‘Very significant possibility’ U.S. avoids recession, Fifth Third Bank economist says

Business Journals – Despite inflation remaining high and the U.S. Federal Reserve raising interest rates at unprecedented levels, Fifth Third Bank Chief Investment Strategist Jeffrey Korzenik says there is a “very significant possibility” the economy avoids a recession altogether.

During the bank’s third annual economic outlook event, hosted in Houston this week, Korzenik said the U.S. economy has been far more resilient than people expected, giving the Fed the opportunity to adequately fight inflation through raising rates. When the Fed has raised interest rates in the past at a similar speed and magnitude, it usually leads to a recession.

However, Korzenik said that’s a rule of thumb and not always the case.

Korzenik offered a practical view of a recession, one that was popularized by President Ronald Reagan: “A recession is when your neighbor loses their job. A depression is when you lose yours,” he quoted.

Using this view, Korzenik examined the current U.S. economy through the job market. Periods of recession are marked by job losses, but the nation has added about 3.5 million to 4 million new jobs this year, meaning the country can’t currently be in a recession as some economists might say, according to Korzenik.

Despite the strong job market, there’s a tight labor market, Korzenik said. There are typically more job seekers than job openings, but right now there are about 10.7 million openings and only 6 million people looking for work, he explained.

“We have no historical precedent in the United States for a gap of this magnitude,” Korzenik said.

Even with the tight labor market, the strong job market adds a lot of resiliency to the U.S. economy, which may bode well for potential future economic conditions, Korzenik said.

Also, consumer financial health is strong with the burden of debt payments at multigenerational lows and commodity prices coming down, Korzenik said. Thus, the economy is not “terribly sensitive” to the Fed raising interest rates, he noted.

Part of this has to do with home mortgages, which played a major role in the 2008 financial crisis, Korzenik explained. In 2007, about 35% of all mortgages had adjustable rates, so they were highly sensitive to the Fed’s actions. Now, just 5% to 7% of mortgages are adjustable.

Given how resilient the U.S. economy has been thus far, with a strong job market and a strong consumer, the country can avoid a recession, Korzenik said. Even if one occurs, he believes it would be a “soft landing.”

“It’s hard to imagine a deep recession when you don’t have a problem in the financial sector, when you don’t have high indebtedness levels and when you don’t have massive dislocations in the economy,” Korzenik said. “That means that if we do hit a recession, it is probably going to be fairly short lived and less painful than typical.”

The Fed’s job now is to manage inflation expectations, Korzenik said. There’s a concept called inflationary psychology, where consumers are willing to pay more for goods now if they think those products will cost more in the future, which ends up being a dangerous cycle that only increases inflation even more, he explained.

Inflation expectations are still low, Korzenik said, giving the Fed some flexibility in how it handles rising prices.

“One, they can pivot and start easing interest rates because they have not lost control with this important factor,” he said. “But two, because managing inflation expectations is so important, it also means that while they can pivot if they need to, they won’t tell you.”

There’s also the question of what happens next after the dust settles on the current economic situation. Korzenik said there will be some clear winners and losers, trends which can already be seen today.

With the tight labor market, Korzenik said companies are going to follow workers, meaning where people are living is important. Looking at migration and real estate appreciation, the winners here are the U.S. South, Southeast and, to some extent, the non-California West, while the losers are the Northeast and West Coast, he said.

Central business districts may also be losers, as employees come into the office less and work from home more, Korzenik said. This will have a trickle-down effect not only for commercial real estate, but also restaurants, retail and office personnel. Suburbs will become winners in this as employees move away from city centers, Korzenik said. 

For now, because of the Fed’s actions, Korzenik said, something is going to break — either the economy or inflation. Which one breaks will determine whether the country can avoid a recession or if a recession will occur, as well as the extent of the economic downturn.