“The Worst Is Yet to Come”: Why Economists Consider a US Recession Inevitable
Recession in the US is almost certain in the next 12 months, according to updated forecasts, despite President Joe Biden’s claims that the country will be able to avoid stagnation and that “any recession will be very small”
Discussions about the likelihood of a recession in the world’s largest economy have been going on for several months. The new forecast of experts seems to be able to put an end to these conversations: in their opinion, a recession will come in the next 12 months, and it is not possible to avoid this scenario.
A recession is a significant decline in business activity that lasts for months or even years. During these periods, the country’s economy records negative GDP, rising unemployment, falling sales and a decline in income and production.
The disappointing forecasts of analysts cast a shadow on the high-profile statements of President Joe Biden on the eve of the November midterm elections. Biden has repeatedly stressed that the US will avoid a recession and that any recession will be “very small” in an attempt to instill American confidence in the country’s economic stability under his administration.
However, tightening financial conditions, persistent inflation and expectations that the Federal Reserve will push for a rate hike increase the risk of a further contraction in economic activity.
Economic indicators of a recession
The US economy contracted by 0.6% in the second quarter, thus demonstrating a drop in business activity for six months in a row. Falling for two quarters in a row is a widely accepted criterion by which it is customary to formally determine the fact of the onset of a recession.
In addition, inflation, which hit 40-year highs, is still floundering despite aggressive rate hikes, with prices up 8.2% in September, lower than last month but still above analysts’ forecasts. The Fed has already raised the cost of borrowing to 3-3.25%, and given the inflation data, experts have reason to expect another major increase at the meeting in November.
The U.S. housing market is also struggling, with average 30-year mortgage rates above 6% for the first time since the 2008 housing market crash. At the same time, the decline in consumer buying activity has already led to lower housing prices in some markets.
As for unemployment, in September it fell to 3.5% compared to 3.7% in August. The number of people employed in non-agricultural sectors of the economy increased by 263 thousand. September’s figures were the lowest rate of growth in the number of jobs since April 2021. The data was also received negatively by investors, raising fears that the fall in the unemployment rate could trigger an additional increase in interest rates by the Fed to fight inflation.
Timing and scope of the coming recession
Probability and Timing of a Recession
According to the latest poll of economists, there is a 63% chance of a recession in the US in the next 12 months, compared to 49% in the July poll. For the first time since July 2020, after the last brief but sharp recession, the poll showed a probability above 50%.
At the same time, experts suggest that the recession will be relatively short-lived. According to those who believe that a recession is more than 50% likely to occur next year, the average duration of a recession will be eight months.
A recession probability model developed by Bloomberg economists Anna Wong and Eliza Winger casts an even harsher diagnosis on the US economy: a 100% chance of a recession by October 2023, compared with an earlier forecast of 65%.
Bloomberg’s economic model uses 13 macroeconomic and financial indicators to predict the likelihood of an economic downturn over a one-month to two-year horizon.
GDP
Economists have revised their forecasts for the growth of the US gross domestic product downward: if in July experts expected growth of 0.8% in the first quarter and 1% in the second, now they expect a 0.2% decline in GDP in the first quarter and 0.1% in the second.
“The upcoming slowdown in the economy due to rate hikes and a stronger dollar is huge and will reduce GDP growth by about 2.5 percentage points next year. In light of this, it’s hard to see how the US can avoid a recession,” said Aneta Markowska, chief economist at Jefferies LLC.
Overall, experts expect the economy to grow by 0.4% in 2023, during the fourth quarter. In 2024, growth, in their opinion, will be 1.8%.
Unemployment
Employers are likely to respond to slower growth and profits with job cuts in the second and third quarters. Economists believe that the number of non-farm payrolls will decline by an average of 34,000 per month in the second quarter and by 38,000 in the third quarter. According to earlier surveys, the number of jobs was expected to increase by an average of 65,000 per month during this period.
They also predict that the unemployment rate will rise to 3.7% in December and 4.3% in June 2023. Economists’ average unemployment rate forecast for the end of next year is 4.7%, and they expect it to broadly stay at that level until 2024.
“The Fed is trying to choose the lesser of two evils: accept a recession with rising unemployment today or risk more aggressive and entrenched inflation,” said KPMG’s Diane Swank.
Real estate market
An increase in Fed interest rates is expected to further slow housing demand next year. Economists predict that home prices will decline by 2.2% in 2023, according to the US Federal Housing Finance Agency’s seasonally adjusted house price index. This will be the first such reduction since 2011.
Fed rate hike
Investors fear that an over-hawkish Fed could lead to excessive monetary tightening and plunge the economy into a sustained downturn.
The Fed raised the base federal funds rate by 0.75 percentage points. At each of its last three meetings, the last of which took place in September. Now the rate is from 3 to 3.25%
A growing number of analysts doubt that the Fed will be able to keep raising rates to reduce inflation without causing unemployment and an economic downturn. The number of economists who believe the Fed will raise interest rates too much, causing unnecessary economic weakness, rose from 45.6% in July to 58.9%, according to the latest poll.
“A soft landing will most likely remain a mythical outcome that will never actually happen,” said Daniil Manaenkov, an economist at the University of Michigan.
A soft landing occurs when the Fed’s monetary tightening results in lower inflation without triggering a recession.
Economists on average expect the Fed to raise the federal funds rate to 4.267% in December, with the rate peaking at 4.551% next June.
About 30% of economists are confident that the Fed will start cutting rates in the fourth quarter of 2023, and 28.3% expect a rate cut in the first quarter of 2024.
World economy
Concerns are growing among politicians and economists that the consequences of a US recession will affect the global economy as a whole.
“The worst is yet to come, and for many people, 2023 will feel like a recession,” the International Monetary Fund said in a report.
The organization maintained its latest forecast for global economic growth this year at 3.2%, but now expects that growth to slow to 2.7% in 2023. At the beginning of the year, the IMF stated that in 2022 the global economy will grow by 4.4%, in 2023 - by 3.8%. The lower forecasts signal a deterioration in the economic outlook in recent months.
“Risks are cumulative,” said Pierre-Olivier Gurinchas, chief economist at the International Monetary Fund. “We expect about a third of the global economy to be in a technical recession.”
The Fund defines a technical recession as an economic downturn for two consecutive quarters.
Despite the harsh tone of the IMF experts, individual economists take an even more radical position. On average, Bloomberg economists expect global economic growth to reach 2.9% this year and slow to 2.5% next. In the euro area, growth will be only 0.2% in 2023, while Eastern Europe faces a fall in production.
Stock market
A recession in the economy cannot but affect the state of the stock market: a general slowdown in business activity leads to a drop in company profits, and investors’ uncertainty keeps them from investing in risky assets. Fears of a looming recession have already hit the US stock market, with the S&P 500 down 25% since the start of the year, firmly heading into bearish territory.
For example, JPMorgan CEO Jamie Dimon has warned that the US economy is on the verge of a recession, which he expects to enter within nine months, and the stock market could fall another 20% from current levels, that is, from 3600 points to about 2900 points.
According to Bloomberg, in early 2022, Wall Street’s year-end target for the S&P 500 was 4,950 points, ranging from 5,330 to 4,400 points.
However, as the stock market has been declining throughout the year, most Wall Street strategists have consistently lowered their targets. Today, the S&P 500 has a year-end average price target of 4,054 with a high of 5,100 and a low of 3,200.
Lisa Shalette, chief investment officer at Morgan Stanley Wealth Management, said U.S. corporate earnings could be under pressure from slower demand and higher rates.
“Such risks have not yet been factored into the consensus outlook for 2023, which poses a significant threat to equities for the remainder of the year,” Shalette said. “Even without a recession, an average earnings decline in 2023 would see the index fall 10% to 15% from current estimates.”
Mike Wilson, chief equities’ strategist at Morgan Stanley in the US, sees the S&P 500 down as much as 11% from consensus, with his baseline earnings-per-share forecast for the index for 2023 at $212, according to Shalette’s note.