‘Short and Shallow’ Recession Expected in 2023

If the long-anticipated recession actually happens, it is more likely to be a bump in the road than a pothole that disrupts the economic recovery.

“Our own leading economic indicators suggest that if we are going to have a recession, it’s probably starting right about now in February, March, or as late as the beginning of the second quarter,” said Dana Peterson, chief economist for The Conference Board. “If we do have a recession, we think it’s probably going to be short, and it’s going to be shallow. It may start in the first quarter and be more pronounced in the second quarter, but we are not anticipating major declines in GDP growth.“

Peterson shared her insights during the February 23 media briefing “Are We in a Recession or Not?” presented by The Conference Board. Although two consecutive quarters of negative GDP growth last year was considered a recession by some economists, she defines the term differently.

“A lot of that was due to changes in inventory and trade,” Peterson said. “That could still happen, but we are defining this more in terms of domestic demand growth—which is all of the things consumers are spending on—being negative.”

She expects the unemployment rate to remain low.

“Even though we anticipate a short and shallow recession in the United States, we don’t anticipate material deterioration in the labor market, with the unemployment rate barely rising to 4.5 percent,” Peterson said. “That’s really right around the neutral rate. We still would experience a very tight labor market, even with a 4.5 percent unemployment rate, which is roughly equivalent to about 900,000 jobs.”

Workforce participation explains part of the labor shortage. “If you go back to 1980, you had roughly four working-age persons for each retired person,” she said. “In 2023, you have just three, and in 10 years you are going to have two. Labor shortages are a long-term issue we are looking at. As a result, many businesses are telling us that they are continuing to hire or not really looking to shrink their labor forces.”

The Fed’s Rate Hikes

Peterson expects an end to the recent aggressive interest rate hikes by the Federal Reserve. “We anticipate another two interest rate hikes,” she said. “We believe the Fed is near the end of its tightening cycle. Once it reaches that terminal rate, which we believe is going to be between 5 percent and 5.25 percent, it is going to keep that rate fixed through the balance of this year and not consider any interest rate cuts until next year.”

Housing and services, such as food consumed away from home and transportation, are the biggest drivers of current inflation. Several other risks could derail the Fed from meeting its targeted rate.

“Food prices could continue to be sticky,” Peterson said. “Grocery prices are being influenced in part by the war in Ukraine, bad weather, and bird flu. There also is a risk of an increase in oil demand as China reopens. If global oil prices rise because of demand in China, that could have an effect on the U.S. consumer price index.”

Also keep an eye on consumer spending. “We could have higher inflation if consumers continue to spend,” she said. “We saw a decline in November and December. The key things will be how much excess savings consumers have, if they are going to spend out of their increased income, or if they are going to continue to use credit cards.”

The ongoing debate about the federal debt ceiling is another wildcard, said Lori Esposito Murray, Ph.D., president of the Committee for Economic Development, the public policy center of The Conference Board.

“The debt ceiling debate is on the table right now and is the most front-and-center issue that could disrupt where we are going and take us off the path,” she said. “Even the debate itself, as it gets close to the cliff, is disruptive. There are cataclysmic ramifications if the crisis is extended by three or four months. It’s very easy to have the crisis and hit the cliff. It’s harder to recover from it, even in terms of the debate happening now.”

The outcome will depend in large part on House Republicans. “We know at least rhetorically that Speaker McCarthy does not want us to go into default,” Murray said. “So the question becomes what can he deliver on the Republican side that will meet the spending decreases they want to happen, that will keep enough of his caucus together and if necessary, appeal to Democrats.“

Despite these risks, however, Peterson expects inflation to continue its downward trend. “We believe the Fed is going to achieve the 2 percent target toward the end of next year,” she said.

From: BenefitsPRO