A new year-ahead outlook report from CoBank cautions that while the U.S. economy is not currently on the verge of recession, economists have never been more pessimistic and there are still reasons for concern. The report noted that over the past 50 years, inflation higher than 5% has never been tamed without incurring a recession.
“As financial conditions continue to tighten, we expect the U.S. economy will steadily soften through the first half of 2023, ushering in a brief, modest recession,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange.
Kowalski continued that the unemployment rate could rise as high as 5% and lead to a decline in consumer spending. He added that with the softening in the labor market and the slowing of wage gains and spending, it will be difficult to stabilize prices.
The CoBank 2023 outlook report reviews several key factors that will impact the agriculture and market sectors in the rural U.S. Aftershocks from the Russia-Ukraine war, inflation and an energy crisis can expect to be felt in 2023. Higher interest rates and production costs, an elevated dollar and weakening demand—along with a divided government—will all help shape 2023.
Global economy
While the global economy has strongly rebounded from the pandemic, it will sputter in 2023, Kowalski wrote. Europe is likely already in a recession and will experience flat or negative GDP growth in 2023. China will continue to struggle with the fallout of its zero-COVID policies, although it is one of the few economies in the world not experiencing excessive inflation. Greater Asia will be negatively affected by sliding global demand for goods.
“Emerging markets will keep the global economy growing in 2023 as advanced economies collectively stagnate, and possibly even shrink,” Kowalski said.
U.S. economy
Nearly half of surveyed economists expect a U.S. recession in 2023, Kowalski said. The expectation is a result of the Federal Reserve’s interest rate hikes, but the economy still has considerable momentum and is not on the verge of recession, he said. The labor market is still very tight, consumers are still spending and corporate profit margins have hit record-high levels despite inflation.
“If a recession is coming, it will take several months for these factors to reverse course, delaying any potential recession until at least Q2 2023,” Kowalski said.
But it’s unclear how businesses would lay off workers after there have been such severe staffing shortages over the past two years. Millions of workers left the labor force in 2020 and have not returned—this could help soften the blow of approaching higher unemployment rates.
Tightening financial supplies will likely soften the U.S. economy through the first half of 2023, which will result in a brief and modest recession. Available jobs will decline and add slack to the labor market, which will ease the upward pressure on wages, Kowalski said. Improving supply chain conditions and moderating commodity prices will generate additional downward pressure on supply-side inflation, he added.
“We estimate that this painful yet necessary chain of events will reduce headline inflation to a range of 3.5-4.5% by late 2023, and lead to flat GDP growth for the year.
Farm bill
The next move for Congress in 2023 will be to reauthorize the farm bill, which expires on Sept. 30. The 2022 midterm election results were unexpected, as the Republican party’s majority in the House of Representatives was smaller than expected. The big question is how each party’s leading member will affect the 2023 Farm Bill.
“House Republicans can be expected to focus on input costs, inflation, work requirements for nutrition assistance programs, controlling immigration, and limiting the cost of the bill,” Brian Cavey, CoBank senior vice president of government affairs, wrote. “Senate Democrats can be expected to focus on protecting conservation and climate spending, urban agriculture, equitable program delivery, maintaining or growing nutrition programs, domestic and global food security, and ag labor provisions.”
Both parties will be focused on inflation, beating supply chain challenges, limiting foreign ownership of land and resources, expanding broadband access and promoting trade.
But at the end of the day, the Senate will have the upper hand in the farm bill debate, making decisions on policies that will impact agriculture for the next decade, he said.
Farm margins
The broader U.S. agricultural economy has fared quite well through the disruptions of the past three years, posting record highs for net farm income in 2021 and 2022, said Rob Fox, director of CoBank’s Knowledge Exchange division. However, 2023 will put financial strains on producers from higher production costs, higher interest rates, a higher dollar, and weakening demand caused by declining incomes. These are all unlikely to reverse in the near term, he said.
Other risks loom, too: The ongoing drought and increasing political tensions with China. There is a 50/50 chance of there being a third year of La Niсa weather conditions, which will bring the worst drought since 2011-13—but this time, it will be more concentrated in the West, and more devastating to water supplies and pasture conditions, Fox said.
A deteriorating political relationship with China will likely lead to minimized imports of U.S. farm products, replaced instead with Brazil.
“It is no wonder that recent producer sentiment surveys show that despite record high net incomes in 2022, farmers’ expectations for future conditions are at their lowest since 2015,” Fox said.
Meat production
Most U.S. animal protein industry segments have posted excellent gains over the past three years, but this will likely end in 2023, according to Brian Earnest, lead economist for animal protein in CoBank’s Knowledge Exchange division. High costs of feed, labor and construction will limit production expansion. Demand will decline due to reduced income and lower consumer spending levels.
Red meat and poultry demand has been steadfast over the past two years, despite higher inflation. Retail grocery sales are rising, but not as fast as inflation, meaning volume sales have been declining. CoBank expects U.S. meat and poultry consumption to be flat at best in 2023, with marginal gains in chicken and pork to offset beef declines.
Red meat production will be down 2 billion pounds annually in 2023, mostly a result of shrinking cattle supplies.
“The decline reflects an estimated 5% annual reduction in total beef cow inventory and comes at a time when beef still has a tailwind of support from consumers,” Earnest said. “As a result, prices will remain historically strong, in both live cattle and beef markets.” — Anna Miller,WLJ managing editor
