Inflation has begun to ease and economists are weighing the odds of the possibility of a recession in 2023—and while it still seems likely, it’s not nearly the sure bet it seemed just months ago.
A recession is defined by the National Bureau of Economic Research (NBER)—the official recession scorekeeper—as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months,” though economists also believe two consecutive quarters of negative economic growth constitute a technical recession.
While the NBER can use indicators to gauge if the economy is in a recession or not, it can take anywhere between 4 to 21 months before the committee officially announces that the U.S. is in a recession.
A recent survey from the National Association of Business Economists (NABE) shows that economists believe the likelihood that the U.S. is or will approach a recession is down to 56%, dropping from the previous survey in which two thirds of those polled believed a recession was imminent.
Other economists share the sentiment as the Goldman Sachs Research Group shows there is only a 35% chance of a recession and believes the U.S. can avoid one altogether.
Bank of America economists project a mild recession later in 2023 as they expect inflation and the core consumer price index (CPI), which drops more volatile items such as food and energy, to fall to 2.7% and 2.8%, respectively, in the fourth quarter.
The Conference Board—a nonprofit think tank—reports the U.S. leading economic indicators (LEI), which measure strength across markets, fell 1% in December and are down 4.2% over a six-month period. Senior director Ataman Ozyildirim believes an economic downturn could happen in the upcoming financial quarters.
While inflation has begun to ease, other economists are still expecting higher interest rates to push the U.S. economy into a recession later this year, according to a survey conducted by the Wall Street Journal.
Inflation fell for a sixth straight month in December to 6.5%, but core CPI rose 0.3%, which was expected.
With LEI continuing to fall, economists expect the Federal Reserve to respond with smaller hike rates at the upcoming Fed meeting in February.
In December, the Fed announced it expects interest rates to fall between the 5% to 5.5% range in its 2023 projections.
In total, the U.S. has experienced ten official recessions since the Great Depression, which ended in 1933, according to the NBER. The last recession was in 2007, after the housing bubble burst, causing unemployment to reach as high as 9.5%, according to data from the Bureau of Labor Statistics. To try and tame inflation that has remained stubbornly high since 2021, the Fed has been hiking interest rates, which works to cool rising prices by slowing down the economy—prompting some experts to worry the slowdown could spark a recession.
“We expect inflation will fall with accelerating momentum in coming months thanks to the reduced impetus of energy and food prices, easing supply chain bottlenecks and reduced final demand. Still, we continue to expect headline and core inflation will remain above 3% until mid-2023 and end the year above the Fed’s 2% inflation target,” says EY Parthenon chief economist Gregory Daco in an executive briefing.
The Journal survey reveals that economists believe the U.S. has a 61% chance of entering a recession in the next 12 months. “While recent inflation prints have shown some progress, a few persistent categories like core services are associated with the historically tight labor market, suggesting that there is still ‘a long way to go’ for the Fed,” Deutsche Bank economists Brett Ryan and Matthew Luzzetti told the Journal.
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