I recently gave a speech to the Alamo Chapter of the Government Finance Officers Association of Texas in which I shared my thoughts on the state of the economy and my forecast for the San Antonio economy in 2023. In short, I am about as confident as one can be that we will have a recession in 2023. The biggest uncertainty about the forecast concerns how long the recession will last and how deep it will be. At this point my thought is that the economy will not experience a big decline, and the decline will be for a relatively brief period of time.
Although I am by no means the only economist who is predicting a recession, it seems somewhat odd calling for a recession at this point, since employment growth is strong, the unemployment rate is low, and gross domestic product is still growing. However, there are some key indicators that are pointing toward a recession. One of the main indicators is the yield curve, which has not been this persistently inverted in forty years. Employment growth, while still strong, is declining, and the unemployment rate appears to have hit its bottom. Consumer spending is starting to slow as the large increase in savings due to the various pandemic stimulus programs has been depleted. Delinquency rates on credit cards are also rising indicating consumers are under some financial stress. Private domestic investment is starting to decline, as it has done before every recession since 1980. The housing market has started to soften, as have other lending activities. These trends are what we expect to see as the Federal Reserve has raised their Federal Funds Rate a large amount in a short period of time to try to get inflation under control with the ultimate goal of also keeping the economy on its growth path. In other words, it is trying to execute a “soft landing.” In my reading of the data going back to the recession at the beginning of the 1970s, the Federal Reserve has not been successful at executing a “soft landing,” so I am not confident that they will be successful this time. This is not meant to discredit the Federal Reserve; it is just an extraordinarily difficult task to accomplish.
Given the direction all of these indicators are pointing, I am projecting that employment growth in San Antonio will be flat to down about 1.0%, and the unemployment rate will rise to 4.5-5.0% in 2023.
The San Antonio economy has bounced back from the pandemic-induced recession quite nicely, and I believe the economy will likely continue to show growth at or slightly above its long-term trend in 2022. I project employment growth this year to be in the range of 2.2-2.7%, and the unemployment rate will continue to decline to about 3.5-4.0%. The data, trends, and potential factors that I am seeing in my crystal ball that form the basis for this forecast are discussed in the rest of this post.
After a quick rebound from the pandemic-induced recession, the San Antonio economy has moved toward its more long-term average growth rate in employment. This is somewhat against the pattern seen in the other major metropolitan economies across Texas, as they have continued to maintain historically strong growth. This is especially the case for the Austin economy. These patterns are evident in the following chart showing the year-over-year employment growth. Even though many of these areas have continued to experience such strong growth, it is clear that there is a sizable gap between them and the Austin economy.
As shown in Chart 2, the Austin economy grew 8.11% percent in December, which was still substantially larger than the second-fastest growing region – Dallas – at 5.82% and Fort Worth, the third fastest growing region at 5.02%. The San Antonio economy grew 2.87% in December – the slowest among the major metropolitan regions and below the growth rate across the state of 5.08% and the U.S. at 4.52%.
The large disparities in the growth of the Austin economy relative to San Antonio, and the other major metropolitan economies in Texas for that matter, is worth exploring, and I will have a post on that soon. For now, I want to focus on San Antonio.
Chart 3 shows the year-over-year employment growth by month across broadly-defined industries from January 2019 through December 2021 for San Antonio. As expected, the hospitality industry took the largest dive during the lock down followed by the professional services industry. These two industries have also had the largest immediate recoveries, along with the other services industry.
Chart 4 and Table 1 show the employment growth by industry from the depth of the pandemic-induced recession in April 2020 to a year later in April 2021, i.e., from trough to peak, and then for the remainder of 2021. It needs to be kept in mind that these are similar lengths of time, but it is clear from these numbers that the growth rates across almost all of the industries in San Antonio have slowed considerably. The manufacturing, construction and mining, and education and health industries have seen their growth basically stall or even turn slightly negative in the last three quarters of 2021. The one exception is the hospitality industry that not surprisingly continues to experience growth far above average.
Table 2 compares employment growth in San Antonio over its history leading up to the pandemic (Jan. 1991-Dec. 2019) to the growth rates across industries over the past year. Overall employment growth in 2021 was 2.87%, a bit above the historical average of 2.37% growth. Five of the ten industries – manufacturing; trade transportation, and utilities (TTU); professional services; hospitality; and other services – continued to grow at above average rates in 2021. Not too surprisingly, the hospitality industry continues to lead the growth with a rate of 10.87% in 2021 – far above the industry’s historical average. Only two industries experienced declining growth in 2021 – construction and mining and information. As shown in Chart 3, the declining growth in the information industry is a regression back to the mean based on recent history. Not to give away too much of the punch line for my next post, but this explains, in part, the difference in growth rates between Austin and San Antonio.
I expect these overall slowing trends in employment growth to continue through 2022 in San Antonio. Some of this is just going to be a regression back to the mean from the large growth rates as the economy recovered from the pandemic-induced recession. The structure of the San Antonio economy is an additional reason, and the potential effects of growth in the global and national economies will also play a role, as discussed below.
Similar to the pattern in the other major metropolitan Texas economies and across the state and U.S, the unemployment rate in San Antonio has steadily declined after the precipitous fall following the re-opening of the economy ending 2021 at a rate of 4.2% (see Chart 5). As shown in Chart 6, San Antonio had one of the lowest unemployment rates among the major metropolitan economies in Texas before the pandemic at 3.0%. However, San Antonio experienced one of the largest surges in its unemployment as it climbed to 14.1% in April 2020 at the depth of the recession, but as noted, unemployment has been consistently declining and is similar to the rate in Dallas (4.1%) and Fort Worth (4.2%). The unemployment rate in San Antonio is also lower than the statewide rate at 5.0%, but it is a bit higher than the U.S. unemployment rate at 3.9%. Compared to San Antonio, the unemployment rate in Austin was 0.9 percentage point lower at the end of 2021 at 3.3%. The strong economic growth since April 2020 has surely been the main driver pushing unemployment rates down, but it should be kept in mind that at least part of this decline may be due to the decline in the labor force participation rate due to the Great Resignation phenomenon. In fact, while the labor force participation has been increasing, it is still below the pre-pandemic rate of 63.4% in February 2020 for the U.S.
These structural changes in the labor market are one of the risk factors to this forecast. I can see these changes potentially having both positive and negative effects on economic growth. If the labor market adjusts to these changes fairly quickly and workers fill the jobs at higher pay and with enhanced benefits, this could serve as a boost to overall economic growth. However, if the current trend continues for an extended period of time, this could continue to exacerbate the shortages in many markets and serve to dampen economic growth. These adjustments in the labor market may be forestalled in industries where there is a relative paucity of benefits, such as paid sick leave. If the shortages causing the rapid increase in the inflation rate do not diminish in the near future, the persistent inflation at relatively high rates will also likely be a deterrent to growth in and of itself. In response to this, the Federal Reserve has sent strong signals that it will most likely be raising interest rates several times this year, which will also serve to slow the economy some. There could also be bubbles in many asset markets, such as the stock and housing markets, and if one or more of those bubbles burst, they might also cause the economy to pause a bit, even if it does not push it into a recession. The strong economic growth was, at least in part, driven by the federal government stimulus, and with that coming to an end, consumer spending is likely to move back into a more typical pattern over time causing a moderation in U.S. economic growth. It is also likely that growth in the global economy will also slow this year because of similar trends, and the economic effects of the war in Ukraine may also slow global economic growth a bit. Overall, it seems these various factors combined with the structure of the San Antonio will mean the local economy will continue to grow fairly strongly in 2022 but at a slower rate than in 2021.
The culinary industry in San Antonio directly employed 125,770 workers and paid wages and benefits of $4,4 billion in 2019. The industry had a direct economic impact as measured by output of about $16.6 billion. The direct contributions to gross regional product (GRP) of the industry totaled $7.1 billion. However, with the impact of the COVID-19 pandemic, these impacts declined in 2020 with direct employment in the industry falling to 110,121 and wages and benefits declining to $4.0 billion. Direct economic impact shrank to about $15.8 billion, while the industry’s contribution to gross regional product fell to $6.5 billion.
When multiplier effects are included, the total employment supported by the culinary industry in San Antonio in 2019 was 227,764 workers who earned wages and benefits of almost $8.0 billion. The total economic impact on the local economy as measured by output amounted to $29.3 billion, and the industry’s contribution to GRP in 2019 was $13.4 billion. Like with the direct impacts, the total impacts declined in 2020. Total employment supported by the culinary industry declined to 208,642 jobs with incomes of $7.3 billion. The total output (i.e., economic impact) fell almost $1.5 billion to about $28.0 billion, and the total contribution to GRP declined 6.9% to $12.5 billion.
The Federal Reserve Bank of Dallas publishes a monthly report on San Antonio economic indicators, and in its most recent report, they published the following chart showing the fluctuations in restaurant reservations compared to 2019 in San Antonio and Texas. As they note, the demand for dining in restaurants fluctuates directly with the number of COVID cases, which accounts for the softening trend since June with the exception of the spike over Labor Day weekend. Another interesting trend the graph shows is the separation between dining demand in San Antonio and Texas over this past summer. Throughout the time period covered by the graph, the changes in San Antonio and Texas tracked very closely, but it seems the large amount of tourist activity in San Antonio over the summer generated a surge in demand for dining at restaurants in San Antonio over this past summer that was considerably larger than the activity across the state. It looks like the trend lines are back to moving more closely together following the Labor Day weekend and the return to school.
The unemployment rate continued its decline in August across the major metropolitan economies in Texas and across the State and U.S. as the recovery from the economic effects of the pandemic continue (see Chart 1). In San Antonio, the unemployment rate declined to 4.8%, This is 1.8 percentage points above the pre-pandemic level, so while the economy is certainly recovering, there is still a ways to go. San Antonio has the third lowest unemployment rate compared to the other major metropolitan economies in Texas with Austin having the lowest at 3.8%. The unemployment rate in Texas stood at 5.9%, a bit higher than the unemployment rate for the U.S. at 5.2%.
However, the total level of employment in San Antonio declined in July and August, as shown in Chart 2. This indicates to me that at least part of the decline in the unemployment rate in San Antonio may be due to people dropping out of the labor force and therefore, no longer being counted in the unemployment rate. This is also occurring in some of the other major metropolitan economies across the state.
While there have been monthly declines in total employment the past couple of months, the year-over-year growth rates in employment continued to be strong in August with growth in San Antonio coming in at 3.94% (see Chart 3), a good bit above the average historical growth rate in the region of about 2.3%. However, these growth rates continue to decline across most regions in the state, as well as across the entire state of Texas and the U.S. This is likely due to a regression to the mean as the recovery continues and some pull back in consumer spending due to the Delta variant. Another possible factor is the lag in business travel due to the pandemic. This especially affects those local economies with large leisure and hospitality industries like San Antonio because the convention activity is not filling in for the decline in leisure travel as the new school year began.
If we can keep making strides against the pandemic, growth should continue into the near future. This does not mean the year-over-year growth rates will increase, as they will likely tend to move more toward their long-term average rates in the respective areas as the economy gets closer to full employment. The sustained growth will also continue to push the unemployment rates down, especially as the structural unemployment is reduced.
As the government debt is swelling dramatically in the U.S. and other countries, there is concern that such high levels of debt will depress economic growth in the future. Research by Reinhart and Rogoff (2010) and Reinhart, Reinhart, and Rogoff (2012) indicate the threshold in which the level of debt as a proportion of GDP where growth rates start to decline is ninety percent. Others have argued that such a threshold does not exist because it is not the high debt that is causing growth to slow, but rather, it is slow growth that is causing the level of debt to escalate (Panizza and Presbitero, 2012; Herndon, Ash, and Pollin, 2013).
Pescatori, Sandri, and Simon (2014) take a little different look at the possibility of the existence of such a threshold and contribute some interesting insights. They look at different thresholds instead of focusing on just one, such as ninety percent, and they analyze growth performance over longer periods of time (5, 10, and 15 years) instead of just during the year after which a country’s debt level cross a threshold. This allows them to analyze the effects of changes in debt levels on growth and the longer-term effects. It also accounts for the potential reverse causality effects and the outlier periods of growth. Additionally, it mitigates some of the effects of omitted variables, such as automatic stabilizers (e.g., unemployment insurance).
Their findings are quite interesting.
…The sharp reduction in the following year’s growth that we observed in countries whose debt rose above 90 percent is no longer present for countries that have high but declining debt. In fact, even countries with debt ratios of 130 to 140 percent that are on a declining path have experienced solid growth. This suggests that high debt itself is not causing the low growth in these episodes. Furthermore,…the initial debt trajectory remains important event after 15 years, with falling debt associated with higher growth. That is, the trajectory of debt appears to be an important predictor of subsequent growth, buttressing the idea that the level of debt alone is an inadequate predictor of future growth [emphasis mine] (Pescatori, Sandri, and Simon, 2014, p. 41).
The data they analyzed covered the period from 1875 through the end of the last century. Recognizing that the wide variability in growth rates over some periods of this history (e.g., Great Depression, period following World War II) might distort their results, they “compared an economy’s average growth rate during an episode with the simple average of growth rates for all economies over the same period” (p. 41). Even after this adjustment, they still found
“that, in general, the growth performance of economies with high debt is fairly close to that of their peers with lower debt…Furthermore, we found that an economy’s debt trajectory still matters. Among economies with the same debt levels, the growth performance over the next 15 years in countries in which debt is initially decreasing is better than in countries where it is initially increasing…It is particularly striking for debt levels between 90 and 115 percent of GDP (for which average growth is 1/2 percentage point higher). Furthermore, there is no unique threshold that is consistently followed by a subpar growth performance…Economies with a debt level between 90 and 110 percent of GDP outperform their peers when debt is on a declining trajectory. At the least, this suggests that the debt level alone is insufficient to explain the growth potential of an economy. It also suggests that countries that have dealt with their budget deficits (as indicated by a declining debt level) may be well placed to growth in the future despite high debt levels” (Pescatori, Sandri, and Simon, 2014, p. 41).
They develop a few policy implications from this research. One is that since there does not appear to be any threshold effect, governments can engage in short-term fiscal stimulus, such as is being done in many countries in response to the pandemic, without being concerned that once they cross a certain threshold with debt, economic growth will slow. It is the trend in the debt to GDP ratio that matters, so what has the trend been in the U.S.?
The chart above shows the debt to GDP ratio in the U.S. The data only go through Q4 2019, so it does not include the current stimulus in response to the coronavirus pandemic. Once that is taken into account, this ratio will move even higher. It does not appear that the trajectory of the level of U.S. is moving in the right direction over the past decade. This is clearly due in part to the response to the Great Recession, but even during the historically long growth period following that recession, the level of debt compared to GDP continued to grow. This does not mean we should not be pursuing a stimulus in response to the pandemic, but as noted by the authors, the U.S. will need to reverse this trend once the economy gets back on track if the high level of debt is not going to have deleterious effects on the future growth rate of the U.S. economy.
Herndon, T., Ash, M., and Pollin, R. (2013). Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff. Political Economy Institute Working Paper No. 322 (Amherst, Massachusetts).
Panizza, U., & Presbitero, A.F. (2012). Public debt and economic growth: Is there a causal effect? MoFIR Working Paper No. 65 (Ancoma, Italy: Money and Finance Research Group).
A couple of weeks ago I gave a speech in which I anticipated that the audience would like to have some discussion about the potential economic effects of the upcoming presidential election in the U.S.
To support the discussion, I worked with one of our economics students at St. Mary’s University to create a chart showing the growth in gross domestic product for the U.S. by presidential administration.
As shown in the graph, GDP growth during Democratic administrations averaged 4.13% and during the Republican administrations, growth averaged 1.77% if you include the Great Depression and 2.72% if you do not include the Great Depression. Without going into more in-depth analysis, it is difficult to make too much of these numbers. I do not think it is correct to just attribute strong or weak growth only to the policies passed during any of these administrations. They can certainly have effects on the economy during their times in office, but the strength or weakness of the economy during most presidential administrations is often due to some extent to the policies implemented well before a president takes office.
For example, some of President Hoover’s policies certainly made the Great Depression worse, but I do not think one can attribute the entire Depression to him. President Roosevelt was the beneficiary of the growth after the Great Depression, the massive amount of spending during World War II, and the fact that he was in office for twelve years. President Obama took office as the economy was at or near the depths of the Great Recession, the cause of which I would attribute to policies implemented by Presidents Reagan, Clinton and Bush 43.
There are other studies that go into more depth on growth during the presidential administrations that I may write about in future blog posts. As previously mentioned, while it is difficult to say much about growth during specific presidential administrations based only on the data presented in this chart, there is one fact worth noting. I hear quite a bit that the economy slows or even goes into recession during Democratic administrations, but as shown in the graph, that is clearly not the case.