Foretelling the future of the economy is never an easy task, even at the best of times. The U.S. economy at the beginning of 2023 threatens a bumpy ride, but that didn’t stop a group of savvy economic leaders from giving their best shot at predictions on Wednesday, Jan. 18 at the Lyons CEEE Economic Forecast at the University of Delaware.
The 2023 Economic Forecast, hosted by Lyons Companies and UD’s Center for Economic Education and Entrepreneurship at the Alfred Lerner College of Business and Economics, brought together top business minds to unpack the uneasy market conditions influenced by the COVID-19 pandemic and the war in Ukraine. It also had a celebratory tone as the first in-person version of the event since the onset of the pandemic.
The speakers gathered at the Audion in the Tower at UD’s Science, Technology and Advanced Research (STAR) Campus made up a reunion from the last in-person event in 2020: Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia; Dan Mahaffee, director of policy for the Center for the Study of the Presidency and Congress; and Michael Farr, chief market strategist, Hightower Advisors, LLC, author and regular media contributor.
The past year was one “that especially after the war in Ukraine, nobody could have predicted — very high uncertainty,” said Nick Timiraos, chief economics correspondent for the Wall Street Journal. Timiraos moderated the event and led a panel discussion among the speakers after they made their predictions for the upcoming year.
Under growing economic storm clouds, the forecast took on greater urgency, with speakers openly discussing the R-word — recession — along with supply chain woes, rising interest rates and the looming possibility of a nasty debt ceiling fight in Congress. Despite all this, the predictions held a strong note of optimism.
Watch the complete event online here.
Recession or no recession?
Harker, no stranger to campus as the former UD president, had to choose his words very carefully, especially in 2023 because he is a voting member of the Federal Reserve Board’s Federal Open Markets Committee, which makes interest rate decisions.
Harker’s remarks at the Jan. 18 event were picked up by outlets including Bloomberg, the Wall Street Journal, and Reuters. Even the robots were listening.
“Whatever he [Harker] said in his speech today went through every AI program” doing computer trading, Farr said, with the potential to contribute to market swings.
With that kind of audience, Harker struck an optimistic tone on the economy. He brought up scars remaining from COVID, like workforce shortages, inflation and damaged supply chains, but said, “The national economy, if you step back, remains relatively healthy overall … Although inflation is biting, many Americans are still spending, even if they have to dip into their savings to do so.”
Harker added with emphasis, “GDP growth will be modest, but I am not forecasting a recession.”
Amid rising interest rates, Harker suggested unemployment could see a slight uptick, topping off at around 4.5% before falling back to 4% over the next three years.
“There is little evidence of a major downturn in the job market at this point,” he said, despite layoffs in the tech sector.
Farr was not ready to go that far.
“There’s certain things that I can say that [Harker] really can’t say,” Farr said with a note of humor. Of a recession, Farr said, “I think that’s going to happen.”
He cited statistics like the rate of return on treasury bills. The one-month rate has been a percentage point higher than the 10-year rate, he said. “A hundred percent of the time that’s happened before, we’ve ended up in recession. So, let’s go with that.”
To the point that Americans are dipping into savings, he said consumers are “running out of wallet,” in that savings rates have fallen to near record lows and household debt has gone way up. Add to that the national debt, which has grown so high that it will limit the nation’s economy, he said.
Immigrants, often a wedge political issue, came up in a positive light as a potential untapped resource.
The country is not helpless when it comes to worker shortages, Harker said. “We’re about 4 million workers short of where we need to be, but we can fix that with changes to the immigration system.”
Mahaffee agreed. “We have to let workers in … The other solution has an 18-year lead time.”
A looming debt showdown
Congress appears to be headed for a major fight over raising the debt ceiling to pay the nation’s debts, risky timing given the economy’s volatility.
The dramatic fight over confirming Rep. Kevin McCarthy as speaker of the House of Representatives, Mahaffee said, set us on the path to brinkmanship over important decisions like the economic agenda and particularly the debt ceiling.
A default on our debts, once unthinkable, “is something we now talk about in terms of 40% or 50% probabilities,” Mahaffee said. He foresees a possibility of lawmakers reaching a “forcing point” for 48 to 72 hours, before backpedaling and coming up with a solution in the face of dropping markets. That could result in damage to international confidence in the U.S. and its debt obligations, he said.
Farr agreed. The Republican holdouts in the speakership decision, he said, took 15 votes to do what everyone knew they were going to do, signaling a clear message to McCarthy on a potential debt battle: “We will do it and we don’t care.”
“I really don’t think they understand the real consequences to our country, and our country’s reputation and our economy,” he said. “How is the Federal Reserve supposed to keep enough liquidity in the system if a panic occurs over some sort of debt default?”
This showdown has happened before, but it’s different now, Farr argued. “In 2011, these people were getting along and making nice-nice compared to what they’re doing in Washington now,” he said.
The battle with inflation
With the Federal Reserve’s Harker on the stage, much of the conversation centered around inflation and how to deal with it.
Don’t count on interest rates coming down soon, he warned.
“The Federal Reserve is absolutely committed to bringing inflation back to our 2% mark,” he said, and added, “I expect that we will raise rates a few more times this year.”
The government can’t fix supply chain problems, but its goal is to slow the economy modestly to bring supply in line with demand.
Harker predicted core inflation will drop to 3.5% and eventually return to the target 2% by 2025.
Farr wasn’t convinced on the timeline. “That sounds pretty dreamy,” he said, although he agreed inflation numbers were heading in that direction.
The speakers acknowledged that those who can least afford economic pain are bearing the brunt. Although core inflation is coming down, people still face high food prices, Farr said. (Core inflation does not factor in food and energy prices).
The average person, he said, is more concerned with the high cost of butter and eggs. And while wages have increased, they haven’t kept up with food costs.
“When people see the credit card is maxed out and the kitty is empty, then they’ll probably start to apportion blame,” Mahaffee said.
Could China’s relaxation of its COVID rules free its economy, leading to more inflation? Mahaffee, who has spent time studying in China, is not overly concerned about a ripple effect from that quarter.
“I think the Chinese economic story could actually get worse before it gets better,” he said. Even with China’s economy opening up more, it’s still facing significant headwinds, and “I don’t think it’s going to be the kind of bounceback you saw in the United States (that contributed to inflation).”
So what does this add up to?
Investors should not pin their hopes on the Fed reversing its interest rate policy, according to Farr, and Harker reinforced that idea.
“I think it’s going to be a while,” Harker said, noting it will depend on the data. But, “I’m increasingly confident that we’re getting the demand side under control.”
None of those on the stage seemed to be in panic mode despite the striking economic challenges, instead showing faith in the underlying system.
Well, a degree of faith.
Reading from a slide listing a stable democratic government as one of the United States’ assets, Farr faltered. “We have a stable dem – we have a – we have a government, dammit,” he amended, to laughter from the crowd.
Despite all the crises, droughts, floods and world conflict, the economy keeps chugging along, Harker said, although it’s impossible to predict whether some action of Russian President Vladimir Putin will cause another spike in energy costs, or whether we’ll be blindsided by diseases like avian flu that drive egg prices higher.
“In the next 12 or 24 months, this stuff is over with,” Farr said, taking an upbeat view. “It’s over. The recession, if we have one, 12, 24 months, it’s gone … This is going to pass. We’re going to get through this. We’ve done this before.”
“Don’t do something stupid because you get scared. Just look at that long term,” he said.
Back in person, key aspects of the Economic Forecast return
While last year’s streamed version of the event went well, the interactive experience of an in-person event is important, said Tim Lyons, vice president of client services for Lyons Companies. He pointed to networking and relationships as key to growing the event from its small beginnings to now, when hundreds of business leaders gather to hear from prominent speakers.
That stems from the company’s culture. His father, the late David F. Lyons Sr., was a big proponent of organically growing business through personal relationships, he said.
With the pandemic underway and the Economic Forecast event held remotely, the University’s CEEE has not been able to give out its James B. O’Neill Award since 2020.
The award, which recognizes “substantial contributions in promoting economic, personal finance, and entrepreneurship education,” made its return this year, going to Donna Fontana. Fontana graduated from UD’s Lerner College in 1985 with a bachelor of science degree in finance and is a member of UD’s Board of Trustees. She has dedicated herself to teaching financial literacy, and has supported scholarships at UD along with the center’s efforts to teach financial literacy in Delaware.
Carlos Asarta, director of CEEE, lauded Fontana’s support of the University and her work teaching budgeting, investing and other personal finance concepts to students in East Harlem.
“We applaud her passion for urban and personal finance education, and are very happy to formally recognize one of our own graduates,” he said.
Fontana fondly recalled her time studying at UD, saying she vividly remembers her introduction to macroeconomics class where she fell in love with the topic.
“I had never had such a rewarding educational experience before,” she said.
Speaking of the impact the CEEE is having on classrooms in the state of Delaware, Fontana said “I’m so excited to support the center and honored to receive this recognition.”