Augustine (Gus) Faucher is senior vice president and chief economist of The PNC Financial Services Group, serving as the principal spokesperson on all economic issues for PNC.
Prior to joining PNC as senior macroeconomist in December 2011, Faucher worked for 10 years at Moody’s Analytics (formerly Economy.com), where he was a director and senior economist. He was responsible for running the firm’s computer model of the U.S. economy, edited a monthly publication on the U.S. economic outlook, covered fiscal and monetary policy, and analyzed various regional economies. Previously, he worked for six years at the U.S. Treasury Department, and taught at the University of Illinois at Urbana-Champaign. He was named senior vice president in March 2015, deputy chief economist in February 2016, and to his current role in April 2017.
Faucher is frequently cited in international, national, and regional media outlets including The Wall Street Journal and The New York Times. He has appeared on ABC World News, CBS Evening News, NBC Nightly News and Nightly Business Report, and is regularly featured on CNBC, CNN and Fox Business. In addition, he appears regularly on CBS Radio, NPR and Marketplace.
Hi, I'm Gus Faucher, Chief Economist for the PNC Financial Services Group, with a Business Banking Economic Outlook for the fourth quarter of 2022. Interest rates in the United States are increasing as the Federal Reserve raises rates in an effort to cool off economic growth and slow inflation. Both short-term and long-term interest rates have risen as the Fed has raised the Fed Funds Rate, it's key short-term policy rate.
The biggest positive for the U.S. economy in the fourth quarter of 2022 is the very strong labor market. Job growth in 2022 has averaged about 500,000 per month. That's about double the pre-pandemic pace. And as of the third quarter of 2022, employment in the United States is back above its pre-pandemic level. That's remarkable given the 22 million jobs that the U.S. economy lost in March and April of 2020.
However, the labor force in the United States is structurally smaller than it was before the pandemic and businesses are having increasing difficulties in attracting workers. This is the Labor Force Participation Rate, the share of adults 16 and over who are either working or looking for work. You can see that it steadily fell from 2000 on with the retirement of the baby boomers and then plunged with the pandemic. It has come back somewhat since then, but remains well below its pre-pandemic level. There are just simply a lot of people who have dropped out of the labor force with the pandemic and they are not coming back. Which means that this structurally tighter labor market will persist over the longer run and businesses need to rethink about how they are going to attract and retain workers.
As the economic expansion continues in late 2022 and into 2023, consumer spending growth is going to shift from consumer spending on goods, either durable goods, big ticket items like cars and appliances, or non-durable goods meant to last fewer than 3 years, things like food, clothing, medications, and to consumer spending on services. These numbers are adjusted for inflation. You can see that as of mid-2022, consumer spending on services is just barely above its pre-pandemic level, while consumer spending on goods is much higher than it was before the pandemic. As the labor market continues to improve, as consumers feel comfortable spending, as inflation slows, we will see consumers increasing their purchases of services, but reducing their purchases of goods.
Small business optimism remains solid according to PNC's Small Business Survey Fall of 2022 results. You can see that the share of small businesses who are pessimistic has increased slightly since the spring of 2022, in part because of high inflation. But still, the level of pessimism is much lower than it has been over the long run in this survey. And the share of businesses who are strongly optimistic increased from the spring of 2022 to the fall of 2022. Businesses generally feel pretty good and are seeing strong demand and do expect that their company's prospects will improve over the next 6 months.
Inflation remains elevated in the U.S. economy, but there are indications that inflationary pressures are receding. This is the New York Fed's Global Supply Chain Pressure Index. The long run value is set equal to zero. You can see that global supply chain pressures are elevated, but they have been falling over the past year or so. As businesses continue to reconfigure their supply chains and as production continues to increase, I expect that global supply chain pressures will continue to slow over the next year and that will contribute to lower inflation in 2023.
We're also seeing a slowing in economic activity from higher interest rates. In particular, from higher mortgage rates. The blue line on the left-hand scale is your typical 30-year fixed mortgage rate. That has gone from below 3% in 2021 to around 5% currently. Not surprisingly, as the cost of buying a home increased, we've seen single family home sales fall, and we've also seen a decline in housing starts. This is what the Federal Reserve is trying to do by raising interest rates. They are cooling off activity in interest rate sensitive industries like housing, and that will contribute to a slowing in economic growth over the next year or so.
However, PNC's baseline economic outlook is for slower economic growth, but not recession. We expect that the U.S. economy will continue to expand throughout 2023 and into 2024 although recession risks now are elevated because of high inflation and Federal Reserve interest rate increases. The unemployment rate, which soared to almost 15% in the spring of 2020 with the pandemic, is now down to around 3.5%, that's the lowest rate that we've seen in 50 years. We expect with a bit weaker economic growth, that the unemployment rate will increase over the next few years, so get a bit above 4%. That will reduce some of the labor market pressures that we've seen and weigh on wage growth, but again, we're expecting a modest slowing in U.S. economic activity, but not an outright recession.
Thank you very much for your time. You can find all of our materials at PNC.com/economicreports. And you can follow me on Twitter @GusFaucherPNC