Mixed Signals

When local business leaders were asked this spring to turn into soothsayers and offer their recession predictions, most saw one looming.

Springfield Business Journal’s 2023 Economic Growth Series survey asked the question, “When will the next recession occur?” Nearly 40% of respondents said a recession would hit by the end of the year, with another 4% predicting it almost immediately, within three months of the time of the survey, collected April 28-May 31. Another 15% predicted a recession in 2024, with 13% saying a recession would not hit any time soon. Nearly 30% said they just didn’t know.

Economist David Mitchell, professor of economics at Missouri State University and director of both the Bureau of Economic Research and the Center for Economic Education, would fall in with the 13% of respondents who do not see a recession on the horizon.

“Generally speaking, I’m pretty optimistic about this one, actually,” he says.

The National Bureau of Economic Research declared that a recession did take place in March and April 2020, but noted the COVID-19 recession was the shortest in U.S. history.

“The formal definition of recession is two consecutive quarters of negative economic growth,” Mitchell says. “We haven’t seen that, and I don’t think we’re going to see it in the third quarter, though we might see some softening in the fourth quarter.”

Gross domestic product increased at an annual rate of 2.4% in the second quarter, according to the U.S. Bureau of Economic Analysis. In the first quarter, GDP increased 2%.

There are some problems on the horizon for the economy, according to Mitchell, particularly with regard to inflation. The Federal Reserve has raised interest rates to their highest level in 22 years, with rate hikes approved at 11 of the last 12 meetings of the governing body. Inflation is down from last year’s 40-year peak of 9.1%, but it has not yet reached the target rate of 2%, Kathleen Navin, St. Louis Fed senior business economist, reported at a Springfield Area Chamber of Commerce event on Aug. 16.

“The Fed raising interest rates doesn’t appear to have had the same effect that it would during normal conditions,” Mitchell says. “We still have some abnormal conditions due to COVID, which upended and upturned everything. It’s going to be a while before it goes back to normal.”

Mitchell says some signals point toward a recession, like the inverted yield curve, with short-term interest rates exceeding long-term rates for U.S. Treasury securities.

“It’s pretty interesting, because every recession has been preceded by an inverted yield curve,” he says. “The problem is, every time you’ve had an inverted yield curve, you haven’t necessarily had a recession. It’s a necessary but not necessarily sufficient indicator that a recession is coming – but it does send up a warning signal.”

Mixed signals
Jason England, president of Arvest Bank in Springfield, is not sure where the economy is going, but he thinks a recession almost certainly will affect some sectors.

“Everyone’s been predicting a recession, but it is still yet to have occurred,” he says. “Normally, I have a sense of the direction where things are going, but right now the Fed also has a hard time understanding how things continue to be stronger than expected.”

England says recessionary results may be noted in certain business categories without the economy going into a full global recession. If he had to guess, he says sensitive industries will be more susceptible.

“We still see a lot of great growth – and that’s Springfield-specific, not the U.S. economy,” he says.

The construction industry seems to have a great pipeline, England noted, even with nongovernment work, much of which is temporarily off to the side.

“Normally, we should be starting to see cracks in the economy,” he says.

Stacie Ramos, estimating and preconstruction services manager for KCI Construction Co., says recession is a constant conversation in nearly every circle she is part of.

“For our company in construction, there’s a noticeable shift in where the funds are, but we haven’t noticed a decrease in projects – just in who’s funding the projects,” she says.

There are fewer privately funded projects and more government-funded ones, she says.

“What we’re chasing is going to become, for the foreseeable future, things supported and funded through government money that has already been awarded.”

Projects funded through the American Rescue Plan Act have a tight timeline and generally have to be zeroed-out in 2026, she notes.

“I’ve done this a while, and that’s a new dynamic to the process,” she says. “It brings a lot of unique challenges, but if you’re chasing it, there’s a lot of it to be had right now.”

In the more distant future, private projects are waiting in the wings and accruing capital, Ramos notes.

Still, England says, it would be very optimistic to say there will not be a recession at all, particularly with the Fed raising rates as much as they have.

“Something will have to go through a recession – through two quarters of negative growth,” he says. “Somebody’s going to have to experience that just because of the nature of the game.”

But the Fed should be getting some credit, he notes.

England says the first recession he experienced was in 1992, and though several have followed, none have been exactly replicated, whether that is the dot-com recession in 1999, the housing recession in 2007 or the recent COVID recession.

“Each one tends to be for different reasons; they don’t tend to repeat themselves,” he says.

An important factor in recession is always consumer sentiment, he says.

“It’s kind of a self-fulfilling prophecy,” he says. “People start pulling back, and the news comes out showing that they’re pulling back, so they pull back more. So far, we haven’t had that cycle.”

He targets consumer debt as a major source of concern, however.

In early August, the Federal Reserve Bank of New York reported credit card balances had topped $1 trillion for the first time, rising for five consecutive quarters, culminating with a 4.6% increase from the first to second quarter in 2023. Consumer financial services company Bankrate has reported the average credit card interest rate is 20.53%. At the same time, Bank of America reported a steep increase in the number of people making hardship withdrawals into 401(k) accounts – up 36% year over year from Q2 2022 to 2023.

“Consumer debt and credit cards are at an all-time high,” England says. “At some point, that will start reducing people’s spending habits, and that’s probably the first step into a recession.”

The election factor
Particularly since the recession, the will-we-or-won’t-we conversation about recession has dominated economic news. Both England and Mitchell think a forthcoming election adds fuel to that conversational fire.

“If you can get people thinking there’s a recession going on – and we all know who’s president, who’s in Congress, who’s in the Senate, who the governor is – we can start tying that albatross around their neck,” Mitchell says. “I wouldn’t say the economy is great, but it’s not in recession, either. It’s kind of thumping along.”

England agrees.

“With an election coming up, that question of are we going through a recession or not is great for politics,” he says.

He says the Fed may have done all the work it is going to do on inflation until after the election as political debates begin.

When asked if it matters whether the economy can be labeled as recessionary, Mitchell says there is one way in which it does.

“If we know we’re in a recession, we can predict what will occur – the Fed or federal government will do this or that,” he says. “It adds clarity to uncertainty.”

And while recession feels like a bad word, England says that’s not entirely true.

“Recessions are not necessarily bad,” he says. “They wash out the highly speculative stuff that gets people in trouble. If it goes for a long time, a deeper recession may wash out highly speculative money.”

Recession is a mathematical function, England says, and a high rate of spending one year may be followed by year-over-year reduction, even though spending may still be high.

“People get caught up in the definition,” he says. “You also have to look at the
real world.”