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Inflation Threat Continues and Recession is Nigh, Say CSUF Economists

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By Daniel Coats ’15, ’18

In 2023, the economic landscape is not only mixed but rather confounding, with an unusually large level of uncertainty regarding the near-term outlook.

Though below its peak, inflation remains at much higher levels than today’s generations are used to. But many economists, businesspeople and lay people anticipate an economic recession. And several major banks – including California’s largest, Silicon Valley Bank – have collapsed recently.

Expert Cal State Fullerton economists Anil Puri and Mira Farka helped to make sense of the changing times at the Spring Economic Forecast, held at the Westin South Coast Plaza on April 27.

The event was attended by government leaders, economists, local executives, and business students.

Making Sense of a Confusing Narrative

“The actual data itself seem to spew a mixture of confusing narratives,” noted Puri and Farka. “Consumer sentiment is the lowest in over six decades, according to the University of Michigan index, but a tad above historical averages according to the Conference Board…The labor market is piping hot according to the establishment survey, but a cooler affair if one were to look at the household survey.”

Despite the uncertainties, the news is not all grim. After peaking at 9.1% in June 2022, the consumer price index (CPI) – a leading measure of inflation – is down to 5%. Milder weather allayed fears of a gas-starved winter in Europe despite the ongoing Russia/Ukraine war. And China’s economy is coming back online after the long COVID pause.

“Perhaps the most important reason for a dose of optimism is the resiliency of the global economy,” said Puri and Farka. “There was no shortage of drama last year: rapid rate hikes, the Russia/Ukraine war, commodity and energy shocks, and continued supply disruptions from China’s draconian lockdowns. Yet, the global economy took all this astride. All told, global growth came at 3.2% — 1.3 percentage points below what was expected back in December 2021 — but not a calamity either.”

Unemployment in the U.S.– currently at 3.6% – is at the lowest level in more than five decades. And even the housing market has shown some strength despite a slowdown.

Puri and Farka maintain that the most likely scenario is still a looming recession, but not a repeat of the Great Recession.

“High inflation, interest-rate hikes, a tech-sector crash, and looming troubles in commercial real estate, invoke echoes of every garden-variety recession we have witnessed since the 1980s… As such, our outlook calls for a “normal recession,” not the heart-stopping calamity of the financial crisis but a garden-variety kind akin to the early 1990s or 2000s,” said Puri and Farka.

Understanding the Banking Crisis

To a world beset with inflation, the news on March 10 of the failure of Silicon Valley Bank, a leading tech industry financial institution, was a bit of a shock and puzzlement. And for financial data nerds, the bankruptcy was especially reminiscent of the failure of Bear Stearns that precipitated the 2008 global financial crisis. Both events happened on the second Friday of March in their respective years.

Soon, Signature Bank had failed, while overseas, Credit Suisse was forced to merge with UBS.

“More victims would undoubtedly have followed had it not been for the swift response of authorities,” said Puri and Farka. “Haunted by ghosts of crisis past, they moved quickly to squelch fears and breathe trust and confidence in the banking sector.”

Puri and Farka believe that the banking system is more fragile than many believe. But that doesn’t mean a repeat of 1929 or 2008.

“Regional banks both small and mid-sized are significantly more at risk than large global systemically important banks. This is not to say that large banks are entirely immune. They have suffered sizable losses in their bond portfolios as a result of higher interest rates,” said Puri and Farka.

“Additional bank failures do not necessarily mean an outright calamity. From 2010 to 2020, the FDIC closed more than 200 banks, though they were small with the vast majority having less than $1 billion in assets. Even if a mid-sized bank, such as First Republic, were to fail, it won’t sink the banking system. Indeed, it is important to spell out what the current banking crisis is not: It is not the financial crisis of 2008. Then, the issue was default risk…The issue today is interest-rate and duration risk, an easier issue to address by flooding the market with ample liquidity, as the Fed and the Treasury are currently doing.”

The Southern California View

In the local region, they noted that employment conditions have improved, yet remain below the pre-pandemic levels. And after soaring for two consecutive years, home prices have begun to decline, albeit from a very high level.

As of the latest available data in February 2023, median home prices are down 5.8% in Orange County from the peak, down 19.4% in Los Angeles County, off 5.8% from the peak in Riverside County, and down 4% in San Bernardino County. Further drops are anticipated, but prices are still significantly higher than before the pandemic.

“Supply continues to be tight as many homeowners are reluctant to move given current low rates in their fixed rate mortgages,” said Puri and Farka. “Tightening credit conditions, given the current banking turmoil, will put further pressure on the housing market.”

The Wood Center’s Orange County Business Expectations survey (OCBX), which polls local businesspeople on their outlook for the economy, shows that inflation remains the top concern, followed by labor/supply chain issues, but also increased worries about budget deficits and the debt ceiling.

A third of respondents expect inflation to be between 4% and 5% by the end of 2023, while a third think it will be between 5% and 6%.

Most expect a recession, but when it will start – or if it already has – and how deep it will be remains points of debate.

45.8% expect a mild recession, 40% anticipate a “normal recession” – a bit worse than the mild type but far less damaging than the Great Recession, and 5.1% expect a serious recession. Only 6.8% of respondents believed a recession would be averted.

About a quarter of respondents believe that the recession has begun, with most of the rest thinking it will come later this year or in 2024.

For More on the Woods Center

The Woods Center for Economic Analysis and Forecasting is an invaluable resource to the Southern California business community, providing comprehensive analysis of the national, state and local economies at the annual economic forecast conference each October and a midyear forecast in April.

Various interim reports and surveys provide analysis of trends in between these scheduled events.

Read more about the Woods Center’s research on their webpage or our news articles.

Daniel Coats