Economists expect the US to slip into a mild recession by mid-2023, as higher interest rates seek to reduce the drag of inflation on the economy.
The Federal Reserve Open Market Committee recently implemented its seventh interest rate hike of the year, a 0.5-point increase that came a day after data indicated the consumer price index eased slightly to a 7.1-percent annualized rate in November, down from 7.7 percent previously.
The latest FOMC hike followed four straight interest rate hikes of 0.75 points each.
Rising interest rates have slowed the economy throughout the year, although a continued strong job market and consumer spending have generally led economists to forecast a mild recession in 2023, as opposed to a deep recession.
“It will be a general recession” in the second half of 2023, said Jeff Korzenik, chief investment strategist Fifth Third Banksaid during this month’s annual economic outlook hosted by The Right Place Inc. in Grand Rapids.
“We’re not going to have the big dislocations in the economy that you would normally associate with a major recession,” Korzenik said. “We have a lot of momentum in the labor market. We’re adding 200,000 to 300,000 jobs a month and it takes a long time to decay before you actually get into a recession.”
Korzenik believes there is a “very distinct chance, maybe a 40 percent chance, that we could get some kind of soft landing” for the U.S. economy and remain to avoid a recession, he said.
“There’s some reason to believe inflation will break before the economy, but when you start getting into some of the details it gets a lot stickier,” he said.
For example, Korzenik noted that transportation and housing costs are expected to trend downward, while new car prices will continue to rise. He is “really concerned” about wage inflation from an acute labor shortage, as employers raise compensation above recent norms to attract and retain workers.
Nationwide, there are about 10 million open jobs, with only 6 million people actively seeking employment. Wage inflation has averaged about 5 percent nationwide, more than double productivity gains, Korzenik said.
“It’s too much. This is inconsistent with achieving the Fed’s target of 2 percent inflation,” he said. “If we go into recession, it will be because we can’t get our hands around the labor problem. This labor problem is really extraordinary.”
The at the University of MichiganRegional economist Don Grimes said the Research Seminar in Quantitative Economics expects a “very mild recession.” Grimes predicts the US economy will ease into recession in the second half of 2023, with full-year real GDP growth of 0.5 percent, then 0.8 percent in 2024.
According to the University of Michigan’s latest economic outlook, the new year will begin with 0.3-percent real GDP growth in the first six months of 2023. Real GDP then contracted by 0.8 percent in the second half of the year.
The U.S. should return to 0.8-percent real GDP growth for 2024 as the Federal Reserve eases monetary policy, according to the University of Michigan Outlook.
Several economists have submitted that outlier Federal Reserve Bank of Chicago A median projects a 0.6-percent increase in real GDP between the fourth quarter of 2022 and the fourth quarter of 2023.
“The big question for next year is whether inflation will come down, which we all hope will happen, so that the Fed doesn’t have to put the brakes on the economy,” Tom Wahlstrom, a senior business economist at the Federal Reserve Bank of Chicago, said at the recent Economic Outlook Symposium.
“According to our forecasters, the least rosy forecast is for a mild recession at most” in 2023, Wallstrom said. “The medium forecast is what I would call a ‘soft landing’.”
In an updated US outlook issued last week, Comerica Inc. Economists predict that real GDP will contract by 0.2 percent for 2023, then grow by 1.3 percent in 2024. Comerica expects real GDP to be flat in the fourth quarter of 2022, followed by a contraction of 1.8 percent and 1.4 percent in the first and second quarters of next year, respectively. . According to the Comerica Outlook, real GDP growth should rebound in the third quarter and reach 1.8 percent a year from now.
Also, Comerica expects that wage growth by the end of 2023 “will likely slow to a rate consistent with pre-pandemic trends,” the proposal suggested.
The economic outlook also predicts that inflation and CPI will moderate in 2023. The University of Michigan predicts that core inflation will register 6.2 percent for 2022 and ease to 4.3 percent in 2023 and 2.5 percent in 2024.
The FOMC issued a view after last week’s latest interest rate hike project that core inflation – which excludes volatile food and energy prices – could fall to 3.5 percent in 2023 from an expected 4.5 percent this year.
Given continued employment growth, “tremendous strength” in the financial system, consumer spending that remains strong and high savings rates, the U.S. economy is “not as exposed as you would normally be” to rising interest rates, Korzenik said.
“We would argue that we have more elasticity in the economy than usual and that gives us time,” he said, referring to whether this elasticity would give the economy enough time to deal with inflation without falling into recession.
“It’s a different kind of cycle, (and) that gives you more resilience,” Korzenik said.
Wells Fargo It also predicts that inflation will ease to 4.1 percent in 2023 and 2.7 percent in 2024 with the consumer price index. The producer price index, projected at 9.9 percent by the end of 2022, will decline to 3.9 percent in 2023 and ease further to 2.4 percent from 2024. , according to Wells Fargo.
The Federal Reserve Bank of Chicago expects “a substantial slowdown in inflation,” Wallstrom said. Economists submitting outlooks to the Chicago Fed forecast a median CPI of 4.4 percent.
“We have to reduce inflation, otherwise the Fed will be forced to raise rates,” Wallstrom said. “If inflation doesn’t come in as expected, it will have to slow down even more, and that’s where this ‘hard landing’ comes into people’s forecasts.”
The FOMC was “on a warpath” against inflation throughout 2022 and raised rates at an “unprecedented pace,” Korzenik said.
“Part of this is because the Fed has fallen behind in the fight against inflation,” he said.
In a statement after last week’s interest rate hike, the FOMC said that “sustained increases” in interest rates would be “appropriate to achieve a monetary policy stance that is sufficiently restrictive to return inflation to 2 percent over time.”
Comerica’s outlook expects the FOMC to “probably make two final rate hikes of two percentage points each quarter in early 2023” and tag inflation “likely to slow below 5 percent by next spring.”