Recession on the mind

Door one

OEA’s baseline, or most probable, outlook is that the Federal Reserve will be able to engineer a soft landing: raising interest rates enough to tame inflation yet not so much as to cause a recession.

Consumers spent throughout the pandemic, aided initially by fiscal policy (e.g., enhanced unemployment insurance benefits, the Paycheck Protection Program) and then by rising incomes and equities. However, they spent more on goods (e.g., new appliances, exercise equipment) and less on services (e.g., travel, restaurants). This sudden shift contributed to overloaded supply chains, which in turn led to higher prices. The Office of Economic Analysis believes that going forward consumers will continue to spend, but shift away from buying goods and back towards services — more in line with pre-pandemic habits. Supply chains are already easing, and this shift in behavior will further alleviate issues and, thus, inflationary pressures.

If this scenario plays out, the nation and Oregon will avert a recession and continue to add jobs. But with interest rates already high, consumer and business spending will slow. Consequently, employment growth will decelerate in the near-term and the unemployment rate will tick up to 4.6 percent by late 2024 from its current near-historic low of 3.7 percent.

Door two

Given the increasing downside risks, the Office of Economic Analysis developed an alternate outlook in their latest forecast that incorporates a recession. The scenario here is that inflation is more persistent and entrenched than expected and consequently the Federal Reserve raises interest rates higher, aiming for price stability at the expense of job growth. It will take a year or more for today’s rate hikes to work through the economy given the lag in policy and current strong household balance sheets. By late 2023, the economy slips into a recession. The Office of Economic Analysis expects it to be relatively mild and short, with Oregon losing 57,000 jobs, or 2.9 percent; significantly less than the dot-com and housing recessions. The 2023-2024 recession in Oregon will be more volatile than the nation as a whole given our industry structure and reliance on in-migration. Growth resumes in 2025.

These are just two scenarios among many possibilities, known and unknown. Inflation is the key issue, and its depth and breadth going forward is difficult, if not impossible, to predict.