April 14, 2023

By Harris L. Kempner, Jr., President


Since our last report to you, much has happened in the economic sphere, all of which further confirms our previous view that the U.S. will be in recession by the end of the 3rd Quarter of this year. Moreover, indications now are it will be deeper than we had believed.

The most important new economic event of the last quarter was the failure of three banks in early March. This resulted in major withdrawals from all banks, even some of the largest. This in turn led to U.S. bank lending slumping by the most on record in the final weeks of March. In fact, some $105 billion less lending, according to the Fed’s weekly H.8 report. This factor will have a relatively new dampening effect on an already slowing economy.

In addition, the Fed has continued to raise rates multiple times since January, which is intended to slow the economy in order to slow inflation. And it’s working. Job cuts rose more than 15% in March from the previous level. U.S. manufacturing PMI has fallen precipitously from 60 in late 2022 to a recession level 46.3 in 12 months. Of importance we think, all this is finally beginning to slow inflation somewhat. Average hourly earnings rose just .3% in March down to 4.25% year-on-year from 5.8% in January and many commodity prices have also fallen. We shall soon see if these trends cause a Fed pause in rate raising in May.

The one major area of strength remains the labor market. It has stayed consistently strong until now, with an employment rate for March at an exceptional 3.5%. However, signs of weakness are beginning to show even here. For example, job cuts rose 15% in March from the previous month.

All in, we think the economic events and trends are clearly leading to a recession sometime in the 3rd quarter. The new bank trends of deposit outflows and less lending have heightened this possibility, and probably will make it a hard landing rather than a mild one.

However, all of this assumes that Congress, particularly the House, comes together enough to expand the debt ceiling in time to prevent default in the next few months. If not, and we do default as we have said in previous reports to you, the economy will get much worse than we presently assume. The chances of that are increasing every day that there is no coherent response to the Administration’s proposed budget.