(CNN) — A recession was expected in 2023.
This time last year, skyrocketing inflation was barely moving, leaving the Federal Reserve with no choice but to continue raising interest rates. The S&P 500 was already in a bear market. Layoffs, especially in the tech sector, piled up as companies cut costs.
And to top it off, the Philadelphia Phillies made it to the World Series, a historically terrible sign for the economy, since every time the team wins it starts a recession.
But the Phillies’ eventual loss to the Houston Astros last year was apparently a victory for the economy because a recession never occurred.
Truth be told, the reasons he didn’t make it to 2023 have little to do with baseball and more to do with good policies and a little luck.
However, as the standard investment disclaimer states, past performance is no guarantee of future results.
Favorable circumstances for a recession in 2024
The risk of recession has increased since the Federal Reserve began its tightening cycle in March 2022, Federal Reserve Chair Jerome Powell told reporters in December. However, he assured, “there is little basis for thinking that the economy is now in recession.”
But even when the economy appears to have never been in better shape, there is always the possibility of a recession next year, Powell added.
This is because unexpected economic crises (such as a global pandemic) can occur at any time.
Barring unexpected future events, some economists believe current conditions still have the potential to usher in a recession next year.
“The recession is simply delayed, but not completely eliminated,” said Kathy Bostjancic, chief economist at Nationwide Mutual.
One metric Bostjancic has followed closely is employment in the private service sector, excluding health and education. The remaining private service sectors (such as transportation, entertainment, and hospitality) are more cyclical, meaning they are more vulnerable to economic shocks. So studying movements in that sector gives a better idea of the state of the economy, he said.
In November 2022, monthly hiring in the private service sector, excluding health and education, totaled 92,000, according to data from the U.S. Department of Labor. However, the November 2023 jobs report shows a sharp decline, with 22,000 new hires in the sector.
Overall, job growth has been strong over the past year, helping to keep the unemployment rate below 4%.
But Bostjancic is not convinced this will last until the new year. The economist believes there is a 65% chance of a mild recession in 2024 and predicts the unemployment rate will rise to 5% in the third quarter. That’s nearly a percentage point higher than Federal Reserve officials’ median projection for the unemployment rate in 2024, according to the latest Summary of Economic Projections.
The drop in income due to unemployment, which Bostjancic predicted, would likely cause consumers to reduce spending and lead to a recession, he told CNN. And unlike in recent years, consumers have no “extra fuel” to fall back on because they have exhausted savings built up during the pandemic, she added.
There is also the risk of recession stemming from the Federal Reserve itself. That’s because the central bank’s current high level of interest rates aims to slow the economy to help bring inflation closer to its 2% target.
But if inflation continues to decline and the Federal Reserve waits too long to cut interest rates, that could prevent the economy from growing, said Louise Sheiner, a senior fellow at the Brookings Institution and policy director at the Hutchins Center for Fiscal and Monetary Policy.
This means it will be difficult for the Federal Reserve to determine when it is appropriate to cut interest rates, if it makes sense to do so.
For example, Sheiner explained, because interest rates take time to spread through the economy, previous actions by the Federal Reserve may already slow the economy enough to bring inflation closer to target, even if they have not yet reflected in the data. If the Federal Reserve leaves interest rates unchanged, it could end up going too far and causing a recession “by mistake.”
On the other hand, there is also the danger that inflation will be much more difficult to fight.
If the Fed wants everyone to believe it is committed to reducing inflation to 2%, “it will have to engineer a slowdown,” Sheiner told CNN.
This could mean keeping rates higher for a longer period than investors currently expect, or even raising interest rates.
The need for another recession-free year
It’s not entirely out of the question that the Federal Reserve gets a soft landing, a term used to describe a scenario in which inflation cools without a significant rise in unemployment.
Over the 11 rate-hiking cycles of the last 60 years aimed at reducing inflation, this has happened only a few times: in 1964, 1984 and 1994. But that doesn’t mean it can’t or won’t happen again. . .
David Mericle, chief US economist at Goldman Sachs, is one of those who believe in a soft landing.
“The hard part of the fight against inflation is over,” he wrote in a November note, adding that “the conditions are in place for inflation to reach its target again, and the hardest blows of monetary and fiscal adjustment are already behind us.” Backwards”.
While there were “good reasons to worry” about a recession last year, he said, he “doesn’t see any particularly high risk right now.”
With the unemployment rate hovering at historically low levels and millions of jobs still at stake, “it would be surprising if we had a sudden deterioration in the labor market,” Mericle told CNN.
His team sees only a 15% chance of recession in the next 12 months. He called it the “unconditional historical average,” meaning that in any given year he believes there is a minimum 15% chance of a recession occurring. But when inflation was near its peak during the banking crisis that began in March 2023, economists at Goldman Sachs saw a 35% chance of a recession in the next 12 months.
They lowered their forecast starting in June as inflation continued to improve, the job market became more balanced and banking stress dissipated.
While Mericle doesn’t see any “obvious” triggers for a recession, he said it would likely be “some sort of unexpected shock to the economy.”
2023-12-30 22:40:00
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