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Economists Mixed on Recession Outlook, Labor Market Looks Up

August 1, 2023

Article courtesy MIRS News for SBAM’s Lansing Watchdog e-newsletter

Michigan saw one of the lowest unemployment rates in years, but three economists are not busting out the champagne and still say the high-interest rates and inflation are an issue.

University of Michigan Research Seminars and Quantitative Economics Director Gabriel Ehrlich was one of the economists forecasting a mild national recession for 2023, but said the state could be spared in a November 2022 report.

“I think it’s too early to declare, ‘OK, we have victory, we have a soft landing,’ but I do think it is fair to say this is kind of what the beginning of a soft landing would look like, if inflation is coming down without seeing the labor market really deteriorate,” Ehrlich said.

Michigan’s 3.6% unemployment rate for June is among its lowest since the U.S. Bureau of Labor Statistics (BLS) started keeping monthly state rates in 1976. However, many other states have low unemployment rates, too. Michigan’s rate was tied with Louisiana as the 12th highest among the 50 states.

BLS reported Friday that only 11 states have higher unemployment rates than Michigan’s. New Hampshire and South Dakota have the lowest rates at 1.8%.

Arkansas, at 2.6%, Maryland, at 2%, Massachusetts, at 2.6%, Mississippi, at 3.1%, New Hampshire, at 1.8%, Ohio, at 3.4%, Oklahoma, at 2.7%, Pennsylvania, at 3.8%, and South Dakota, at 1.8%, all reported the lowest monthly unemployment rates since 1976.

MIRS put together a spreadsheet that showed the rates since 1976, and Ehrlich pointed out that every recession since that time has been marked by high unemployment rates.

“It would be tough for me to imagine we could really get a recession without seeing some evidence in the labor market,” he said.

Chris Douglas, a professor of economics at the University of Michigan-Flint, said he could see it happening, because of an over-extended jobs market.

He said there are nearly three times more job openings right now than the number of workers needed to fill them.

“I think if the economy goes into recession you, as the employer, you just stop looking to fill those jobs.  The job openings would collapse back down to more normal before you would see layoffs,” Douglas said.

He said it could be several months of recession before anyone would see labor impacts.

Along with the collapse of the jobs market when looking for recession signals, Douglas said the gross domestic product, or GDP, along with the high interest rates and when the short-term interest rates are higher than the long-term interest rates, which is known as an inverted yield curve.

However, he said the yield curve has been inverted for about a year and there has been no recession.

“It’s like the joke, ‘Economists have forecasted the last nine out of five recessions,’” Douglas said. “Because recessions are hard to forecast and can take people by surprise.”

He pointed to the economic collapse in 2008 and said there was job growth up until the housing market bubble exploded.

“That’s when the floodgates opened and things got really bad, really quickly.  That just caught a lot of people by surprise and that’s just how recessions work.  Everything is good until they’re not,” he said.

As the year has gone on, Douglas said he is more optimistic for what is known as a soft landing, which is when the interest rates are raised to decrease inflation but don’t impact the labor market.  However, he said the country has been spoiled by low interest for too long.

“We have a low interest rate economy and high interest rate environment,” he said.

To give a glimpse of what that means, he pointed to the collapse of Silicon Valley Bank and First Republic, because they were holding too many mortgage-backed securities that were low-interest.

Douglas said knowing what banks were holding was something that couldn’t be known until something happened.

“It’s like the old Warren Buffett quote, ‘When the tide recedes, you’ll see who is swimming naked,’ and I feel like that’s what is going on with high interest rates,” Douglas said.

Tim Nash, director of the McNair Center for the Advancement of Free Enterprise and Entrepreneurship, pointed at those high interest rates as an area of concern.

He said consumers would be the ones to pay the price and that personal debt – along with national debt – was at an all-time high. He said there was about $17 trillion in consumer debt. Making up that about $12 trillion was whole mortgage debt and about $1.78 trillion in student debt with about $1 trillion in credit card debt.

“The consumer right now is stacked pretty high with payments from previous spending, which means moving into the future they have less flexibility and less opportunity to spend money,” Nash said.

He pointed to the third and fourth quarters as possible breaking points.  He pointed to indicators in trucking stating the logistics firm JB Hunt posted revenue going down in 2023 by 18.4%.

“There’s a shortage of drivers, but there’s a lot of these trucking companies that are saying, ‘Hey, I couldn’t employ them right now if I wanted to,’” Nash said.

He also pointed to car lots with new vehicle inventories that are on the rise.

There were bright spots that he saw, including the stock market and the labor market as an indicator that any possible recession could be fairly mild.

“If we don’t do the kinds of things that would make it worse,” Nash said.

He pointed to governmental spending as one thing that could make the recession worse. He said he would rather see the Federal Reserve reduce the money supply than raise interest rates.

“It’s going to take quite a few months as inflation comes down for interest rates to decline. So I think we’re going to be faced with higher credit card costs, higher home mortgage costs, I think we’re going to be faced with high auto loans,” he said.

He said getting personal and governmental spending under control would be prudent.

“Because if we don’t, we’re going to have a more difficult recession than the one that I think is coming inevitably at the end of this year, beginning of 2024,” Nash said.

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