Are we headed for a recession? More economists think a 2023 downturn may come later than they thought
Forecasters have modestly upgraded their outlook for the economy and job market, and they now expect a recession to begin later in 2023 than they had thought.
Fifty-eight percent of the economists still say there’s more than a 50% chance of a downturn in the next 12 months, according to a panel of 48 forecasters surveyed Feb. 3-10 by the National Association of Business Economics (NABE). That’s about the same share as in a December survey.
But just 28% expect the slump to begin in this quarter, compared with 52% who held that view in December. Instead, 33% predict a recession will start in the second quarter and another 21% say it will begin in the third quarter.
A big reason for the improved forecast is January’s stunning 517,000 job gains and drop in the unemployment rate to 3.4%, a 54-year low. The jobs report, announced by the Labor Department early this month, portrayed a more vibrant employment market than had been captured by the steady slowing in monthly payroll gains late last year to a still robust 300,000 or so.
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How will the job market look in 2023?
NABE forecasters now project average monthly employment additions of 256,000 in the current quarter, up from their estimate of 103,000 in December, according to their median forecast.
They also predict average job gains of 102,000 a month for all of 2023, up from 76,000 in December, and unemployment that rises to 4.3% by the fourth quarter, below the 4.5% that had been projected.
Even as they foresee the nation slipping into a mild recession this year, most of the economists believe unemployment could peak at just 4.9% – still a historically low level.
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Is consumer spending increasing?
Booming job gains have bolstered Americans’ income and spending, which makes up 70% of economic activity. Consumption jumped 1.8% in January, the Commerce Department said Friday, the largest gain in nearly two years, despite high inflation, rising interest rates and a shrinking reserve of the additional cash U.S. households amassed early in the pandemic.
“I think the economy has proven to be more resilient than many economists expected,” says Ken Simonson, a NABE survey analyst and chief economist of Associated General Contractors, a trade group for the construction industry.
Many experts say low household debt, the pandemic-related savings and the vigorous labor market have helped Americans weather the higher costs of inflation and rising interest rates.
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What will be the effects of Fed hikes?
To be sure, growth is poised to slow as the Federal Reserve’s most aggressive campaign of interest rate hikes since the 1980s – aimed at bringing down inflation – curtails consumer and business spending. Many economists believe the strategy will trigger a recession this year.
But the NABE forecasters expect the economy to grow 0.8% in 2023 – based on the change in average GDP over the four quarters compared with 2022. That is down from 2.1% last year but up from their 0.5% estimate in December.
Inflation generally has fallen briskly in recent months, and the forecasters reckoned the consumer price index would rise 3% in 2023, down from their December estimate of 3.1% and the 6.5% gain recorded last year.
Still, they estimate the Fed’s key interest rate will end 2023 at a range of 4.75% to 5%, above the 4.5% to 4.75% range they previously predicted but below the 5% to 5.25% range projected by Fed officials.
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What is the biggest risk to the economy?
Just 51% of the economists say excessive Fed hikes pose the biggest risk to the economy, down from 65% in December. A small but growing share now sees a broadening war in Ukraine as the greatest risk.
The NABE survey, however, was taken before recent reports showed inflation rising more than expected in January, a development that could prod the Fed to raise rates more sharply.