On the Threshold of Recession
Sad to say, we think the likelihood of a recession starting in 2023 is increasing. While the Federal Reserve has not explicitly forecast a recession, the unemployment rate projected in the Fed’s quarterly Survey of Economic Projections[i] is consistent with a recession forecast.
While GDP rose in Q3 2022 and seems likely to rise mildly in Q4 2022, we have been seeing signs of weakness in the economic data. Recent data shows housing sector activity is plunging with sliding house prices; nonresidential construction is falling across the board; business equipment investment is slowing; exports have started to fall; consumer spending is slowing with absolute declines in durable and nondurable goods; and a situation of excess inventories is likely to lead to a period of declining inventory investment. The pace of job gains has been slowing and the unemployment rate rose in October.
A variety of surveys and indicators have been sending a message that recession risks have risen.
We think these data could get worse as the New Year starts.
How bad could it get?
The US has had 12 recessions since 1945. The two most recent—the 2007-2009 global financial crisis and the 2020 pandemic-induced downturn—were considered dramatic, traumatic and highly memorable. They were also, in many ways, atypical.
Memories of the past two recessions have investors concerned there will be another severe recession with what could be a very large rise in unemployment. As we contemplate the potential for unlucky #13, we don’t have a strong conviction on how pronounced a 2023 recession could be, but we do think it should be closer to a typical recession in terms of severity.