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 am Gus Faucher, Chief Economist for the PNC Financial Services Group with an economic outlook for the first quarter of 2023. The United States is a rising interest rate environment, With inflation near a 40-year high. the Federal Reserve is aggressively raising both short-term and long-term interest rates. This, in turn, is increasing borrowing costs for households and businesses. This is designed to slow economic growth in an effort to bring down inflation.
The labor market remains extremely strong with good job growth through the end of 2022 and into 2023. The unemployment rate is near a 40-year low, and the U.S. economy has added back all of the 22 million jobs lost in March and April of 2020 with the pandemic, and then employment is now actually above its pre-pandemic level. In fact, strong job growth is a concern for the Federal Reserve, which is concerned that the tight labor market is pushing up wages and inflation.
But there is good news on inflation. Shipping pressures are easing, according to the New York Fed's Global Supply Chain Pressure Index. This is based on things like shipping freights, surveys of purchasing managers, and shipping delays. The long-run value is set equal to zero. There are still some shipping pressures in the system, but they are down from about a year ago and continue to normalize. This, in turn, is helping bring down inflation.
There are different types of inflation in the U.S. economy. Energy inflation has been a primary driver of high prices, but the that is slowing as we've seen a big drop in gasoline prices and prices for other energy goods over the past year. Food and beverage inflation is elevated as markets adjust to strong demand for food at home and strong restaurant demand. However, that does appear to be settling in. Goods prices, excluding food and energy goods, have been a big contributor to inflation, but we have seen a slowing there as supply chain pressures have eased. However, the big concern for the Federal Reserve right now is what we call core services inflation. These are the services that we buy as consumers, excluding food and energy services, so this is things like education, healthcare, and housing. This has seen an acceleration since 2021, and this is especially concerning for the Federal Reserve because this type of inflation tends to be sticky. It tends to persist from month to month, and so the Federal Reserve is very concerned that high core services inflation could get embedded in the economy and lead to high inflation over the longer run. As a result, the Federal Reserve has been raising interest rates in an effort to cool off economic growth.
And in particular, we've seen a slowing in the housing market as the 30-year fixed-rate mortgage has gone from below 3% as recently as late 2021 to around 7%. Not surprisingly, given very high mortgage rates and the big run-ups in house prices that we've seen over the past couple of years, housing demand is falling. Sales of existing single-family homes have fallen by about 30% since early 2022, as has housing starts, and so a cooling in the housing market is one factor that is contributing to weaker economic growth.
PNC does expect a recession in early 2023 as the economy continues to absorb the impact of these higher interest rates. However, this recession should be pretty mild, more like the recessions experienced in the early 1990s or the early years of this century, rather than the Great Recession from 2007 through 2009 or the recession tied to the Coronavirus pandemic. One big reason why this recession will be mild is that consumers are generally in good shape. Households saved up a lot of money during the pandemic with stimulus payments and reduced opportunities to spend. Although the saving rate has fallen since then, households still have more than $1 trillion in extra savings that they can use to support their spending. In addition, consumer balance sheets are in very good shape. Households have paid off a lot of debt when they received stimulus payments during the pandemic, and they've also had the ability to refinance their debt at lower interest rates. So even though interest rates are rising, debt payments, as a share of household income, remain near record lows.
Another reason why this recession should be fairly mild is that businesses will be reluctant to lay off workers. The labor market is structurally tighter now than it was before the pandemic. The labor force participation rate, the share of adults who are either working or looking for work, is about a percentage point below where it was prior to the pandemic. This has created labor supply issues. These problems are expected to persist, even if we do get a recession, and so businesses will be reluctant to lay off workers, even if the economy does slow. This, in turn, will limit the hit to jobs and the hit to household incomes and should contribute to what will hopefully be a mild recession.
Giving rising interest rates to cool off inflation, PNC's baseline economic outlook is for a mild recession starting in the second quarter of 2023 and lasting roughly through the end of next year. Real GDP should contract by about 1%. The labor market will take a hit. The unemployment rate, which was near a 50-year low at the end of 2022 at around 3.7%, is expected to move up above 5% by late 2023 or early 2024, and there will be job losses. However, this recession will be much milder than the Great Recession in 2007 through 2009 or the Coronavirus recession.
Thank you very much for your time, and you can find all of our materials at PNC.com/economic reports. You can follow me on Twitter at @GusFaucherPNC. Thank you.