Fed Watch Q3 2023 Update on The Fed’s New Normal
What’s Different About This Growth Recession?

Fed Watch Q3 2023 Update on The Fed's New Normal

On the Q3 2023 Construction Market Outlook Forum, Richard provided an update on The Fed’s New Normal, highlighting four key factors that make navigating this growth recession different than any we’ve had in the past. These factors, outlined below, present a unique set of challenges and considerations for understanding and adapting to the current economic landscape:


  1. Price Inflation Issues: Unlike past growth recessions since 2010, the current situation is characterized by high price inflation, whereas previously, inflation was often below target levels.

  2. Duration Concerns: The current high price levels suggest that this recession may last longer than previous recessions. The focus is on how quickly consumer prices drop and the intensity of measures needed to control them.

  3. Federal Reserve’s Approach: The Fed is currently maintaining its stance, not increasing rates further, and observing the decline in real interest rates. This approach differs from the sudden, aggressive actions seen during the onset of the pandemic.

  4. Overall Economic Impact: The current recession presents a unique challenge with its combination of high inflation and the Federal Reserve’s strategies to manage it, potentially leading to a longer period of economic adjustment.


Update on The Fed’s New Normal 

Horizontal red lines indicate pauses in the rise of price levels of financial assets.

How the Fed's New Normal paused the rise of price levels during this growth recession

 Richard Vermeulen: I think this is a very good graphic about the new normal. I talked about this quite a bit in the past presentations. 

And what the new normal is, is that the Fed is empowered to look at unemployment. And levels of employment and look at keeping prices stable in order to maintain prices; when everything was collapsing, they needed to do those injections, and they accomplished it. The hangover is to take some of that stuff back out; like, how do you slow the economy down? 

And there is a lot of talk about how we’re going to get through this without a real recession, a full-blown recession, where growth is low and unemployment is high. 

So, what I noticed in the data as we’re coming out to that long expansion was that there were plateau periods, and you’re seeing here the stock market prices, the New York Stock Exchange price levels, and that’s an indicator where the money’s coming out of the system and, prices went up, and then they plateaued, and they stayed that way. How long did they stay there until the next round of growth in price levels for assets? And that’s what the key is right now. 

We can see that we’re going forward across the top of the page. We don’t know how long it’s going to last. We can see these previous episodes of growth recessions and how long they lasted.”


Previous Recessions’ Unemployment Rates vs Current Recession’s Unemployment Rates 

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

Previous Recessions' Unemployment Rates vs Current Recession's Unemployment Rates 

Here’s the labor force. So, the Fed is empowered to look at the labor force and look back over a long period of time, and this gives us some insight into how long those deep recessions went with respect to unemployment. And you can see that it’s very short for this 1; it barely made the radar before employment came back after the pandemic. So, these actions are aggressive, and they shorten these timelines, and we hardly feel the pain. 


Analysis of Past vs Present Growth Recessions 

Over the past three months, job gains averaged 266 thousand jobs per month. The unemployment rate saw a slight increase to 3.7% from 3.5%.

Update on The Fed's new normal-what is different about this growth recession GDP Unemployment and Inflation
Data source: https://www.bls.gov/news.release/pdf/empsit.pdf

Here, we’re looking at the growth part of the growth recession with these horizontal lines, how long they lasted from 2011 through 14 and so on, where growth got below 2 percent. And how long was that?


What’s Different About This Growth Recession?

So, the issue we’re facing now, which was different from the growth recessions that we experienced from 2010 on through to date, is that we did not have price inflation problems. In fact, inflation was below target through that time. We didn’t have enough inflation, and that was part of the new normal. We have to get inflation to our target. It’s below it. We got to get it above.

But we’ve got the opposite issue. Now it’s above, and we got to get it below. How long that lasts is the big question, and it likely will last a little bit longer than the previous growth recessions because those price levels are high. All eyes are on how quickly the price levels in PCE consumer prices drop and how hard do we need to go on it right now. The Fed’s staying put. They’re not going up any further. They’re watching things decline. Real interest rates are out there, and hopefully, it works out for the best, but be prepared for this being a little bit longer. It’s not going to be the sudden movements we saw with the onset of the pandemic. 


Vermeulens Forecast Under The Fed’s New Normal 

The impact of the Fed’s policies on non-residential inflation.

Vermeulens Forecast Under The Fed's New Normal - The impact of the Fed's policies on non-residential inflation.
Data source: Vermeulens Index

The lower line shows what we were talking about with respect to the Fed needing to hit its inflation target of 2 percent. There was a long period of time when they were under target and the economy was underperforming. Therefore, they created this new normal that said we are literally going to inflate, and we are going to get to our target. 

So, they are now getting above that 2 percent long term. And, of course, they’re going to come down and do everything they need to do to hit that again, and the relationship between non-residential construction and the overall economy is roughly times two. We’ve got a long-term that’s trending towards 4 percent, and the Fed’s trending towards 2 percent, and that’s the difference between a microeconomy and a macroeconomy.


Richard’s Overview and Recommendations

We’re seeing a flattening. A soft landing is definitely what would lead to that 4 to 6 percent range, as I said, roughly double what the Fed is targeting for consumer prices. 2 to 3 percent is what they’re hoping for in 2024. 

As far as bidding contingency, Richard states, “We started the pandemic with recommendations in the 5 to 15 percent range, and we are starting to come into a position where very few of our projects are using bidding contingency. We’re still suggesting a 0 to 5 percent range, depending on the region, depending on the project.” 

Watch The Forum Clips of "The Fed's New Normal"

Fed Watch Q3 2023 Update on The Fed's New Normal
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View previous “Fed Watch” posts from Richard Vermeulen

See more from the Q3 2023 Construction Market Outlook
  • Strategic Planning When the Fed Hits Pause: A comprehensive look at how Vermeulens navigates construction cost escalation, drawing lessons from previous economic slowdowns.

  • Insights on the Q3 Construction Market and Beyond: An in-depth analysis by Vermeulens on current escalation patterns and what they indicate for the future of the construction industry.

  • Residential Reset – How Interest Rates Shape the Future: Insightful perspectives from Carter Jenkins, Central Operations Manager, Amherst Holdings.

  • View the full forum with Q&A on our YouTube channel →

  • Download the full forum transcript with slides

  • Check out the Vermeulens Q3 Market Outlook Quarterly Report → 
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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