Bill Witkowski probably won’t be among the first folks to spot a recession on the horizon.
His higher-end customers who can spend anywhere from $2,000 to $20,000 at Michigan Antique Preservation Co. in Wyandotte have deep pockets even in downturns.
“I’m not seeing any slowdown right now,” said Witkowski, 65, who started the business 40 years ago and weathered the Great Recession that hit nearly 15 years ago.
The economy most likely will lose momentum, he imagines, given higher gas and grocery prices, rising interest rates and inflation. But he’s not picturing anything as shocking as the Great Recession, the last time he had to trim his tiny payroll.
“Is slowing down a true recession?” Witkowski asks. “Or is it a temporary thing? What’s the outlook two or three years from now?”
No doubt, most consumers are frustrated when $50 of groceries can fit in two bags or $80 of gas can fit into one gas tank.
Soaring prices for all sorts of items from gas at the pump to airline tickets to food chip away at your spending power — and something has to give somewhere.
About 79% of consumers expected bad times for business conditions in the year ahead, the highest since 2009, according to the June report by the University of Michigan Surveys of Consumers. Consumer sentiment fell 14.4% in June.
“As higher prices become harder to avoid, consumers may feel they have no choice but to adjust their spending patterns,” U-M economist Joanne Hsu said in a statement.
Some scratch items off the list or trade down to lower priced goods. Such adjustments might trigger shocks in the economy.
But whether we’re going to fall into a true recession is a tougher call. Some economists say there’s a 50% shot that the U.S. economy will fall into a recession this year or next.
How any recession could look — and some say we might avoid one — or how long one might last could prove to be less predictable than the pandemic.
Consider the outlook in Michigan.
Michigan often leads the nation into a recession as massive layoffs hit car companies. Autos are a highly cyclical business that see sales come to a screeching halt when people who are out of work quickly stop taking out loans to buy cars and trucks.
What’s unusual now is that automakers don’t have lots filling up with unsold inventories. Strong consumer demand has outpaced supply as semiconductor shortages cut into auto production for the past two years.
“Car sales in April and May were at recession levels because of a lack of supply, not a lack of demand,” according to University of Michigan economist Don Grimes.
“Auto manufacturers cannot produce enough vehicles,” he said. “There is no indication they can’t sell everything they can produce.”
As a result, he said, there’s no indication that auto manufacturers or other durable goods manufacturers will want to cut back production and lay off workers.
“So it looks like a very weird pre-recession period. And that is why we may be able to avoid a recession.”
Shoot, though, some consumers swear that a recession is already here, which seems a stretch when the U.S. jobless rate was 3.6% in June for the fourth month in a row. Michigan’s jobless rate was 4.3% in May.
“Recession,” based on what former President Ronald Reagan said when campaigning, “is when your neighbor loses his job. Depression is when you lose yours.”
It’s possible that the U.S. economy could show two consecutive quarters of negative growth in 2022 — and that’s viewed as a technical definition of a recession.
The gross domestic product decreased at an annual rate of 1.5% in the first quarter. The first estimate for GDP in the second quarter is to be released July 28. Some expect another negative quarter.
The National Bureau of Economic Research makes the official call on when recessions begin and end. Those calls often come well after the recession started. The experts look for a significant decline in economic activity that isn’t just in one industry but instead spread across the economy and a falloff that lasts more than a few months.
Even so, the stark recession in 2020 lasted just two months at the start of the COVID-19 pandemic. The economic research group concluded that “the subsequent drop in activity had been so great and so widely diffused throughout the economy that, even if it proved to be quite brief, the downturn should be classified as a recession.”
No doubt, talk about the next recession and potential red flags keep cropping up.
The Institute of Supply Management’s manufacturing index, for example, has long been viewed as a leading indicator of a recession or an economic rebound.
When the manufacturing index moves below 50, the manufacturing economy is contracting. While the index remains above 50 now, we’ve seen a rapid decline.
The index had been strong at 61.1% in November — hitting 18 consecutive months of growth. The June number fell to 53% — down 3.1 percentage points from May and the lowest reading since June 2020 when the index hit 52.4%.
David Sowerby, managing director and portfolio manager for Ancora Advisors in Bloomfield Hills, said Wall Street finds the downward direction concerning and it’s contributing to fears that recession risks are rising, perhaps putting the probability of a recession above 50%.
If a recession hits, Sowerby said, he’s expecting that it could be more mild than the deep fallout that took place in the financial crisis that began about 15 years ago.
The Great Recession lasted 18 months, running from December 2007 through June 2009. The U.S. jobless rate hovered around 9% and higher for much of 2009 and 2010.
Gabriel Ehrlich, director of the University of Michigan’s Research Seminar in Quantitative Economics, doesn’t see a recession in the next 12 months as being inevitable.
But he noted that a recession could be triggered by two different sources — the war in Ukraine and the Federal Reserve’s effort to fight inflation in the U.S.
Russia, he warned, ultimately could escalate its economic warfare by cutting off natural gas supplies completely to Europe, disrupting industrial production and supply chains, and triggering an economic fallout abroad that would hurt the U.S. economy as well.
“All bets are off if supply chains have major problems,” Ehrlich said. “That’s the No. 1 wild card.”
If a U.S. recession is triggered by supply chain and component disruptions due to the war in Ukraine, he said, it’s a lot harder to predict the depth of the job losses in manufacturing and the auto industry.
The other recession risk, Ehrlich said, involves the Fed’s effort to raise interest rates to control inflation. We’ve seen three rate hikes by the Federal Reserve since March and the Fed is expected to roll out another rate hike at its two-day meeting July 26 and July 27.
Another aggressive three-quarter-point interest rate increase is expected, following a similar hike in June. The June increase was the steepest interest rate hike since 1994.
June’s 75-basis-point hike put the federal funds rate at a target range of 1.5% to 1.75%.
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It’s possible, though maybe a long shot, that the Fed could engineer a slowdown without triggering a recession, commonly called a “soft landing.”
Or the Fed could throw the economy into a deep freeze trying to cool inflation.
The risk, Ehrlich said, is that the Fed overdoes it and the U.S. ends up in a recession as consumers pull back spending and businesses cut jobs. After the July hike, he expects a half-point hike in September and possibly two quarter-point hikes in November and December.
Michigan, he said, could be less vulnerable to major job losses than in the past because of the major backlog of unfulfilled demand for cars and trucks. But the jobs picture would be worse, he estimated, if major supply chain disruptions took place because of the war.
Ehrlich said he’s cautiously optimistic that big backlogs in demand for both autos and housing offer some cushion to keep the economy rolling ahead, if even at a slower pace.
Consumers who held off buying cars for the last few years, theoretically at least, would need to replace older vehicles at some point.
Auto stocks, though, have taken a brutal beating the past few months as recession fears mount.
General Motors stock closed at $31.27 a share on July 6, down $1.10 a share or 3.4%. But that’s down 52.4% from the close of $65.74 a share on Jan. 4.
Ford Motor closed at $11.06 a share on July 6, down 14 cents or 1.25%. But that’s down 56% from the close of $25.19 a share on Jan. 14.
Stellantis closed at $11.57 a share July 6, down 14 cents or 1.2%. But that’s down 46.8% from the close of $21.76 a share on Jan. 14.
Many of the economic headlines aren’t reassuring.
A red-hot housing market is showing signs of cooling after mortgage rates skyrocketed.
The war in Ukraine has contributed to driving up oil prices, fueling the financial squeeze being felt by those who live paycheck to paycheck. Gas prices edged down in July — and some say the trend could continue. Michigan’s average was $4.916 a gallon for regular gas as of July 6, according to AAA Michigan. The average had hit a record $5.223 a gallon on June 11.
The lingering after-effects of the supply chain disruptions triggered by the pandemic continue to take a toll, too.
“We’re in unchartered territory,” Witkowski said, referring to all the changes we’ve seen since the pandemic and now the war.
Witkowski raised his prices to deal with higher costs. He also sold a vacation home in Myrtle Beach, South Carolina, that he had for 25 years, recognizing he’s not had time to go there in 3½ years and he expects housing prices to fall as interest rates go up.
But he’s not sure that the country is heading for a deep recession.
While many well-off consumers saw significant declines in the latest bear market on Wall Street, Witkowski said, they seem prepared to keep going.
“They’re just going along like they normally would,” he said, “just a little bit cautious.”
Witkowski’s customers often are collectors or landmark destinations with antique furniture, such as the historic home of auto heiress Matilda Dodge Wilson and her second husband, Alfred Wilson, known as Meadow Brook Hall in Rochester.
His business also does repair and restoration for everyday furniture damaged when a company is relocating employees. Even with more remote work after the pandemic, he said, companies keep shifting employees to other locations.
How much longer that lasts no one knows.
Fingers crossed that Michigan might not be on the front lines this time around for the next economic slowdown, as well.