Recession Forecast 2023: USA Inching Towards Recession in the Next 12 Months
There are already signs of an economic downturn in the USA
- As per the official definition of recession two consecutive quarters of contraction in the gross domestic product (GDP) is termed as recession has already hit the US economy.
- On Thursday, Meta stock, one of the most prominent of American companies on the Nasdaq stock exchange, fell by around 25% in a single day due to disappointing results. It recorded one of the biggest single days falls in its history of trading.
- Not just Meta, most stocks are being punished very hard for missing the street expectations and it is said that wilt in the earnings is always the starting point of a recession period.
In this article, we will talk about the various factors via which recession is calculated and then try to gauge the possibility of it in the US in the next 12 months.
Recession Forecast 2023: Factors Signalling Toward Recession
Recession causes a decline in economic output, a contraction in GDP growth, and a decline in consumer demand and employment. We will look at each of these factors and a leading indicator of recession and which is the bond yield curve.
Inverted Yield Curve
The bond yield curve plots the interest rates or yields on similar bonds across a variety of maturities. The most common yield curve is that of US Treasury bonds issued by the Federal government.
In a normal environment, the yield of longer duration bonds like 10 years or 20 years is usually higher than that of shorter time frames like 2 years because time is risky and hence longer duration bonds give higher returns on maturity to attract investors. The yield curve inverts when a longer-duration bond yield is lower than that of a shorter-duration bond yield. The most common spread is that of 10 years yield vs. 2-year yield. The main reasons for this inversion are
- Investors lose confidence in short-term bonds due to the economic downturn and move their money to long-term bonds, increasing their prices and hence decreasing their yields.
- Also, investors feel that interest rates will be cut in the long time frame to support the economy, hence making 10-year bonds attractive, moving up their prices, and reducing their yields.
The inverted yield curve has correctly predicted each of the 10 US recessions since 1955 (there were a few false signals also), but a recession was always preceded by an inverted yield curve. So, we can safely assume that if a recession has to come in 2023, then there should be an inverted yield curve in 2022. The US has been dealing with an inverted yield curve for over a month now.
The curve was normal six months ago but has gotten some inversion since last month due to Fed rate hikes, which has impacted short-term bonds more as compared to long-term bonds. The longer the curve remains inverted higher is the probability of a recession in 2023. If it reverts back to a normal curve within the next month also, we can safely assume that the recession will be very short-lived even if it comes.
Contraction in GDP Growth
The technical definition of a recession is two-quarters of GDP contraction. Let us analyze the GDP numbers for the last 12 months.
In the first two quarters of 2022, the GDP growth rate was -1.6% and -0.6%. Surprisingly, the GDP numbers released for the third quarter show a major reversal. It grew at 2.6% in the third quarter, shrugging off the fears of a recession in the upcoming quarters. The primary reason for the GDP growth is good exports and fewer import bills due to the falling prices of oil and gas. Although, as per analysts, this GDP growth is not sustainable and the real effect of Fed increasing interest rates will be seen in the fourth quarter and onwards, it instills the confidence in US economy and reduces the chances of a recession in 2023.
Recession Forecast: Look at Employment Data
Another important aspect of recession is falling employment across the economy. In other words, unemployment rises in the phase of recession, which takes sometimes months or even years to come back to normal. In the USA, the Bureau of Labour Statistics (BLS) releases every month the data of non-farm payrolls which is the number of workers in the US excluding farm workers and some other job classifications. According to BLS, non-farm payroll contributes approximately 80% to the GDP.
The image above shows the change in the number of people employed as compared to the prior month. The picture shows that the number of non-farm payrolls has been positive for the last 12 months. Although it is decreasing in the recent few months, it is way above the positive mark, which shows that the possibility of a recession in the near future is very bleak. For example, at the time of Covid 19, non-farm payroll reported a -20687 in August 2020. So, employment data has been strong which further supports the GDP data.
Recession Forecast: Commentary by Bloomberg
As per the Bloomberg news article, there is a 100% probability of recession in the upcoming year. The latest recession probability models used by economists Anna Wong and Eliza Winger have forecasted higher recession probability across all timeframes with 12 monthly estimates that by October 2023 hit 100% from the previous 65%. The major reasons cited are tightened financial conditions, persistent inflation, and the hawkish stand by Federal Reserve which is still keen to increase interest rates to control inflation.
Recession Forecast 2023: Conclusion
The stock market is often the first one to gauge upcoming recession in the wake of bad corporate results and with the bear market taking a toll on investors wealth. The Workforce is the last group of people to be affected by the recession as dropping employment numbers do not begin with the onset of a recession, it takes time to set in and much more time to set off even after attaining normal conditions.
It is debatable whether the US is in a recession right now or not, but GDP numbers have been strong in recent quarters. Consumer spending is also on the right track as seen in the inflation data. There is no denying that there is an increased probability of recession in the upcoming year but if the GDP does grow in Q4 with slightly less pressure from oil prices, the US can negate the recession next year.