Is a recession coming? Some economists are starting to say no

More than halfway through 2023, and the recession that many economists were once predicting was all-but inevitable this year has yet to materialize. While forecasters still believe an economic downturn is likely to occur in the not-so-distant future, the consensus on Wall Street is generally that its timing has been pushed back to 2024.

The U.S. economy has warded off a recession largely because both the labor market and consumer spending remain robust, even in the face of decades-high inflation. The economy’s resilience has given economists on Wall Street and beyond reason to be optimistic again — and that’s reflected by various surveys that suggest lower probabilities of an imminent recession. 

Count the staff of the Federal Reserve among those prognosticators who have had a change of heart. While they are forecasting “a noticeable slowdown in growth starting later this year,” the staff aren’t bracing for a downturn, Federal Reserve Chair Jerome Powell said in July, following one of the bank’s regularly scheduled meetings of the Federal Open Market Committee. “Given the resilience of the economy recently, they are no longer forecasting a recession.” 

Still, because recessions are an inevitable part of the economic cycle, it’s a question of when, and not if, one will happen, notes Brian Jacobsen, chief economist of Annex Wealth Management. “It’s a little premature to say one isn’t coming at all,” he cautions.

Speculation about a potential recession is hardly new; some people have been calling for an economic downturn for more than two years. That’s been driven by speculation about whether Federal Reserve policymakers could successfully cool red-hot inflation without hampering the pace of economic growth. 

So far, it appears the Fed has engineered a so-called soft landing. The central bank has done so by aggressively raising a benchmark interest rate since March 2022, from near-zero to a range of 5.25% to 5.5%. The Fed’s goal? To curb inflation that reached levels not seen since the 1980s. While the Fed’s actions could create some softening in labor market conditions, a soft landing will be achieved if there isn’t a broader economic slowdown. 

The problem with the question of whether a recession is coming is the timing of such downturns is incredibly difficult to predict with accuracy and may not be evident until a recession is underway. And then the “official” declaration of a recession, which is made by a committee of the National Bureau for Economic Research (NBER), ends up being “very dated,” Jacobsen notes. In fact, NBER has taken between 4 and 21 months to determine past trough dates that indicate a recession has occurred. 

The NBER’s definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Committee members make this call based on indicators that include:

• Real personal income less transfers
• Nonfarm payroll employment
• Real personal consumption expenditures
• Wholesale-retail sales adjusted for price changes
• Employment, as measured by the household survey
• Industrial production

Surveys aren’t necessarily a reliable indicator of recession risks, though they offer insight into how professional economists are gauging the health of the economy. As of July, 71% of business economists say the odds of the U.S. entering a recession in the next 12 months are 50% or less, according to a survey by the National Association for Business Economics.That same survey in January showed “widespread concern” among economists about such a downturn this year.

The rosier outlook has been driven by improvements in leading indicators of the business cycle, including the number of initial jobless claims and confidence measures of both consumers and small business owners, notes Bill Adams, senior vice president and chief economist at Comerica Bank. These indicators are now signaling “a much less consistent message” about a downturn, he adds. “The risk of the U.S. economy flipping into a recession in the near-term looks lower than at the start of the year.”

Another positive sign? Gross domestic product, when adjusted for inflation, grew at a 2.4% annual rate in the three months ending June 30, up from a 2% rate in the first quarter, according to figures from the Bureau of Economic Analysis.

Even so, recession news persists because there’s no all-clear sign for the U.S. economy — and the same surveys and forecasts that suggest more optimism still show some lingering doubts.

That’s why Jacobsen prefers to monitor real-time indicators that aren’t subject to the subsequent (and potentially multiple) revisions like most economic reports. The fixed income market — and specifically the yield curve — continue to suggest it’s possible a recession is coming.

Looking at the spread between the yield on the 10-year U.S. Treasury versus the 2-year U.S., or what’s known as the yield curve, has historically been a reliable indicator of weakness in the economy. It’s also potentially a recession predecessor. On a real basis, meaning adjusted for inflation, this particular yield curve inverted in 2022 — meaning the shorter-term security was paying a higher yield than the longer-duration securities, which is abnormal.

An inverted yield curve has historically predicted a recession with a horizon of as much as two years. It’s not the inversion itself, however, but the yield curve’s return to normal that may accompany the recession, Jacobsen notes. But just as yield curve inversions can prove temporary, so can un-inversions, he notes, which makes this recession indicator a bit tricky: It’s not obvious until after the fact, he notes.

What’s more, even if the yield curve has been a reliable indicator of past recessions, it’s possible that the current inversion is skewed by the Fed’s policy — and so then, too, is its current usefulness, Adams notes. That’s because the inversion may be signaling that market participants are anticipating the central bank will cut rates in the future amid lower inflation rather than because of a recession, he adds. 

Accurately forecasting a recession at any time is difficult, but it’s made all the more complex by current dynamics. “We’re in a very unusual economy,” notes Adams, citing the recovery from the COVID-19 pandemic, structural changes in the economy, and current Fed policy. “I don’t think looking at a single indicator and comparing to prior cycles is good for predicting the near future.” 

That said, the risk of a recession within the next year is higher than the historic average, and there was a surge in the number of layoffs at the beginning of the year, Adams says. As such, people may feel more anxious, even if a recession hasn’t officially been declared. Americans may have actually endured a “mini recession” in late 2022 triggered by weakness in the majority of indicators tracked by the NBER —- without realizing it, Jacobsen says.

Regardless, there are things you can do with your money right now to feel more confident about your financial picture. Strategies to recession-proof your money include:

Speculation about a recession can understandably make people nervous, particularly if you work in an industry, like tech, that’s experienced layoffs this year. For now, there’s no recession news beyond speculation, which is why it’s important to make reason-based decisions about your money, rather than react from a place of fear. If you accept that an economic downturn is inevitable and control what’s within your control with your finances, that can make you feel more confident when a recession does eventually emerge.

That means it’s the perfect time to shop around to find the best bank for your needs and make sure your money is working as hard for you as possible. Consider maintenance fees, availability of branches (if in-person banking is important to you), variety of savings products and tools, and of course interest rates. Online banks tend to offer the highest return on your deposits. In fact, savings account rates and 1-year CD rates at the best online banks are upwards of 5.00% right now.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as the Home and Financial Services Editor for the Hearst E-Commerce team. Email her at [email protected].