The answer is almost for sure “yes and no”. Yes and No?
There are certain industries that have already entered a recession and see no sign of that changing in 2023. There are industries that are growing and not experiencing any type of recession. Some companies, even in those flourishing industries, will face tough times during 2023. Conversely, there are probably companies in recessionary industries that will flourish. What is probable is this: 2023 will not see the end of the recessionary times for some or the good times for others. It is also probable that inflation is here to stay for some years. Inflation may be lower than at the end of 2022, but it will be sticky and difficult to bring down to the 2% target.
One of my friends made a comment back during a 1990s recession that stands out to me in my memory. He owned a restaurant but complained he would rather own a car dealership. He reasoned that car buyers during recessionary periods will put off the decision of buying a new or used car for six or 12 months, but eventually would buy that car. If someone does not go out to eat at a restaurant today they do not wait for another six months to go. If they do not go today that business is lost forever.
I wonder though if that has not turned around. During the pandemic in 2020, and into 2021, most people were getting a stimulus check but not going anywhere because we were sheltering in place for months. Many businesses closed down during COVID times. People were paying down debt and saving money. As we began to shift away from sheltering and as businesses opened, there seemed to be a rush to spend all the money that had been saved and use credit availability to buy. Demand had been building for a year or more. The global supply chain slowed any number of products for sale including new car production. Shopping for a new car meant searching online, ordering the car and making the deposit, and then waiting months until the new car was delivered. Used cars were in such demand that prices soared.
A month or so ago, demand for new and used cars seemed to have dropped off a cliff. It is my friend’s observation; car buyers had put off the decision to buy a car during the height of COVID, but by 2022 had both the money and urge to buy. When that pent up demand was satisfied, sales tumbled. The automotive industry seems headed toward a recession, and it is not the only retail industry. November showed reduced spending not only on cars, but also furniture, home improvements, and electronics – all areas which saw high growth during 2021 and early 2022. In November, people were spending more in restaurants, on travel and entertainment, on healthcare and personal care, and on general merchandise.
With the Federal Reserve raising interest rates, housing peaked and is slowing down. Mortgages and refinancing have dropped. Those industries will likely be in a recession in 2023.
Recession fears raised a lot of talk about 90,000 IT people laid off by the big technology firms (excluding Twitter as an outlier). That is not a surprise either; big tech companies often end the year by laying off employees they consider “low quality”. While there will be 90,000 IT people laid off, few will be unemployed for long. There are currently 805,000 job openings for those same people; that is almost 9 jobs for every one of those IT people laid off.
Which leads to the growth side. My wife and I flew to California for Thanksgiving. We had breakfast in an airport restaurant, which had a QC code on the table for the menu. Downloading the menu, we ordered and paid for our breakfast on our phone. There were two staff members in the entire restaurant; in days past, there might have been as many as five or six. What we experienced is the use of robotics to replace people. Already quite common, I believe we will see more and more of this. Fast food restaurants are replacing cashiers with kiosks. Car dealers are beginning to replace service people with automated stations. Put your car keys in the kiosk, dial up what you would like for service. There is no longer a human being to act as the face of the company; they have been replaced with a computer.
Currently there are 4 million more jobs in the United States than there are people to fill them. There are 250,000 to 400,000 jobs being created every month, and fewer than 100,000 net new entrants to the job market. That number is likely to grow during 2023 before it comes down. Unlike in years past, when the Fed was raising rates, it would increase unemployment sored. Yet it is unlikely that unemployment will increase much if at all during 2023.
74% of all major companies in the United States are working on developing robotics to supplement or replace their workers. That process will take time to complete. It also means that companies in those industries could do very well while others suffer the impact of higher rates. There are also the jobs that are being created to deal with climate change and green growth. There are factories being built bring onshore supply chains that had moved overseas.
Consumers may, for the next year or so, reduce their spending on big ticket items for 2023, but they will continue to spend.
We’ve said it before and will say it again: “Things that have never happened before happen all the time.” Inflation may be here to stay. This is not the same inflation that Volker dealt with, even though it seems like the Fed is treating it as such. Volker took the reigns of the Fed when inflation had been raging for more than 15 years. Unemployment was over 6%.
The Taylor Principle says that to control and reduce inflation, central banks must increase interest rates to levels greater than the rate of inflation. That would mean the Fed will probably continue to raise rates until they are at least one percent above inflation, or to a level of six percent based on the current rate of inflation. For those industries and companies that are interest-rate sensitive, 2023 and beyond will likely be recessionary and difficult. Meanwhile, those industries and companies in growth areas will not experience recession but expansion.
2023 is looking like a “stock picker’s market”.