Even if the U.S. avoids recession in 2023, American consumers and investors could face a sustained slowdown through 2024, according to a new forecast published by Mark Zandi, chief economist at Moody’s Analytics.
Zandi even coined a new term to describe such a prolonged downturn, calling it a “slowdown” in a note sent to clients and reporters on Tuesday.
The prevailing view on Wall Street is that the U.S. economy will likely enter a short-term recession in the first half of 2023 as the Federal Reserve cuts interest rates to soften the blow for investors and consumers, but it will end well before the first half of the year. the end.
Still, while Zandi believes the Fed’s most aggressive rate hikes in decades will hurt GDP growth, he thinks a strong U.S. labor market and other consumer-related factors should help prevent a sharp contraction in the economy.
“There’s no doubt the economy will struggle next year as the Fed tries to curb high inflation, but the baseline forecast believes the Fed will be able to do so without triggering a recession,” Zandi noted.
According to several forecasts, Zandi expects US gross domestic product to grow by around 1% or less on an annualized basis for all four quarters of 2023.
Zandi is not alone in his view that the US economy will avoid a recession this year. Goldman Sachs Group GS,
chief economist Jan Hatzius shares a similar outlook, as do other high-profile names on Wall Street.
What sets Zandi apart is that he expects a significant amount of economic pain, but believes it will arrive over a longer period of time, making it somewhat easier for consumers and investors to cope with, according to his note.
Underpinning this forecast is the notion that the Fed could roll back interest rate hikes before hitting the economy with another “policy blunder,” as some believe it will by delaying rate hikes until 2022. thinks that inflation is “temporary”.
Also read: Wharton’s Jeremy Siegel accuses the Fed of making one of the biggest policy mistakes in its 110-year history
Although a recession is usually seen as two consecutive quarters of economic contraction, the National Bureau of Economic Research will have the final say in declaring when a recession officially begins and when it officially ends.
Even if the U.S. economy avoids a punishing, job-destroying collapse, Zandi added, Americans could still feel the impact of falling assets and home prices.
Moody’s expects economic growth to slow to 0.8% in the third quarter of this year. Zandi and his team do not expect GDP growth to exceed 2% until the third quarter of 2024.
What is “slowing down”?
Economists see a roughly 65% chance that the U.S. economy will enter a recession this year, according to the median forecast of a Wall Street Journal poll.
While Zandi disagreed with that outlook, he acknowledged that the biggest risk with such high levels of confidence is that the recession becomes a “self-fulfilling prophecy” as consumers and businesses curb spending to bolster their savings. times ahead.
Already, there are signs of a darkening outlook, from falling commodity prices like oil to the Conference Board’s index of leading indicators, which takes into account factors like the Treasury yield curve.
But there are many signs that the economic picture is not as dire as all that. Inflation data released over the past few months suggest that price pressures are already beginning to ease.
This means that the Fed’s monetary policy “almost caught up with the current economic and financial market conditions. The reaction function suggests that the funds rate should be close to 5%, which is consistent with investors’ current expectations of the terminal funds rate,” Zandi said.
The US financial system is in good shape
Zandi said that typically, both the state of the U.S. economy and the financial system look more dangerous in the months before a recession begins. But that’s not happening this time around — at least not to the extent of previous recessions.
“Typically, recessions are preceded by significant imbalances such as overstretched households and businesses, speculative asset markets, and an overextended undercapitalized financial system,” he said.
“For most, none of these imbalances exist today,” he said.
Consumers have enough savings despite the cuts
Economists pay close attention to consumers’ bank accounts, and while some have expressed concerns about declining savings, Zandi believes American households will have little trouble paying off debt and continuing to spend as interest rates rise.
“Many households have also done a good job of managing their debt. “The share of their income going toward principal and interest payments is near record highs, and in most cases these payments will not increase with higher interest rates.”
What’s more, Zandi believes that while home prices will continue to fall as the pandemic-era home buying boom subsides, the housing shortage caused by more than a decade of limited construction will help protect home values.
Banks have been vulnerable in the past, but they are also well capitalized to withstand a severe downturn. Instead, credit growth remains “flat,” Zandi said.
“There is neither too much credit (as before the financial crisis, when lenders extended loans to households and businesses that were fundamentally unable to pay them), nor too little credit (as in the post-crisis, when even creditworthy borrowers couldn’t get loans in this credit crunch). ),” he said.
‘Known unknowns’ are risks
The risks to the US economy are many, Zandi pointed out towards the end of his analysis. While there’s a chance some new complicating factor could pop up out of nowhere, some of the biggest risks are what Zandi describes as “known unknowns.”
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Examples include the escalation of the conflict in Ukraine by Russian President Vladimir Putin or the emergence of a new variant of COVID-19 in China. Moreover, financial missteps abound, including the possibility that weakening corporate earnings in the U.S. will force investors to lower stock prices even further.
Zandi provided other examples of “known unknowns” in the chart below.
In terms of severity, Zandi fears, “a partisan showdown over the Treasury debt limit, which must be raised again by the fall of 2023,” could be the most destabilizing.
Wall Street economists generally expect the recession to begin before the second half of the year. As MarketWatch’s Isabel Wang reports, much debate continues about the depth and duration of the recession.