ORANGE, Calif.—Leading economic forecasters at Chapman University expect a mild or moderate recession to hit the U.S. possibly by next summer.
Although the economy seems to be recovering from record-high inflation this summer, other signs point to a slowdown, according to Chapman’s President Emeritus Jim Doti.
“There is something to worry about, because it’s the calm before the storm and it’s starting to rain,” Doti told hundreds of attendees Dec. 13 at the university’s A. Gary Anderson Center of Economic Research presentation of its bi-annual economics and business review. “We are forecasting a recession for next year.”
As an example, residential investment spending on single-family homes and multi-family condos have declined sharply, dropping even further than seen in the 1973–1975 recession.
Leading indicators today resemble the 1974 economy when the nation was introduced to stagflation—an economic condition when inflation and unemployment rates are high and consumer spending slows.
Among the causes of that recession was an oil crisis and a stock market crash, spinning the economy into a downturn that lasted through President Jimmy Carter’s term. Construction and residential investment dropped sharply, and consumer spending decreased in the 1970s.
Consumer spending has remained strong this year, but it has started to decline, according to Doti.
“And that will be enough to lead to a recession,” Doti added.
This year’s increased interest rates are also contributing to a slowdown, he said.
The Federal Reserve has raised interest rates seven times since March. The central bank expects rates to climb to 5.1 percent next year.
As a result, the spread between the Fed funds rate and the 10-year T-Bond rate has narrowed. By the end of this year, Doti said he expects the spread to turn negative, marking a key indicator of an impending recession that he predicts will start as early as June 2023.
Jobs Expected to Decrease
While jobs have recovered almost back to pre-COVID pandemic levels, numbers are expected to recede again in 2023, according to the center’s report.The employment recovery has also been uneven, especially in California. Riverside, San Bernardino, San Diego, San Benito, and Santa Clara counties have gained jobs while Orange, Los Angeles, Alameda, and Contra Costa counties have lost positions.
Orange County has generated fewer jobs than the state over the past four years, Doti said. The county has had no growth in wage and salary since 2018. The state’s job growth reached 2 percent during the same time.
The center predicts job losses in the county for most of 2023, but rapid job growth in the first three months of next year is expected to lead to an overall increase of a half-percent for the year.
The types of jobs have also been unevenly distributed, Doti said. Jobs in leisure and hospitality haven’t fully recovered, while jobs in technology, aerospace, scientific research, and pharmaceutical development have been strong, he said.
Home Building Will Slow
California’s real estate market will be the state’s weakest economic sector, Doti said.“Mortgage rates exceeding 7 percent have already decimated home sales and building permit valuations,” the center reported.
State Revenue
A recession in 2023 would have a significant impact on the state’s budget, possibly leading to a $22 billion revenue shortfall, Doti said.In addition, the state used billions of dollars in one-time federal COVID funds to increase budgetary spending from 2020 to 2022, and that money will no longer be available.
“If a recession occurs next year, its impact on the state’s coffers will most significantly hit tax revenues from personal income taxes and capital gains,” according to the report.
