Consumers have held a recession at bay for months now with their robust spending, fighting off the burden of rising prices and higher interest rates. But their resolve, not to mention their financial reserves, are waning and that could force a retreat in the larger economy.
“My guess is that a recession happens in the middle of 2023,” predicted economist Eliot Eisenberg while addressing the Denver Metro Association of Realtors Economic Summit on Friday morning. “It won’t be that deep and it won’t be that long.”
Even if the economy doesn’t technically enter a recession, growth will be close to zero, he said, speaking primarily to real estate agents who are already feeling the cold winds of a chilling economy.
The U.S. economy consists of consumer spending, business investment, government spending and trade, or exports minus imports. Most of those areas are weakening in ways that will likely accelerate as the year moves forward.
Consumers accumulated $2.1 trillion in surplus savings from reduced spending and direct government support during the pandemic in 2020 and 2021. They have been spending that money down, first on goods, and then on services, and have about $0.9 trillion left, Eisenberg said.
But inflation is gnawing away at those reserves and the current savings rate is near historic lows. Real income gains aren’t keeping up with high living costs and people are charging forward with credit, adding an average of $28 billion a month in consumer debt since last February, according to ContingentMacro.
Additionally, tighter monetary policy is chipping away at the wealth households accumulated during the pandemic. Looser monetary policy contributed to $40 trillion in additional wealth, mainly from higher home and stock values. But about $7 trillion of that was lost last year, with more erosion expected.
Higher mortgage rates, which went from around 3% on a 30-year loan in late 2021 to more than 7% before settling back in the 6% range have killed off mortgage refinancings and greatly reduced affordability. That has decimated the mortgage industry and the pain is spreading to the larger real estate sector.
Home and condo sales last year fell 20% in metro Denver compared to 2021, and by December that decline was running closer to 40%, putting a huge dent in the volume of real estate transactions.
Manufacturing in the U.S. is contracting, and the prices of some goods are starting to fall. Earlier this week, a survey of supply managers showed the services sector slipped into a contraction in December. If service spending continues to shrink, then a recession is not far away, Eisenberg said.
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Consumers, small business owners, corporate CEOs — confidence is in the toilet for pretty much everyone. And that is showing up in reduced business investment. Higher interest rates are also making it harder to fund private construction projects and capital expenditures.
Given that it helped create the current inflationary mess with excessive stimulus, the federal government can’t step into the gap with increased spending, Eisenberg said, at least not while the Federal Reserve is still trying to bring inflation under control.
That said, inflation has peaked, and the Federal Reserve should finish raising interest rates in the first quarter, he said. Job growth will flatten and unemployment will rise. When that happens, consumers will eventually be forced to pull back.
“This labor market is tight like a snare drum,” Eisenberg said. “If it weakens, we are done.”