Arizona Economists Say Mild Recession Likely

Article originally posted on AZ Big Media on February 2, 2023

The specter of recession looms over 2023, with the prices of eggs — along with other consumer goods — rising while home prices are falling. Indeed, the New York Post obtained a note from Goldman Sachs to its clients highlighting Phoenix as one of four markets that could experience a housing crash akin to the Great Recession with prices dropping in excess of 25%.

“Not true,” says Danny Court, partner and senior economist with Elliott D. Pollack & Company, during the IREM CCIM Economic Forecast on Jan. 26. “The Goldman Sachs [prediction] of a 2008-era crash of 25% is from peak to trough. [Phoenix] has already experienced a 13.5% decline from peak to now. If we go down another 10% or 15% in price, we’ll be back to March 2021 [levels].”

In other words, the current decline of home values is not cataclysmic but more like “a slight recovery on affordability,” Court explains. “Who thought they were getting a great deal [on a house] in 2021?”

A Soft Landing or Recession?

The overall economic outlook is uncertain, but Court notes that the U.S. isn’t currently in a recession, but one is possible in 2023. The National Bureau of Economic Research [NBER] is the institution that officially calls recessions and has yet to do so, despite the U.S. recording two consecutive quarters of negative GDP last year.

“That’s not a recession,” Court explains, “that’s one indicator that the NBER [considers]. What they’re looking for is broad-based, wide-ranging slowdown across many sectors, and that didn’t happen.”

The Federal Reserve, however, has raised interest rates aggressively to combat rising inflation, which cools the economy by making borrowing costs more expensive.

Gus Faucher, chief economist at PNC, writes that, “Inflation has peaked but remains above the Fed’s 2% objective. The Federal Open Market Committee [FOMC] is concerned that services inflation, driven by the tight labor market and strong wage growth, could lead to persistently high inflation and is set to increase the federal funds rate by 25 basis points at its [Feb. 1] meeting.”

The FOMC did indeed increase the federal funds rate by 0.25% on Feb. 1, and Faucher believes they aren’t done yet.

“The [FOMC] statement and the [Fed Chair Jerome] Powell press conference point to at least two more 25 basis point increases in the fed funds rate, at the FOMC’s mid-March and early May meetings,” he writes. “However, PNC expects just one more 25 basis point increase in 2023, in mid-March. The difference comes from the outlook for the economy. PNC expects the U.S. economy to enter into recession over the next few months, which would deter the FOMC from raising the fed funds rate beyond the committee’s next meeting. The FOMC, however, is projecting weak economic growth in 2023, but no near-term recession, which would indicate at least two more rate increases this year.”

Adds Court, “[The Fed] will call it a slowdown or soft landing, but they’re trying to induce a recession to take care of inflation. We’ve never tried to do that when we have 10.3 million unfilled jobs and only 6 million people looking for those jobs.”

Because of the unique economic environment caused by the pandemic, the Fed is operating in uncharted territory, which increases the overall risk and complicates economic prognosticating. Still, Court forecasts that there’s a 20% chance the Fed will achieve the desired soft landing, with inflation brought under control and the economy only experiencing a slowdown.

The most likely outcome — at 50% odds — is that the Fed continues to increase interest rates to tamp down inflation. “It’s painful,” he says, “but short and shallow in terms of recession. This means a recession in the second half of [2023] that ends in the first quarter of 2024.”

Court predicts there’s a 30% chance for a recession to be deeper and longer than expected due to geopolitical conflict. “We cannot control a foreign government’s actions that disrupts the global economy, which impacts all of us,” he notes.

Even with the unknowns, Court is bullish on Greater Phoenix, saying that the region is on the short list for every major manufacturer, enjoys a good business climate and has a positive demographic trend.

“Expect a recession this year, but nothing as severe as 2007-2009. Short and shallow is our current forecast,” he concludes. “We’re not having a housing crash, it’s just a soft market right now. Long term, [Greater Phoenix] is the place to be. We have a great economy, and we are having so much success and will continue to do so. Housing affordability is an issue we need to tackle, but the long-term outlook is very good.”