Economist tells Rochester business leaders that the chance of recession is low

ROCHESTER — As economist Bernard Baumohl presented his outlook for 2023 at the annual Rochester Area Chamber Economic Summit, the crowd of more than 300 local business leaders leaned forward in their chairs to hear why he doesn’t believe a recession is on the way.

Baumohl, chief global economist at The Economic Outlook Group, estimated the possibility of a U.S. recession in 2023 at 25%, despite the majority of his audience holding up their hands to signal that they expect a recession.

“Why are we so optimistic? There are a couple of reasons. First, you cannot have a 'jobs full' recession. It's an oxymoron. It can’t happen,” he said. “Second, inflation data is getting better and prices are coming down. And that tends to suggest that we are now seeing the peak of interest rates. Banks are also much better capitalized, so we don't expect to see any major crisis in the financial community.”

Baumohl, who the Wall Street Journal named as the “Most Accurate Economic Forecaster in 2018,” presented his analysis on Tuesday morning as the keynote speaker at the chamber’s Summit.

Early in his talk, he did acknowledge the uncertainty in trying to predict the future by joking that he no longer uses a crystal ball.

“We don’t use that technology anymore. We use a Magic 8-Ball,” quipped Baumohl.

In today’s world, far more than just traditional financial factors are influencing the economy. That has forced him to expand his view.

“Over the last three years we have had a series of exogenous shocks, one right after the other. We had the global pandemic. We had Russia's invasion of Ukraine. We had supply chain shocks. We had China's zero-COVID policy and then suddenly we saw that abruptly scrapped. It has fundamentally changed the business landscape,” he said. “Geopolitical forces are having a very significant impact on the global economy. So we've got to take a look at those as well. … I'm not just here as an economist. I'm here as a political economist. And the downside of that, of course, is I'm now representing two completely disreputable professions.”

Baumohl said that his organization has consulted many experts and studied the political and economic landscape to factor in Russia’s war on Ukraine, the future impact of COVID and how high the Federal Reserve will raise interest rates to control inflation in the U.S.

“We have concluded that the war in Ukraine will likely come to an end by summer for a couple of reasons. Essentially, the Russian economy has been really devastated by this,” he said. “Even before the war broke out, the size of Russia's economy was smaller than that of Italy. Russia was always punching way above its economic weight. And now with its recession last year and this year, they'll be lucky if the size of their economy is larger than Mexico.”

Baumohl stressed that we are not in a post-COVID era, but the U.S. is somewhat sheltered by having 77% of the population vaccinated. However, much of the rest of the world is is still unvaccinated, so we must remain vigilant.

On interest rates, he cited a variety of positive economic factors about inflation being tamed that led to the conclusion that rates will peak at 4.75% to 5%, which is lower than the Fed’s own estimates of rates peaking at 5.1% to 5.25%.

One major topic that repeatedly was brought up by Baumohl as well as by local business leaders was the challenge of hiring and retaining employees in today’s economy.

Brigid Tuck and Jennifer Hawkins of the University of Minnesota Extension office presented the results of the 2023 Business Outlook Survey, where 135 businesses answered a variety of questions.

On employment, 50% of respondents kept its workforce steady in 2022 and 20% grew their number of employees. However, many businesses said they wanted to hire more people, but could not find any.

“Basically, one out of every six businesses said they wanted to hire but we couldn't do it because we couldn't find the workers. So that was concerning. If you think about future growth for the region, how are we going to do that if we don't have workers?,” said Tuck. “More maybe concerning is that 60% of the restaurants and food establishments that responded to the survey reported that problem.”

In 2022, businesses responding to the survey listed the three top concerns as “Hiring paid employees,” “Increasing cost of employees” and “Retaining paid employees.” Those top concerns were unchanged when businesses looked ahead in 2023 in the latest survey.

Baumohl pointed out that employment in most industries, except home construction, are up in Minnesota as unemployment remains at historic lows. Wages are also increasing. He said this tight workforce trend is not a temporary phase.

“Labor market conditions have changed in a very fundamental way. The increase in jobs is not as a result of some cyclical force,” he said. “It's not simply a cyclical business cycle. … Baby Boomers are retiring. … Secondly, there have been severe restrictions in immigration. And for the last couple of years, the fertility rate and birth rate in this country have been dismal for the last couple of decades. So we're really not getting a significant increase in the labor force.”

Having more jobs than available people will mean employers will need to be more and more creative to attract and retain talent. He expects the trend of offering sign-on bonuses and then retention bonuses to continue.

Baumohl told the crowd that some hospitals are offering nurses sign-on bonuses of $30,000, while some pharmacists are collecting $75,000 bonuses and pilots are receiving $100,000 bonuses.

“And on top of that, if it turns out this person is a good worker, then they receive an additional retention bonus in addition to raises just to retain them, because it is a very, very competitive labor market out there,” he said.