The global pandemic has wrought havoc on economies around the world, and the U.S. is no different. In the wake of lockdowns and economic slowdown, many economists believe that a recession is looming.
This article will discuss what a recession is and discuss whether a recession is likely in 2023.
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What Will I Learn?
- What Is a Recession?
- Are We in a Recession in 2023?
- When Was the Last Recession?
- Are We in a Recession or Repression?
- When Will We Know If We Are in a Recession?
- 1. Consumer Price Index (CPI)
- 2. Gross Domestic Product (GDP) Growth
- 3. Industrial Production
- 4. Conference Board Leading Indicators
- 5. ISM Manufacturing Index
- 6. Retail Sales
- 7. The Stock Market
- 8. Treasury Yield Curve
- 9. Initial Jobless Claims
- 10. The Unemployment Rate and Labor Market
- 11. Job Openings and Labor Turnover Survey (JOLTS)
- A Closer Look at the Two Possible Outcomes
- Final Thoughts
What Is a Recession?
A pervasive, significant, and protracted decline in economic activity is what is often referred to as a “recession.” Even though more complex calculations are often utilized, a generally accepted rule is that two consecutive quarters of negative GDP or gross domestic product growth suggest that an economic downturn may occur.
The National Bureau of Economic Research (NBER) employs a much more comprehensive approach to measuring recessions than the more straightforward two-quarters of negative GDP growth by taking into account other variables, such as:
Real personal consumption expenditures
Are We in a Recession in 2023?
According to the NBER, America is not currently in recession. This is because of good corporate earnings growth and a strong labor market.
Also, the fact that recessions are so rare, having occurred only eight percent of the time in the last 30 years, contributes to the notion that we are not currently in a recession at the start of 2023.
However, experts believe that a recession could still happen at some point soon. It’s also important to know how to invest ahead of a recession, as it can be something that can drastically change your portfolio.
The Federal Reserve Will Soon Raise Interest Rates, Possibly Leading to a Recession in 2023
The Federal Reserve (Fed) remains steadfast in its commitment to raising interest rates until inflation begins to fall below its present levels. That might lead to a fall in the economy, which no one, much alone the NBER, could deny is a recession.
When Was the Last Recession?
The NBER estimates that the most recent recession occurred between February and April 2020.
Because some state and local governments loosened regulations, unprecedented direct payouts and unemployment insurance helped consumers get by. The economy was already recovering by May of the same year.
Prior to that, the Great Recession, which ran from December 2007 to June 2009, marked the previous contraction of the economy. That recession lasted longer even though it wasn’t as bad as the COVID-19 Recession.
The Great Recession and the recent recession were separated by the longest corporate growth in American history, going back to 1854.
Are We in a Recession or Repression?
The phrase “financial repression” refers to actions taken by governments to funnel money from the private market to themselves in an effort to reduce debt. Because of the overall policy decisions, the government may borrow money at incredibly low-interest rates and pay for public spending at a low cost.
This move is repressive because it causes savers to earn rates that are lower than the inflation rate. Recessions are economic downturns that result in negative growth that leads to a higher unemployment rate.
While the U.S. is not currently under recession or repression, The Federal Reserve (Fed) does intend to implement repression in the future to lower inflation. This will lead to a recession.
When Will We Know If We Are in a Recession?
How can you tell when we are in a global financial crisis? Could there be a mild recession in the U.S. in 2023? To help you know how to tell when we’re in a recession, we’ve drawn up a list of economic, market, and job market indicators.
1. Consumer Price Index (CPI)
A representative basket of products and services is used to calculate the CPI, which tracks the general shift in consumer prices over time.
Since reaching a peak of 9.1 percent in June, inflation has slowed. The CPI number for December, which was 6.5 percent compared to November’s 7.1 percent, was lower. Even so, inflation is still far higher than the Fed’s target range of two to three percent, which is having a significant impact on the typical American’s purchasing power.
The declining CPI will likely bring us closer to the equilibrium between inflation and the Fed funds rate, which is normally when Fed policy may stop being restrictive.
2. Gross Domestic Product (GDP) Growth
Gross domestic product (GDP) is a monetary indicator of the total market value of all the final goods and services that a country manufactures and sells over a given period.
According to the second estimate of the GDP in the United States, the economy expanded at an annual rate of 2.9 percent in the last quarter of 2022.
This came after a third-quarter GDP annual growth rate of 3.2 percent, which contributed to yearly GDP growth of 2.1 percent overall. These figures pull the United States further away from the brink of a downturn.
3. Industrial Production
The Federal Reserve reports that industrial production increased by 1.6 percent from the previous year in December last year. However, it had decreased by 0.7 percent from the prior month.
Although orders were up and production was down last month, output forecasts were higher. Since high-productivity businesses such as construction and manufacturing were weaker than low-productivity sectors in the previous quarter, the output per hour was likely unchanged.
The truth is that for the economy as a whole, this sends out conflicting signals. We may not yet be out of the woods, even though the industrial forecast seems more promising than it did a year ago.
4. Conference Board Leading Indicators
An American economic leading indicator designed to predict potential economic activity is referred to as the Conference Board Leading Economic Index. The Conference Board, a non-governmental body, calculates it by taking the values of 10 important factors into consideration and using that information to create the index’s value.
In December, the lead index of the Conference Board decreased by one percent. This indicates that the decline in 2022’s second half was much greater than in the first six months. Regrettably, this may be the most obvious indication that a recession is approaching for the American economy.
Moreover, this economic index has been signaling an impending downturn for a few months. Over the past six months, the index declined at an annual rate of 8.2 percent, which is typically seen at the beginning of a recession.
5. ISM Manufacturing Index
This study of corporate leaders from industrial enterprises had, until recently, produced good results every month for over two years.
However, despite this growth, the ISM manufacturing index actually decreased in December for the second consecutive month due to weaker demand and sluggish output.
The purchasing managers index (PMI) is a poll of buying and supply executives in more than 400 industrial enterprises across the U.S. Not all signs were considered bad by this month’s respondents. Although consumer demand may have decreased, it stayed high, providing hope for the coming year.
6. Retail Sales
Retail sales in December 2022, according to preliminary estimates, had increased six percent from the previous year but were down 1.1 percent from November. Analysts didn’t view the positive year-over-year figures as much of a benefit for the economy at large.
7. The Stock Market
Investors have seen the S&P 500 rise so far in the new year. The index has gained more than 12 percent since the previous market low on October 12, in addition to being up 5.4 percent to date. The bear market, though, is probably still very much alive.
8. Treasury Yield Curve
An inverted yield curve occurs when short-term interest rates pay out more than long-term rates. Given that the market anticipates weaker long-term growth, this is often a warning sign of an upcoming recession.
9. Initial Jobless Claims
The weekly initial jobless claims data gives an indication of the number of people that have started applying for unemployment benefits. More people are quitting their jobs and requesting unemployment insurance.
However, initial unemployment claims are currently at a nine-month low in the last week of January. In comparison, there were over 200,000 by the end of December, which represented a number that had remained largely constant throughout 2022.
10. The Unemployment Rate and Labor Market
The U.S. labor market is still strong despite uncertainty throughout the economy and worries about a potential decline in the months ahead. Moreover, the unemployment rate has decreased a few points from last year and is back to its pre-pandemic levels.
In reality, companies created 517,000 non-farm positions in January, considerably above the 188,000 additional jobs predicted by the majority of economists.
At the end of 2022, the labor market was extremely tight, with the unemployment rate returning to a low that we haven’t seen in half a century.
11. Job Openings and Labor Turnover Survey (JOLTS)
Even while the unemployment rate is relatively low, there are still a lot more jobs available than there were before the pandemic, despite the fact that it is down from this time in the previous year. In January 2020, there were approximately 7 million job opportunities as opposed to 11 million today.
However, only six months earlier, there were roughly one million more job opportunities, indicating a slight decline in the demand for labor. Although the labor market is still generally tight, market participants are closely monitoring the trend.
The Fed could embrace a less aggressive monetary policy as a result of a deteriorating employment situation, which could soften the economy’s landing.
A Closer Look at the Two Possible Outcomes
The U.S. may not face a recession in 2023. However, this cannot be said with complete certainty. Let’s explore the two possibilities for the coming year.
The Soft Landing
There is no guarantee that the United States will experience any kind of recession.
The Fed has persisted in claiming it can increase interest rates without causing a recession, instead guiding the country toward what is known as a “soft landing,” in which the U.S. economy contracts but doesn’t decline, and unemployment doesn’t rise dramatically.
Recent evidence supports a more optimistic scenario. The yearly inflation rate dropped in December, and it continues to decline. A few of the elements that particularly alarmed the Fed are also moving in the correct direction, most notably the slowing of wage and price rises.
As a result, the Fed has been able to scale back the number of its rate increases. As a result, economists now anticipate the Fed may only raise rates by a quarter point.
The Hard Landing
No eventuality can be counted out in an uncertain world, including the possibility that the Fed’s rate increases may contribute to the start of a challenging recession or a “hard landing,” as it is known in the business world.
One possibility is that the Fed might raise interest rates excessively. Interest rate management is an imperfect science, and errors can have serious consequences.
Russia’s attack on Ukraine continues to have a negative impact on the world economy. Nobody knows how the conflict there will turn out in the end.
Another significant potential risk is approaching: the oncoming conflict over the debt ceiling.
If the ceiling isn’t raised, the national government won’t be able to cover all of its obligations, leading to a default. That would tremble global financial markets. Even if the government is able to prevent a default altogether, even coming near one could increase borrowing prices and reduce people’s retirement funds.
The global economy has suffered as a result of the COVID-19 pandemic, and the U.S. economy is no different. Although we are not currently in a recession, economic indicators suggest a significant decline in financial markets and economic activity.
Even though there isn’t a recession yet, the economy isn’t doing well. Just bear in mind that not all of the data points we ranked above would have equal weight in determining if the United States is experiencing a recession.
Due to low unemployment, good wage growth, and a high number of open positions, the labor market is where the economy is strongest.
Consumers currently appear to be handling high inflation better than they did in the previous year, and it is anticipated that prices will continue to decline in the months ahead.
The housing market, in particular, is vulnerable to higher borrowing costs and has not performed well.
Will there be a mild recession, a severe downturn, or smooth sailing? Only time will tell.