Is a Recession This Year Unavoidable?

Chief Economist Eugenio J. Alemán discusses current economic conditions.

The short answer to this question is, no, not at all.

The long answer, however, is trickier than it seems. So far, the majority of the sectors of the economy that have a higher sensitivity to high interest rates have reacted accordingly to the Federal Reserve’s (Fed) monetary tightening. That is, several investment sectors of real gross domestic product, have been in negative territory since early 2021, as the table below clearly shows. As an example, real residential investment has been declining since the second quarter of 2021, unabated. Nonresidential investment in structures has also been in negative territory since the second quarter of 2021 but managed to come back into slightly positive territory during the last quarter of 2022, up 0.4% on an annualized, seasonally adjusted basis. Nonresidential investment in equipment has been hit-or-miss but has posted three negative quarters since the third quarter of 2021.

Eugenio J. Alemán, PhD,
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So far, this weakness in investment has not been sufficient to bring the U.S. economy into a recession and our take is that we are probably close to the bottom in terms of investment weakness in this cycle. The reason for this is that housing is the most sensitive sector to higher interest rates and thus it adjusts the fastest to these higher rates. This means that the two more rate increases we expect in March and May would probably have marginal effects on the investment side of the U.S. economy.