slowcession? Richcession? Or just recession?
Whether it’s in the supermarket aisle or in the corporate suite, many people expect a recession, even if there’s no certainty that one will occur.
Poll after poll shows recession fears are high. Is easy to see why.
The Federal Reserve is raising interest rates the most aggressively since the early 1980s in its race to reduce inflation. And a recession is usually the consequence when the central bank starts raising borrowing costs.
The prospect of a recession is certainly scary. But even if the US is headed for one, it’s worth keeping in mind that no two recessions are the same.
A downturn could be momentary, like the brief pandemic-induced one in 2020, or more like the economic tsunami that followed the 2008 housing crash.
So, from recession with a small r to the so-called soft landing, here are some of the current predictions for what kind of economic slowdown the US might face.
The recession with a small r
In a recent survey of economists, the World Economic Forum found that nearly two-thirds of those surveyed believe there will be a recession in 2023.
But here’s the good news: Many analysts expect a relatively mild and short recession, or what is sometimes called a recession with a small r.
Unlike in the early 1980s, when the Fed’s sharp rate hikes led to a brutal recession, this time around the economy appears to be reasonably resilient despite dealing with the highest rate of inflation in some 40 years.
A big reason is the health of the job market. Yes, there have been high-profile layoffs at companies like Google and Amazon recently. But those ads were largely about downsizing after these companies overhired during the pandemic. In fact, overall data still shows that employers are continuing to hire.
Employers added 4.5 million jobs last year, marking a rather spectacular return from the depths of the pandemic.
Of course, the Fed’s rate hikes will likely result in some job losses. In December, the Fed projected that the unemployment rate would rise to 4.6%, from the current near-record low of 3.5%.
But that would still be a historically low number.
The ‘slow cessation’
Trying to come up with catchy terms to describe an event is something of a tradition in economics, although they rarely catch on, with a few exceptions like “the Great Resignation” or “shortage inflation” (which was coined in this newsletter).
Moody’s Analytics is now testing it.
“Slow unemployment” is a forecast that the economy will go through a difficult period of near-zero growth, but will ultimately avoid real contraction. It is an argument that others also believe.
In a report setting out its thesis, Moody’s argues that the economy still has a lot going for it, including healthy household finances as well as strong corporate balance sheets.
Moody’s believes they could help offset the economic consequences of rising interest rates, such as higher borrowing costs, slower economic growth and more volatile financial markets.
“Under almost any scenario, the economy will have a difficult 2023. But inflation is moderating rapidly and the fundamentals of the economy are strong,” writes Mark Zandi, Moody’s chief economist.
“With a bit of luck and reasonably adroit policymaking from the Fed, the economy should avoid a full-blown recession. If so, we can call it a slow release.”
This was coined by Wall Street Journal columnist Justin Lahart. Yes, journalists struggle to find catchy terms, too, with an equally poor track record of success.
“Richcession” refers to a recession or near-recession that hits the rich more than the low-income. That would be unusual because recessions tend to hit the relatively less well-off the hardest.
The poorest people are already suffering from the current recession, but Lahart and others say that if we do go down, low-income workers may find themselves more isolated than in past recessions.
Labor shortages during the pandemic forced many companies to raise wages to hire staff. Wage gains at the bottom of the income scale were proportionately higher than those at the top, although many workers’ wage gains were partially eroded by inflation.
Inflation is now declining, but wage gains are holding up. That factor should help lift the overall net worth of low-income workers as they grapple with a potential recession.
And the latest employment data shows that sectors that normally hire low-income workers, such as entertainment and hospitality, continued to hire strongly as Americans continued to dine out and take vacations. In fact, retail companies, still remembering the nightmare of hiring workers during the pandemic, are more willing to retain staff.
That also raises hope that those with fewer resources can avoid some of the impact of an economic downturn.
Of course, there is no certainty that the United States will have to endure a recession.
The Fed has continued to argue that it has a way to raise rates without causing a recession, and instead takes the US significantly.
Some recent indicators point towards that more optimistic scenario.
Inflation continues to moderate, with the annual rate falling to 6.5% in December from a high of 9.1% in June.
Some of the factors that particularly concerned the Fed are also moving in the right direction, including, most prominently, the cooling of wage and price increases.
That has allowed the Fed to moderate the size of its rate hikes, and analysts now expect the central bank to raise rates by just a quarter of a percentage point at its meeting next week.
In addition, China’s end of its COVID-19 restrictions has raised hopes for a stronger global economy, which may also have a positive impact on the US. However, this works both ways, as a Increased demand for energy to boost China’s economy could result in higher oil and gas prices.
the forced landing
In an unpredictable world, no scenario can be ruled out, and neither can the possibility that Fed rate hikes help trigger a hard recession or hard landing in economic jargon.
On the one hand, the Fed could exaggerate rate hikes, raising them more than necessary. Interest rate management is an inexact science, and mistakes can be terrible. The Fed was widely blamed for keeping rates too low in the run-up to the 2008 global financial crisis, for example.
Meanwhile, Russia’s invasion of Ukraine continues to weigh on the global economy. No one can predict how the war will eventually end there.
There is another big potential risk on the horizon: the looming fight over the debt ceiling.
If the ceiling is not raised, the federal government will not be able to pay all of your bills, resulting in a default. That would rock financial markets around the world. Even if the government manages to prevent an actual default, simply reaching out could increase borrowing costs and put a dent in people’s retirement savings.
In an interview with CNN, Treasury Secretary Janet Yellen warned that failing to raise the country’s debt limit has the potential to trigger another “global financial crisis.”
The worst case scenario, hands down, and one that would likely end up causing a recession, with a capital R.