Regional Market Summary Q1 2023

Chugging Along

Quarterly Market Report Q1 2023

Written by Dr. Kenneth A. Kriz, Distinguished Professor of Public Administration, University of Illinois

In our last Quarterly Market Summary, we noted the almost unanimous view in Wall Street economists throughout 2022 that a recession was likely. We also noted that facts on the ground had remained stubbornly against this view. With the passing of another quarter, we have seen another arrow in the heart of the models of the Wall Street experts. Despite near assurances that Real GDP would be negative in the first quarter, it managed to grow at an admittedly muted 1.3 percent. While this growth was hardly spectacular, especially compared to growth figures in the early pandemic recovery (Figure 1), output still grew.

REAL GDP GROWING SLOWLY

Source: U.S. Bureau of Economic Analysis. Gross Domestic Product (Second Estimate).

LABOR MARKET STILL "TIGHT"

The labor market also has held up extremely well in the past year. The unemployment rate made a jigsaw pattern in the first quarter, falling in January and March but rising slightly in February. Overall, the rate in March was the same as the rate in December. In fact, since March 2022 the unemployment rate has fluctuated in a tight range from 3.4 percent to 3.6 percent. Nonfarm payroll employment grew by just under a 2.5 percent annual rate. Once again, this performance is not spectacular. But it is also definitely not indicative of a recession. One measure that we track as an indicator of labor market “tightness” is the ratio of job openings from the Job Openings and Labor Turnover Survey conducted by the U.S. Bureau of Labor Statistics (BLS) to the number of unemployed people from the BLS Household Employment Survey. In “normal” economic times there tend to be around 1.2 job openings for every unemployed. In bad economic times, such as the pandemic, that ratio falls to below 1.0. But when the economy is expanding, the ratio rises. At the end of the first quarter, the ratio stood at 1.68, indicating a tight labor market. That ratio is slightly below where it was in early 2022, when it briefly went above 2.0, but still the notion that we are in a recession, or about to enter one, is clearly not supported by this data.

Source: U.S. Bureau of Labor Statistics, Job Openings and Labor Turnover Survey and Employment Situation Summary.

NATIONAL GDP NEAR LONG-TERM TREND GROWTH

Higher frequency indicators support the notion that the national economy is still growing, if slowly. The Weekly Economic Index, calculated by a team of economists at the New York and Dallas Federal Reserve Banks, suggests that year-over-year growth of Real GDP will be around 1 percent as of the end of the first quarter. And both the Arouba-Diebold-Scotti Business Conditions Index, published by the Philadelphia Federal Reserve Bank and the Chicago Fed National Activity Index indicate that national economic growth is roughly at the long-term trend, which is around 2 percent. A newer high frequency index, created by a team of researchers at Notre Dame University and the Spanish Central Bank, indicates that national growth is just below long-term trend growth (Figure 3 – the value of 0 on this index indicates long-term trend Real GDP growth).

Source: Baumeister, C., Leiva-Leon, D., and Sims, E. (2021). Tracking Weekly State-Level Economic Conditions. Unpublished paper. Notre Dame University, Banco de Espana, National Bureau of Economic Research, and Center for Economic and Policy Research. Available at: https://sites.google.com/view/weeklystateindexes/dashboard

MIDWEST DOING SLIGHTLY BETTER THAN NATIONAL ECONOMY

Figure 3 also shows weekly high frequency economic indicators for the states of Iowa and Illinois. The Midwest region in general grew more than the national economy in the first quarter of 2023. The regional economy appears to be slightly stronger and better positioned than the coastal economies. This is borne out in data for the Quad Cities metropolitan area. Nonfarm payrolls continued to grow throughout the quarter (Figure 4) and consumer spending stayed strong throughout the quarter, falling only a little at the end of March (Figure 5 – although not shown, consumer spending rebounded in April).

Source: U.S. Bureau of Labor Statistics. Employment Situation Summary.

LOCAL SPENDING UP COMPARED TO JANUARY 2020

Source: Opportunity Insights. Economic Tracker: Consumer Spending. Original data: Affinity Solutions.

STILL MUCH UNCERTAINTY IN THE FORECASTS

As with previous quarters, the bigger question is whether the economy will maintain its somewhat slow but steady growth. There are many different answers to this question. Respected organizations such as the Conference Board have suggested that the near certainty of a recession persists (a recent report estimated that probability at 99 percent). However, equally respectable forecasters such as James Hamilton of the University of California, San Diego, and Claudia Sahm, formerly an economist at the Federal Reserve, put the recession probabilities at less than 10 percent and less than 1 percent, respectively. As we have written earlier, the only certainty about these forecasts is uncertainty. The May 2023 Survey of Professional Forecasters, conducted by the Philadelphia Federal Reserve Bank, showed that nearly 20 percent of professional forecasters were forecasting a recession, while 10 percent forecast robust year-over-year economic growth of greater than 2.5 percent.