter of 2023, business' spending for equipment and intellectual property will contribute to GDP growth. By early 2024, we expect all the major economic sectors to contribute to GDP growth. As noted, we expect a brief, mild recession. Specifically, on an annual average basis, inflation- adjusted GDP will decline by 0.2 percent. Non-farm employment will decrease by only 0.5 percent. The unemployment rate will rise from 3.8 percent in 2022 to 4.4 percent in 2023, a gain of only 0.6 percentage points. Typically, unemployment rises much more during recessions. We believe employers will hold onto workers more tenaciously given recent difficulties filling positions. That will help ensure that the recession is mild. Nominal personal income will grow by 4.0 percent, but that's less than 1 percent growth after accounting for inflation. The annual average rate of inflation will drop from 7.6 percent in 2022 to 3.5 percent in 2023. Again, a 2023 recession is not inevitable, but the path to a soft landing is relatively narrow. Monetary policy will have to be near perfect and nothing else can go wrong in the global economy. In 2023, we believe the odds favor recession over expansion. Consumer Spending On an inflation-adjusted basis, personal consumption expenditures will decrease at an annual rate 1 percent in 2023. Consumers' outlays grew by a trend rate of about 2 percent in 2022.

• Cover