Dana M. Peterson, Chief Economist at The Conference Board
The Conference Board is a 107-year-old business think tank focused on delivering insights for what's ahead. Our clients are C-suite executives of Fortune 500 companies from around the world. We provide insights that include economics, ESG, human capital, marketing and communications, and public policy and geopolitics.
Absolutely. I think the labor market is divided into three segments:
Segments that are letting people go. These include information, technology, transportation and warehousing, retail, construction and real estate. Those industries did very well during the pandemic when everyone was cooped up and interest rates were low. Now that interest rates have risen and there's less demand for technology and goods, those segments are rightsizing, and letting people go.
Segments that have labor shortages and are hiring. Some of those sectors include hotels, restaurants, healthcare, and even the government sector–usually industries where you have to physically show up to work. These industries are hiring more people and increasing their payrolls every month.
Somewhere in the middle. The industries in this sector are more stagnant–no layoffs, no hiring.
It's these end-point sectors that are driving the labor market. We believe as we progress through the year, the sectors that are letting people go will overwhelm the sectors that are adding jobs. So we do expect the unemployment rate to rise and payrolls to start turning negative later in the year. But the unemployment rate is probably not going to rise by that much (maybe one percentage point) so going from roughly 3.5% right now to 4.5%. That's still a tight labor market compared to previous downturns: at the start of the pandemic, the unemployment rate shot up to 13.5%, and during the Great Recession, the unemployment rate was 10%.
Generative AI is both creative and additive, as well as destructive and subtractive. AI can be used to save time–for instance, think of how much time economists spend researching and writing reports. It might be useful to put a few code words into AI to get a general direction. However, it’s important to note that AI is only pulling existing materials, so it still needs a human element. Jobs will be created because of AI but jobs will also certainly be eliminated.
There are a couple important things:
We have three measures we consider when thinking about a recession: CEO Confidence Survey, Consumer Confidence Gauge, and Economic Indicators Gauge. All our gauges are saying the recession should be starting right about now. And really the key is the consumer. If consumers feel like something is going on, if something is bad, if they might lose their jobs, then they're going to pull back on consumption. And we have seen some pulling back on consumption in two areas:
The last piece of the puzzle for a consumer-driven recession to occur is consumers pulling back on services–and based on the last few readings of retail sales and personal consumption expenditure data, consumers are certainly pulling back.
Another consideration is that some businesses have already pulled back on investments in a lot of areas and will probably continue to do so, not only in terms of human capital but also equipment and structures.
As for the implications, we think that this recession will probably hurt a bit in terms of weakening the labor market and consumers pulling back on consumption. But it's not going to be anything like we've seen in the past two recessions, we expect it to be a bit more regular (high inflation, raising interest rates).
One of the biggest effects of the SVB failure is tighter financial conditions. Many banks, especially smaller ones, are having to go to the Fed to borrow cash and remain liquid, and because they're borrowing from the Fed, they're less likely to issue credit or lend cash to businesses and consumers, which is why I think this will affect businesses more than consumers.
Consumers are already pulling back on big spends. But when it comes to businesses, they are going to go to these banks and ask for capital for short-term purposes, for operating costs, but also for big investments. And if they are not given the cash because the banks have borrowed their money from the Fed, businesses will have to pull back on their plans for long-term investments.
When it comes to the tech sector and venture capitalism, this is a huge blow, because Silicon Valley Bank and other institutions that modeled their business practices like them had access to bespoke types of capital and lending, which is wiped out now. So now businesses and tech firms are going to have to go to angel investors or larger banks who are less likely to lend to startups, which certainly will pose a setback.
Governments are instituting something called industrial policies where, essentially, they tell businesses where they can situate their supply chains and their factories, pressuring business all around. We asked multiple domestic and global companies in a survey back in November how things might've changed since these policies came out and what they’re doing about their supply chains. In the U.S., the most common answer, 44%, said nothing. However, some other answers included thoughts like reshoring or creating redundancies.
But businesses also need to think about geopolitics and policies when thinking about moving their supply chains to other countries and keeping an eye on the cost. Overall, businesses are being squeezed by geopolitics, the pandemic's shock, and the realities of trade issues.
We asked executives what they are prioritizing to defend against external and existential issues, and some of the top responses were innovation, digital transformation, and automation.”
Well, digital is anything that requires technology, right? So, semiconductor chips and STEM research and anything that you need more than just human capacity for. You need that aid of technology to make things greater and more efficient and more productive, but you can’t lose the human element.
By the end of this year, inflation is probably going to be around 3% instead of 5%. So that's going to be good news. Looking further ahead, by the time we get to next year, inflation will go down to 2% because of the work that the Fed is doing.
Additionally, like I said, the recession is probably going to be short and shallow. So, that means not too many layoffs, most people will still be working, and we'll likely be out of it next year and see faster growth.
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