The year 2023 is already here, and analysts around the world are trying to anticipate what changes await us in the American markets. Estimates are that inflation will slow down thanks to the Federal Reserve’s interest rate hikes, but at the same time and as a result, the United States is expected to slide into recession.
Since March 2022, the Fed has been aggressively raising interest rates to curb inflation. The increases make the loans more expensive and thus should cool consumer spending, and accordingly the decrease in demand will in turn lead to a decrease in prices. However, this could weaken the labor market and economic growth, as businesses may reduce hiring or lay off workers as a result.
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In the background, the US stock market ended its worst year in more than a decade. Experts have been warning of an economic slowdown and recession for some time, and these are their top three scenarios for the expected recession in the new year.
Thanks to consumers: a shallow and short recession
As mentioned, the consensus on a recession on the horizon is shared by most analysts, but quite a few of them believe that the recession will be mild and short, even if economic growth and the labor market weaken.
Beth Ann Bobino, chief U.S. economist at S&P Global, told the VOX news site that she expects to see two quarters of negative GDP in the first half of 2023, and the unemployment rate to peak at 5.6 percent by the end of the year, up from its current level of 3.7 However, Bobino explains that there is a lot of weight to the savings accumulated by households during the epidemic, which will probably allow consumers to continue spending money and thus keep their heads above water.
Many analysts think the U.S. economy is strong enough and has the ability to grow slowly until at least the end of the first half of 2023. “Given the resilience of the U.S. economy and the tight labor market, we expect a shallow and brief slowdown or recession,” Nancy Tengler, CEO and chief investment officer, told MarketWatch. First of the investment company Laffer Tengler. “This could allow shares to rise in the second half of 2023, after the first quarter is expected to be volatile, as they bypass the danger of recession.” Tengler adds that the current market consensus is too pessimistic, as she believes consumers still have breathing room and the possibility to maintain spending higher than expected, given the strong US labor market.
While many Americans are withdrawing their savings in the wake of rising prices and the expiration of the coronavirus-era stimulus programs, households with higher incomes that cover essential costs will likely continue to save their savings for a rainier day as they look at the storm clouds hovering over the labor market. And yet, Bobino remains optimistic: “Even as US households start to eat up the savings, there is still a lot of savings compared to before the pandemic,” she said. “High-income households have a lot more, but when we look at the distribution, it’s really not particularly bad “.
Nationwide Chief Economist Kathy Bustjancic expects a mild recession to develop around the middle of this year and inflation to slow to 2.8% by the end of 2023, according to the Fed’s preferred measure of personal consumption expenditures. However, the cooling of inflation will likely come hand in hand with slower revenue growth for many businesses and with their profit margins shrinking as consumers cut back on spending.
According to the November employment report, US employers hired more workers than expected and even raised wages. 263,000 jobs were added in November, above forecasts, and the unemployment rate remained steady at 3.7%, near a half-century low. However, estimates are that job growth is expected to slow in 2023, when high interest rates continue to hurt investment and industries return to the number of workers they had in the days before Corona. According to Julia Polk, chief economist at ZipRecruiter, this kind of “significant cooling” in labor market conditions will keep the recession away.
“Our view is that employment growth will continue to slow down and eventually there will be a decrease in the number of jobs,” says Bustjancic. “It will have a substantial impact on consumer spending, and it will be a large part of the reason we fall into a recession. It is the labor market and consumers that have kept the economy moving, but as soon as there is a sharp turn in these areas, the general economy will also make one.”
Mark Lucchini, chief investment strategist at Janney Montgomery Scott, thinks the stock market is likely to decline toward the start of the actual recession, with an expectation of recovery toward its end. “We expect stocks to struggle and continue to be under pressure in the coming months or quarters, before eventually recovering, perhaps in the second half of the year,” Lushini told MarketWatch. He attributed the economic resilience to the “healthy balance sheets” of the households, which accumulated “an abundance of savings” during the pandemic.
No stimulus: stubborn recession
Alongside the mild forecasts for a mild and short recession in 2023 that will be accompanied by a strong economic recovery – David Kelly, chief global strategist at JP Morgan, predicts a recession that the economy will have difficulty recovering from. The good news, according to Kelly, is that a prolonged period of persistent recession should curb inflation and force the Federal Reserve to significantly ease its monetary tightening, Kelly wrote in a November note.
“However, the other side is that a mild recession will probably not create much additional demand, and assuming we only see a moderate increase in unemployment – the increase in employment and income as a result of a decrease in the unemployment rate will also be lower than usual,” he explained. “Perhaps the most significant detail, unlike any of the last four recessions, is that there is unlikely to be any significant fiscal stimulus to reinvigorate the economy.”
In addition, significant global events, affecting the supply chain, have become common in recent years. From a global epidemic to the war in Europe that left economic effects that will not subside soon. If global oil supplies stretch a bit more following the war in Ukraine, or if China returns to its zero-contagion policy again, it could lead to a more pronounced global economic slowdown, said Joe Brosoualas, chief economist at RSM. “If the scenario of a severe recession does occur, it is likely to be the result of another major supply shock arising from the energy sector,” he said.
A more drastic drop could also result if inflation is more persistent and sticky than policy makers expect, added Bostajancic. This could lead the Fed to be more aggressive in its fight against inflation, meaning raising interest rates or keeping them at a high level for a longer period of time, thus further slowing the economy. “It’s possible,” she said. “Perhaps inflation will turn out to be stubborn and even higher than expected.”
If at all: technical recession only
Compared to those who are trying to predict the size of the approaching recession, economists at Goldman Sachs once again emphasized their determination that the US economy will probably manage to avoid it altogether. of 35% that the US will enter a recession within the next year, an estimate that is well below the median of 65% among analysts polled by the Wall Street Journal,” Goldman Sachs economists said in their 2023 forecast. “The US may avoid a recession in part because data on economic activity is nowhere close to indicating one.”
However, soft landings are rare and difficult to achieve. The last one that occurred in 1994 and 1995 is considered by some economists to be the only real soft landing. Raising interest rates in an aggressive manner increases the risk of a significant slowdown of the economy and a large jump in unemployment, but the risk of the opposite situation – not being able to curb inflation – is more serious.
Erica Groschen, a senior economic advisor at Cornell University and former commissioner of the Bureau of Labor Statistics, believes that a soft landing is the most likely option, with inflation softening and the labor market strengthening, according to her. Although the unemployment rate is close to a half-century low and job growth has slowed, employers continue to add hundreds of thousands of jobs to the economy every month, Groshen explains.
It should be noted that after two consecutive quarters of negative growth in gross domestic product (GDP) at the beginning of 2022, the US economy expanded in the third quarter at an annual rate of 2.9%, according to government data. Two consecutive quarters of declining GDP is dryly described as a “technical recession,” although the National Bureau of Economic Research, which officially declares a recession in the US, has a broader definition of a recession.
To this, Bustjancic said that the United States can avoid a contraction in GDP if the labor market warms up enough, wages slow and inflation falls faster than economists expect. “The odds are still pretty low, but they’ve started to pick up recently” with inflation slowing faster than expected, she said.
Brosualas also sees a scenario in which the US avoids a recession, despite his forecast that shows a 65% probability of a recession during the year, if indeed inflation slows faster than economists expect and excess consumer savings “cushion” the economy. He does not expect the Fed to lower interest rates until 2024, but explains that officials could start signaling future interest rate cuts in mid-2023 or late 2023, which would spark optimism among households and boost consumer spending.