Factors setting up for mild US recession starting in Q3/Q4 2023 – ICIS

JERSEY CITY, New Jersey (ICIS)–A combination of several factors including restrictive interest rates, tightening credit from the regional banking turmoil and weakness in several leading indicators are pointing to a mild US recession starting in Q3/Q4 2023, an ICIS economist said on Thursday.

The ICIS US Leading Business Barometer (LBB) has been signalling recessionary conditions for many months, along with the inverted yield curve – 10 year Treasury yield lower than the 2 year Treasury yield – while money supply has declined, said Kevin Swift, senior economist for global chemicals at ICIS.

Swift spoke at the ICIS World Surfactants Conference in Jersey City, New Jersey, US.

Plus, the regional banking crisis is further tightening credit, which had already been tightening prior to the recent crisis, he pointed out.

“All these factors tend to suggest a mild recession in the US,” said Swift, who noted that consensus among economists is for a recession to start in Q3 or Q4 2023.

While goods inflation has come down, services inflation remains elevated and sticky, as this is tied to the labour market which remains very tight.

While demographic effects tend to move very slowly, COVID-19 accelerated the retirement of Baby Boomers, compressing a typical six-to-eight-year period of retirements to about two to three years.

“The upper end of experienced talent has left the workforce, and the three generations following the Baby Boomers has gotten smaller and smaller,” said Swift.

“Colleges are facing crisis, as there are 15-20% less students than a decade ago. Companies recruiting for jobs ask – when is this going to end? It won’t,” he added.

The tight labour market has prevented a recession so far, but also has kept inflation elevated, he noted.

However, restrictive Fed policy should lead to inflation easing to an average of 4.3% in 2023 and 2.5% in 2024, said the ICIS economist.

The Fed Funds rate of 5-5.25% is considered restrictive given that the Fed’s preferred measure of inflation – the core Personal Consumption Expenditures (PCE) price index – is running at a three-month average of 4% year on year, said Swift.

Surfactants demand is tied to consumer spending and confidence, the latter of which fell in the US April reading on persistent inflation as well as an uncertain employment outlook, he noted.

Overall, ICIS projects US GDP growth of just 1.0% in 2023 and 0.4% in 2024, and global GDP growth of 1.8% in 2023 and 2.7% in 2024 with China, India and southeast Asian countries leading the recovery.

For the US Fed and other central banks, there is a risk of policy mistakes, if interest rates remain too high for too long while inflation eases, the economist noted.

“Risks of a global recession are still present. Risks are shifting from supply chain to geopolitical,” said Swift.

“And given underlying demographics, debt is a real threat around the world,” he added.

Focus article by Joseph Chang

Thumbnail shows US dollars. Image by Al Greenwood.