Economists’ crystal balls are pretty cloudy when looking at the rest of 2023 amid conflicting data, with many seeing a slowdown ahead while differing on whether we’ll get a recession.
Key Takeaways
- The U.S. economy defied estimates that predicted a recession in the year’s first half.
- Where the economy is headed for the second half is unclear, with data making the picture murkier.
- Economists disagree on whether we’re headed for a mild recession or a mild slowdown.
By some measures, the U.S. economy has stayed remarkably healthy during the first half of 2023, defying widespread predictions that it would fall into a recession. Many employers have stayed in hiring mode, with the economy picking up a surprisingly high 339,000 jobs in May. Consumer spending, the main driver of the U.S. economy, has held up well too, with retail sales in May beating expectations.
“Team Recession” has data that points to its case too. Inflation, running at 4% a year as measured by the Consumer Price Index, is still too high for the liking of the Federal Reserve. Fed officials have signaled that its campaign of anti-inflation rate hikes that began in March 2022 and which has raised its interest rate to its highest since 2007 isn’t over yet. That means already-high borrowing costs for individuals and businesses will likely go higher still, dragging on economic growth, potentially to the point of causing a recession.
Another worrisome sign: the yield curve, a historically reliable predictor of downturns, has been warning of a recession ahead.
Mild Economic Slowdown Predictions
Economists at investment bank Goldman Sachs are among those who view a serious downturn as unlikely. In a June forecast, Jan Hatzius, Goldman’s head of research, predicted the U.S. economy had a 25% chance of falling into a recession within the next 12 months. Inflation is already fading, and the Fed won’t have to push the economy into a recession to tame it, Hatzius argues.
The Conference Board, a nonprofit economics think tank, takes a dimmer view, predicting that consumer spending will fall in the second half of the year as households exhaust their pandemic era savings and as people with federal student loans resume payments in October.
The Conference Board predicts inflation will only fade to a 3% annual rate by the end of the year and that the Fed won’t begin lowering interest rates until 2024. On top of that, the federal government is set to pare back spending as the result of the debt ceiling deal struck between President Joe Biden and Republicans at the beginning of the month, further dragging down economic activity.
Short Recession Predictions
Economists at PNC bank predict a recession, though a “mild and short” one, with the Gross Domestic Product falling in the fourth quarter of 2023.
“Layoffs should be small because firms, having suffered through severe worker shortages, will want to avoid being caught flat-footed once the economy starts to pick up again; this will limit the hit to consumer incomes and consumer spending,” Gus Faucher, chief economist at PNC, and other staff, wrote in a commentary this week.
Economists at mortgage giant Fannie Mae similarly forecast a mild recession beginning in the fourth quarter, with mixed data providing a “murky” view of the economy’s trajectory. Among the many wild cards: the extent to which the economy will be dragged down by banks becoming more strict about lending in the wake of a string of high-profile bank failures this spring.
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