Bank Economists See Inflation Moderating as Growth Stalls in 2023

Weakening consumer and business spending, and improving supply chains, will support the Federal Reserve’s efforts to drive inflation lower this year and next toward its 2% target, according to the latest forecast of the American Bankers Association’s Economic Advisory Committee. The committee, comprised of 15 chief economists from some of North America’s largest banks, also expects stalling economic growth in 2023 followed by a modest recovery in 2024.

The weak outlook for consumer spending and business investment led the committee to forecast no growth in the economy this year, placing the nation on the edge of a mild recession. The committee is evenly divided on the prospect of a recession in 2023, with balanced upside vs. downside risks. The group expects economic growth to recover to 1.6% next year (fourth quarter over fourth quarter).

The Federal Reserve’s policy tightening so far is inducing desired adjustments in the economy according to the committee that will aid a substantial moderation in inflation over the course of the year. The bank economists forecast that consumer price inflation will decrease from 7.1% year-over-year in last year’s fourth quarter to 2.8% in 2023, followed by a drop to 2.2% in 2024. The core personal consumption expenditures measure preferred by the Federal Reserve is expected to follow suit, declining from 4.7% to 2.9% to 2.2% over the same time periods.

A meaningful slowdown in consumer spending will contribute to disinflation. Consumer spending was the main driver of economic growth over the last three quarters, but the group expects it to slow sharply to 0.3% over the course of 2023. The bank economists believe that supply-constrained spending on goods has been satiated and the run-up in post-pandemic spending on services has mostly run its course.

“Household spending is close to stalling this year,” said Simona Mocuta, committee chair and managing director and chief economist at State Street Global Advisors. “Federal stimulus payments helped consumers withstand the pandemic-driven recession and build substantial savings. But much of the excess savings has been depleted, especially for lower-income households.”

Moreover, the group expects that the exceptionally robust labor market that has supported personal spending will cool with the economy. After job gains averaging almost 400,000 a month in 2022, the committee expects moderate job losses this year. This will raise the unemployment rate from 3.5% last month to 4.6% by year-end, and further into 2024. The labor force participation rate is expected to be little changed through next year.

The committee expects slackening in the labor market to reduce competition for workers and ease wage gains going forward. The bank economists expect growth in average hourly earnings to slow from 5.2% last year to 4.2% in 2023 and 3.3% in 2024.

Decelerating consumer spending has depressed the outlook for business according to the EAC forecast. Clients report declining sales and orders in interest-rate-sensitive sectors. Firms have become cautious in restocking inventory and have cut back spending on plant and equipment. Much of the current capital spending is carryover from supply chain issues and replacement of aging fleets, equipment and other assets.

The group forecasts minimal inventory investment and a 1.0% decline in nonresidential fixed investment in 2023.

“Easing demand and sharply rising financing costs are leading many companies to adopt ‘wait and see’ postures on both hiring and investment,” said Mocuta.  “At the same time, staffing remains a challenge for many firms.”

In addition to wage disinflation, the group cites several other factors that will help reduce  inflation going forward, including declining oil and gasoline prices, moderating housing costs and improving supply chains.

Goods prices are retreating as transportation, energy, and raw commodity price inflation subside and demand conditions soften. Moreover, firms are less able to increase prices. Services inflation will ease more slowly, in tandem with still-strong but smaller wage gains.

“Both headline and core inflation will continue to moderate because demand is slowing and supply is improving.” said Mocuta. “We’ve seen a lot of opportunistic pricing across the economy over the past two years that cannot persist with a more price-conscious consumer.”

Given expectations of steadily declining inflation, the committee believes that the FOMC is close to the end of its tightening cycle. Additionally, a majority of committee members expect to see the start of an easing cycle in late 2023.

Mortgage interest rates are forecast to slide slowly from the current rate of 6.6% to 6.2% in December and 5.8% late in 2024. Despite declining rates, affordability is seen as a continuing problem for prospective homebuyers. The committee forecasts a broad correction in housing prices, with the national average price of homes declining 6.0% this year. However, the group believes that shortages in inventory-for-sale, exacerbated by contracting housing construction, will forestall more dramatic declines.

View detailed EAC forecast numbers. 

The 2023 ABA Economic Advisory Committee includes:

• EAC Chair Simona Mocuta, managing director and chief economist, State Street Global Advisors, Boston;
• Bill Adams, SVP and chief economist, Comerica Bank; 
• Scott Anderson, EVP and chief economist, Bank of the West/BNP Paribas, San Francisco;
• Beata Caranci, SVP and chief economist, TD Bank Group, Toronto; 
• Augustine Faucher, SVP and chief economist, PNC Financial Services Group, Pittsburgh;
• Ethan Harris, managing director and head of global economics, Bank of America Securities, New York;
• Peter Hooper, managing director and vice chair of research, Deutsche Bank Securities Inc., New York;
• Tendayi Kapfidze, managing director and chief corporate economist, Wells Fargo & Co., New York;
• Bruce Kasman, managing director and chief economist, JPMorgan Chase & Co., New York;
• Christopher Low, chief economist, First Horizon National Corp’s FTN Financial, New York;
• Richard Moody, SVP and chief economist, Regions Bank, Birmingham, Ala.;
• Doug Porter, managing director and chief economist, BMO Financial Group, Toronto;
• Carl Tannenbaum, EVP and chief economist, The Northern Trust Company, Chicago; 
• Luke Tilley, executive vice president and chief economist, Wilmington Trust Investment Advisors, Wayne, PA; and 
• Ellen Zentner, managing director and chief U.S. economist, Morgan Stanley.