US Recession Now Expected to Start Later This Year

Despite rising inflation and worries of a recession, the US economy remains resilient. But a recent survey indicates that more economists now anticipate an earlier start to the recession than previously anticipated.

Over the next 12 months, consumer spending is likely to slow and inflation could ease. While this should help avoid a recession, it could also have adverse effects on businesses and consumers.

Economic Outlook

According to a survey released Monday by the National Association for Business Economics, more economists anticipate that the US will enter recession later this year than previously anticipated. A majority of 48 economists polled believe this downturn will begin later this year.

The economy has been growing at an annual rate of more than 3% for several years now, yet inflation has begun to creep up. To combat this, the Federal Reserve has raised interest rates eight times since 2009 in an effort to cool off the economy.

What the Fed has done so far may have been beneficial for consumers. The biggest risk is that it might have to raise its key rate higher than anticipated, leading to more expensive mortgages, auto loans and credit card borrowing - all of which would be detrimental for borrowers.

Alternatively, the Federal Reserve might decide not to raise its benchmark interest rate, allowing the economy to expand at a slower rate as consumers cut back their spending and businesses reduce staff levels. Either way, we'll likely see how long it takes for this recession to end.

No matter when the recession comes, it is essential to be prepared. The best way to do this is by making our economies more resilient than they currently are so that when the inevitable occurs, we can recover faster and with less pain. That means eliminating zoning laws which make housing more expensive, as well as offering additional support to businesses and individuals alike.

Business Outlook

Global economic growth is now predicted to begin later than anticipated due to a cost-of-living crisis and tightening financial conditions in most regions, combined with Russia's invasion of Ukraine. The International Monetary Fund (IMF) now projects 2.9% growth for 2023 compared with their October forecast of 3.4%.

The International Monetary Fund (IMF) predicts a sharper-than-expected slowdown in global economic activity will likely result in recession this year, due to an "unprecedented" pace of central bank interest rate increases that have raised concerns that inflation could reach "unmanageable" heights, they noted.

BofA Global Research's economists and strategists anticipate that the global economy's direction in 2023 will be heavily influenced by how central banks respond, China's reopening, and energy prices remaining high. All of these variables are expected to play a role.

The Fed's aggressive monetary tightening campaign is expected to cause a shallow recession in 2023, with real GDP growth declining by 0.2%. Fourth-quarter-to-fourth quarter GDP growth is also projected to decline by 0.3% due to weaker domestic demand and global trade patterns.

Rate increases force many investment institutions like insurance companies and pension funds to revalue the value of their assets, potentially leading to substantial losses for them.

Another contributing factor is higher interest rates, which make it harder for businesses to borrow. As a result, companies must cut back on investment spending, making the economy less productive overall.

According to the Conference Board, these negative trends could combine to cause a recession in 2023. They anticipate that real incomes will decline by around 1% during the first half of 2023 and then rebound as inflation begins to slow and the Fed takes action against it.

Over the next two years, inflation is projected to remain elevated but eventually fall back into the 2% range as businesses resolve their supply chain issues and consumers begin paying more for goods and services. While the Fed may keep raising interest rates through 2023, they should begin to ease up in the second half of 2023. As a result, yield curves should flatten out with 10-year Treasury ending the year at around 3.25% down from its peak of 4% in November.

Consumer Outlook

US economists now anticipate that the 2023 recession will start later than anticipated, due to a series of reports showing an unexpectedly resilient economy. Of 48 economists who responded to a National Association for Business Economics survey, 58% anticipate it starting this year - exactly the same percentage who said so in December's NABE survey - but only 25% predict it will have begun by March 31st - half as many who thought so back then.

Consumer spending was seen as more resilient than anticipated, with the National Retail Federation forecasting overall sales growth will slow slightly to 1% in 2023. In the first two months of 2023, a strong surge in retail store and restaurant sales, coupled with improved consumer confidence levels, resulted in an uptick in household spending.

Consumer confidence could still dwindle if the Fed begins raising interest rates sooner or longer than anticipated and inflation drops faster than anticipated, according to Joe Brusuelas, chief economist at RSM. Lower wages would then result in tighter labor markets than previously believed, according to Joe.

According to Fed officials, inflation, which had been rising above the Federal Reserve's target in recent years, is now expected to slow to 2.8 percent by the end of 2023. This number remains above their 2% target for inflation and could potentially hinder economic growth as higher interest rates push borrowing costs up for consumers.

Though inflation is expected to moderate, it may not be enough to prevent a recession. A major supply shock such as Russia's war against Ukraine or China's zero-Covid policy that compounds supply chain problems could trigger an even more severe downturn.

Bostjancic notes that an increase in job losses and a sharp drop in household income could not only result in greater job losses, but it could also stifle US economic growth and lead to the Fed cutting its benchmark interest rate. "If enough froth comes out of the labor market, wages slow, and inflation comes down faster than anticipated, then that might help cushion things a bit," she suggests.

Monetary Policy

In late 2023, the US economy is forecast to begin a recession; however, it will likely be milder than the one experienced in 2022 due to slowing inflation and fears of an impending downturn. This would help stave off a sudden and drastic downturn.

Inflation is expected to moderate as the Fed's interest rate hikes take their toll on consumers and businesses. Ultimately, this should lead to a reduction in inflation rates - beneficial for the Fed and economy alike, but may also mean lower wages for workers.

However, economists caution against overestimating how long the monetary policy tightening cycle might last. That could cause an even more severe economic downturn if a major supply shock or geopolitical event disrupted things more than anticipated, according to Joe Brusuelas - chief economist at RSM.

However, inflation could start to slow earlier than anticipated by economists, potentially helping the economy avoid a recession. If inflation does decline faster than forecasted, that would give the Federal Reserve approval to cut interest rates even sooner and stimulate consumer spending - essential for economic recovery.

If the Federal Reserve's interest rate hikes slow down too quickly, it could cause a sharp rise in unemployment which would further harm the economy. Many workers who are unemployed will have difficulty finding new jobs or earning enough money to cover their living costs.

Another factor that could help the US avoid a recession is excess savings that households have amassed. This extra money isn't tied to specific jobs and can be used by families during times of uncertainty, like when a new job opportunity presents itself or the healthcare system collapses.

These factors, combined with the fact that many Americans don't have much debt, should prevent the US from entering a recession in 2023; however, it remains uncertain whether this will occur or not.