Recession, Gas Prices, Inflation? UofL professor predicts where the economy goes in 2023

LOUISVILLE, Ky. (WDRB) -- Kentuckians faced an economic rollercoaster in 2022 seeing prices like never before at the grocery store and gas pump.

While people celebrate ringing in a new year, a local economist believes there could also be a recession to ring in as well. A recession is typically defined as a weak or negative growth in real Gross Domestic Product (GDP) in two successive quarters that is also accompanied by a significant rise in unemployment.

University of Louisville economics professor Jose Fernandez predicts a small recession is coming, but it's not all bad news economically for Kentucky after a difficult year for consumers.

Gas prices rose to nearly $5 in Louisville in June, while inflation drove up the price of grocery bills. Finance firm Moody's Analytics reported last summer that the average consumer was spending $460 more a month compared to 2018.

Consumer spending accounts for nearly 70% of U.S. economic activity, and Americans have remained resilient ever since inflation first spiked almost 18 months ago. Cracks have begun to show, however, as higher prices for basic necessities take up an increasingly large share of everyone’s take-home pay.

Inflation has retreated from the four-decade high it reached this summer, but it’s still sapping the spending power of consumers. Prices rose 7.1% in November from a year ago, down from a peak of 9.1% in June.

"You're going to start to see consumers pull back some, you're definitely going to start to see businesses not invest as much, which means they're not going to hire as many people," Fernandez said.

Fernandez said inflation concerns stick will remain as the Federal Reserve is expected to raise interest rates to 5%. The Federal Reserve raised its key interest rate for the seventh time this year earlier in December.

The central bank boosted its benchmark rate a half-point to a range of 4.25% to 4.5%, its highest level in 15 years. Though lower than its previous three-quarter-point hikes, the latest move will further increase the costs of many consumer and business loans and the risk of a recession.

The Federal Reserve wants to further slow down spending to slow inflation.

"I would say we should learn to live with $3 and above when it comes to gasoline prices," Fernandez said.

But other parts of the economy could stabilize in 2023. Fernandez believes the housing market will return to normal, which could end the buyer-bidding wars.

The housing market slump deepened in November as sales of previously occupied U.S. homes slowed for the tenth consecutive month — the longest such stretch on records going back to 1999. Existing home sales fell 7.7% last month from October to a seasonally adjusted annual rate of 4.09 million, the National Association of Realtors said last week.

"It's not going to be those by lunch you put in one offer and by the evening you have to put in a second one," Fernandez said.

With extended unemployment benefits ending, more people are expected to return to work.

Since its creation in 1938, Kentucky unemployment insurance was available for up to 26 weeks -- or half a year. Beginning Jan. 1, the amount of time available will vary using a new formula created by lawmakers this spring. It is based on the state's unemployment rate from months prior. A lower unemployment rate will result in a shorter time unemployment benefits are available. The new range will be a maximum between 12 and 24 weeks.

Fernandez expects that to result in more workers in hospitality, restaurant and service industries.

Wages are also expected to continue to rise.

In 2023, Fernandez does expect to see a slow down in the number of jobs available nationwide, but Kentucky has a bright economic forecast next year.

Two battery manufacturing plants are being built in Glendale, Kentucky, a venture that will employ 5,000 people to produce batteries for future Ford and Lincoln electric vehicles. It's the biggest economic development deal in Kentucky history, with the state giving approval to a $250 million contribution of public money to BlueOval SK, the joint venture of Ford Motor Co. and South Korea's SK Group.

"Kentucky on the other hand, there's a lot of factories that are coming on line this year so there's going to be jobs available," Fernandez said. "I do think that labor is going to continue to grow in Kentucky, so I'm not as concerned with our local and regional economy."

Nationally, the Fed’s policymakers predicted slower growth and higher unemployment for next year and 2024. The unemployment rate is envisioned to jump to 4.6% by the end of 2023, from 3.7% today. That would mark a significant increase in joblessness that typically would reflect a recession.

Consistent with a sharp slowdown, the officials also projected that the economy will barely grow next year, expanding just 0.5%, less than half the forecast it had made in September.

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