Slowcession? Richcession? Or just recession?
Whether in the supermarket aisle, or the corporate suite, a lot of people are expecting a recession – even if there’s no certainty there will be one at all˳
Survey after survey shows fears of recession are high˳ It’s easy to see why˳
The Federal Reserve is increasing interest rates in the most aggressive fashion since the early 1980s as it races to bring down inflation˳ And a recession is often the consequence when the central bank starts raising borrowing costs˳
The prospect of recession is certainly scary˳ But even if the U˳S˳ is headed for one, it’s worth keeping in mind that no two recessions are alike˳
A recession could be blip-ish, like the short, pandemic-induced one in 2020, or more like the economic tsunami that followed the 2008 housing meltdown˳
So, from recession with a small r to the so-called soft landing, here are some of the current predictions of what kind of economic slowdown the U˳S˳ could be facing˳
The recession with a small r
In a recent poll of economists, the World Economic Forum found that nearly two-thirds of the respondents believe there will be a recession in 2023˳
But here’s the good news: Many analysts expect a relatively mild and short recession, or what is sometimes referred to as recession with a small r˳
Unlike the early 1980s, when the Fed’s steep rate hikes sparked a brutal recession, this time around the economy still appears to be reasonably resilient despite grappling with the highest inflation rate in around 40 years˳
A big reason is the health of the labor market˳ Yes, there have been high-profile layoffs at companies such as Google and Amazon recently˳ But those announcements were largely about paring back staff after these companies over-hired during the pandemic˳ In fact, the overall data still shows employers continue to hire˳
Employers added 4˳5 million jobs last year, marking a pretty spectacular comeback from the depths of the pandemic˳
Of course, the Fed’s rate hikes will likely lead to some job losses˳ The Fed in December projected the unemployment rate would rise to 4˳6%, from the currently near-record low of 3˳5%˳
But that still would be a historically low number˳
The ‘slowcessation’
Trying to come up with catchy terms to describe an event is something of a tradition in economics, though they rarely actually catch on, with a few exceptions such as “the Great Resignation” or “skimpflation” (which was coined in this newsletter)˳
Moody’s Analytics is now giving it a try˳
“Slowcessation” is a forecast that the economy will undergo a difficult period of almost no growth but will ultimately avoid an actual contraction˳ It’s an argument that others also believe˳
In a report laying out its thesis, Moody’s argues that the economy still has plenty of things going for it, including healthy household finances, as well as strong corporate balance sheets˳
Moody’s believes those could help offset the economic consequences of raising interest rates, such as higher borrowing costs, lower economic growth, and more volatile financial markets˳
“Under almost any scenario, the economy is set to have a difficult 2023˳ But inflation is quickly moderating, and the economy’s fundamentals are sound,” writes Mark Zandi, Moody’s chief economist˳
“With a bit of luck and some reasonably deft policymaking by the Fed, the economy should avoid an outright downturn˳ If so, we may dub it a slowcession˳”
The ‘richcession’
This one was coined by Wall Street Journal columnist Justin Lahart˳ Yes, journalists also try hard to come up with catchy terms, with a similarly poor track record of success˳
“Richcession” refers to a recession or near-recession that impacts the rich more than lower-income folks˳ That would be unusual because recessions typically hurt the relatively less well-off the most˳
Poorer people are already suffering in the current downturn, but Lahart and others say that if we do slip into recession, lower-income workers may find themselves more insulated than in previous recessions˳
The labor shortages during the pandemic forced many businesses to boost wages to recruit staff˳ Wage gains at the bottom of the income scale were proportionately larger than those at the top, although many workers’ wage gains were partially eroded by inflation˳
Inflation is now easing but the wage gains remain˳ That factor should help lift the overall net worth of lower income workers as they face a potential recession˳
And the most recent labor data shows sectors that typically hire lower-income workers such as leisure and hospitality continued to hire strongly as Americans continued to dine out and take vacations˳ In fact, retail businesses, still remembering the nightmare of recruiting workers during the pandemic, are more keen to hold onto staff˳
That’s also raising hope that those with lesser means could be spared some of the impact of an economic downturn˳
The soft landing
Of course, there’s no certainty the U˳S˳ will have to endure a recession at all˳
The Fed has continued to argue it has a path to raise rates without sparking a recession, instead steering the U˳S˳ into what’s called “a soft landing” – a scenario in which the economy slows but doesn’t contract, and unemployment doesn’t spike significantly˳
Some recent indicators point toward that more optimistic scenario˳
Inflation continues to moderate, with the annual rate falling to 6˳5% in December from a peak of 9˳1% in June˳
Some of the factors that especially worried the Fed are also trending in the right direction, including, most prominently, cooling wage and price increases˳
That has allowed the Fed to moderate the size of its rate hikes, and analysts now expect the central bank will raise rates by only a quarter percentage point at its meeting next week˳
Furthermore, China’s end to its COVID-19 restrictions has raised hopes for a stronger global economy, which can have a positive impact in the U˳S˳ as well˳ This cuts both ways, though, as increased demand for energy to power China’s economy could result in higher oil and gas prices˳
The hard landing
In an unpredictable world, no scenario can be ruled out – and neither can the prospect that the Fed’s rate hikes will help spark a tough recession, or a hard landing in economic lingo˳
For one, the Fed could overdo the rate hikes, raising them more than necessary˳ Managing interest rates is an inexact science and mistakes can be dire˳ The Fed was widely blamed for keeping rates too low in the lead-up to the 2008 Global Financial Crisis, for example˳
Meanwhile, Russia’s invasion of Ukraine continues to weigh on the global economy˳ Nobody can predict how the war there will ultimately end˳
There is another, big potential risk on the horizon: the looming fight over the debt ceiling˳
Failure to raise the ceiling would leave the federal government unable to pay all of its bills, triggering a default˳ That would rattle financial markets around the world˳ Even if the government manages to avoid an actual default, simply coming close could raise borrowing costs and put a dent in people’s retirement savings˳
In an interview with CNN, Treasury Secretary Janet Yellen warned not raising the country’s debt limit has the potential to spark another “global financial crisis˳”
A worst case scenario, for sure, and one that would likely end up sparking a recession — with a capital R˳
