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 an Economic Outlook for the fourth quarter of 2023. Economic growth is surprised to the upside in 2023, thanks to strong consumer spending and demand from businesses. According to PNC's Fall 2023 Small Business Survey, small business owners are extremely optimistic about prospects for their company over the next six months.
With the highest positive ratings in the more than 20 year history of the survey, small businesses are seeing strong demand for their goods and services. And plan to increase hiring and capital spending in the months ahead in response to this strong demand. They have also increased their optimism about the U S economic outlook. That is taking place despite very high interest rates, however. The Federal Reserve has been pushing up interest rates in an effort to cool off economic growth and slow inflation. And both short term and long term interest rates are at their highest levels in more than 20 years. The job market remains extremely strong, although job growth has slowed somewhat in 2023.
The unemployment rate has been about three and a half percent this year. That's close to the lowest unemployment rate in about 50 years. And over the past few months, the U. S. economy has been adding about 150, 000 jobs per month, a very solid number, and perhaps even slightly above the economy's long term average.
But that job growth is down from closer to 300, 000 per month at the beginning of 2023. That's good news for the Federal Reserve, which is concerned that the labor market is too strong in the U. S. economy, contributing to high wage growth and high inflation. And so the Fed is attempting to cool off the U. S. labor market.
We have seen big shifts in economic activity since the pandemic and the recovery. This chart shows various measures of economic activity adjusted for inflation, with the pre pandemic level set equal to 100. Consumer spending on services is up about 5 percent from where it was before the pandemic.
On the other hand, consumer spending on goods is up about 15 to 20 percent above where it was before the pandemic. So, with the pandemic, consumers have been buying a lot more goods. What this means is, is that this strong goods spending has contributed to inflation, although that is leveling off somewhat with goods purchases stabilizing.
But, as the economy continues to expand, we do expect that consumers will shift their spending from goods to services. To things like education, health care, travel and tourism, recreation and leisure, and so forth. Business investment has seen a moderate recovery since the pandemic. Although high interest rates will be a drag on business investment in the near term.
Investment in housing, the black line, that was very strong in the immediate aftermath of the pandemic. As households put additions on their home, people bought new homes. But more recently with higher mortgage rates, we've seen a big drop in housing investment. And the red line, after tax personal income, that's the key to this entire chart.
You can see that that surged in early 2020, and then again in early 2021, thanks to assistance from the federal government. But then we started to see after tax personal income adjusted for inflation decline with the end of stimulus programs and high inflation. But more recently, with inflation slowing and the labor market remaining strong with decent wage growth, we have seen after tax personal income growth pick back up again, and that, in turn, is supporting consumer spending in 2023.
Inflation remains a big concern for the Federal Reserve. Energy prices are actually down over the past year, the green line. And food and beverage prices have seen growth, but slower growth in 2023. Core goods prices, goods excluding food and energy, we've seen inflation there level off, and so that's good news.
But if you look at the blue line, core services, that is services excluding food and energy, so that includes things like education, health care, housing, travel, and tourism, and so forth, that inflation remains very strong, and that's very concerning for the Federal Reserve because a lot of this inflation is wage driven, and a lot of this inflation is sticky, it persists for month to month, and that's why we see the Federal Reserve raising interest rates in an effort to cool off economic growth.
We can see the impact of those higher interest rates most clearly in the housing market. The typical rate on a 30 year fixed mortgage has gone from below 3 percent in late 2021, up to above 7 percent currently. Not surprisingly, this has made it much more expensive to borrow to buy a home. And so we've seen existing single family home sales fall by about a third, and we've also seen housing starts fall by about a third.
This is how the Fed tries to cool off economic growth, by raising interest rates, that makes it more expensive for businesses to borrow, for households to borrow, and that in turn discourages purchases in interest rate sensitive industries like business investment, housing, and purchases of big ticket consumer items like recreational vehicles and appliances.
PNC does expect that the cumulative impact of all of the interest rate increases that we've seen over the past couple of years will result in a mild recession starting in the first half of 2024. But PNC does expect that that recession will be mild. In particular, the very tight labor market will discourage businesses from laying off workers.
This is the labor force participation rate, the share of adults who are either working or looking for work, and it is well below its pre pandemic level. In our small business survey, business owners report that they still are having great difficulties in hiring workers, although there are some indications that the labor market is loosening up somewhat.
That being said, given the problems in hiring, even if we do get a downturn next year, businesses will want to hold on to their workers. That will limit layoffs and limit the hit to consumer incomes and consumer spending. PNCs baseline outlook is for a mild recession starting sometime in the first half of 2024 with real GDP falling about 1% from its peak to its trough in mid 2024.
The unemployment rate, which is down to around 3.5% currently will gradually increase through the rest of 2023 and throughout 2024, peaking it around for 5 percent in early 2025. PNC expects the economy will start to recover in the second half of next year. With the recession, we will see slower inflation, and that will give the Fed leeway to cut interest rates starting in the spring of 2024, supporting an economic recovery in the second half of next year, and then accelerating in 2025.
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.