It’s interesting how different factors played a role in the belief of a recession in the United States around a year ago. Some experts thought that the idea that the US will fall into recession in 2023 was not synced with reality. As per the Federal Reserve, it is no longer forecasting the US recession.
The first two quarters of 2022 saw a contraction in U.S. Output with a 1.6% annual rate decline from January to March and a 0.6% annual rate decline from April to June. By one definition some argued that the country was already experiencing a downturn.
Inflation
To address inflation concerns the Federal Reserve increased interest rates. These were the highest in two decades. Central bank officials are now cautioning that more rate hikes might be on the horizon. Powell mentioned that there is still work to be done in controlling price spikes, which could potentially impact unemployment rates and wage growth.
Despite these challenges, staff economists at the bank no longer consider a contraction as the most likely scenario for this year. Initially, they had raised concerns about a slump after several banks failed back in March.
In July the unemployment rate was 3.5% which was much lower than what the experts had expected. The inflation is also low at 3.67% in August 2023.
Surprisingly despite unemployment remaining relatively stable, it raises questions about whether this forecast shifts the timing of a recession into a year. Or if there is potential for a “soft landing,” where economic growth slows but avoids a full-blown recession. This is a consideration for President Joe Biden as he approaches the election year.
In their projections, even the Congressional Budget Office estimated that the United States would completely avoid a recession and instead project that economic growth would slow down to a rate of 0.4 percent before bouncing back. The GDP growth for Q2 in 2023 was 2.4%
US Recession – Will Interest Rates Have Any Impact?
The Federal Reserve’s aggressive increase, in interest rates, has had a positive impact. Yields on fixed-income investments, such as certificates of deposit money market funds and bonds rose in response to these rate hikes. Mortgage rates and the interest charged on types of financing including credit card debt and automobile loans also went up.
The areas of the economy that are directly affected by interest rates experienced the impact. For instance, the housing market temporarily slowed down due to rising mortgage rates although it has recently stabilized. Haworth mentions that it’s important to keep an eye on factors well such as the potential for consumer and business borrowing to decrease due to higher loan costs caused by rising interest rates.
Despite the Federal Reserve tightening policy since March 2022 job growth surpassed expectations and averaged around 400,000 per month throughout 2022. Job growth reports remained solid during the seven months of 2023, however new job creation slowed during the same period.
Despite the slowdown, in wage gains during the beginning of 2023 recent data suggests that they have now stabilized. According to the information, private nonfarm payroll wages have grown by 4.4% over the 12-month period ending in July 2023. This level of growth is likely still considered a risk for inflation, by the Federal Reserve.
Will the Economy Maintain its Current Trajectory?
A crucial question is whether the Federal Reserve’s aggressive approach to interest rates will help or if things will remain the same. However, the rise in interest rates controls inflation.
According to Matt Schoeppner, an economist at U.S. Bank, it seems plausible that the economy will avoid a recession. He anticipates that real GDP growth will remain modest in the near future. He describes this as a “growth recession,” where we witness an economy with an impact on employment.
Data source: Statista
The Federal Reserve appears resolute in its commitment to combating inflation. Fed chair Jerome Powell recently stated that they will closely monitor data to guide their moves. Based on this assessment they will proceed cautiously in deciding whether to tighten policy by raising interest rates or wait for additional data.
However recent data indicates that the Fed may face pressure to tighten their policy even more. Haworth explains that softer employment figures are easing concerns among investors regarding rate hikes, by the Federal Reserve.
Impact on Investment Decisions
In the quarter earnings growth slowed down. Still exceeded expectations. This trend has continued into the quarter. Experts suggest that investors should pay attention to factors that have supported the economy despite the interest rate rise.
Although capital market performance has surpassed expectations so far in 2023 it was largely driven by technology stocks. Many other sectors of the market did not perform well in comparison. If there is growth in the coming months it could benefit other sectors of the market that are more reliant, on positive economic trends. The strength shown by the U.S. Stock market in July seems to be more widespread and not limited to a group of stocks.
Conclusion
In 2023 there is still a concern, about the possibility of a recession in the United States. According to research conducted by Goldman Sachs, there is an agreement that there is a 65% chance of an economic decline within the next year.
