In the future, the year 2023 may be known as the year of the recession that didn’t happen. Last January, The Wall Street Journal asked a panel of 70 economists to assess the chances of a recession occurring the following year. The median response was 63%. Unless something drastic occurs in the next few days, most of them were wrong – 2023 has come and gone without witnessing any recession.
Has the recession been avoided or postponed?
Economists have been grappling with the likelihood of a recession since the end of 2021 when prices for some goods began to rise rapidly with the reopening of the economy following pandemic shutdowns. By mid-2022, prices for all sorts of goods and services were rising at their fastest pace since the early 1980s, and for many experts, a recession – defined as a sustained economic decline – seemed inevitable.
However, economic growth continued at a brisk pace, the unemployment rate hardly changed from its historic lows, and inflation significantly retreated from its peak in 2022. Consumers were expected to cut back on spending, yet instead, they increased it.
Federal Reserve officials grew optimistic that high inflation could be curtailed so that the economy could experience a “soft landing” rather than a recession. Fed officials indicated they were likely to reduce their benchmark interest rate from its highest level in 22 years next year. In turn, interest rates on many types of loans, such as mortgages, have already begun to decline.
James F. Smith, an independent economist who runs EconForecaster, believes the chances of a recession this year were slim, estimating them at about 1% almost a year ago. This view has been justified so far, and he sees no signs of it changing anytime soon.
“We have record numbers of people working, and they’re making more money than ever” Smith said. “They feel reasonably confident, not great, but reasonably. People are in very good financial shape. The inflation rate is coming down significantly, and interest rates are following suit quite significantly.”
If the U.S. economy manages to avoid a recession, it would be a challenge to history. Eight of the other nine times the Federal Reserve raised interest rates to combat inflation, it led to a recession. So what is different this time?
Smith points to two key factors. First, the Fed’s actions to combat inflation were so drastic that floating money supply declined for the first time in 70 years, which helped extinguish inflation fires more effectively than past rate-hiking campaigns.
The cash assistance provided by the government to families during the pandemic may have helped spur inflation in the first place, but it also helped mitigate the recession. Things like stimulus checks, rental assistance, and extra unemployment benefits provided families with enough financial resources to survive and continue spending despite job losses caused by the pandemic and the subsequent rising inflation.
Like many things in economics, the precise reasons behind the recession or its absence will be raised but not definitively known. “Every recession is different,” Smith said. “We’re just trying to figure out how or why, and we don’t always find that out. We just say ‘It’s a puzzle’.”
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Wall Street Journal. “About the Wall Street Journal Economic Forecast Survey”.
Piper Sandler. “How Likely is a Soft Landing? A Look at History Since the 1960s”.
Goldman Sachs. “Why U.S. Money Supply is Shrinking for the First Time in 74 Years”.
Source: https://www.investopedia.com/about-that-recession-we-were-all-bracing-for-8419748
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