Jeremy Hill, director of the Center for Economic Development and Business Research. Hays Post file photo
By RON FIELDS
Post News Network
While the prospect of recession has been an economic bogeyman for months, one Kansas economist says such a slowdown would be the best medicine for long-term economic health in rural Kansas and Nebraska.
Jeremy Hill, director of the Center for Economic Development and Business Research at Wichita State University, expects the issue of inflation to continue into 2023 — despite multiple attempts by the Federal Reserve to cool the U.S. economy through interest rate hikes.
Persistent inflation, supply chain issues choking inventory, full employment leading to spiking wages, and eroding consumer confidence — all have been factors on the minds of economists.
"If inflation continues to come down, that would be the softest landing we could get, but I think inflation is going to be stickier," Hill said. "I think the U.S. will go into a small recession in the first part of 2023. Honestly, I think that this would be very helpful. A pause in the economy would allow everyone to correct and build up inventory."
Hill
While the Fed's attempt to cool the economy and temper inflation has made some impact, Hill pointed out the driving factor fueling the overheated economy is not on the demand side of the equation — where increased interest rates would make a more direct and immediate impact.
"Around the state, demand is still high ... and there are the supply chain issues," Hill said. "I expect the Federal Reserve still has to fight it. But inflation is not all on the demand side. It's not demand."
Supply of goods and labor is helping spike prices, and businesses face not only a lack of every-more-costly inventory, but also increasing wages driven by an economy at full employment.
National unemployment remains below 4 percent — much lower in rural Kansas and Nebraska — which led to a 5 percent increase in wages in the third quarter of 2022, a key piece of fuel for the inflation fire.
One direct effect the Fed's interest rate hikes will create is a lack of willingness to relocate as mortgage rates and housing costs rise, especially as inflation continues to outpace wage increases.
"In the first half of (2022), we saw some migration to rural areas. The second half of the year, that has slowed down. The cost of mortgages, the willingness to move, has factored into that."
Growing the labor market in rural areas remains about competition, Hill said.
"How competitive is that rural community and that rural lifestyle? Whichever (local economy) is growing is where that labor force is going to go," he said. "How competitive are you for that household?"
And while most economic news as 2022 closed out was dreary, Hill said positives remain — especially in rural areas.
"Wages and opportunity are great," he said. "Overall, I think households are doing better than what consumer confidence is."
But even if the U.S. or global economies should fall into recession, Hill expects rural Kansas and Nebraska to weather the storm better than other areas.
"I'm more optimistic that Kansas and parts of Nebraska have a lot of opportunity, even in a recession," he said. "Ag and oil and gas and manufacturing ... are all going to do better relative to the U.S. ... better than what's going on in the national economy."
Hill's biggest concern entering the new year remains with those pulling the strings of federal policy.
"They have a whole lot of power and control. Policy error is the biggest issue to worry about. And with so much pressure, the potential for error is so high," he said, noting poor management of consumer confidence, misreading employment signals and other factors could lead to poor policy choices.
Events on a national scale, such as the recently sidestepped railroad strike, would lead to even more unpredictable outcomes, Hill said.
"That kind of event — an unknown — could easily throw us off," he said.
Since 1948, the U.S. economy has averaged one recession about every six years, ranging between two (2020) and 18 months (the Great Recession of 2008).
And while economists recognize that cyclical nature of the economy, effects of structural changes such as the COVID-19 pandemic are much more difficult to predict.
"On the demand side, it's a completely different environment (post-pandemic). Demand is so much higher," Hill said. "The whole thing is completely different. Labor inputs are a completely different environment, highlighted by the retail and service sectors, but it's all drastically different."
Should the U.S. enter into a recession, Hill said the most important thing to remember is to remain educated about what is going on and not fall prey to doom-and-gloom trope.
"How do you put it into context when some are misaligning where things are going? Different views get overshadowed," he said. "Inflation has been coming down, and it will likely put us in recession — and that's not the end of the world.
"The economy is overheated. A pause was take a lot of pressure off the economy."