With the economy showing relative strength in 2023, even in the face of big rate hikes, many previously bearish economists and Wall Street titans have changed their recession forecasts. They now believe that after more than two years of warning of impending economic doom, the Fed might be able to curb inflation without triggering a job-killing recession. But Oren Krachkin, chief U.S. economist at independent economic consultancy Oxford Economics, disagrees with the new rosy outlook.
“Some forecasters are knocking a U.S. recession out of their baselines. But we still think rising interest rates, a restrictive Fed and tight lending standards will lead to a mild recession in late 2023,” he wrote in a note Tuesday road.
Krachkin acknowledged some risks to his forecast, noting that the economy has clearly recovered from the pandemic. But the economist still sees a “moderate recession” looming as consumers rapidly spend their coronavirus-era savings and businesses slow hiring.
However, Krachkin also pointed out that how a recession is defined in this case matters. The National Bureau of Economic Research (NBER) defines a recession as two consecutive quarters of negative gross domestic product (GDP) growth accompanied by “a significant decline in economic activity across the economy that persists for more than a few months.”
But “with some sectors underperforming while others remain strong, economic data may not meet the traditional definition of recession used by the National Bureau of Economic Research, the arbiter of recession in the United States,” Krachkin explained.
After years of COVID-19 lockdowns and travel restrictions, Americans are returning to airports and restaurants, hoping to make up for lost time. The rapid shift in their spending habits has helped service industries such as travel and leisure thrive, even as industries focused on selling goods, such as manufacturing and construction, have struggled.
If this continues: “The economy could be in — or has actually been in — a ‘rolling’ recession rather than a typical one,” Krachkin wrote.
A rolling recession is when some industries shrink and suffer job losses while others continue to grow, resulting in overall GDP growth that is positive but below historical standards.
Krachkin isn’t the only forecaster who sees a recession on the horizon. Ed Yardeni, founder of Yardeni Research, has argued for months that interest-rate-sensitive sectors from housing to manufacturing are already in rolling recession, while health care to education Other industries that are less sensitive to interest rates have managed to continue growing.
However, some more bullish economists, including Moody’s Mark Zandi, are betting on a soft landing. Zandi said earlier this summer that light household debt, stable oil prices and stable inflation expectations should help the Fed curb inflation without causing unemployment to rise.
Still, Krachkin noted that Oxford Economics’ newly developed industry “business cycle indicator” model, which measures expansion or contraction across sectors, could support evidence that a rolling recession is occurring.
According to the model, the service sector is on a “strong trend” due to strong leisure and hospitality spending, income growth and growing business investment. However, the story is different when it comes to commodity-producing sectors such as manufacturing and construction.
“Our commodity-producing industry BCI is suffering,” Krachkin wrote. “With commodity demand well below pandemic-related peaks, businesses carefully managing inventories, interest rates at multi-year highs, and credit flowing less freely to businesses and consumers, it’s no surprise that our manufacturing BCI is sending a pessimistic signal. “
For manufacturing, construction and other goods-producing industries, the downturn has arrived, Oxford Economics said. If a true recession does hit the entire economy as the Fed raises rates: “History shows that commodity-producing industries typically suffer greater output and employment losses,” Krachkin warned.