In spite of initial optimism surrounding the avoidance of a recession in 2023, the much-anticipated “soft landing” scenario has faltered significantly in the US.
During the second quarter of the year, there was a prevailing belief that the U.S. economy could successfully evade the crisis. Factors such as a decrease in inflation, a robust job market, and increased consumer spending had instilled confidence in the ability of the world’s largest economy to sidestep a downturn.
Nonetheless, underlying threats persisted. Despite the decline in inflation, interest rates had surged to levels not seen in two decades, and certain indicators continued to hint at the economy not being entirely out of danger.
A last-minute agreement to avert a government shutdown did push an immediate risk slightly into the future. However, the potential for a significant auto industry strike, the impending resumption of student-loan repayments, and the looming possibility of a renewed shutdown after the temporary spending deal expires all pose threats that could easily trim a percentage point from GDP growth in the fourth quarter.
Why is it difficult to predict a recession-
Back in October 2007, Janet Yellen, who was then the San Francisco Fed President, confidently stated that the most probable outcome was for the economy to experience a “soft landing.” This was just two months before the Great Recession hit the economy.
Predicting a recession can be exceptionally difficult. Traditional forecasting methods operate on the assumption that future economic trends will simply extend from current conditions. However, this linear approach doesn’t hold true for recessions, which are non-linear events, making them particularly challenging to foresee.
Reasons for the 2023 recession-
The National Bureau of Economic Research has pinpointed six potential indicators that could potentially trigger a recession by the close of 2023. These indicators encompass various factors, including brain function, monetary policy dynamics, labor strikes, elevated oil prices, a looming credit crunch, and even the conclusion of Taylor Swift’s concert tour. It’s important to note that this evaluation primarily relies on recent forecasts, which may not have fully accounted for emerging economic threats in the coming months.
Auto Strike: The United Auto Workers union has initiated a strike at the three major American auto companies, marking the first simultaneous targeting of all three. The strike has been expanded to include approximately 25,000 additional workers. Given the extensive supply chains in the industry, stoppages like these can have a disproportionately significant impact.
Student Loan Payments: Millions of Americans will resume making student loan payments this month following a three-and-a-half-year pandemic-induced freeze. The resurgence of these payments could potentially reduce annualized growth in the fourth quarter by another 0.2 percent to 0.3 percent.
Surge in Oil Prices: Oil prices have risen by nearly $25 since their summer lows, crossing the $95 per barrel mark.
Yield Curve: A September sell-off pushed the yield on 10-year treasury bonds to a 16-year high of 4.6 percent. The sustained increase in borrowing costs has already influenced a decline in equity markets.
Global Economic Downturn: The possibility of a global economic downturn affecting the US is a concern. China is grappling with a real estate crisis, while the euro area is experiencing a contraction in lending at a rate even faster than during the depths of the sovereign debt crisis, indicating that already sluggish growth is likely to decline further.
Government Shutdown: A 45-day agreement to keep the government operational has postponed one risk from October to November, a juncture at which it could potentially inflict more damage on the fourth-quarter GDP figures.
In recent years, economists have experienced a humbling lesson. Faced with monumental disruptions caused by the pandemic and the Ukraine war, forecasting models that previously performed well during more stable periods have proven to be significantly inaccurate.