Wells Fargo’s chief economist predicts modest recession for 2023

Jay Bryson delivered a mixed bag of financial news and predictions Wednesday during the Wells Fargo economic forecast breakfast presented by the Greater Reading Chamber Alliance.

Bryson, managing director and chief economist at Wells Fargo’s corporate and investment bank, told those gathered in the Sovereign Performing Arts Center that he expects a recession in 2023, probably beginning in the second quarter.

The good news, he said, is that the economic setback should be nowhere near as severe as the recession that cripped the economy late in the first decade of the 2000s.

“Do we think a recession is coming? Yes,” he said. “Do we think it’s going to be a 2008-style recession? We don’t think so. I think it will be much more modest than that.”

Having made that prediction, however, Bryson, a Lancaster County native who now lives in Charlotte, North Carolina, left himself some wiggle room when asked if it’s possible that a recession could be avoided.

“It’s certainly possible, but I just don’t think it’s realistic to expect that,” Bryson answered.

The Greater Reading Chamber Alliance hosted its annual Economic Forecast Breakfast on Wednesday, Dec. 7, which featured a presentation from Jay Bryson, managing director and chief economist with Wells Fargo Securities, on “The U.S. Economic Outlook in Uncertain Times.” (BILL UHRICH – MEDIANEWS GROUP PHOTO)

Inflation

The inflation rate is starting to decline, but still stands at about 8%, Bryson reported, with about half of that rate coming out of the services sector.

About 4% of the current inflation rate can be attributed to the services sector, 1% to core goods, and about 1.5% each to food and energy.

High inflation rates have eroded real disposable income, Bryson explained, resulting in Americans saving less and using their credit cards more.

“In short, people are not saving very much, and they’re running up their credit cards,” he said. “That is not sustainable.”

Bryson feels the country is about at peak inflation and the rate will drop, but it will not reach the targeted 2-3% range until 2024. That is due largely to high energy costs, he said.

Interest Rates

The Federal Reserve will continue to raise interest rates, Bryson predicted, topping out at about 5% in the second quarter of 2023, where the rates will remain until sometime in 2024. The current Federal Reserve interest rate is 3.75% to 4%.

The tightening of interest rates is the Fed’s effort to avoid having inflation become entrenched as it did during the 1970s and early 80s. During that period, inflation started rising in the mid-1960s and continued to do so until it reached 14% in 1980.

In response, the Fed — led at that time by Paul Volcker — raised interest rates to 20% in 1980.

Interest rates will not get nearly that high, according to Bryson, but the Fed will continue to raise them in its efforts to keep inflation under control. Interest rates set by the Federal Reserve affect rates on mortgages, credit cards and other types of loans.

“What they learned from the 1970s is that you can’t let inflation get entrenched,” Bryson said. “The Feds would rather risk a mild recession now than to have that happen.”

Other Forecasts

Bryson said wage growth remains strong at about 5%. The downside of wage growth is higher prices, which sustain inflation.

The housing market is slowing and expected to be about 15% lower next year than it was in 2022. Manufacturing also is expected to slow, Bryson said.

Real gross domestic product, which reflects the value of all goods and services produced by an economy within a given year, is expected to drop by about 1.5% in 2023. Bryson compared that decrease with the Great Recession of 2007-2009, where GDP fell by 4%.

While certain geo-political events remain uncertain and, along with other factors could negatively affect the economy, the current economic situation appears to be stable, Bryson said, with fundamentals like interest rates, trade balance, inflation and others either stable or heading toward stability.

“The underlying fundamentals of the economy are pretty good right now,” he said.

Wells Fargo Economic Outlook Webcast Set for Thursday, Dec. 8

Top economists with Wells Fargo, including Bryson, will host a 2023 economic outlook webcast starting at 11 a.m. on Thursday, Dec. 8. The event is free and open to the public, but you must register at wellsfargo.com/economics. The webcast will last for about one hour.

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