Economist predicts a ‘short and shallow’ recession

Is the U.S. in a recession?

“It’s probably the top question of the day,” said Dana Peterson, chief economist at The Conference Board, at a recent webinar.

If the U.S. is in a recession, “it’s probably starting right now,” she said. She presented some data pointing to a recession starting either in the first quarter early in the second quarter of 2023.

Leading indicators have fallen well into negative territory, she said. A current reading of those indicators suggests a recession may already be here.

Recession warning signals

Recession warning signals “have been flashing red since March 2022,” Peterson said. She noted that the six-month rate of leading economic indicators fell below 4% at that time. The diffusion index has been below 50 since January 2022. These two factors suggest what Peterson described as “a shallow recession.”

The short and shallow recession Peterson predicted will be characterized by negative domestic demand. She described domestic demand as all the things consumers spend money on and business invests in.

If the U.S. is in recession, Peterson said, she didn’t anticipate deterioration in the labor market. She predicted a modest increase in the unemployment rate, which would level off toward the end of 2023.

Labor market still tight

The labor market may see some weakening and the jobless rate could rise to 4.5% - or about 900,000 layoffs – but this still constitutes a tight labor market.

Labor market damage may be muted because of a continuing labor shortage. Baby boomers are retiring, shrinking the working age population. In addition, the COVID-19 pandemic continues to have an effect on labor force participation.

“Labor shortages are not a right-now thing,” Peterson said. “It’s a long-term thing that we’re looking at.” She added that many employers are responding to the labor shortage by either not looking to hire more workers or by not looking to shrink their workforce.

A recession would be driven by the Federal Reserve’s tightening in reaction to excessive inflation, Peterson said. She predicted two or three more interest rate hikes are likely before the Fed considers cutting rates in 2024.

“I think the Fed is nearing the end of its tightening phase,” she said. “From here on out, the Fed will be highly focused on inflation.”

Peterson said she believes inflation has peaked and prices are expected to decelerate through 2023 into 2024, with the Fed’s target of 2% annual inflation unlikely to be achieved until the end of 2024.

What is driving inflation? Peterson said housing (including rent) as well as strong demand for services. Food prices could continue to remain high as they are impacted by flooding, droughts, bird flu and the war in Ukraine that is affecting the world grain market. She also warned that as China reopens after COVID-19 restrictions, there could be increased demand for energy, leading to a rise in oil prices.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].