John Deere economist: Any U.S. recession likely to be mild

While a U.S. economic recession is still possible, it’s likely to be much more mild and short-lived than the deep recession of 2009. That message was one of the key points made by keynote speaker Kanlaya Barr, director of corporate economics for John Deere, to an estimated 360 attendees at the Corridor Business Journal’s annual Mid-Year Economic Review luncheon Tuesday at the DoubleTree by Hilton convention center in downtown Cedar Rapids. Ms. Barr noted the global economy has gone through “a really intense time in the past few years,” defying economists’ predictions at nearly every turn, as persistent predictions have long pointed to a global recession – a phenomenon that, so far, hasn’t yet materialized. The current economic picture is rooted in the COVID-19 pandemic. As the crisis swelled, nearly $5 trillion in stimulus funding was injected into the U.S. economy in an attempt to avert fiscal catastrophe. That funding, doled out in three separate allocations, totaled nearly 25% of the country’s annual GDP, about “double the amount the other developed countries put into their economies” over the same period, she said. Meanwhile, as expenditures in travel and other areas declined by as much as 80%, consumer goods sat aboard ships outside ports on both coasts, with no dock workers available to unload them, as an estimated loss of 17 million workers led to unprecedented supply chain bottlenecks. “And what did we do?” she asked. “Because of the money we had, we saved that money, then we pretty much went on to buy everything we could get our hands on.” As evidence, she noted the U.S. spending rate soared from about 9% before the pandemic to nearly 35% at the pandemic’s height. “So are we surprised where we are today?” she asked. “We (saw) the level of inflation hitting a 40-year high because of the amount of money that we spent. That’s how we got here.” And even now, economists can’t agree on how best to incentivize economic recovery, with some advocating even more aggressive Fed rate increases and others favoring a more gradual approach. “For those in the banking industry, you've seen how fast the rate hikes have been,” she said. “But still, some companies don’t think that’s fast enough. If you would have told me about the rate hikes we’re seeing a year ago, I would have thought the economy would have gone into recession already, but it has not.” In an unusual economic inversion, Ms. Barr noted that the current interest rate, hovering around 5%, is actually lower than the fed fund rate of 5.25%. While inflation is coming down “nicely” in many sectors, it remains “stubbornly high” in the service sector. But with positive trends in employment and wage levels, conditions are beginning to move in the right direction, she noted. Regarding trends in the near term, Ms. Barr said she expects the economy to continue to slow down to slowing consumer spending, while businesses look to decrease expenses and banks face more than $600 billion in as-yet unrealized losses in the long term due to mismatched assets. However, the global supply chain bottleneck has been improving quite significantly, nearing pre-COVID level, and as a result, trucking demand has declined sharply, leading to dramatic adjustments across the shipping industry. “Air freight has also come down quite a bit,” she noted. “I still remember when here at John Deere, we had to charter airplanes to carry to pick up tires so we could ship tractors and combines to our customers. Those days seem to be behind us, and things are moving in the right direction on the supply chain side.” Ms. Barr said she believes that “if things go according to plan” – the Federal Reserve slows the pace of interest rate increases and inflation continues to decline – any potential recession would likely be mild and short-lived, and some interest rate declines could even be in the mix in the longer term. “Right now inflation is about 4.9%,” she said, “and we are looking at inflation in a range between 3.5% to 4% by the end of this year.” However, there’s still a great deal of uncertainty in forecasted trends, she said, and segments such as housing and commercial real estate could see more moderate growth curves, even some declines, over the second half of 2023. The ag market also presents a number of uncertainties, Ms. Barr said. “Agriculture is now a global competitive market,” she said, noting rising production levels from Brazil, Argentina and several Latin American countries, along with “emerging threats” from former Soviet Union countries, particularly Ukraine and Russia, and huge production expansions in China. Still, she said, “our farmers are doing such a great job being productive and competitive,” she said. “And it is very cyclical. A lot of agricultural prices depend on the weather.” Commodity prices have been moderating from last year’s levels, she noted, and income levels remain “pretty good,” but “we still have a long way to go to see how the growing season is going to turn out” due to a growing drought threat. “Farm incomes are moderating from what the USDA is forecasting, but it's still above the long-term average,” she said. She concluded that with so many trends in flux, it can be challenging to make long-term business plans in many industries. “There’s still a lot of uncertainty out there,” she noted.