With the stock market falling and interest rates rising, most experts think the economy is doing very well this spring.
The good news: It’s not. Overall output fell modestly in the first half of the year, but employers added at least 250,000 jobs in each month of 2022. The economy has never had a job market downturn this strong.
As economists look ahead to 2023, however, the recession warning lights are flashing brighter. Chris Varvares, a Clayton-founded vice president at S&P Global Market Intelligence, resisted using the “R” word until recently, but now thinks a recession is possible.
High interest rates reduce demand for housing at the same time the federal government provides little fiscal stimulus and rising prices put a damper on consumer spending. Recent layoffs by tech companies like Amazon, Meta and Twitter may mark the end of the post-lockdown hiring boom.
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“We’re seeing some weakness in the labor market,” said Paul Christopher, head of global market strategy at Wells Fargo Investment Institute. “In past recessions, the labor market is the last pillar of the economy to fall before a recession.”
Varvares believes that the decline will begin at the end of this year or at the beginning of 2023, but that in any case “the first quarter of the next year will mark the main point of the economic slowdown.”
Note that modifier: is in the middle. Households don’t have as much debt as they did before the 2007-09 recession, Varvares said, and state and local governments are still sitting on piles of federal stimulus money.
Automakers, whose production is constrained by a global chip shortage, cannot cut back further. “Instead of the usual pattern, we may see auto production continue to rise during a recession,” Varvares said.
His firm predicts that unemployment will hit 5.7% next year, amounting to 2.5 million lost jobs. That’s higher than the current unemployment rate of 3.7% but well below pre-recession levels.
The rate may not be so high, Varvares said, if employers “retain” workers because they remember how hard it was to hire.
This recession probably won’t look like one of the last two. The decline of the epidemic in 2020 was short and steep, while the one that started in late 2007 was long and deep.
“The consumer balance sheet, especially home equity, is in much better shape than it was 15 years ago,” Christopher said. “There is a ring here that will help the economy avoid a major recession.”
Christopher’s best guess is that the next recession will last 7 or 8 months. Varvares sees the economy starting to bounce back in the second half of next year.
It is possible, he added, that we can still avoid recession. That soft-landing scenario could happen if financial conditions continue to improve, including a strong stock market and low bond yields.
The “inflation miracle” can also help. The Federal Reserve may stop raising interest rates when it sees inflation falling rapidly.
That doesn’t seem likely at the moment. James Bullard, president of St. Louis Federal Reserve Bank, said recently that the Fed’s policy rate should be between 5% and 7%, from less than 4% now, to further inflation.
The Fed has insisted all along that it can beat inflation without pushing the economy into recession. So far so good, but warning lights say its luck may be running out.