Local economists raise more recession concerns. What that means for Charlotte’s economy
Two months ago, Charlotte economist John Connaughton predicted there were about 50-50 odds that the economy would slip into a recession by the end of the year. As the Federal Reserve moved to raise interest rates and curb high prices, the direction of the economy could go either way.
Now, it’s no longer just a coin toss.
“I think there’s a two-thirds chance we’ll have a recession by the end of this year. I’ve increased it considerably,” Connaughton, director of UNC Charlotte’s economic forecast, said. “I’m more pessimistic than I was.”
He joins a growing group of N.C. experts who have altered their forecasts in recent weeks amid increasing signs of an imminent economic downturn.
Recessions, which typically lead to job losses, lower incomes and other economic consequences, could pile on to the financial pain Charlotteans have already felt for months in the form of ever-rising prices.
Michael Walden, a Raleigh-based economist and professor emeritus at N.C. State, made a similar adjustment to his predictions this month. About nine weeks ago, he told The Charlotte Observer that he expected a 1 in 3 chance of an impending recession.
Now, he said he thinks those odds are 50-50.
In May, the Observer spoke with economists and analysts about the possibility of a recession in 2022. They were wary of a possible downturn, but quick to point out that it was just that: a possibility .
Now, they say a contraction seems much more likely – though it’s hard to say for sure when it will start, how long it will last or how it might impact Charlotte.
“I think that anytime between now and early next year we’re likely to fall into recession,” said Mark Vitner, Charlotte-based senior economist with Wells Fargo. “I think we unfortunately have to be prepared for some unpleasant surprises.”
How does a recession start?
By some measures, the U.S. economy is clearly headed toward a recession, Walden said. By others, it could be already in one.
One unofficial rule of thumb defines a recession as two consecutive quarters of declining GDP, he said.
Thursday’s number from the U.S. Department of Commerce fits the bill: the agency reported that the U.S. economy shrank 0.9% in the second quarter of this year.
However, the official declaration of a recession comes from the National Bureau of Economic Research, he added.
But the nonprofit can take months to make an official call, often doing so months after a recession begins — the group officially called the two-month 2020 economic slowdown in July of last year.
So economists in Charlotte and elsewhere are debating the question of if a contraction has already begun or, if not, when one would start, Connaughton said.
“We’re having a real knock-down, dragged out fight over whether or not the (two-quarter rule) signifies a recession,” Connaughton said. “The answer to the question is (it’s) in the eye of the beholder.”
Are there signs a recession won’t occur?
But in some ways, the economy is sending “mixed signals,” Connaughton said. That idea may resonate in Charlotte, where jobs are plentiful and cranes still dot the skyline.
Economists admitted that one common marker of a recession – high unemployment — hasn’t quite materialized. The unemployment rate can rise to 10% percent or higher in a downturn, but current numbers are a fraction of that.
“It’s hard to make the argument that we’re in a recession now, when you have unemployment below 4%,” Connaughton said.
In fact, in some industries, there are still more openings than workers.
“We continue to hear from banks broadly that they’re having a hard time finding enough people to hire,” said Nathan Stovall, a finance sector principal analyst with S&P Global.
So even after two quarters of falling growth, some economists may be hesitant to declare a contraction just yet.
Why are economists worried now?
Still, the list of economic red flags is mounting.
The housing market has slowed. Consumer sentiment hit its lowest point in 70 years in July, according to one survey. Persistent price increases are stretching Americans’ salaries.
In the markets, long term interest rates in government bonds have fallen below short-term rates, an occurrence called a yield curve inversion that has preceded every recession since 1955.
“The economy is not as healthy as it should be” Connaughton said.
And for months, economists have eyed the Federal Reserve to see if the country’s central bank can successfully raise interest rates and slow inflation without tipping the economy into a downturn.
It’s a tricky feat to pull off. The Fed has triggered a recession eight times since 1961 while trying to rein in inflation with higher rates.
On Wednesday, the Fed hiked interest rates again by 0.75 percentage points, an aggressive increase that officials signaled wouldn’t be the last.
The odds of a so-called “soft landing” — reining in inflation without a recession — aren’t encouraging, Connaughton said. “I’m not terribly optimistic.”
What would a recession mean for Charlotte?
Still, there’s a silver lining for Charlotte: all of the four experts the Observer spoke to agreed the city would fare better than others in the event of a downturn.
Due in part to current employment numbers, it’s likely that fewer Charlotteans would lose their job than in past recessions, Walden said.
And Stovall was quick to point out that a 2022 recession would look nothing like the economic chaos unleashed on the city 14 years ago, spurred by crises in the finance sector.
“This is a walk in the park compared to ‘08” Stovall said. “That (kind of scenario) isn’t really in the cards.”
Still, growth in Charlotte would slow. Construction and manufacturing firms would see profits dip, as would banks and other financial firms. The housing market would cool, and the region would see fewer expansion announcements from tech companies and other new, desirable employers.
“The benefit for us is some breathing period,” Walden said of N.C. markets like Charlotte and the Triangle. “There are a lot of businesses stretched to the limit (right now).”
But some consequences of a downturn are just plain unpredictable.
“We all know the economy is not necessarily trending in the right direction,” Connaughton said. “But we don’t really have a good handle on what could take place over the next six months.”
This story was originally published July 28, 2022 at 6:00 AM.
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