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, 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. 


Webcast Transcript:

Gus Faucher: Hi, I'm Gus Faucher, Chief Economist for the PNC Financial Services Group with an economic update for Black Business Month. The U. S. economy continues to do very well in the summer of 2023. The unemployment rate is near a 50 year low. However, the Black unemployment rate has moved higher over the past couple of months, although recently it hit the lowest rate ever in the history of the survey going back to the 1950s.

The labor market remains extremely strong with solid job growth and good wage growth. However, recession risks are rising as the Federal Reserve has increased, increased interest rates to the United States. In response to high inflation, the Federal Reserve has been pushing up both short term interest rates, as indicated by the blue line, the yield on a three month Treasury bill; as well as long term interest rates, as indicated by the orange line, the yield on the 10 year Treasury note.

This has made borrowing more expensive for businesses, consumers, and potential homebuyers. The Fed is doing this in response to very high inflation in the United States economy. Energy inflation, the green line, surged with the Russian invasion of Ukraine, although it has slowed in recent months, and in fact energy prices are now down by about 20% over the past year.

Food and beverage inflation has been very high with disruptions of supply chains, but has slowed in 2023. Inflation for core goods, the orange line, that is goods excluding food and energy goods, was very high in 2021 and 2022 with strong demand and supply chain disruptions, but now core, core goods inflation is essentially minimal.

But for the Federal Reserve, the biggest concern is the blue line. That is inflation for core services, services excluding food and energy. That inflation has been elevated over the past year and a half. And this is of concern to the Federal Reserve because this inflation tends to be sticky. That is, it tends to persist from month to month.

And it's also driven largely by wages. And so the very strong labor market and strong wage growth is leading to high core services inflation. That's why we see the federal reserve raising interest rates in an effort to cool off economic growth, create a bit more slack in the labor market, reduce wage pressures, and bring down this core services inflation.

We're seeing the impact of higher interest rates in particular in the housing market. The blue line on the left hand scale is the typical interest rate for a 30 year fixed rate mortgage, and that has gone from below 3% as recently as late 2021 up to around 7%. Currently, this has made it much more expensive for potential home buyers to buy a home, and not surprisingly, with the big run up in house prices that we've seen over the past couple of years and much higher mortgage rates.

We've seen much reduced housing activity. So, for example, existing single family home sales, the orange line on the right hand scale, have fallen by about 30% from their peak in early 2021. Similarly, there's been about a 30% decline in single family housing starts as it has become much more expensive to buy a new home.

This is what the Federal Reserve is trying to do. By raising interest rates, they're making it more expensive for consumers to borrow, for businesses to borrow, for potential homebuyers to borrow. And that in turn is weighing on economic growth. PNC does expect to see a recession starting in late 2023 or early 2024 as the impact of these higher interest rates continue to work their way through the economy.

However, PNC does expect the upcoming recession to be mild. The biggest reason why is the tight labor market. This is the labor force participation rate, the share of adults who are either working, working or looking for work. It has fallen dramatically over the past couple of decades because of the retirement of the baby boomers, and then fell even further with the pandemic.

It has come back somewhat since then, but is still well below its pre-pandemic level. This is contributing to the very tight labor market that we are experiencing in the United States economy. And what this means is, even if there is an economic slowdown, businesses will be reluctant to lay workers off.

They've seen what can happen when they can't find workers. And so if they expect the recession to be short and mild, they will hold on to their workers because they want to be prepared once the economy starts to pick up again. PNC's baseline economic outlook is for a mild recession starting in late 2023 or early 2024, as the economy feels the impact of all the interest rate increases that we have seen in the economy over the past couple of years.

Real GDP output of goods and services adjusted for inflation will fall by about 1% or [00:05:00] less from the peak in mid 2023 through the trough in the economy in mid 2024. And then we will start to see the economy pick up later next year as the Federal Reserve cuts interest rates in response to slower inflation and the deteriorating labor market.

The unemployment rate, which is as low as 3. 4% earlier this year, a 50-year low, will increase gradually over the next year and a half or so, peaking at slightly above 5% in late 2024 or early 2025, and then start to decline 2025 as the economy improves. Thank you very much for your time. You can find all of our information at, and you can follow me on Twitter @GusFaucherPNC.