Even the March 10 Silicon Valley Bank closure couldn’t sway the 50-50 odds that UNC Charlotte economist John Connaughton gives for the chance of a 2023 recession. Even if a recession occurs, he expected it to be short-lived. Still, the ride might be a bit rocky before inflation falls to 3% by year’s end, as he predicts.
“Don’t open your 401(k)s this month. Trust me,” says Connaughton.
Connaughton delivered his First Quarter North Carolina Economic Forecast Thursday at the university’s Uptown campus. He was joined by Jeffrey Roach, senior vice president and chief economist for LPL Financial, a San Diego-based investment firm that has a big suburban Charlotte office. Connaughton has a long history of economic forecasts that provide lots of N.C. economic information.
Job markets remain strong, the Federal Reserve’s interest rate hikes seem to be beating back inflation and consumers are spending money on vacations after mostly staying home during the pandemic, he says.
Banking crisis worries remain a wild card, both economists agreed, although neither believes the problems of a few banks will spread widely. The Silicon Valley Bank collapse complicates matters for the Federal Reserve as it tries to curb inflation, while showing confidence in the U.S. banking system.
“In the short term, the Fed is going to have to balance the need to increase interest rates to fight inflation with the increased risk to the financial sector associated with higher interest rates,” Connaughton says.
“For now, the Fed has stemmed systemic risk by creating a lending facility that effectively insures all banking deposits. That action is quantitative easing, in essence, and is contradicting the Fed’s inflation fight.”
The Fed lagged behind rising inflation when it started raising interest rates in March 2022. Playing catch-up has made the task of fighting inflation harder, Connaughton says. Connaughton says he would favor a 25-point hike from the Fed in the next go-around, which he says would help reduce inflation and quell banking worries.
Connaughton and Roach joked that the two mostly agreed on their forecasts on the state’s economy, including the banking worries.
“This is a concentrated issue for under-diversified financial firms insufficiently hedged against rising rates,” Roach says
As for personal advice, the two emphasized that everyone’s circumstances are different, so a strategy for one person probably won’t work for another.
“There’s value in having professional help,” says Roach. Connaughton countered by saying even he pays for financial planning services because he wants someone “who’s doing this every single day.”
With people living longer and working, Connaughton suggests investors consider “a little riskier portfolio” as they approach retirement age.
If inflation falls to 3% by year’s end, interest rates would settle at between 4.5% to 5%, the two agreed. Year-over-year inflation peaked at 9.1% in July, but from August 2020 to November 2022 the Consumer Price Index has increased 16.7%.
“I’ll believe it when I see it the price of eggs come down,” says Connaughton.
North Carolina’s Gross Domestic Product is expected to increase by 1.6% over the 2022 level in 2023, according to the UNCC report. For 2023, 12 of the state’s 15 economic sectors are expected to experience output increases, with agriculture projected to see the strongest growth at 17.6%.
Other top growth sectors for 2022 are expected to be:
- Mining: 6.2%
- Information: 6.0%
- Hospitality and leisure services: 4.6%
- Health and education services: 4.0%
Three sectors — finance, insurance, and real estate (FIRE); government; and transportation, warehousing, and utilities (TWU) — are expected to experience growth below the projected GDP growth of 1.6%.
According to the report, all 14 non-agricultural sectors are expected to experience employment increases during 2023. The sectors with the strongest expected employment increases in 2022 are:
- Information: 5.8%
- Mining: 5.6%
North Carolina employment is expected to reach 4.93 million by December, a 1.5% increase a year earlier. The state is expected to add 74,300 net jobs in 2023.
North Carolina’s unemployment rate is expected to remain steady in 2023, closing out the year at 3.9%.
If a recession happens, unemployment could come close to 5% Connaughton says. During the Great Recession from 2007-2009, unemployment peaked at 10% in October 2009.
The North Carolina Forecast, which began in 1982, is published quarterly by UNC Charlotte’s Belk College of Business. The full report and a recording of the presentation will be available at belkcollege.charlotte.edu/forecast.
The Second Quarter 2023 North Carolina Economic Forecast Report will be released in May.