How likely is a recession in 2023?

The writing is on the wall, and the majority of U.S. economists agree that the U.S. is in store for a recession next year.  

Year-over-year U.S. consumer price increases unexpectedly surged last month to 8.6%. That means that the Federal Reserve’s efforts to slow down the economy over the past few months through two different interest rate hikes have yet to bear a measurable effect on inflation.

With more experts sounding the alarm over inflation, and the Fed gearing up for even more aggressive action, economists are becoming increasingly convinced that the economy will come to a grinding halt and begin contracting soon.

This will likely happen next year, according to a new survey of 49 U.S. macroeconomics experts conducted at the beginning of June by the Financial Times and the Initiative on Global Markets, an economic policy and market research center at the University of Chicago.

The U.S. will officially be in a recession when the National Bureau of Economic Research (NBER) identifies a significant decline in economic activity lasting over an extended period of time, usually thought to be two fiscal quarters. The economy already went through a dip in the first quarter of 2022, when GDP fell by 1.5%. Numbers for the second quarter will be released by the Bureau of Economic Analysis in late September.

Nearly 70% of the economists surveyed believe that the NBER will make this call at some point in 2023, with 38% predicting that a recession will start during the first two quarters of that year, and 30% forecasting an official start in the second half.

Only one of the economists surveyed believes a recession will be called this year, while 30% predict that an economic contraction will not happen before 2024.

The biggest drivers of inflation over the past several months have been rising prices for food and gas, both of which have been hit by a global supply disruption since the Russian invasion of Ukraine at the end of February. 

Russian President Vladimir Putin has not been afraid to use food and energy exports from Ukraine and Russia as a bargaining chip during the war, which has sent prices for these commodities soaring. Over the past year, food prices in the U.S. have gone up 10.1% and energy costs are up 34.6%, which has led to average national gas prices exceeding the $5 a gallon mark for the first time ever.

More than half of the economists who responded to this survey predicted that these same forces—geopolitical concerns emerging from the war in Ukraine and higher energy costs—will persist for the remainder of 2022 and into 2023, and most likely continue applying pressure on inflation in the U.S. to keep rising. 

Other factors, including ongoing supply chain disruptions that are sending prices soaring for everything from groceries to cars, are also expected to continue impacting inflation into next year, according to the survey.

The survey did not differentiate between a severe or mild recession in 2023, although economists did identify several factors that could potentially limit the negative economic impacts of tighter monetary policy. 

Almost a quarter of economists believed that high consumer spending through inflation would be the most important factor in limiting losses and improving the chances of a mild economic slowdown, joining the ranks of several banks and other economists who have said the same thing.

But the biggest factor that could mitigate the chances of a severe recession could be the U.S. housing market, which has been running red-hot for months and will likely stay this way next year. 

Over half of the economists surveyed said that the active housing market could be what steers the U.S. economy away from a bad recession, joining the likes of mortgaging company Fannie Mae, which already predicted that the hot housing market could cushion the blow during a recession.

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Dive Brief:

• The U.S. economy probably will not grow this quarter and, after more weakening, may fall into a brief recession by early next year, the Conference Board said Thursday, citing its Leading Economic Index (LEI).
• “Consumer pessimism and equity market volatility — as well as slowing labor markets, housing construction and manufacturing new orders — suggest that economic weakness will intensify and spread more broadly throughout the U.S. economy,” according to Ataman Ozyildirim, senior director for economics at the Conference Board. “The economy could tip into a short but mild recession by the end of the year or early 2023.”
• The LEI, which projects the economic outlook seven months ahead, fell 1.6% from January to July after rising by the same amount during the previous six months, the Conference Board said.

Dive Insight:

The Conference Board’s bleak forecast adds to several recent warnings by economists that the U.S. is headed toward at least a mild downturn sometime during the next two quarters.

Factors including housing market weakness, the highest inflation in four decades, geopolitical turmoil, flagging manufacturing and crimped supply chains will likely bring on an economic slump, they say. Also, the Federal Reserve risks triggering a recession as it tries to curb price pressures by raising the federal funds rate at the fastest pace since the 1980s.

CEOs share the pessimism, according to results of a survey by the Conference Board and Business Council released Wednesday. Four out of five CEOs (81%) are preparing for a brief, shallow recession during the next 12 to 18 months, with 12% predicting a deep downturn that will harm global growth.

“CEOs are now preparing for the near-inevitability of a U.S. recession by year-end or in 2023,” Business Council Vice Chair Roger Ferguson said in a statement. Only 7% of top executives predict sustained growth.

The U.S. may already be undergoing a downturn. The economy shrank 0.9% during the second quarter after slumping 1.9% during the first three months of 2022, meeting the common definition of a recession as at least two consecutive quarters of negative growth.

Three out of four CEOs (77%) said general economic conditions had worsened since the second quarter, according to the survey. During the prior survey, 61% of CEOs said the economy deteriorated from the first to the second quarter.

CEOs identify inflation as their top challenge, with three out of five saying input costs during the past three months have either held steady or increased, according to the survey.

During the next 12 months, half of CEOs plan to expand payrolls compared with 63% during the second quarter, the survey found. Similarly, 82% of CEOs plan to expand capital spending compared with 93% during the April-to-June period.

Although less optimistic about the economy, CEOs “report conditions and intentions at their own firms that paint a more nuanced picture,” Conference Board Chief Economist Dana Peterson said in a statement. For example, three out of four CEOs “say demand has risen or held steady over the past three months.”

Indeed, the economy shows some glimmers of vitality. Consumer spending remained solid last month, the Commerce Department said Wednesday. Also, the unemployment rate in July fell to 3.5% — the lowest since the start of the pandemic in early 2020 — as U.S. employers far outshone forecasts and expanded payrolls by 528,000.

The Conference Board’s LEI tracks 10 data sets, including average weekly hours in manufacturing, average weekly claims for unemployment insurance, building permits, the Standard & Poor’s 500 Index and the spread between the federal funds rate and 10-year Treasury bond.

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