US recession in 2023 now seems more likely than not
|Summary
- We are changing our base case forecast for next year from an economic soft landing to a mild recession starting in mid-2023.
- Recent data suggest that inflation is becoming increasingly entrenched in the economy. High inflation is eroding real income, which likely will weigh on consumer spending growth in coming quarters.
- Additionally, the Federal Reserve is becoming increasingly more hawkish. The FOMC has already raised its target range for the federal funds rate by 150 bps since March, and we look for the Committee to hike rates by an additional 275 bps by early next year. Higher interest rates will eventually depress interest-rate sensitive spending.
- Other financial conditions have tightened significantly recently. Credit spreads have widened, most major stock market indices have slipped into bear market territory, and the dollar has strengthened considerably. Tighter financial conditions will also impart slowing effects on the economy.
- Many underlying fundamentals generally remain sound. Household and business balance sheets are generally in good shape, and the banking system is well capitalized. Consequently, we do not expect the downturn we are forecasting to be especially deep or prolonged.
- In our view, the recession will be more or less equivalent in magnitude and duration to the downturn of 1990-1991. That recession lasted for two quarters with a peak-to-trough decline in real GDP of 1.4%.
- Recession next year is not necessarily assured, and the Fed may still be able to pull off an economic soft landing. But prospects of a soft landing are looking increasingly less credible, and we now judge that recession next year is more likely than not.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.