The American economy is in the throes of a profound structural change that will bring a recession next year and force businesses to adapt to a new era of higher costs, according to Joe Brusuelas, chief economist of RSM US.
Brusuelas offered his perspective on the changing economy on Monday during his keynote address at RSM’s Tax in Motion: 2022 Tax Summit.
Brusuelas pegged the probability of recession at 65% over the next 12 months as the Federal Reserve continues its campaign of interest rate increases to tame stubbornly high inflation.
“The economy is in a precarious position,” he said. “Firms need to begin preparing for a downturn.”
Middle market firms, which have shown resilience in the early phases of the Fed’s rate hikes, will be facing reduced demand from businesses and consumers, tighter financial conditions and, ultimately, a slowing economy.
Brusuelas said that the Fed is committed to restoring price, and it will come at a cost, including the loss of at least 1.7 million jobs with the potential for more.
As painful as those job losses will be, though, Brusuelas said that this recession will most likely be milder than previous downturns and will last less than a year.
The good news is that the Fed’s efforts to reduce demand through higher rates will have the intended effect of lowering inflation, probably to around 3% next year, Brusuelas said, enough for the central bank to ease its rate hikes.
Brusuelas detailed the outlook for financial and labor markets, inflation and supply chain dynamics as the U.S. economy prepares for a new era of higher costs, higher interest rates and lower demand.