During this month’s CEO Podcast, Washington Hospitality Association President & CEO Anthony Anton was out of town, so board chair Brian Moreno and vice chair Tiffany Turner sat in for him. Moreno is co-owner of a franchised business organization with McDonald’s Hamburgers and Turner owns and operates Adrift Hotel.
Their guest was Steve Scranton, chief investment officer and economist at Washington Trust Bank, and the three discussed the economic outlook of 2023.
“The Washington economy is going to be very similar to the U.S. economy,” Scranton said. “I think that what we will probably see, is the fact that with all the actions taken by the federal reserve, the consumer has really been drawing on two resources to keep spending.”
They’ve been using their savings accounts, and they’ve been using their credit cards in the hopes that soon prices will go down, or their wages will go up.
Why have they been doing this? He said that the average worker’s expense growth has outpaced their wage growth for the last 20 consecutive months.
Now, the average worker is starting to reach their limits on these two resources.
“The personal savings rate for the U.S. went from 20.4% in the first quarter of 2021 down to 2.7% now, he said. “And the same for credit card balances. We’ve seen a dramatic increase just from April of . Credit card balances have risen $200 billion.”
Scranton said that reality is going to hit consumers during the first quarter of 2023, with the bills coming due after the holiday season. Consumers will start cutting back on non-essentials.
He predicts slower spending in the first quarter of the year, but he doesn’t believe there will be a recession during the first half of the year. Instead, he thinks there will be a high risk of a recession during the second half or closer to the end of 2023.
Turner was curious about the historical cycle of recessions and how long they lasted.
Scranton said the average recession sees a decline in economic growth of 1.6%. The average duration of a recession is 11 months.
“They’ve been as short as three months; they’ve been as long as 19 months,” he said. He added that no one announces a recession once it starts. The National Bureau of Economic Research declares this but is always slow to do so because they want to make sure of the facts and indicators.
The last two big recessions were what he called crisis recessions: both the pandemic crisis and the Great Recession were caused by events, not the natural ebb and flow of the economy.
The last one that was not a crisis recession was the tech bubble of 2001, which lasted nine months and only saw a decline in economic activity of about 0.5%.
“Prepare for 12 months, be happy if it’s nine months, but that way you’re not surprised.”
Moreno wondered about how this outlook will affect labor and how operators should prepare for the pressure of a slow economy and tight labor market.
Scranton said the labor market would continue to be tight. During the pandemic, people aged 55 and over thought early retirement would work because of the huge surge in 401(k) balances and the huge surge in home prices.
“What we’re starting to see now is some evidence that some of those people are coming back because they didn’t budget for the inflation levels that we saw,” Scranton said. “They really didn’t anticipate their expenses to be as high as they’ve been. And their 401(k) balances, depending on how they invested, are down anywhere from 15-30%.”
According to the federal reserve, they felt there were 1,500,000 people who left the labor force because of early retirement.
Scranton said there has been a large increase of women in the goods-producing side of the economy: in the construction industry, women are up more than 10% from where they were in February 2020, compared to overall construction only being up 1.7%.
More women are entering transportation and warehousing, such as Amazon. There was a 17% increase of women entering this industry, compared to the industry only up 12%.
“I worry that maybe the case here, especially for women, is they decided that they are leaving the leisure and hospitality industry. They are moving into a different sector, and whether that is a permanent change or not, I really thank that’s what the operators should be thinking about.”