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Pittsburgh economists predict a mild recession this year

Sarah Kovash
90.5 WESA
A panel of experts shared their economic forecasts for the year at a luncheon Downtown hosted by the Economic Club of Pittsburgh Thursday, Jan. 26.

Financial experts in the Pittsburgh region agree with the majority of economists that the U.S. will enter a recession this year, thanks to interest rate hikes at the Federal Reserve.

“I think that the Fed is fully committed to getting inflation back down to 2%,” PNC chief economist Gus Faucher said. “I think we may not like how we get there, but the Fed will get inflation to 2%. And I would expect that we’ll be there sometime probably in the first half of 2024.” He spoke Thursday at a forum the Economic Club of Pittsburgh hosted Downtown.

In December, consumer prices in the U.S. rose by 6.5% over the previous year, meaning the annual inflation rate had declined from 7.1% in November and a 40-year high of 9.1% in June. The Fed has raised interest rates from zero to more than 4% since March 2022, as it seeks to get inflation back under control.

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As a result, Faucher said, “I do think that we will get a recession. And I do think that with the recession, we'll see slower inflation and a deterioration in the labor market”

He predicted the Fed will increase interest rates to between 4.75% and 5% by the spring and then start to cut them by the end of 2023 and through 2024.

The labor market remains tight for now. In November, the unemployment rate for the Pittsburgh metropolitan area dipped to a half-century low of 4.0%. Chris Briem, a regional economist at the University of Pittsburgh’s Center for Social and Urban Research, noted at Thursday’s forum that local job growth lags the rest of the country.

His analysis shows that, over the course of the pandemic, employment in the Pittsburgh area has fallen most among people between the ages of 45 and 64: Locally, this age group held 26,000 fewer jobs in the winter of 2022 than in the winter of 2019, a decline of 6.4%.

Those aged 65 and older, however, experienced a 7% increase in employment over the same period. Although some of them had reached retirement age, they collectively held 5,000 more jobs in the winter of 2022 than three years earlier.

Briem said it is not clear from available data what has driven overall contraction in the region's labor force, though he noted workers could be moving away from Pittsburgh or retiring early.

Faucher predicts a diminished labor force will help to dull the effects of a recession.

"Businesses will want to limit layoffs [considering] the steady, long-run decline [in the workforce] due to the retirement of the Baby Boomers," he said. "We have a structurally tighter labor market post-pandemic compared to pre-pandemic. It's basically been flat throughout 2022."

In addition, Faucher noted that consumer debt levels remain relatively low, meaning the average household has more of a financial cushion to weather a slowdown – a marked contrast from the run-up to the Great Recession. In another break from the 2008 meltdown, there's also no housing surplus today, and banks are well-capitalized, Faucher said.

For its part, the Fed forecasts that the country will avoid recession altogether. But that assessment likely amounts to wishful thinking, according to the reasoning of Chris Lattimore, a senior vice president for Merrill Lynch’s Duckworth Haggerty Group, a private wealth management division. Lattimore estimates there’s only a 10% likelihood the U.S. manages a “soft landing” from elevated inflation rates.

On Thursday, he predicted that equity markets will begin to bounce back in the second half of the year, when he expects the Fed to ease borrowing costs. But for now, he advised members of the Pittsburgh Economic Club to steer clear of risky investments.

“It's a little too early to be pressing down on the gas,” Lattimore said. But he added, “Longer term … we are optimistic on a lot of the innovation ahead of us.” He cited opportunities to invest in artificial intelligence, energy efficiency, vehicle electrification, and life sciences, along with increasing demand in emerging markets and among Millennial consumers.

“We think the future's very bright. And this year will be a fundamental year for investors in terms of resetting,” Lattimore said. “So in our view, it's important that you have a plan. You have to be ready to shift from covering the brake with your foot to pressing down the gas this year.”