December 1, 2022 4:44pm
Investor Perspective: The State of Our Local Economy
As we approach the end of the year, there remains uncertainty around the trajectory of the economy. Are we in a recession or are we heading there? What will the economy look like in 2023? These are just a few of the questions we hear everyday from investors and we wanted to provide you with the most up-to-date information so you can prepare accordingly.
We enlisted the expertise of PNC’s Chief Economist, Gus Faucher, to answer these questions and more. As senior vice president and chief economist of the PNC Financial Services Group, Faucher is the principal spokesperson on all economic issues for PNC. Prior to joining PNC in December 2011, he worked for 10 years at Moody’s Analytics (formerly Economy.com). Previously, he worked for six years at the U.S. Treasury Department and taught at the University of Illinois at Urbana-Champaign.
View the full Q&A below:
GLI: How would you describe the current state of the Greater Louisville economy?
Faucher: The Louisville economy is in excellent shape. The area continues to report strong job growth in late 2022, and employment is now more than 1% above its pre-pandemic level. The unemployment rate in the Louisville-Jefferson County metro area is below 3% and near a record low.
GLI: How do you see that description changing as we move into 2023?
Faucher: The U.S. and Louisville economies are likely to fall into recession in 2023 as the Federal Reserve continues to raise interest rates. Higher rates are already weighing on interest-rate sensitive industries like housing, and overall economic growth is slowing. Louisville’s auto industry is likely to take a hit in 2023 as higher rates reduce affordability and weigh on vehicle and appliance sales. And Louisville’s transportation/distribution industry will suffer from a national contraction.
GLI: Does the current state of our local economy differ from what you are seeing nationally?
Faucher: While national job growth has slowed in recent months, it has actually accelerated in Louisville toward the end of the year, and is slightly above the national average.
GLI: Do you believe we are in a recession? Why or why not?
Faucher: The U.S. and Louisville economies are not in recession in late 2022. The best indicator of this is the labor market. Job growth is well above its pre-pandemic pace both locally and nationally. The Louisville unemployment rate is below 3%, and the U.S. rate is near a 50-year low. Other indications that the U.S. economy is not in recession are continued growth in consumer spending and household incomes (excluding government payments) adjusted for inflation, and increasing industrial output.
GLI: What are your predictions for the remainder of 2023 and how will that impact the growth of our regional economy?
Faucher: The most likely outcome for next year is a mild recession, similar to those of 1990-1991 and 2001, with a small contraction in real GDP and an increase in the unemployment rate to around 5.5%. This will come from higher interest rates as the Federal Reserve looks to slow inflation. Most recessions are caused by the Fed raising interest rates to bring down inflation. This recession should be much milder than the Great Recession of 2007-2009.
Given Louisville’s exposure to autos and appliances, both interest-rate sensitive industries, and the area’s important logistical firms, a national recession means a Louisville recession. The local housing market will take a hit as big price increases over the past couple of years and high mortgage rates weigh on demand; local house prices are likely to fall around 10% over the next couple of years until affordability improves.
Although PNC’s baseline forecast is for recession, there’s still a one-in-three chance that the U.S. economy manages to avoid recession next year. If we get a few lucky breaks on inflation and the Fed doesn’t need to raise interest rates much more, the U.S. economy could experience weak growth next year but not an outright downturn.
GLI: What are you most optimistic about in 2023?
Faucher: Consumers are still in pretty good shape despite high inflation. Households, on average, still have money saved from stimulus payments and reduced spending during the pandemic, and their debt loads are low. Although consumer spending is likely to take a hit during a recession, it should only be a small decline.