To put it very unscientifically, the economy right now is weird.
Major tech companies keep announcing layoffs, but unemployment claims fall week after week. The cost of just about everything is way up, but Americans haven’t really stopped spending and tightened their belts.
Meanwhile, the Fed has signaled it plans to raise its benchmark interest rate again to deal with stubbornly high inflation.
Is this what we call a recession? Or is it about to become one? We asked economists to help us navigate these strange times, and predict what’s yet to come in 2023.
What is a recession?
A brief, but important, definition before we dive in: What does it even mean to be in a recession? That definition is largely up to the National Bureau of Economic Research, which isn’t a government organization, but even the White House calls them the “the official recession scorekeeper.”
The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
The nonprofit’s committee of economists take lots of government metrics into consideration when determining in a recession, and those are often not available in real time. For that reason, recessions are easier to recognize in retrospect than in advance or in the moment.
Given that definition, are we in a recession or not?
“To the best of my knowledge, we are still expanding,” said Lawrence J. White, professor of economics at the NYU Stern School of Business.
The United States’ GDP grew by 2.7% in the fourth quarter of 2022.
“It may be a bit slower than before, but the economy is still expanding, despite the fact that we’ve had a substantial increase in interest rates and substantial tightening of monetary policy by the Federal Reserve,” said White.
Jake Clopton, economist and founder of commercial mortgage broker Clopton Capital, agreed we aren’t in a recession – yet. “We’ve already seen people starting to access their 401(k)s early, stuff like that, and obviously mortgage rates have gone up a lot. But it just hasn’t fully realized itself yet, and you know, I think we’re getting close to that.”
Here’s the bad news: Most economists still expect a recession to hit within the next year. A survey of 48 forecasters issued by the National Association for Business Economics found about 60% of respondents believe the U.S. economy is more likely to slide into a recession in the next 12 months than it is to avoid an economic downturn.
In December, about half of the forecasters thought a recession would start by the end of March, but when asked again last month, only a quarter thought that would happen.
More economists now believe a recession, if it does materialize, will come later in the year, but they disagree on the precise timing.
For Clopton, it comes down to the Fed continuing to raise interest rates. “In the last seven or eight times the Fed tried to rein in inflation by raising rates, they induced a recession. They’ve got a pretty good track record there.”
Clopton predicted we’ll start to see more indicators of a recession in the second half of the year.
But not every economist agrees. There are plenty who still believe the Fed will be able to achieve a tricky “soft landing,” in which they raise interest rates enough to curb inflation without triggering a recession.
“I tend to be an optimist and so I am thinking the Fed is going to be able to pull this off with a slowing down, maybe even a leveling of economic activity, but not the decrease that would earn the label recession,” said White.
FiveThirtyEight analysts pointed out that while some key economic indicators point toward a soft landing, others point toward a rather hard landing down the line. Only time will tell which scenario pans out.