Will there be a recession in 2023? 3 economic forecasts for the new year

In 2022, many Americans felt pessimistic about the economy: inflation was higher, recession fears were spreading, and interest rates were rising.

Going into the new year, economists say that 2023 will bring changes. Inflation is expected to slow as the effects of the Federal Reserve’s rate hikes continue to ripple through the economy. But it could also mean the United States goes into recession and more people lose their jobs or struggle to find new ones.

Starting in March 2022, the Fed is aggressively raising interest rates to keep inflation under control. Making debt more expensive should help cool consumer demand, resulting in slower price increases as people spend less. However, this can weaken the labor market and economic growth, as businesses may end up hiring or laying off workers.

There’s always the possibility of the unexpected, but here are three different economic scenarios that could play out in 2023:

1) A mild recession may occur

Many economists predict that the US will enter a mild recession in 2023. This means that economic growth and the labor market will weaken, but the recession will be relatively short and unlikely to be too painful.

Beth Ann Bovino, chief U.S. economist at S&P Global, said she expects to see two-quarters of negative GDP in the first half of 2023 and the unemployment rate to be above its current level of 5.6 percent by the end of the year. 3.7 percent. But Bovino said the extra savings accumulated by households during the pandemic should provide some cushion for the economy.

In the early days of the pandemic, many Americans dug into their savings after cutting spending away from personal events, and lawmakers enacted a series of stimulus measures to support the economy. That extra savings, some economists say, should help stave off a more severe recession while keeping households from carrying heavy debt.

Still, many Americans are drawing down these excess savings as inflation rises and stimulus programs expire. Many of these savings are also in the hands of high-income households, who may not be able to spend this extra money during a recession because they may be more concerned about job stability and may already have enough income to cover basic expenses.

Low-income households, most in need of assistance, drained those excess savings more quickly. But checking account balances for low-income families are still higher than they were in 2019, according to the latest estimates from the JPMorgan Chase Institute.

“While U.S. households are beginning to eat away at their savings, they still have more savings than before the pandemic,” Bovino said. “Higher-income households have more, but looking at the breakdown, it’s really not too bad.”

Inflation is also expected to decline as the effects of the Fed’s interest rate hikes continue to ripple through the economy. Inflation is already starting to slow: In November, consumer prices rose 7.1 percent from a year earlier and 0.1 percent from the previous month, a slowdown from early 2022. Although this provides some relief for Americans, the prices of many necessities such as food. and rent is still much higher than before the pandemic.

Fed officials expect inflation to slow in 2023, though they believe it will take several years to reach the central bank’s 2 percent annual inflation target over time, according to the Fed’s latest economic projections. Officials also expect the unemployment rate to rise to 4.6 percent by the end of 2023.

Kathy Bostjancic, chief economist at Nationwide, said she expects a moderate recession in the middle of this year and inflation to slow to 2.8 percent by the end of 2023, based on the consumer price index. As inflation cools and consumers cut back on spending, many businesses may see slower revenue growth and shrinking profit margins, Bostjancic said.

This could cause some employers to slow hiring or lay off workers, meaning even a mild downturn could be painful for many people.

“Our view is that employment growth will continue to slow, resulting in outright job losses,” Bostjancic said. “It’s going to have a significant impact on consumer spending, and that’s going to be a big part of why we’re going into recession. It was indeed the labor market and the consumer that kept the economy going, but once it turns around, so will the overall economy.”

2) The US can avoid recession altogether

Fed officials have repeatedly said they aim for a “soft landing” — a scenario in which the central bank raises interest rates and the economy slows enough to bring down inflation but avoid a recession.

Soft landings are rare, and the Fed’s (the last one in 1994 and 1995 is considered by some economists to be the only real soft landing). By raising rates aggressively, officials risk significantly slowing the economy and triggering a big jump in unemployment. But doing too little may allow inflation to become a more permanent fixture of the economy, which may be more difficult to address in the future.

Fed officials say a soft landing is still possible. Fed Chairman Jerome Powell said the central bank is targeting slow but positive economic growth and a relatively weak labor market. Powell said the labor market continues to be “extremely tight,” with the demand for workers still outstripping the available supply. If those conditions are rebalanced, he said, it would reduce upward pressure on prices and wages.

“There are channels through which the labor market can return to equilibrium with relatively small increases in unemployment,” Powell said at a news conference after the Fed raised interest rates by half a percentage point in December.

Erica Groshen, senior economic adviser at Cornell University and former commissioner of the Bureau of Labor Statistics, said the labor market is strong and softening inflation makes her believe a soft recession or mild recession are the two most likely outcomes. For example, the unemployment rate is near a half-century low and job growth has slowed, but employers continue to add hundreds of thousands of jobs to the economy each month. Some economists argue that these strong conditions mean that the labor market has been allowed to slow more than normal.

However, Groshen noted that soft tapering has historically been difficult for the Fed.

“Maybe they’ll get a really soft landing,” Groshen said. “But it hasn’t been easy to calibrate things so closely in the past.”

At Nationwide, Bostjancic said the United States could avoid a contraction in GDP if “enough bubble” bursts out of the labor market, wages slow and inflation falls faster than economists expect.

As inflation has slowed more than expected, Bostjancic said, “The odds are still quite low, but they’ve started to pick up recently.”

RSM chief economist Joe Brusuelas said his forecast included a 65 percent chance of a recession next year, but if inflation slows faster than economists project and excess savings help cushion the economy, it could help the country avoid recession. . While he said he doesn’t expect the Fed to cut rates until 2024, he said officials could start signaling further rate cuts in mid- or late 2023, which could boost consumer spending as households feel more optimistic about their finances. said he could increase it.

3) A severe recession is not off the table

Another possible outcome is a more severe recession. Although several economists say this is unlikely, it could happen if the economy experiences another major supply shock or geopolitical event.

If global oil supplies are further strained by Russia’s war on Ukraine, or if China’s zero-Covid policy significantly worsens supply chain problems, it could lead to a more pronounced global economic slowdown, Bruseulas said.

“If we were to experience a more severe recession, it would likely be stimulated by another large negative supply shock from the energy sector,” Brusuelas said.

Bostjancic said that if inflation is more persistent than policymakers expect, a steeper decline could result. That could cause the Fed to become more aggressive in its fight against inflation, meaning officials could raise interest rates higher or keep them higher for longer, further slowing the economy.

“It’s possible,” Bostjancic said. “Perhaps inflation is more stubborn and rising than expected.”

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