Economic update: is recession all but certain?

January 30, 2023

Many leading economists believe a recession is all but certain in the months ahead. With the health of the transport industry tied so closely to the economy at large, it is important to understand the causes and consequences of this potentially dire situation.

In spite of current economic uncertainties, the US labor market remains strong. The rate of job creation has returned to around 500,000 jobs per month since the massive wave of layoffs brought on by the COVID-19 pandemic. Labor force participation is also on the rise, reaching 62.3% in December of 2022—just one percentage point lower than the pre-pandemic rate.

A strong jobs report would not normally indicate a looming recession, but other key indicators are not so rosy. More than anything, continued inflation points to rocky times ahead. So, what created the conditions that are fueling the runaway inflation we see today? Federal Reserve policies may largely be to blame.

For a detailed look at the figures cited in this article along with some helpful charts, watch the latest episode of the Stay In Your Lane Podcast.

The Fed has two tools at its disposal to rein in inflation: the policy rate and the balance sheet. Following the financial crisis in 2008, the Fed’s rate was set to zero for the first time ever. Meanwhile, the balance sheet (a record of all the Fed’s held assets) grew significantly—a practice that is essentially the same as printing money. These policy choices continued long after the emergency conditions that facilitated them had normalized. When COVID hit, the supply of money was increased even further to help stabilize the economy. Some experts see the duration of the Fed’s COVID policy as the cause for our current predicament with inflation.

“It was the right thing to do, but they kept it in place for over a year too long,” Explains Dan North, Chief Economist for Allianz Trade North America. “That is the classic formula for inflation: too much easy money for too long.”

Policymakers at the Fed initially believed inflation would be transitory and were slow to introduce rate hikes to get the situation under control. When this belief proved false, increases to the policy rate were no longer enough to curb inflation.

The most common measure of inflation can be found in the Consumer Price Index, defined by the US Bureau of Labor Statistics as a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. This index reached a peak of 9.1% in June of 2022. Though this indicator has now fallen to 6.5%, that doesn’t mean prices are falling for consumers—only that the rate of increase has slowed.

Why are the Fed’s policy decisions leading us into a recession? Find out in part 2 of our conversation with Dan North on the Stay In Your Lance Podcast.

This brings us back to the labor market, where wage growth is strong at a nominal 5.1% rate. Adjusted for inflation, the rate is actually down 2.3% from 2020. This weakened spending power has sent consumer confidence into a tailspin. Personal consumption spending, which accounts for 70% of all economic activity, is well below the normal average. This is bad news for transport businesses that depend on the sale of goods to survive.

In an attempt to avert a recession, the Fed is increasing the funds rate at the most aggressive pace ever. Still, reliable indicators such as the Treasury Yield Curve, consumer confidence surveys, and the rate of new jobless claims all point to recession on the horizon.

“You rarely hear an economist say the word ‘certainly,’ but it’s a virtual certainty that we’ll be having a recession this year,” says North.

As dire as that prediction sounds, North is optimistic that this recession could be short lived. “There will be job losses, but we think this one will be shallow and relatively short,” he says. “It’s going to feel horrible, but we’ll come out the other side.”

Whatever the future holds for the economy and the transportation industry, Triple T Transport is ready to tackle all your 3PL needs. Thanks to our strong relationships with our transportation partners, we’ll be here to assist you through good times and bad. Contact us to learn more and request a quote today.

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