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Jan 19, 2023

Written By: Keith Prather, Armada Corporate Intelligence

Washington DC, USA – March 9, 2018: Closeup of Federal Reserve bank facade. iStock Images

Analysts have been disjointed on the direction of the economy and whether a recession will hit, when it will hit, and how deep or shallow it might ultimately be. Even today, with Q4 coming in hotter than expected, debates rage over whether Q1 will usher in the start of a mild recession or whether the country will push it until later in 2023, or whether it will come at all.

For the credit management industry, the important factor to watch is the Federal Reserve and the actions it continues to take on interest rates to tame inflation. The Fed has signaled that two more quarter-point interest rate increases are likely in Q1, with hints that it could move the Fed Effective Funds Rate to 5.5% (the highest since February of 2001). With a strong labor environment and sticky wage inflation at 4.7%, the Fed must find a way to cool wage inflation, even at the risk of pushing the economy into recession.

Many have asked if the inflation issue is really that important and why would the Federal Reserve prefer to push the economy into recession rather than allow inflation to continue to trend above 2%-2.5%? There are two primary reasons.

First, 61% of US households are currently living check-to-check, and among that group, data shows that most are using 97% of their allowable credit limits on their credit cards (the period between Q1 of 2022 and Q2 of 2022 was the fastest-growing for credit card debt in more than 20 years). Most of these households are one significant auto or home repair, medical expense, or other unexpected expense away from financial failure. The Fed cannot allow most US households to continue to slip into personal bankruptcy risk, and it must get everyday essentials inflation (food, shelter, energy) under control.

Second, there has been a noticeable change in corporate lending. Note how many institutional banks are setting aside tens of billions of dollars to cover credit default risk. The percentage of banks that are tightening credit standards on commercial industrial loans for medium and large-sized companies has now risen from a net negative 32.4% in Q3 of 2021 to now over 39% (the second highest rate since the Great Recession with the other peak hitting in Q3 of 2020 at 71.2%). Banks are still lending, but there is an obvious lean toward risk aversion.

There are many books written on the role of inflation, interest rates, and US interest payments on the Federal debt. It is too much to cover here. But just realize that the Federal Reserve is walking a tightrope between pushing interest rates higher to tame inflation, being able to service the Federal debt (which benefits during inflationary periods because it pushes tax income higher), and not tanking the dollar in the process (a tightening US can push the dollar lower). All those factors move in relation to one another. Pull too hard on one lever, and it throws the system out of balance (even more so than it is!). As we all know, the biggest risk is that interest rate policy typically does not have a market effect for 3-6 months. The Fed may not know it is overtightening until it is too late.

At the heart of the 2023 economic outlook are those factors mentioned above. Left alone, the US economy would plow through with solid growth of nearly 2% for the year on the back of stable corporate investment, solid labor market, good consumption rates, reshoring and Foreign Direct Investment still pouring in, nonresidential construction strength, etc.
But the tightening of the Fed (based on all the reasons given earlier) is the primary headwind risk. If it can manage to strip about 4 million jobs off the job openings count (which is still near historic highs at 10.5 million), it might be able to orchestrate the perfect soft landing. Six million open jobs are “normal”, and wage inflation would ease which would allow the Fed to be more flexible on rates and perhaps enter a pivot cycle late in the year or early in 2024.

There are so many other factors that will work to shape the US economy. China reopening, the War in Ukraine and its impact on European energy prices, global Central Bank policy (bouncing between tightening and easing cycles), and many other factors will certainly play a role.

But the Federal Reserve really does hold the key as it monitors the interplay between inflation and household solvency vs. allowing the economy to do what it naturally wants to do right now: grow.

Recession risk is still in the cards, the timing of which seems to stretch over Q2 and Q3 (Q1 could usher in the beginning of a recession period – but the labor market is still too strong now). At this point, if the country visits recession, there is a strong possibility that it would look to be a softer landing and shorter in duration (full year 2023 Real GDP remaining flat Y/Y), barring anything catastrophic happening in the financial markets.

Mr. Keith Prather is a Managing Director and Co-founder of Armada Corporate Intelligence. During his 22 years with Armada, he has provided corporations with market intelligence and analysis covering domestic and global economics, geopolitics, raw material and supply chain developments, environmental impacts, and other factors that affect the national operating environment.

Keith was a co-designer of the Armada Strategic Intelligence System which forecasts several sectors within industrial production, including automotive, aerospace, machinery, computers and electronics, electrical components and appliances, primary metals, and fabricated metals. The forecasts use advanced analytical models and have proven 97% accurate up to 6 months in advance. For a free trial, visit

Keith is a former CFO and is the chief editor for the Flagship, an “Officer of the Watch Report” read by more than 18,000 corporate executives and he presents at more than 60 keynote events a year. For a free trial of the Flagship, visit

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