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.
I'm Gus Faucher, Chief Economist for the PNC Financial Services Group with an economic outlook for the second quarter of 2023. Interest rates in the United States continue to rise as the Federal Reserve tightens monetary policy in an effort to fight high inflation. Both short-term and long-term interest rates have gone up over the past year, as seen on the yield on a three month treasury bill; the blue line, and the yield on the 10 year treasury note; the orange line.
But even with higher interest rates and increased uncertainty, small businesses are feeling optimistic about the outlook. According to PNC's latest small business survey results from the Spring of 2023 companies expectations for their own prospects over the next six months are the highest in the more than 20 year history of the survey.
However, we are starting to see the impact of higher interest rates on the US economy. For example, the interest rate on your typical 30 year fixed rate mortgage has gone from below 3% as recently as late 2021 to about 6% currently. Not surprisingly, that has made home ownership more expensive and existing single family home sales have fallen by about 30% over the past year.
Similarly, single family housing starts are down by about 30% as potential home buyers find it more expensive to buy a home. And this is weighing on housing and overall economic activity. PNC does expect to see a mild recession later this year and in early 2024, but a couple of factors will limit the severity of the recession.
First. Households are generally in good shape. If we look at household debt relative to income, the orange line on the right hand scale, the financial obligations ratio; that is still very low and is much lower than it was heading into the recession in 2007 and 2008. Similarly, households have managed to save a lot of money over the past couple of years thanks to stimulus programs and limited opportunities to spend.
Although the savings rate has declined since 2021, households still have an extra 1 trillion dollars in savings that will allow them to maintain their spending even if we do experience an economic slowdown. Another factor that will limit the severity of a potential recession later this year is the tight labor market.
The labor force participation rate; the share of adults 16 and over who are either working or looking for work, is about a half of a percentage point lower than it was heading into the pandemic. This is why businesses are finding it so much more difficult to hire now than they were a few years ago. And what this means is, is even if we do experience a recession in 2023 and 2024, businesses will be reluctant to lay workers off because they assume that they will have difficulties in finding workers once the economy picks back up again.
The most likely outcome is, is that the United States experiences a mild recession in late 2023 and early 2024 with real GDP declining somewhere between one half of a percent and 1%. Similarly with the recession, PNC expects a modest increase in the unemployment rate over the next couple of years, reaching a peak of about 5% by late 2024.
You can find all of our materials at pnc.com/economicreports, and you can follow me on Twitter at @gusfaucherpnc. Thank you very much for your time.