Are American Consumers in a Recession?

Over the past few months, supply-chain headwinds, inflationary pressures, inverted U.S. Treasury bond yield curve, and rising interest rates has added friction to the U.S. economy and to business operations across industries.

Consequently, investors have become extremely pessimistic about the economic outlook and stock market sentiment, which both are expected to witness a downturn in 2023 amid the impending prospects of a recession.

Per JPMorgan Chase, rising interest rates, record decades high inflation, geopolitical pressure and other factors could lead to a recession that will likely wash away the benefits of savings and the massive government aid received during the pandemic. Moreover, the job market is expected to downshift significantly and unemployment is projected to increase next year as the economy weakens.

A growing number of companies are opting to leave jobs vacant when employees leave or announcing hiring freezes. Widespread layoffs so far have been limited to the handful of industries hammered by rising interest rates, such as technology, housing and finance, say Mark Zandi, chief economist of Moody’s Analytics, and Jim McCoy, senior vice president of talent solutions for ManpowerGroup, a staffing firm.

The Federal Reserve, by increasing its benchmark interest rate to counter inflation, has raised the possibility of a downturn next year. Some experts believe that the Federal Reserve’s bid to contain inflation by increasing interest rate and tightening the money supply will likely achieve its target but put pressure on the consumer’s wallet and potentially trigger a recession in 2023.

Fifty-seven percent of the National Association for Business Economics (NABE) economists see more than a 50% chance of recession next year, according to the results of a new survey published by NABE. The survey pointed to the Federal Reserve’s continued raising the federal funds rate and tightening of monetary policy in an effort to tame inflation as the biggest challenge facing the economy.

Additionally, Gregory Daco, chief economist of EY-Parthenon, expects a recession to hit by the first half of 2023 as hiring slows and layoffs spread across industries, leading to net job losses for the year. He expects the economy to grow just 0.3% for the full year and unemployment to peak at 5.5%.

Many Americans believe that the U.S. economy and the global economy are already in a recession. However, with consistently strong job growth, historically low unemployment and solid growth in consumer spending, that doesn’t sound like a recession most people would remember.

But, a recession is in the eyes of the beholders. Essentially, “It depends on who you ask,” says Capital Group economist Jared Franz. “With food, energy and shelter prices all rising faster than wages, the average American consumer would probably say yes. In my view, we are either on the edge of a recession or we are already tipping into it.”

To put things in perspective, over the past 70 years the average U.S. recession has lasted about 10 months and resulted in a GDP decline of 2.5%. In Franz’s estimation, the next one may be worse than average, if current trends persist, but still less severe than the Great Recession from December 2007 to June 2009.

Key economic indicators point to a potential recession

Sources: Capital Group, Bureau of Economic Analysis, National Bureau of Economic Research, U.S. Department of Commerce.

The official arbiter of U.S. recessions, the National Bureau of Economic Research (NBER) considers many factors beyond GDP, including employment levels, household income and industrial production. Since NBER usually doesn’t reveal its findings until six to nine months after a recession has started, we may not get an official announcement of an economic recession until next year.

“It’s fair to say that most consumers probably don’t care what NBER thinks,” says Capital Group economist Jared Franz. “They see inflation above 9%, sharply higher energy prices and declining home sales. They feel the impact of those data points. The labor market is one of the only data points that isn’t signaling a recession right now.”

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