Bad Times Are Coming, Many Economists Know

The threat of recession has been lurking for more than a year like a vampire hanging on a window pane.

The Bureau of Economic Analysis reported Thursday that the nation’s GDP grew at a seasonally adjusted annual rate of 1.1% from the fourth quarter to the first quarter.

Last year, the economy contracted 1.6% in 2022′s first quarter followed by a 0.6% drop in the second quarter. Then the economy rebounded with gains of 3.2% in the third quarter and 2.6% in the fourth quarter.

CUNA and the Mortgage Bankers Association predicted last October that a recession would start in early 2023. They later changed the timing to late 2023. After the GDP report, they are sticking with their recession predictions, but indicated the timing might be delayed again.

CUNA Chief Economist Mike Schenk on Tuesday said the nation faces a 55% chance of recession this year, but he expects it to be short and mild. He said his team of economists expects the U.S. economy to grow 0.5% in 2023, down from 2.1% in 2022.

CUNA Senior Economist Dawit Kebede said Thursday’s GDP report showed consumers so far seemed unaffected by rising interest rates as they spend more on both goods and services.

“However, consumer spending is likely to be impacted eventually by higher borrowing costs and tight credit conditions,” Kebede said. “Consequently, the economy is projected to slow down further in the next few quarters, with a recession possible by the end of this year or early next year.”

Joel Kan, the MBA’s deputy chief economist, said Thursday that while the economy was still growing through March, persistent inflation will lead the Fed to raise rates one more time this year in May, “then hold the funds rate at this higher level at least through the end of 2023.”

“We forecast a short recession in the coming quarters, as these tighter financial conditions exert a drag on consumer and business activity through tighter lending conditions and higher rates,” Kan said. “This will cause the unemployment rate to rise and gradually lower inflation closer to the Fed’s 2% target by the end of 2024.”

NAFCU Chief Economist Curt Long has been the recession holdout, predicting in January that the U.S. might dodge a recession and the Fed might actually for once achieve a “soft landing” with monetary policy.

In an interview with CU Times Thursday, Long said his optimism has faded only slightly.

NAFCU economists believe the chances of a recession this year have risen to one in three “due to the recent stresses in the banking sector and a possible legislative impasse on the debt ceiling,” Long said.

Long said the Federal Open Market Committee (FOMC) is likely to raise rates by another 25 basis points when its next meeting ends May 3.

“While a Fed-induced recession is possible, the FOMC is nearing the end of the tightening cycle and most of the impacts to the most rate-sensitive sectors, like housing, have already been absorbed,” he said.

While first-quarter growth was slower than the fourth quarter, it showed consumer spending was still holding up. Growth was mainly held back by a drop in inventories, which is likely to reverse this quarter as businesses restock.

A recession would require a worsening in the housing sector, which has already been set back by higher rates, and a significant worsening in a jobs market where unemployment is at a record low of 3.5%.

“From where I sit, 3.5% unemployment — it’s just hard to work on a recession out of that,” Long said. “The pieces in place are not enough to get us there. It’s going to have to be something else.”

Among the myriad possibilities in the world of things going bad fast, his biggest concern is Congress failing to raise the debt ceiling. “If the worst case scenario is realized there, that would be a problem.” And, yes, he said a worst case could include the United States defaulting on its debts.

“I appreciate the views of those who have seen recession on the doorstep for the last 12 months or whatever,” Long said. “The risk is out there, but I’ve mostly been on the optimistic side of things thinking that the strength of the labor market is enough to push through the hurdles that we can see. And so far that’s been the case.”