Recession, Or Recession-ish? Fed Outlook For The U.S. Walks On A Knife’s Edge

Like many economists, Vanguard’s Joe Davis thinks the United States will go into a recession next year, and like many of his colleagues he does not expect it to be a serious one.

He has tentatively named it the “Zoom recession,” in reality a readjustment from the excesses of the pandemic – with tech and a few industries in the crosshairs as people reset how they spend their time and money, but with many industries on the verge trouble.

“It is getting back to normal,” he said.

The U.S. Federal Reserve in new economic projections this week did not explicitly join the recession camp, and Fed Chair Jerome Powell said he believes the country can maintain “modest” growth and sees only a “modest” rise in unemployment even as the Fed deliberately attempts to slow things down to quell inflation.

“I don’t think it would qualify as a recession,” Powell said of the growth rate penciled in by policymakers.

Still, the Fed’s outlook is extremely poor, a half percent growth in 2023 and an increase in unemployment that would be equal to about 1.6 million more people out of work around the same time next year – outcomes that seem recessionary.

It may transpire differently this time, but only if the Fed is able to defy history.

A Flashback To….?

Recessions in the United States have come in various flavors – deep or shallow, short or long. The last two have extended across extremes.

The pandemic induced an acute shock that drove the unemployment rate to almost 15% and saw the economy shrink from April through June of 2020 at a Depression-like annual rate of 30%. But GDP rose 35% in the next quarter, and within two years the unemployment rate had completely recovered, and the recession was gauged to have lasted two months.

By contrast, the downturn induced by a broader financial crisis and a collapsing housing market lasted a year and a half, from December 2007 to June 2009, a span during which GDP contracted during five of six quarters. Payroll employment continued falling for eight months after the recession came to an end and took six and a half years to return to its prior peak.

If a recession does develop in 2023, no one expects it to resemble either of those.

Companies and households are far less leveraged compared to how they were back in 2007, with modest debt service payments in relation to income, and a financial sector that – thanks to post-financial crisis regulations – is better capitalized. All of those factors minimize the risk of a financial crisis, and the deeper type of recession affiliated with it.

A similar analogy, Davis suggests, maybe the period from March 2001 to November 2001. Those months were declared a recession by the National Bureau of Economic Research’s Business Cycle Dating Committee, and gives some context to the Fed’s most recent projections.

Gross domestic product did fall in the first and third quarters of 2001, but rose in the second and fourth, and for the year overall grew by 1%. That’s double the annual growth the Fed says the United States will undergo this year, and what it expects through 2023.

The increase in the unemployment rate then was higher than the Fed currently forecasts for next year. From 3.9 percent in December 2000 the unemployment rate jumped to 5.7% a year later, and the estimated number of unemployed grew by over 2.5 million in a much smaller labor force.

The Fed expects unemployment to rise from 3.7% now to 4.6% next year and remain almost unchanged for two years after that.

In comparison to the “jobless recovery” that plagued the United States after the 2007 downturn, the projections that Powell and his colleagues are laying out might develop into a “job-full recession,” a downturn that passes without any heavy damage to the labor market.

But on its own, the increase in the unemployment rate seen by the Fed would correlate with a recession, and one feature of the U.S. economy is that once the jobless rate increases by half a percentage point it usually increases a lot more from there.

“There is no such thing as a ‘light’ recession,” said Lindsay Owen, executive director of the Groundwork Collaborative, a group that works on issues around economic equality and jobs, and holds that the Fed is putting workers too much in danger in its inflation fight.

“If a million more people are unemployed, they will be disproportionately black, brown, and older. The consequences will be stark even if Wall Street comes out the other side.”

Key Indicators Are Mixed

Though the attention is often on GDP expansion, the macroeconomists on the NBER committee study the factors that ultimately form output, not the GDP number itself.

Among some of those key indicators, the economy still appears to have momentum, even if there are some signs of slowing. On the plus side are jobs. There has never been a recession declared without a complete fall in employment. So far that keeps rising.

Personal income less government transfer programs is another measure the committee monitors, since consumer spending makes up so much of U.S. economic activity, and declines in household earnings can push it lower. Even adjusted for inflation it has so far remained steady.

Industrial production is another metric that usually becomes lower ahead of a recession, and is one of the data points that does seem to have climbed – marking the kind of moment that may register with the NBER if it continues lower.