Thirty-four recessions have occurred in the US since 1854, according to the US-based National Bureau of Economic Research (NBER), which defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in GDP, real income, employment, industrial production, and wholesale-retail sales.”
Although more complex formulas are sometimes used to define recession, it is often considered that two consecutive quarters of negative gross domestic product (GDP) growth or economic contraction mean recession.
Since World War II, the average American recession has lasted about 10 months, as per NBER data. As the world’s ablest business leaders, finance chiefs, treasurers and economists publicise their views on whether the US is in recession, headed for a recession, or expected to escape recession in 2023, Moody’s Analytics says the more likely near-term scenario is not a full-blown recession, but rather a “slowcession.”
The Slowcession economy
“The U.S. economy will struggle in 2023 with halting growth and higher unemployment. Recession is a serious threat. But the Moody’s Analytics baseline forecast—the most-likely outlook—holds that the economy will avoid a downturn. Call it a slowcession”, Moody’s Analytics chief economist Mark Zandi wrote in a report earlier this month.
“Slowcession”, a new term coined by Zandi’s colleague Cristian deRitis, Moody’s Analytics Deputy Chief Economist, is where economic growth grinds to a near halt, but a full or protracted economic downturn is avoided.
Zandi defined the slowcession as “growth that comes to a near standstill but that never slips into reverse.” One of the important factors impacting whether the US will experience a recession or a slowcession is the US Federal Reserve’s (Fed) aggressive interest rate hikes to rein in inflation.
“The baseline outlook holds that the Fed will be able to accomplish this without precipitating a recession. That is, it will be able to raise rates high enough, fast enough to sufficiently quell the wage and price pressures, but not so high and fast that it knocks the wind out of the economy”, Zandi wrote.
Meanwhile, the US economy’s generally solid fundamentals add to Zandi’s optimism that a recession is avoidable. “Typically, prior to recessions, the economy is plagued by significant imbalances such as overleveraged households and businesses, speculative asset markets, an undercapitalized financial system that has extended too much credit, overbuilt real estate markets, or financially stretched state and local governments. For the most part none of these imbalances exist today”, Zandi explained.
Furthermore, what augurs well is that American consumers are in good financial shape. “In our consumer-oriented economy, shoppers are the firewall between an economy in recession and an economy that skirts a downturn. While the firewall is sure to come under pressure, particularly as financially hard-pressed low-income households struggle, it should continue to hold”, Zandi mentioned in the report laying out his argument.
Zandi also pointed to other key developments that influence Moody’s sanguine baseline view of the US economy. These include strong corporate balance sheets that “Have been careful, for the most part, not to take on too much debt”, and a well-capitalised banking system that “is on about as strong financial ground as it has ever been.”
US Banking System Rock Solid
In the wake of the 2008 financial crisis, regulators have required US banks to hold substantial amounts of capital. They must also engage in stress tests to determine how they might react or perform during tough times.
“It is working. There is neither too much credit (like before the financial crisis when lenders gave loans to households and businesses that could not reasonably pay them back) nor too little credit (like after the crisis when even creditworthy borrowers could not get loans in that credit crunch). Credit growth is just right”, he wrote.
Another significant factor boosting the chances of a slowcession are “lower oil prices”, Zandi wrote. Oil prices have dropped to near US$80 a barrel, down from their peak of more than $120 a barrel in June 2022 amid Russia's war on Ukraine.
“Although oil prices are not likely to remain this low for long, since the Chinese economy will revive and Russia may yet respond more forcefully to the sanctions”, Zandi added, but he noted that “The global oil market is adjusting admirably to the severe disruption caused by the Russian invasion.”
Zandi argues that a couple of typical imbalances commonly seen in the build-up to a recession, such as overbuilt real estate and precarious financial straits of state and local governments, are likely not to happen this time around.
Fed misstep can spark a recession
While Zandi expects slowcession for the US economy in 2023, he acknowledges a number of “serious threats” that make a recession a real risk, the most significant being “The prospect of the Fed making an error in setting monetary policy, sparking a recession that would have been unnecessary to achieve its inflation target.”
Zandi cautioned the Fed not to raise rates past 5% in its efforts to combat inflation, “Precipitating a recession in an unnecessary effort to ensure inflation is not a problem.” The Federal funds rate now stands at a target range of 4.25% to 4.5% after its last rate hike in December 2022.
Known unknowns that threaten the US economy
There are plenty of known unknowns, inherently unpredictable shocks that are most likely to emanate from geopolitical flashpoints such as ongoing tensions between the US and China over trade practices and the independence of Taiwan, and the struggles with Iran and North Korea. “If anything veers even a bit off script, skittish consumers and businesses will quickly pull back, and the economy will sink into recession”, warns Zandi.
Known Unknowns Threaten the Economy
He thinks that “The economy is also especially vulnerable to another shock. It would not take a big one to undermine already-fragile sentiment. There are the known unknowns, most notably the Russian invasion of Ukraine.” With no sign of an early end to the war in Ukraine, the risk is growing that the conflict could further escalate in 2023.
Zandi further added that “There is also the pandemic, which appears to be receding with China as the last severely disrupted major economy. But there is no telling if the virus will prove more persistent and once again disrupt the global economy.”
There remains widespread concern over a recession, as the possibility of a prolonged downturn in economic activity is uncomfortably high. Given that inflation is cooling off in the US and its economic fundamentals are robust, Zandi reckons the US can avoid a recession “With a bit of luck and some reasonably deft policymaking by the Fed”.
“It is important not to be Pollyannish, but it is also important not to convince ourselves that a recession is inevitable”, Zandi wrote. “It is not.”
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