Top Economist: Recession Coming, But Boomer Retirees to Mitigate Job Cuts

The US is likely to enter a “shallow” recession in 2023, but the expected wave of Baby Boomer retirement should mitigate job cuts, The Conference Board’s top economist Dana Peterson said on Thursday.

Leading economic indicators point to a recession in 2023, the nonprofit think tank’s chief economist and center leader of economy, strategy, and finance said on a webinar with journalists. Peterson also predicts, however, only a modest increase in the unemployment rate due to a parallel wave of baby boomer retirees leaving the job market.

Peterson noted that the US has “never had millions of people exiting the labor market at the same time,” and that the result would the continuation of a relatively tight labor market as compared to prior recessions.

Effects from the pandemic are also suppressing labor force participation, with many parents keeping their childcare duties, leaving both them and childcare workers out of the labor force, Peterson told reporters. Furthermore, tight US immigration policies have made it difficult for employers to draw labor from outside the country, she said. Those factors should lead to only a modest increase in the unemployment rate to 4.5%, resulting in about 900,000 layoffs.

“I would not want to be one of those 900,000 people,” Peterson says. “But 900,000 is mild to prior recessions.”

Short and Shallow

If the New York-based Conference Board’s predictions materialize, the recession would most likely be short, shallow, and characterized by negative domestic demand. Data released by Fidelity Investments Thursday shows that retirement savers in their sample group held workplace 401(k) contributions steady in 2022 despite a sharp drop in average balances. Those savings patterns, according to the nation’s largest recordkeeper, have been tested by high costs related to inflation, but for the most part savers have held the course.

In response to that inflation, the Federal Reserve has been steadily hiking interest rates, a monetary tightening tool that will likely continue in 2023, according to Peterson. Two or three more 25 basis-point rate hikes are probable, she said, with inflation peaking and gradually falling back to the Federal Reserve’s 2% target in 2024, which is when an interest rate cut would begin to be considered.

Peterson referred to various drivers of inflation, including housing costs, and the steady demand for services post-pandemic.

“The consumer is really the driving force behind this,” she said. They continue to spend, and it remains uncertain whether consumers’ excess savings, wage income, or credit will last, she added.

The war in Ukraine also continues to drive inflation. In the three main sectors of food, energy, mineral supplies, “Putin keeps his finger on the switch,” said Lori Murray, Conference Board president of the committee for economic development.

Energy Price Risk

An additional risk of faster inflation is the resurgence of elevated energy prices, Murray said. China reopening is expected to increase consumption of services and energy, which would raise prices and compound global inflation.

The panelists, however, see inflation eventually moving downwards. Valuations of home prices have peaked and are slowing, while new rents are lower than during the pandemic. However, “the debt ceiling is the most front and center issue that can disrupt that entire apple cart,” Murray said. She stated that the US must get to sustainable debt to GDP ratio.

“In order to do it without suffering dramatic effects on the economy, it would take 20 to 30 years to achieve that goal, so we really need to start now,” she said.

The Conference Board is judging the likelihood of recession in part by the 6-month rate of its leading economist indicator, which has stayed at less than -4% since March 2022.