Brian Bethune (Caitlin Cunningham)

The economy is a collection of paradoxes. Inflation is high, but growth is low. The job market is hot, but wages aren’t keeping pace with rising prices. And despite inflation, consumers continue to spend more. What comes next? To try to get some economic clarity, Phil Gloudemans of University Communications spoke with Brian Bethune, a part-time professor of the practice in the Economics Department, and a professional financial economist and author with a broad range of experience in macroeconomic forecasting, applied economics, finance, and business-cycle analysis. He holds a doctorate in international economics from the Graduate Institute of International and Development Studies in Geneva, serves as a frequent commentator on the economy, and is one of the 75 economists regularly surveyed by The Wall Street Journal.

Peer into your crystal ball and forecast both the “best-case” and the “worst-case” economic scenarios for the next three to six months, particularly as we head into the holiday gift-buying season.

After a robust recovery in the second half of 2020, which extended through 2021, the economy shifted gears to a mid-cycle slowdown in 2022. The stagnation was complicated by rapid inflation acceleration over the past year, which peaked in June, and prices overall were flat in July and August; I expect to see an outright decline in overall prices for September. With interest rates projected to increase through the end of 2022—perhaps by 1 to 1.25 percent—the economy will have considerable headwind, but the best case is that we will generally experience “slow motion” economic conditions through the first half of 2023. The yearly inflation measures will moderate significantly by June 2023, and at that time we should thankfully be out of the inflation “woods.”  

The worst-case scenario is that the Ukraine war not only re-escalates but persists—causing energy and food price inflation to reaccelerate—and the Federal Reserve increases interest rates even higher in the first half of 2023. In this scenario the economy inevitably sinks into recession in the second half of 2023.

Inflation, given a nearly four-decade high, gets all the headlines, but what are the economic developments and factors that we’re overlooking that will significantly impact our daily lives going forward?

The uncomfortable truth is that historically, large-scale conflicts such as the Ukraine war lead to inflation that doesn’t quickly disappear. Natural gas prices have jumped by approximately 75 percent, so higher utility costs are inevitable. The positive on the horizon is a major expansion of energy alternatives such as electric vehicles, wind, solar panels, and high-efficiency heat pumps. Additionally, significant investments in chip technology and production capacity will positively impact the supply chain, and end some of the rationing in product availability.

A recent Bloomberg report indicated that apartment and home rental costs are a key indicator as to where inflation is heading, suggesting that rent may be “topping out” but won’t be cooling any time soon.  Is that a relevant and/or reliable predictor in your view?  

The cost of shelter has sharply escalated. The fundamental issue is limited supply, while demand has increased in major metro areas. Tight supply combined with low interest rates has fueled a housing-price bubble, which peaked in the summer of 2022. The population is more concentrated in urban zones, which puts significant pressure on rent, as well as demands on urban infrastructure. This is a global phenomenon, and requires more innovative thinking on urban sustainability.

Given the large gap that has emerged between price expectations and the reality playing out in certain markets, is it even worthwhile to pay attention to pricing forecasts?

The pricing environment has become more complex than ever. The shortage of memory chips has led to rationing in the supply of new cars, leading to substantial, uneven, and unpredictable mark-ups over the manufacturer’s recommended sale price. This has also spilled over into the used-car market. Additionally, there has been a massive demand shift to more expensive electric vehicles and hybrids, which have variable tax offset incentives across many states. The surge in demand for air travel during 2022 went well beyond what airlines could reasonably ramp up in greater seat capacity. Rationing occurred in this market as well, leading to substantial price premiums. Pent-up demand during the two years of the pandemic, which is difficult to calibrate, has expanded, while supply has been constrained; then the Ukraine war added another dimension of market uncertainty for global supplies of natural gas, crude oil, auto components, and grain.

Analysts report that the 15 percent growth in last year’s holiday shopping was primarily the result of pandemic-motivated purchases of durable goods rather than services. This year, they predict, increased prices have reshaped how families budget for everyday items, resulting in shorter holiday gift lists. In your estimation is that an accurate prognosis?

The acute cost pressures that we have seen in the past year have been concentrated on specific products and services such as new and used cars, airfares, rent, utilities, and groceries. Each of these pressures has very specific drivers that have been previously described. It’s a very unusual constellation of factors, but it does not, in my mind, translate into a persistent inflationary process. Despite all of these pressures, refinery production has been catching up, and fall 2022 gasoline prices—approximately $3.25 per gallon—fell to early 2022 levels. That significant budget relief will release some purchasing power for the holiday shopping season. 


Phil Gloudemans | University Communications | October 2022