PBN summit panel: Economic indicators say recession coming in 2023

PROVIDENCE – In many ways, the party is over.

At least that’s the way the panelists at Providence Business News’ Economic Trends Summit on Thursday see it when it comes to the national and state economies, which they believe are headed into a recession sometime in 2023, though how painful it will be and how long it will last remains to be seen.

Consumer spending and historically large business inventories had cushioned the economy in the last two years, but a cooling effect is on the horizon, as spending is pulled back and government revenues decline, some panelists concluded.  

Thomas Tzitzouris, head of fixed income research at Strategas Research Partners and summit keynote speaker, said recent surveys show business owners’ confidence in the 2023 economic picture has plummeted. Consumer debt and interest payments have skyrocketed in a “toxic” mix, he said.

Strategas estimates the Federal Reserve will raise its benchmark interest rate until it maxes out at 5.25% and that the nation will officially enter a recession early in the third quarter. 

And for business owners particularly, the rise in costs for energy, borrowing and wages – the latter which has grown 4.5% – will continue to create a burden on operations, Tzitzouris said. 

“If you are hoping this economy can slide into a soft landing, don’t expect it,” he told the attendees of the summit at the Providence Marriott.

In fact, according to Tzitzouris, the question of whether Rhode Island will enter a recession has already been answered. He argues it already has, according to leading indicators. Many high-income earners have fled the state, decreasing its tax base. And with the end of the generous federal influx of cash in the form of rescue funds, the state could be in for a tough year. 

“The Rhode Island economy is basically flatlining right now,” he said. 

In the short-term, the residue of leftover public spending that helped keep citizens and businesses afloat during the pandemic can still be directed toward easing the worst effects of the coming economic downturn, said Julietta Georgakis, chief of staff for the R.I. Executive Office of Commerce. 

The $13.8 billion budget proposal recently submitted by Gov. Daniel J. McKee includes millions of dollars in small business initiatives for energy costs and seed funding for the creation of new enterprises, as well as investments in public infrastructure that could create jobs. There are also small tax cuts proposed. 

“Hopefully [the recession] will be milder and less painful than originally predicted,” she said. “[These programs] can help fortify our citizens against the recession.” 

But those in the investment and research space, such as Peter R. Phillips, chief investment officer at Washington Trust Wealth Management, predict an economic tightening that could hamper long-term investment. 

 “It’s hard not to see the writing on the wall,” he said. “These are numbers you can’t ignore.” 

Rhode Island must invest more resources toward matching job seekers with employers who require a skilled workforce in the technology, engineering, and health care fields, said Phillips. 

There was also a discussion of the need to speed up commercial project completion time by cutting government red tape to ease supply chain woes. It’s a heavy lift, said Karl Wadensten, CEO and president of VIBCO Inc., who said the state is now “going into uncharted territory.” 

Wadensten said his company has between $1.5 million to $2 million worth of inventory, which is subject to taxation. 

As the lag times for delivery of necessary parts and materials increases, coupled with rising costs, a decline in consumer spending and a lack of an adequately trained workforce, many businesses may be looking at a difficult year ahead. 

“Time is the only number you can’t get back,” he said, adding that many businesses previously shifted philosophy from “just in time” to “just in case,” by purchasing additional inventory that may have nowhere to go if buying plummets. 

Kevin Casey, vice president of sales at Sweeney Real Estate and Appraisal, said the state needs to do what it can to assist commercial and residential development. 

“If there is nothing going up, then there is nothing to fill,” he said. “But this work from home model is not going away.” 

Tzitzouris said the drag on consumption will have downstream effects. 

“The bull market in leisure and entertainment ended after COVID,” he said. Households will hold on to their cash until economic conditions improve. 

But Wadensten sees a silver lining. Unemployment remains at historical lows and the younger generation of employees have more choices than previous generations, given that they are willing to fill jobs where the market demands. 

“The future of business needs to be dynamic,” he said. “There are a lot of creative people that want to start new businesses in Rhode Island.” 

How the younger labor force responds to these changes is an unknown factor, said Wadensten. 

“That’s the wildcard,” he said. 

If the state can adapt to the changes, the effects of a recession on the way can be blunted with the right mix of government policy and prudent financial management. 

Many changes to labor norms and business practices thought to be temporary have turned out to be long-lasting, such as hybrid workspaces and increased demands from employees regarding work-life balance. 

“The pandemic changed fundamentally what work means,” said Georgakis.

This discrepancy between labor and skill sets requires a recalibration of expectations, Phillips said. 

 “We are going through some growing pains in the way we think about labor,” he said.