Highlights From Economic Trends and Outlook Event

by Carolyn Sweeney

"An unfamiliar twilight" is how Dr. Scott Anderson characterized our current economy in his sobering and broad-ranging presentation at The City Club on January 26, 2023. We can all feel the recent shift in the Bay Area economy with significant layoffs in Tech, declining home prices and inflating prices at the grocery store. Are these eggs made of gold?!?

With recent headlines that indicate the possibility of a major recession, it’s reassuring to hear that a nationally recognized Economist, who wrote his dissertation on Financial Bubbles and Crashes, is forecasting a mild recession in 2023 and a recovery by the end of the year. His forecasts indicate overall 65% chance of recession, based on a number of leading economic indicators, including: we are now at lowest level of excess consumer savings since 2005 after unprecedented levels driven by COVID-19 relief and assistance programs; the Purchasing Managers' Indices for U.S. manufacturing and services have fallen into contraction territory; home builder sentiment is at its lowest point in a decade; bank reserves are dropping, a sign that money will likely become more expensive; banks are tightening credit standards; and small business optimism is low.

Dr. Anderson anticipates that the Fed will need to continue its monetary medicine to bring inflation down from 9% to 2%. This means further rate increases and a high likelihood that we won't see rate reductions until 2024. The Consumer Price Index is forecast to be 5.7% in Q1 2023 and expected to gradually decline below 3% by Q1 2024. The markets have different expectations on rates, as reflected in the Fed Funds futures expected value, of flat to declining rates in 2023, signaling optimism which is disconnected from the Fed messaging.

With the continued higher rates, the impact on the housing market stands out. In addition to low home builder sentiment mentioned above, the National Payment-to-Income Ratio is the highest since the 1980's. San Francisco and San Jose lead the U.S. with the largest home price declines to date of just over 13%. Additionally, Dr. Anderson predicts a rising unemployment rate in California that will top out around 5.4% versus a peak of around 5% across the U.S.

Members, log in to the members-only section of the website, to download Dr. Anderson's slide presentation pdf. You will find it on the events downloads page.