Economy: Silver Linings

State-specific forces will help Georgia’s economy better weather a 2023 recession.

This year, I expect Georgia’s post-pandemic expansion to end and a mild recession to begin, which will last about six months. A recession is not inevitable, but it would take near-perfect monetary policy plus a lucky break to avoid one. It will be extremely difficult for the Federal Reserve to cool down the economy enough to contain the highest inflation in 40 years without triggering a recession. Although I expect both the U.S. and Georgia economies to be in recession, Georgia’s economy is better positioned to weather it.

I expect Georgia’s inflation-adjusted gross domestic product (GDP) to decrease by 0.2%, smaller than the 0.7% drop I project for U.S. GDP.

Housing is the “canary in the coal mine” when it comes to recessions caused by the Fed’s policy moves. Less spending on structures will subtract the most from GDP growth. Higher interest rates and lower profits mean less spending by businesses for equipment, which will also subtract from GDP growth.

Spending by consumers will neither add to nor subtract much from GDP growth. Consumers account for about 70% of GDP and that stability is the main reason the 2023 recession will be mild.

State and local government spending will add to GDP growth. Put it all together, and Georgia’s GDP for the year will be approximately flat. That is far better than our experience in recent recessions.

I do not expect Georgia’s labor market to get hit hard by the recession. The number of jobs will rise by 0.1%, better than the 0.5% decline I foresee for the U.S. The small positive gain reflects job growth early this year that offsets job losses later.

The majority of job losses will be in the most interest-rate-sensitive sectors of the economy, such as construction. Some industries will continue to add jobs, including healthcare, education, leisure and hospitality, professional and business services and manufacturing. Many job openings posted in 2022 have remained unfilled and are carrying over into 2023.

In many ways the nation’s and Georgia’s economies are fundamentally sound. Why, then, do I expect a recession? If you hit the economy over the head enough times with massive rate hikes, eventually it falls. I believe the Federal Reserve will need to raise the federal-funds rate to about 5% to end the inflationary wage-price spiral that began last year. The Fed will likely keep rates at that level until inflation slows to about 3%, late in 2023. At that point it will be clear that the economy is in recession.

The U.S. unemployment rate will have risen above 4%, which is the benchmark for full employment. Mindful of its dual mandate to ensure stable prices and maximum employment, the Fed will make its first rate cut. Shortly thereafter, the economic downturn will end, and an upturn will begin.

The energy-price shock we experienced in the wake of Russia’s invasion of Ukraine is the second reason I expect a recession. Large energy-price shocks caused by supply reductions rather than robust demand growth almost always trigger or worsen recessions.

The negative-wealth effect of declines in stock, bond and home prices is the third reason I expect a recession. While declines in asset prices rarely trigger recessions, they make them worse.

In 2023, these negative developments will feed off each other and in combination will end the expansion. The recession will be mild and short because the labor market is strong, households’ balance sheets are in decent shape and households are sitting on savings accumulated during the pandemic.

In addition, several large economic sectors (healthcare, education and hospitality) will still be rebounding from the pandemic, leading to year-over-year gains.

I believe the Fed will not tolerate economic damage from raising interest rates high enough to achieve its inflation target of 2%. I anticipate the Fed will settle for 3% inflation. In that case, the recession will only last two quarters. Should the Fed insist on 2% inflation, the recession will be longer and more severe.

Several state-specific forces will help Georgia’s economy better weather the 2023 recession than the U.S. economy. One advantage is the enormous number of projects in Georgia’s economic development pipeline.

Another reason Georgia will outdo the nation is that our population will grow at an annual pace that is more than double the national average.

Compared to most other states Georgia will continue to perform well on all those dimensions.

Categories: Economy, Opinions