Why US May Skirt Recession In 2023? A Brief Analysis

Why US May Skirt Recession in 2023? In this article, we examine the latest Reports of Morgan Stanley and Goldman Sachs and analysis to provide a comprehensive overview whether US may skirt recession in 2023.

Why US May Skirt Recession?

Good News! There are reports coming that US may narrowly escape recession in 2023. Let’s get into these news in detail

Reports of Morgan Stanley and Goldman Sachs

Many global research and investment firms are stating that US may escape recession, including Morgan Stanley and Goldman Sachs. Let’s first see what Morgan Stanley’s statements on Economy. 

According Morgan Stanley the U.S. economy may start feeling the effects of policy tightening this year. It expects that GDP growth to be soft in 2023, with corporate sales volumes, power pricing and profits are likely get hit. However, it feels that the current earnings expectations and stock valuations don’t seem to reflect this outlook.

In their research analysis Morgan Stanley has highlighted that U.S. consumer has been extremely strong in 2022 while taking about consumption. They also listed these are solid grounds for their 

1. Though wage growth was not in tandem with inflation, there was an annual rise of 5-6%
2. Labor market remained resilient in November, with an unemployment rate of 3.7% which is slightly above the 50-year low of U.S. unemployment data. 
3. According to October data the personal spending has held up and the real consumption was about 6%
4. The real retail sales growth – that is inflation adjusted – stayed above the trend since 2015.

Morgan Stanley has also flashed warning signs of coming slowdown and they are 

1. Credit Card revolving debt increased to an all-time high of nearly $ 1.2 trillion 
2. Personal Saving rate fell from high of 33.8% in April 2020 t0 2.3% in October, 2022. This is the lowest since 2005.
3. According to Job Opening and Labor Turnover Survey (JOLTs), October, 10.3 million vacancies are there. This is down by 760,000 from a year ago. This means the new job listings are coming down.
4. The JOLTs also show a downward trend in the “quits” category. It was edging toward 4 million compared to 4.5 million in March, 2022. This means that people are not more confident about finding new employment. 

Morgan Stanley predicted 0.5% growth this year. 

Now let’s see what Goldman Sachs report and its statements.

According to Goldman Sachs, the U.S. economy may avoid recession as the data on economic activity is nowhere showing close to recessionary. It stated that according to advance report the GDP in the third quarter grew 2.6% (annualised). U.S. has added 261,000 jobs in October. 

The real personal income (i.e. adjusted for inflation) is bouncing back from the drop during the first half of the year, which has taken a toll due to sharp increase in inflation and fiscal tightening. The Goldman Sachs economists expect this real disposable income to increase more than 3% over this year. Despite tighter financial conditions – subtracting 2% from growth –there is a possibility of will stronger rise in real income this year.  

The effect of pandemic is coming down, demand is slowing, unemployment benefits are normalised and the extra savings during the pandemic period is coming down. Goldman Sachs states that job-workers gap (i.e. total labor demand minus total labor supply) is coming down rapidly. Their research estimates that the job-workers gap has declined from a peak of almost 6 million to only 4 million. This is nearly half of the way to the 2 million level which is required to slow the wage growth at rate compatible with the Federal Reserve’s inflation target of 2%.

The Goldman Sachs economists expects Fed Rate hike of 125 basis points (bps) (earlier they stated 100 bps). They forecast that Central Bank to raise 25 bps in February, March and also in May (now). They forecasts that fund rate to reach high of 5 to 5.25% slightly more than the market priced in. 

They don’t expect any rate cut till second quarter of 2024. The first fed cut in the median hiking cycle has historically come roughly six months after the last hike. They expect that rate cuts will not happen unless economy enters recession after all. 

Our Perspectives:

The International Monetary Fund (IMF), stated in its Global Economic Outlook, October, 2022, that U.S. may narrowly avoid recession. This is a good news for investors and workers. IMF projected that GDP growth to be slow but an increase of 2.3% in 2022 and 1% in 2023.

The IMF stated that this slow growth of 1% this year will be due to the tightening of Monetary and financial conditions.

So, the recession call made by many has gone wrong? Will U.S. will not face recession this year? Wait, let me remind you that “All Glitters are not gold” No economists are policymakers have ever able to predict any recession. 

According to the Federal National Mortgage Association (famously known as Fannie Mae) recession will start in the first quarter of 2023. They stated that U.S. will enter mild recession in first quarter. They stated in their December Commentary, that there will be negative 0.5% growth in 2023 and the economy is expected to return to expansion at 2.2% in 2024.

So, three statements which supports U.S. may narrowly escape recession while one statement says U.S. will enter recession. There are some other analyst and economists who predicts that U.S. will avoid recession altogether. Who is right now? Well this all means only one thing and that’s called speculation. 

Pasta Bowl Recession

There is a brand new term coined to describe the type of recession and it’s a catchy word called “Pasta Bowl Recession”.  According to Forbes “Pasta Bowl Recession” comes from economists’ love of metaphors to describe the shape of recession. 

Normally recession types are explained in terms of English alphabet like V, U or L shaped recession. There is also something called W shaped recession – which also known as double dip recession as the shape of the word itself. 

Sean Snaith, the Director of the University of Central Florida’s Institute for Economic Forecasting, coined this term “Pasta Bowl Recession”. He stated that “U.S. will enter a shallow recession. This means it won’t be deep, but will likely last four quarters, representing – the wide part of the pasta bowl.” 

In other words, if U.S. enters recession it will be for little longer but will not be severe.  

Conclusion

As analysed above there are several reasons to believe why US may skirt recession in 2023. However, it is important to note that any economic activities are dependent on various factors and always unpredictable as such. Therefore, it is very important to keep monitoring the economic indicators, government policies & other possible uncertain factors that might affect the economy.

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