Many previously bearish economists and Wall Street giants have flipped their recession predictions on the back as the economy shows relative strength in 2023 despite aggressive rate hikes. After more than two years of warning of impending economic doom, the Federal Reserve may finally be able to keep inflation in check without triggering a job-killing recession, they now argue. are doing. But Oren Krachkin, chief U.S. economist at independent economic adviser Oxford Economics, doesn’t support the new rosy outlook.
“Some forecasters have ruled out a U.S. recession from the baseline. We continue to think it will,” he said in a note Tuesday.
Krachkin said the economy had recovered nicely from the pandemic and acknowledged some risks to his forecasts. But businesses are slowing as consumers rapidly deplete their coronavirus-era savings. employmenteconomists still believe a “gentle recession” is coming.
However, Krachkin also noted that how we define a recession is important in this case. The National Bureau of Economic Research (NBER) defines a recession as two consecutive quarters of negative gross domestic product (GDP) growth and “a significant decline in economic activity that is spread across the economy and lasts for more than a few months.” .
However, “because some industries are performing poorly and others are still doing well, economic indicators do not meet the traditional definition of a recession used by the US recession mediator, the National Economic Research Service. It’s possible,” Krachkin explained.
After years of coronavirus lockdowns and travel restrictions, Americans are returning to airports and restaurants to make up for lost time. Due to rapid changes in their consumption habits, sectors focused on selling goods such as manufacturing and construction are struggling, while service sectors such as travel and leisure are thriving.
If this situation continues, “the economy may or may already be in a ‘rolling’ recession rather than a typical recession,” Krachkin writes.
A rolling recession is one in which some industries contract and suffer job losses while others continue to grow, resulting in positive overall GDP growth but low by historical standards. refers to
Krachkin isn’t the only forecaster to argue that a recession is coming. Yardeni Research founder Ed Yardeni said interest rate sensitive sectors from housing to manufacturing are already in recession, while other interest rate insensitive sectors from health care to education have managed to grow. claimed to continue.
But some more bullish economists, including Moody’s Mark Zandy, are betting on a soft landing.Zandy said it before this summer With a light household debt burden, stable oil prices, and stable inflation expectations, the Fed should be able to keep inflation in check without a subsequent rise in unemployment.
Still, Kurachkin uses Oxford Economics’ newly developed industry “business cycle indicator” model, which measures the expansion or contraction of individual sectors, to bolster the evidence that a mild recession is underway. It pointed out.
According to the model, the services sector is “trending strongly” due to strong leisure and service spending, income growth and increased business investment. However, it is a different story when it comes to product production sectors such as manufacturing and construction.
“BCIs for commodity-producing industries are suffering,” Krachkin wrote. “Commodity demand is well below pandemic-related peaks, businesses are managing inventories cautiously, interest rates are at multi-year highs, and the flow of credit to businesses and consumers is not so free. , it is no surprise that the manufacturing BCI is showing bleak signs.”
A recession has already begun in manufacturing, construction and other goods-producing sectors, according to Oxford Economics. And if the Fed raises interest rates and a full-blown recession hits the economy as a whole, “as history has shown, goods-producing industries generally suffer greater losses in production and employment,” Krachkin said. warned Mr.