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Tom Barkin

What’s Next for the Economy?

Tom Barkin
Nov. 9, 2023

Tom Barkin

President, Federal Reserve Bank of Richmond

MNI Webcast


  • We’ve come a long way quickly, but the job isn’t done. Inflation remains too high.
  • There is an unusually wide range of potential paths for the economy going forward — from resurgence to soft landing to recession.
  • What path do I see? I do anticipate some sort of a slowdown. I see that slowing as part of what it takes to bring inflation back to target. Price setters need to be convinced.
  • Whether a slowdown that settles inflation requires more from us remains to be seen. We have time to reconcile competing narratives on demand and to test different views on the trajectory of inflation.

Thank you for that kind introduction. I thought I might take 10 minutes to share how I’m seeing the economy. Let me caution these are my thoughts alone and not necessarily those of anyone else in the Federal Reserve System.

As you well know, the Fed has moved aggressively against inflation. We have raised rates 525 basis points in just a year and a half. Hopefully, you agree we needed to take action because, if there’s one thing we have relearned over the past two years, it is that everyone hates inflation. High inflation creates uncertainty. As prices rise unevenly, it becomes unclear when to spend, when to save or where to invest. Inflation is exhausting. It takes effort to shop around for better prices or to handle complaints from unhappy customers. And inflation feels unfair — the wage increase you earned feels arbitrarily taken away at the gas pump.

We are making real progress. In September, 12-month headline PCE inflation was 3.4 percent, down considerably from its peak of 7.1 percent in June 2022. Core was 3.7 percent, and in the last three months, core has been 2.5 percent annualized. We aren’t at our 2 percent target yet, but we’re heading in the right direction.

At the same time, the data shows an economy that has remained remarkably healthy. Despite fears of a recession, we continue to see strong demand and a resilient labor market. GDP grew at a remarkable 4.9 percent in the third quarter. Consumer spending was robust, up 4 percent annualized. Unemployment remains low at 3.9 percent. Job growth has averaged 204,000 over the last three months, roughly double the breakeven pace.

If you had asked me for my forecast a year ago, I would have been pretty happy to be at 3.4 percent inflation and 3.9 percent unemployment at this point. We’ve come a long way quickly, but the job isn’t done. Inflation remains too high, and the Fed has to walk a fine line. If we undercorrect, high inflation could return, as happened in the ’70s. If we overcorrect, we do unnecessary damage to the economy. And even the best policy has the potential to be waylaid by external events, as we’ve been reminded with the recent news from the Middle East.

Worth Watching: Which Path Will the Economy Follow?

Our job is complicated by the unusually wide range of potential paths for the economy going forward — from resurgence to soft landing to recession. Let me talk about each and the implications for policy.

One path is reacceleration — demand picks up and, in turn, so does inflation. The recent data largely tells this story. Third quarter GDP growth defied expectations, fueled by consumers spending down pandemic-era savings and benefitting from higher wages and stock prices. The high-end experience economy is a particular hot spot. Despite a slowing in housing activity, home prices have renewed their upward climb — a testament to continued demand amid tight supply. Construction remains strong, supported by infrastructure spending and an AI-fueled data center boom. And the job market has been remarkably resilient — vacancies have ticked back up, jobless claims have moved down and wage growth remains elevated. Demand this strong isn’t the fix for inflation and would likely require more from us.

But I don’t like depending solely on the data, which is published with a lag and revised multiple times. I’ve made it my priority to be on the ground every week in the hopes of understanding the economy better.

And I’m hearing a different story on the ground. Interest-sensitive sectors, like real estate, manufacturing and deal-making, report they are feeling the impact of higher rates. Pandemic-era stimulus and excess savings have been largely spent down. Retailers tell me lower-income consumers are stretched thin and reprioritizing their spend, and middle-income consumers are trading down, perhaps still buying beef at the grocery store but school notebooks at the dollar store. Banks are feeling margin pressure and have stepped back from riskier sectors, newer customers and less profitable loans. Another way to look at consumer spending is year-over-year where growth numbers look solid but not frothy, making me think the data may just be showing a catch-up from a weak spring.

A second potential path is the elusive “softish landing,” in which demand remains solid while inflation comes down to target. Rate increases and tightened credit conditions both work with a lag and may well work to bring inflation down further in the coming months. Labor markets seem to be coming into better balance. Inflation expectations remain anchored, and the supply side has been working to bring inflation pressures down: Supply chains have largely been repaired, gas prices have backed off last year’s highs, productivity has gone up, and prime-age labor participation has rebounded. If all these forces continue to work to relieve supply pressure, perhaps inflation could return to target without more help from us and without too much damage to demand.

But I’m not yet convinced that inflation is on a smooth glide path down to 2 percent. The inflation numbers have come down, but much of the drop has been the partial reversal of COVID-19-era goods price increases driven by elevated demand and supply shortages. Shelter and services inflation remain higher than historical levels. As I talk to businesses, I still hear of too many above-normal cost and price increases. Health care and insurance costs are spiking. Merit pools are down but still above pre-pandemic levels. The recent UAW settlement could spark another round of labor cost pressure. Large consumer goods companies in sectors like detergents, frozen foods and soft drinks are still raising prices at rates much higher than before COVID-19. After decades without pricing power, businesses aren’t going to back down from raising prices until their customers or competitors force their hands. Don’t get me wrong — a softish landing would be great. But I fear more will have to happen on the demand side to convince price setters the inflation era is over.

A third path is the traumatic recession so many have been forecasting for so long. It could be driven by the Fed’s aggressive rate path, by banks pulling back in force, by geopolitical events, or by some new financial crisis stemming from troubled sectors like commercial real estate. Such a downturn usually works to bring inflation down and turn policy on its head, unless of course it emanates from a supply shock in commodities like oil.

We are clearly not in a recession today, based on the strong data I shared. We will be in a recession someday, because no one ever canceled the business cycle. And it’s worth remembering that most recent recessions have come from unforeseen events like the pandemic or 9/11.

So, what path do I see? I do anticipate some sort of a slowdown, as I just have to believe the net impact of all this tightening will eventually hit the economy harder than it has. As an example, I saw data suggesting that corporate interest payments as a percent of revenue and household interest payments as a percent of disposable personal income have both only gotten back to 2019 levels. These benefits from pandemic-era refinancing and debt repayment won’t last long at current interest rates.

I see that slowing as part of what it takes to bring inflation back to target. As I said, price setters need to be convinced. Whether a slowdown that settles inflation requires more from us remains to be seen, which is why I supported our decision to hold rates at our last meeting. With rates restrictive and financial conditions tightened, we have time to reconcile competing narratives on demand and to test different views on the trajectory of inflation.

I will say that if we do see the economy weaken, it’s worth remembering that not all slowdowns are created equal. We’ve been scarred by our memories of the Great Recession and the Volcker Recession, but they were particularly long and deep. As I talk to firms, I hear reasons to believe that any downturn this time might be less severe.

First, it could cause less dislocation in the labor market. When you think of a slowdown, you naturally think of 2008 when manufacturing workers were sidelined across the Rust Belt, and those last into the workforce bore a disproportionate burden. But those are the workers I hear are most in demand today, as manufacturing plants, hotels, construction sites, and restaurants remain short of workers. Large company layoff announcements this year primarily targeted administrative functions, not front-line workers. These professionals may have a lower propensity to file for unemployment, be unemployed for shorter periods and often can leverage backup savings to bridge their consumption. Unemployment for those with a college degree is just 2.1 percent.

Second, a spending slowdown could be mitigated by latent demand. Houses and cars became expensive and hard to find. But should supply open up in a weakening economy, I suspect we would find a number of buyers who have deferred purchases over the last few years and are ready to buy.

And, finally, the prolonged recession preamble could reduce the cost. This has been called the most predicted recession ever. Businesses have been planning for a downturn for 18 months. They have slowed hiring, streamlined costs, managed inventory levels, and deferred investment. Banks have cut back on marginal loans. Many consumers have tightened their belts. So, if a recession does come, the economy should find itself less vulnerable. And if it doesn’t come, today’s conservatism can fuel tomorrow’s revival. You might even argue that the recent strength in the economy is being supported in part by businesses, consumers and governments that have outperformed their recessionary forecasts.

So, that's how I'm seeing the economy today. Thank you.

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