How this US recession index works: If index rises above 67%, that’s a historically reliable indicator the economy has entered a recession. It was 29% for the spring quarter. (Source: St. Louis Fed)
“Recession or not?” isn’t California’s big 2023 economic question. Rather it’s more like “how bad will the downturn be?”
Yes, certain business metrics, like job stats, show near-record strength while consumers pack shopping center parking lots this holiday season. Yet the resilient-to-date California economy has major challenges ahead.
So, if consensus thinking is correct, then a recession – locally, nationally and globally – is all but a certainty for 2023. That same groupthink suggests it will be a short and mild downturn.
But history tells us that collective wisdom isn’t always so smart. Let me help you form your own opinion about the chances for a significant economic stumble in 2023.
Shoppers make their way through the Brea Community Center on Friday, November 18, 2022, during the Nutcracker Craft Boutique in Brea. More than 200 vendors sell one-of-a-kind items as well as hand-crafted holiday gifts and decorations during the two day event. (Photo by Mark Rightmire, Orange County Register/SCNG)
Consider a dozen questions I have compiled that create the basis for your forecast.
As you go through this list of economic points of concern, take note of which ones are the most worrisome. That will allow you to build your own recession probability for 2023. (You can also take the quiz online at bit.ly/recession23quiz)
#1 Inflation injuries
The cost of California’s lifestyle is a major pain in the wallet. Add on the worst bout of inflation in 40 years.
It’s not a question of “if” inflation gets better in 2023. It will. But how much better will it get?
Without a dramatic improvement in the soaring cost of living, the drag on the economy will be significant. There’s the pain of costlier goods and services and a Federal Reserve raising interest rates even higher to cool the economy.
#2 Haunted housing
Californians know the ups and downs of real estate as well as any American.
In 2023, the housing market can’t get much slower. So the big question is whether this stagnant level of activity is a relatively new normal.
A modest uptick won’t cure real estate’s ills. And if there’s no significant rebound, will a major downturn follow?
#3 Fed follies
California’s very vulnerable to upswings in interest rates.
So how committed is the Fed to icing inflation with high rates?
If the nation’s central bank does too much – or too little – the national and state economy may suffer.
And remember, the Fed’s current thinking calls for an extended period of higher interest rates.
#4 Employers on eggshells
California’s strong job market of 2022 was a significant surprise and a welcome economic underpinning. But will the hiring mood remain for 2023?
Will bosses, after seeing so many dire economic outlooks, play it safe with staffing in the coming year?
Just a pullback in hiring, and not actually firings, could tip the economy into recession.
#5 Consumer contraction
California’s shoppers have been busy even as inflation slashes buying power.
Job security suddenly seems iffy. And one measure of California optimism fell in eight of the past 11 months.
Can all these anxious feelings alter spending habits in 2023?
#6 Paying the bills
Californians have a bad habit of spending more money than they have.
So far, most measures of timely bill-paying by consumers and corporates bill show few problems. What’s worrisome is the size of the borrowings made in the pandemic era.
As the economy cools will individuals and institutions spend all their pandemic-fueled savings?
#7 Technology’s tumble
Is the California economy’s secret sauce in trouble?
In late 2022, we’ve seen headline-grabbing layoffs or hiring freezes at major technology powerhouses.
The tech industry’s outsized California clout is tied to its huge salaries. Any significant tech pullback could be troublesome.
#8 Short on supplies
California with its massive logistics industries and giant ports has an oversized role in keeping America well stocked.
Goods that corporations and consumers need to conduct their daily routines are far better stocked today than a year ago. But that doesn’t mean the supply chain is fully fixed.
And what about commodity prices? Gasoline prices have dived late in 2022. Is that an anomaly or the 2023 norm?
#9 Uncertain utilities
Does California have enough water or power?
Possible electrical brownouts or drought-related water restrictions won’t push California into a recession. These two issues are long-term challenges for the state’s overall economic vibrancy.
But could potential shortages of these necessities be an economic liability for 2023?
#10 Political posturing
If you think the political noise is already high over the economy, just wait for the brewing acrimony a year before the White House is officially up for grabs again.
The debate about our economic future, so far, is healthy. But can sane economic policy emerge from an increasingly polarized political system?
Or, at a minimum, could self-inflicted economic harm be avoided?
#11 Global tensions
The US economy, as wobbly as it is, may very well be the healthiest on the planet.
But California’s economic future has numerous global ties. And with the worldwide economy on shaky footing, even modest tensions can upset the business climate.
Look at Russia’s invasion of Ukraine and its economic fallout, especially to the world’s food and energy supplies. What other geopolitical hotspot might boil over in 2023?
#12 The wild card
When hiccups happen during times of heightened financial anxiety, economic damage can be magnified.
Ponder 2008, for example. The surprising collapse of Wall Street’s Lehman Brothers created worldwide panic about the safety of the financial markets. Lehman was also a major player in California real estate, and its demise had local repercussions, too.
So will there be a significant business failure in 2023 that cracks economic confidence?
Now some math
How many of these 12 questions do you feel are major economic concerns for 2023?
To me, seven of these issues are significant trouble spots – inflation, housing, the Fed, employers, technology, consumers and the wildcard.
Divided by 12 questions, I’ll argue my thinking suggests a 58% chance of a painful recession in 2023.
But that’s the opinion of one jaded journalist. What does your scorecard say?
As 2022 ends, almost every consumer and every business executive is doing some sort of economic outlook calculation.
Worry can become a self-fulfilling prophecy. Recession concerns grow. Defensive actions are taken. Less business happens. Guess what comes next?
That’s the one risk not addressed in my 12 questions or in many economic forecasts. And that’s why a psychology degree, not a business education, may be required to determine whether California gets smacked with another harsh economic downturn in 2023.