Are We in a Recession This Year? Looking at the Likelihood of a 2023 Downturn
Key takeaways
- Headline inflation in May came in at 4%, but core inflation accelerated slightly
- Goldman Sachs now puts the chance of a recession in the next 12 months at 25%, down from 35% after the March banking crisis
- The U.S. Treasury raising bonds and bills after the debt-ceiling crisis could put further strain on the banking system
While inflation remains double what the Fed would like, it’s coming down quicker than other developed economies are managing, which begs the question: is a recession on the way after all, or are we seeing the coveted ‘soft landing’ the Fed has been after all along?
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What’s going on with the U.S. economy?
Honestly, depending on who you speak to, everyone has a completely different opinion on whether the Fed is doing a good job or not. It’s been pursuing a rapid monetary tightening policy in a bid to tame inflation, which peaked at 9.1% last year. It’s increased interest rates ten times in a row, with the target range now at 5% to 5.25%.
In the latest May consumer price index (CPI) figures, headline inflation dropped more than expected to 4%, down from 4.9% the month before. The sizeable drop gave the Fed enough confidence to pause its aggressive monetary tightening policy for June so the economy could have some breathing room and avoid another SVB situation.
The jobs market has been another critical factor in maintaining higher-than-wanted inflation. Nonfarm payrolls grew massively in May, hitting 339,000, but the unemployment rate also ticked slightly to 3.7%, indicating the Fed’s monetary tightening is working.
Could there still be a recession?
Goldman Sachs economists now say there’s a 25% chance that we’ll see a recession in the next year, down from 35% when the March banking crisis happened, so the odds are improving.
Thanks to a couple of factors, we’re not out of the woods yet. The first is the shockwaves from the eleventh-hour debt-ceiling deal that stopped the U.S. economy from toppling into an acute financial disaster but has left the Treasury needing to raise cash via bonds and bills far quicker than normal. The strain could pressure the banking sector like what we saw happen in March.
There’s also the fact that core inflation accelerated slightly in the latest consumer price index (CPI) report for May, which suggests there’s still some way to go with raising interest rates to knock inflation on the head once and for all. The higher interest rates rise, the more expensive borrowing gets, which could result in further hardship for households and businesses having to make hard decisions about layoffs.
The bottom line
The Fed is doing the tough-to-manage job of balancing the inflationary pressures and raising interest rates while avoiding mass unemployment. The fabled ‘soft landing’ is now a possibility again, but everything could change instantly if sticky inflation continues. We don’t envy the Fed’s position right now, that’s for sure.
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