From the Desk of Dale Crossley and Evan Shear
Is a Recession in 2023 Likely?: 7 Indicators to Watch
"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." — Peter Lynch
As the ups and downs of the markets continue, we receive questions daily on whether we think that a recession in 2023 is likely. As you know, a healthy economy experiences recessions from time to time. Since 1945, the U.S. economy has experienced 13 different recessions. Most downward turns have lasted only about ten months, while periods of economic growth typically last about 57 months. Even the Great Recession of 2008 lasted only about 18 months.
Chatter about the possibility of a recession has been going on for months since the U.S. Gross Domestic Product (GDP) for the first and second quarters of 2022 turned negative. However, there's no official announcement, even after two consecutive quarters of negative GDP, because other economic indicators were strong in the same time frame. So, although we can’t predict a recession, here are the indicators to watch.
First, What Is a Recession?
A recession is a significant drop in economic activity generally identified by negative GDP in two consecutive quarters. Other leading economic indicators include:
- A drop in employment levels
- A decrease in consumer spending
- A reduction in industrial output
These indicators have to be significant, widespread, and prolonged for an official announcement to be made.
Review of Current Economic Indicators
The National Bureau of Economic Research (NBER) announces a recession when economic indicators show signs of a continued slowdown. Here's a review of the current economic indicators.
- Gross Domestic Product (GDP)
The U.S. GDP had a positive growth of 2.9 percent in the final quarter of 2022. This was after a 3.2 percent growth in GDP in the third quarter. If two consecutive quarters with a negative GDP define a recession, the U.S. is not currently experiencing one.
- Unemployment Rate
The U.S. labor market remains strong despite concerns for further slowdown and economic unsteadiness. The unemployment rate in December was 3.5 percent, lower than in December 2021. The job market was tight toward the end of the year, with the employment rate hitting a half-century low.
- Consumer Price Index (CPI)
The inflation rate remains above the Federal Reserve's two to three percent target. This has a significant effect on purchasing power. In December 2022, CPI was at a positive 6.5 percent, down from 7.1 percent in November.
- The Stock Market
The Dow Jones Industrial Average (DJIA) fell into a bear market in September 2022. This means it fell by more than 20 percent since its previous highest.
- ISM Manufacturing Index
December 2022 was the second consecutive month that the manufacturing index fell in more than 29 months. The manufacturing PMI dropped from 49 percent in November to 48.4 percent in December 2022. This shows lower economic activity in the sector.
- Industrial Production
Although industrial production in December 2022 was down 0.7 percent from the previous month, it was up 1.6 percent from 2021. This means that industrial output might appear stronger than a year ago.
- Retail Sales
December 2022 retail sales were down 1.1 percent since the previous month but up six percent from 2021. This shows that the average consumer is careful about spending.
What Experts Are Saying
The Chief Economists of the World Economic Forum's Community expect a recession in 2023. Seventy-five percent of those surveyed for the Chief Economist Outlook believe this. According to the survey, 18 percent consider a recession extremely likely, compared to nine percent in the previous September 2022 survey.
They further anticipate monetary tightening in Europe and the U.S. as geopolitical tensions continue to affect the global economy. All the respondents expect weak economic growth in Europe, while 91 percent expect weak growth in the U.S. This is a significant increase compared to the previous survey, where 86 percent expected weak growth in Europe and 64 percent expected it in America.
How Long and Severe Will a Recession in 2023 Potentially Be?
Since recessions have many indicators, NBER, the agency that officially calls them, has difficulty predicting their length and severity. Although the GDP is a significant indicator and was negative for two consecutive quarters, the agency couldn't announce a recession because other indicators didn't confirm a recession.
Final Thoughts on the Likelihood of a Recession in 2023
Recessions are an inherent part of an economy and, unfortunately, affect the markets and investments. However, history tells us that markets recover over time. Staying invested and using a sound investment strategy, such as Voyage, is the best defense against times of economic downturn. We can’t predict whether a recession will be a reality in the coming year, but we can help prepare your portfolio to best weather 2023, with or without a recession.
Please do not hesitate to reach out with questions or concerns about your financial plan.
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