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

In 2022, many Americans feel pessimistic about the economy: Inflation is rising higher, fears of a spreading recession, and interest rates are rising.

In the new year, economists say that 2023 will bring a change. Inflation is expected to slow as the effects of the Federal Reserve’s interest rate hikes continue to ripple through the economy. But it could mean the United States is entering a recession and more people are losing their jobs or having trouble finding new ones.

Since March 2022, the Fed has been aggressively raising interest rates to control inflation. Making loans more expensive should help dampen consumer demand, leading to slower price growth as people spend less. However, it may also reduce the labor market and economic growth, as businesses may reduce hiring or lay off workers.

Of course there are things that cannot be predicted, but there are three possible economic scenarios in 2023:

1) A mild recession may occur

Many economists predict that the United States will enter a mild recession by 2023. That means economic growth and the labor market will weaken, but the downturn will likely be brief and painless.

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 reach 5.6 percent by the end of the year, up from current levels. 3.7 percent. But Bovino said the extra savings that households accumulated during the pandemic should provide a cushion for the economy.

At the beginning of the pandemic, many Americans kept their savings after spending from personal events, and lawmakers passed stimulus measures to support the economy. That extra savings, along with the fact that households aren’t carrying heavy debt, should help stave off a more serious downturn, some economists say.

Still, many Americans are shedding excess savings as inflation rises and stimulus programs expire. Most of these savings are also held by higher-income households who may not spend extra money during a recession because they may be worried about job stability and possibly earning enough to cover essential expenses.

Low-income households most in need of help have been shedding their excess savings at an even faster clip. 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.

“Even though US households are starting to eat away at their savings, they still have a lot of savings before the pandemic,” Bovino said. “Households with higher incomes have more, but if we look at the breakdown, it’s not too bad.”

Inflation is also expected to ease as the effects of the Fed’s rate hikes continue to ripple through the economy. Inflation has begun to slow down: In November, consumer prices rose 7.1 percent from the previous year and 0.1 percent from the previous month, a slowdown from earlier in 2022. Although it has provided some relief to Americans, prices for many necessities like food. and rents are still 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 annual inflation target of 2 percent 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 by the middle of this year and inflation to fall to 2.8 percent by the end of 2023, according to the price index for Personal Consumption Expenditure. As inflation cools, however, many businesses may see slower revenue growth and shrinking profit margins as consumers pull back spending, Bostjancic said.

This can cause some employers to slow down hiring or lay off workers, meaning that even a mild recession can be painful for many people.

“Our view is that labor force growth will continue to slow and eventually there will be job losses,” Bostjancic said. “It’s going to have a material impact on consumer spending, and that’s going to be a big part of why we’re in a recession. It’s true that the labor and consumer markets are what keep the economy going, but if things change, so will the economy in general.

2) The US could have prevented the recession altogether

Fed officials have repeatedly said they are aiming for a “soft landing” — a scenario in which the central bank raises interest rates and the economy does just enough to reduce inflation but prevent a recession.

Soft landings are rare, and difficult for the Fed to do (the last ones that happened in 1994 and 1995 are considered by some economists to be the only real soft landings). By raising rates aggressively, officials risk slowing the economy and causing unemployment to rise. But doing little could allow inflation to become a more permanent economic tool, which could be more difficult to deal with 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 weaker labor market. Powell said the labor market continues to be “extremely tight,” with demand for workers still outstripping available supply. If the situation were to rebalance, he said, it would ease the pressure on prices and wages.

“There is a channel where the labor market can return to equilibrium with a relatively modest increase in unemployment,” Powell said at a news conference after the Fed raised interest rates by half a percentage point in December.

Erica Groshen, a senior economic adviser at Cornell University and a former commissioner of the Bureau of Labor Statistics, said the labor market is strong and inflation is softening, leading her to believe that a soft landing or a moderate recession are the two most likely outcomes. The unemployment rate, for example, is nearly half a century high and job growth has slowed, but employers continue to add hundreds of thousands of jobs to the economy each month. These strong conditions mean the labor market has room to slow down more than normal, some economists argue.

Still, Groshen noted that soft landings have historically been difficult for the Fed to do.

“Maybe they’ll get a soft landing,” Groshen said. “But in the past, it was not easy to calibrate closely.”

Nationwide’s Bostjancic said the United States could avoid a GDP contraction if “enough foam” comes out of the labor market, wages slow, and inflation falls faster than economists expect.

“Opportunities are still a bit low, but they have started to increase recently” as inflation has been slower than expected, Bostjancic said.

Joe Brusuelas, chief economist at RSM, also said that the forecast includes a 65 percent chance of a recession next year, but if inflation is faster than economists project and excess savings help slow the economy, which can help the country avoid recession. . Although he said he did not expect the Fed to cut interest rates until 2024, he said officials could start signaling rate cuts in mid- or late 2023, which could boost consumer spending as households feel more optimistic about their finances.

3) A severe recession is not off the table

Another possible outcome is a more severe recession. Although some economists say it’s unlikely, it could happen if a major supply shock or other geopolitical event hits the economy.

If global oil supplies increase due to Russia’s war against Ukraine or if China’s zero-Covid policy exacerbates supply chain problems, for example, it could lead to a more pronounced global economic slowdown, Bruseulas said.

“If we end up with a more severe recession, it could be stimulated by another negative supply shock coming from the energy sector,” Brusuelas said.

A more drastic decline could also result if inflation is more persistent than policymakers expect, Bostjancic said. This could lead the Fed to become more aggressive in its fight against inflation, meaning officials could raise interest rates higher or keep them higher for longer, slowing the economy.

“It’s possible,” Bostjancic said. “Perhaps inflation is proving to be more stubborn and higher than expected.”