Still Waiting for Signs of a Recession

Elliott D. Pollack & Company 2023 Economic Outlook

Six months ago, we discussed three scenarios that were possible for the economy. Our best case we called the “soft landing” (and gave it a 20% chance) which meant that we escape a recession despite high interest rates with a strong labor market and by bringing inflation under control. The other two scenarios included a recession, one short and shallow, recovering by the second half of 2024 (50% chance) and the worst case being a long and protracted recession (30% chance).

Despite months of predictions that the U.S. is on the verge of a recession, the U.S. economy has remained remarkably resilient in 2023. Stubborn inflation and rising interest rates that typically signal the peak of an economic cycle haven’t managed to spark the job-killing downturn that many, including us, feared was inevitable. What we have seen over the past six months is low unemployment and declining inflation. Job growth has continued and there are still nearly twice as many jobs available as there are people looking for one.

Many economists and investment banks are changing their outlook. Goldman Sachs now reports just a 25% chance of recession in the next year. Bank of America is now forecasting a softer downturn not expected until next year. One of the country’s leading economists, Mark Zandi of Moody’s Analytics, has cited five reasons why the economy could avoid a recession:

Excess Savings

Between low spending during the pandemic and the government’s stimulus money, consumers saved a lot more cash. Savings peaked in 2021 but consumers are still holding on to $500 billion. Consumer spending, which accounts for 70% of our economy, is still increasing.

Labor Hoarding

Businesses have struggled to find employees both before and after the pandemic. They are avoiding layoffs now because persistent labor shortages are expected going forward as baby boomers retire.

Light Debt Loads

Borrowing by households and businesses has been sensible ever since the Great Recession. While household debt is near record highs, consumers are not overly burdened compared to their disposable income.

Anchored Inflation Expectations

While still a burden on households, inflation was down to 4% in May and has been on a downward trajectory for months. The Fed decided not to increase borrowing rates last month, although additional increases are anticipated by the end of the year. If consumers and businesses believe the Fed will do what is needed to rein in inflation, they will behave accordingly. A more positive outlook - that inflation will recede - will help increase the chances of this outcome.

Low Oil Prices

Recessions since World War II have historically been preceded by a spike in oil prices. That has not occurred this time. Global oil markets have adjusted despite the Ukraine war, easing inflationary pressures. We may experience price swings as Saudi Arabia cuts output, but prices have stabilized for now.

Overall, declining inflation, stable oil prices, steady consumer finances, and a strong labor market all point to a potential soft landing. The economy will ultimately slump, but odds are fading that a recession is ahead. Time will tell if this more optimistic forecast comes true.

1.7% INCREASE 2023

2.7% INCREASE 2024

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4.0% INCREASE 2024

-30.0% DECREASE 2023

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