Fed Watch Q1 2023 – Another Growth Recession?
The willingness of the Fed to redefine its mission and methodology

Fed Watch - Another Growth Recession? The willingness of the Fed to redefine its mission and methodology | Image of The US Federal Reserve Building

Chart showing NYSE and Unemployment between 2002 and 2023

The saying goes, “Those who don’t know history are doomed to repeat it.” ~Edmund Burke

We see a pattern of growth recessions since we came out of the Great Recession between 2009 and 2011.

Here we see growth recessions through the increase in price levels for the New York Stock Exchange.

The horizontal red lines indicate pauses in the rise of prices of financial assets, a “wait and see” period for investors while economic growth and incomes catch up to investor sentiment.

Are we in a 4th growth recession since recent peaks in 2021?



“Our policy tightening affects the most interest rate sensitive sectors of the economy, particularly housing and investment.”

Chart showing how the fed policy tightening affects sensitive sectors

The Fed raised rates, likely the last, as they announced May 3rd.

The purple line indicates rising interest rates since early 2022. Investment pricing is down from its highs in 2021.

Housing is down as we saw in our construction volume by sector analysis.

The quotes are from Fed Chair Powell during the press conference on May 3rd.



“When banks raise their credit standards, that can also make credit tight in a broadly similar way to monetary tightening.“

Fed Watch Q1 2023 NYSE Employment chart - Fed Watch Q1 2023 banks raise credit standards

Credit tightening is ahead of expectations.

The green line indicates quantitative tightening.

The recent uptick in the green line corresponds to the recent bank troubles.

As a result of both monetary quantitative tightening and more restrictive commercial lending standards, less money is being created through expanding credit.



“One way to see real interest rates is to look at the nominal rate and then subtract a reasonable estimate of one-year inflation, which might be 3 percent. So, you’ve got 2 percent real rates.”

Fed Watch Q1 2023 inflation chart

Inflation has been slower to come down than expected, but real interest rates are now significant.

The red line shows personal consumption expenditure price levels.

The purple line, the fed funds rate, underlies interest rates available to consumers, which would be over 6%, while inflation decreases toward 4% to create 2% real interest rates.



“The labor market is extraordinarily tight. You still have 1.6 job openings for every unemployed person. We do see softening, but overall, you’re near a 50-year low in unemployment.”

Fed Watch Q1 2023 labor market chart

Employment is very strong, as shown by the yellow line falling below 4%.

There is some wage inflation, but this could moderate without an increase in unemployment.

To quote Chair Powell, “Wages are a couple of percentage points above what would be consistent with 2 percent inflation over time. We do see some softening in wage increases, and we see new labor supply coming in.  These are very positive developments. Fortunately, we’ve been able to do that so far without unemployment going up.”



Horizontal red lines show the previous recessions of 90-93, 2001-2004, 2008-2014.

Fed Watch Q1 2023 Employment Growth Chart

We chart growth in employment in total and as a percentage of the labor force.

During the run-up from 2010, the economy experienced its longest uninterrupted expansion to 2020, during which employment grew steadily from about 130 million to over 150 million jobs.

During this time, we experienced the three growth recessions indicated previously.

Measured by employment, a fourth recession happened in 2021-2022.

This was masked by both fiscal income and employment pandemic measures and by growth in Gross Domestic Product.



Fed Watch Q1 2023 Unemployment spike and GDP chart

This chart shows unemployment spiking with pandemic job losses (yellow line).

While GDP dropped through the floor (blue line), it made a near-instantaneous recovery, which meant that GDP decline did not occur over the 2-quarter minimum to become an official recession.

Note how GDP follows a wave pattern between 1 and 3% that roughly corresponds to other growth recession indicators during the 2010 to 2020 expansion.

Current GDP growth is in the 1 to 2% range.



“Over the first three months of the year, job gains averaged 345 thousand jobs per month. The unemployment rate remained very low in March, at 3.5 percent.”

Fed Watch Q1 2023 Real GDP rising below trend

Real GDP is rising below trend, but jobs are growing above trend

To quote the Fed Chair, “There are some signs that supply and demand in the labor market are coming back into better balance. The labor force participation rate has moved up in recent months, particularly for individuals aged 25 to 54 years. Nominal wage growth has shown signs of easing, and job vacancies have declined so far this year. But overall, labor demand still substantially exceeds the supply of available workers.”


“It’s possible that this time is different; unemployment is even lower than where it was before we raised rates”

Fed Watch Q1 2023 Soft Landing Chart

So soft landings could be the new normal. Again, to quote Chair Powell.

“It wasn’t supposed to be possible for job openings to decline by as much as they’ve declined without unemployment going up. Well, that’s what we’ve seen. It’s possible that we can continue to have a cooling in the labor market without having the big increases in unemployment that have gone with many prior episodes. Now, that would be against history — a labor market with so much excess demand, yet wage increases moving down to a more sustainable level. The case of avoiding a recession is, in my view, more likely than that of having a recession.”

The takeaway is for us to watch employment growth in conjunction with moderating inflation and flatlining asset prices. Based on history, we can expect these to play out over the next two years.

Chair Powell’s statements from the recent press conference May 3, 2023.


To watch the forum recording of this segment, visit Design and Construction Market Outlook Forum May 24, 2023.

Richard Vermeulen - Construction Economist for Green Building

Richard Vermeulen is the construction economist creating profitable sustainability in the built environment. He’s the founder of GreenLight™, author of Green at No Cost, and developer of the Total Benefit Analysis and The Value Process as well as co-CEO, lead economist, and chief estimator for Vermeulens. Richard has developed industry-leading standards for estimating and data-basing complex construction projects throughout North America. In addition to consulting for thousands of major projects over 30 years, Richard has designed and built residential and commercial projects, from hammering nails to hound-dogging bureaucracies. He has traveled extensively, always with an awareness of how cities do and don’t work.

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