The Shifting Outlook for the Recession of 2023: Are We in the Clear?

 

Introduction:

The much-anticipated recession of 2023 appears to be losing steam as economists revise their forecasts. Recent economic data has revealed surprising resilience, leading some financial institutions to push back their recession expectations to 2024. This shift in sentiment is accompanied by positive indicators, such as strong job growth and robust consumer spending, which have contributed to the market's optimism. In this blog post, we will delve into the evolving economic landscape, exploring the reasons behind the revised outlook and examining the potential implications for the future.

The Revised Outlook:

Wells Fargo's team of economists recently adjusted their recession forecast, now predicting an economic contraction in the first quarter of 2024 instead of 2023. They attribute this revision to the economy's demonstrated resilience, which has defied expectations amidst monetary tightening and tighter credit availability. Other financial institutions, including Goldman Sachs and Capital Economics, have also shown increased optimism, with reduced odds of a recession in 2023 and plans to revise their recession calls. Bank of America's chief economist even suggests the possibility of a "soft landing" or a mild recession.

Factors Contributing to Optimism:

The positive outlook for economic expansion in 2023 can be attributed to several key factors. First and foremost, recent economic data has been characterized as "resilient." In May, the U.S. labor market experienced a significant boost, adding 339,000 jobs, the highest monthly increase since January. Additionally, April job openings surpassed expectations, indicating sustained employment opportunities. Despite concerns surrounding inflation, consumer spending has remained strong, further bolstering confidence in the economy.

Growth Continues:

According to the Atlanta Fed's projection, the U.S. economy is set to grow by 2.2% in the second quarter, marking the fourth consecutive quarter of gross domestic product (GDP) expansion. Typically, two consecutive quarters of GDP decline signify an official recession. However, with continued growth and positive economic indicators, the likelihood of an immediate recession appears to be diminishing.

The Fed's Role:

The ongoing debate over a potential recession coincides with the Federal Reserve's aggressive interest rate hike campaign, which has raised questions about its impact on the economy. The outcome could range from a "hard landing" characterized by a deep recession and significant unemployment to a "soft landing" where the economy experiences only a slight slowdown. Bank of America's chief economist aligns with the soft landing scenario, emphasizing that the risk of a hard landing is reduced if bank stress and credit crunches do not worsen.

Dissenting Opinions:

While many financial institutions are revising their outlooks, some bearish calls on the economy persist. Morgan Stanley, for instance, predicts a 16% drop in corporate earnings by the end of the year. Additionally, analysis from Bespoke Investment Group indicates that investors have not heavily bet on a decline in the S&P 500 since 2007. However, it is important to note that the stock market is often forward-looking, and the market's performance thus far suggests that a severe recession in 2023 is not currently priced in.

Conclusion:

The discourse surrounding the recession of 2023 has shifted as economists become less confident in its arrival and extend their forecasts to 2024. Encouraging economic data, including strong job growth and resilient consumer spending, has contributed to this revised outlook. While dissenting opinions remain, the overall market sentiment indicates optimism, with the stock market performing well. As we move forward, monitoring economic indicators, the Federal Reserve's actions, and potential risks will be crucial in assessing whether the anticipated recession will ultimately materialize or if a soft landing can be achieved.