Recession, yes or no. Many economists argued about this after gross domestic product in the United States contracted somewhat in the first half of this year. It was rightly pointed out that the labor market was robust and domestic demand was solid. The decline in economic output in the first half of 2022 was mainly due to the fact that business inventory accumulation was much less dynamic than towards the end of 2021 and residential investment had recently declined.
In the third quarter, the U.S. economy has now grown significantly by an annualized 2.6 percent. But again, we have to ask the question: Recession, yes or no? This time, the question is whether the U.S. economy will be able to avoid a recession in 2023. The U.S. economy suffers from high inflation, subdued growth in the global economy and rising interest rates. Purchasing managers’ indices have fallen sharply and, above all, consumer sentiment is poor – mainly because of inflation. However, despite the many headwinds, the economy is still developing remarkably robustly. I expect a mild recession, but only a sluggish recovery thereafter at the end of 2023 and in 2024.
The high level of savings accumulated in the wake of the pandemic is now being drawn down, and consumer demand will be less and less able to play its role as the main growth driver of the U.S. economy in the way it has in the past. In the course of 2023, growth in private consumer spending will gradually weaken further. Against this background, business investment will also develop weakly in 2023. In addition, higher interest rates are worsening corporate financing conditions.
The impending slowdown in growth or even recession in the U.S. will also worsen the situation on the labor market. Most recently, the unemployment rate was only 3.7 percent in October, compared with 4.7 percent in September 2021 and as high as 14.7 percent in April 2020. However, in the wake of the pandemic, many people have withdrawn from the labor market, at least temporarily; the labor force participation rate in October was still more than one percentage point lower than before the pandemic in February 2020. Initially, the still high number of job vacancies will probably decrease. For the moment, there is no reason to fear a significant rise in unemployment. However, wage increases are now falling ever lower and will lead to losses in inflation-adjusted wages for many people.
Monetary policy is now rapidly becoming more restrictive in the face of still dramatically high inflation. In July, the consumer price index published by the Bureau of Labor Statistics was 8.2 percent higher than in the same month a year earlier. While much of the higher inflation in 2021 was still attributable to temporary factors such as higher oil prices as well as supply bottlenecks and associated price increases for various goods – semiconductors and raw materials, for example – higher price increases are now evident across a much broader range of goods. Inflation is still likely to be noticeably above three percent in the coming year. I do not expect inflation to be near two percent until 2024.
The index of personal consumption expenditures published by the Bureau of Economic Analysis, which the U.S. Federal Reserve primarily uses for its monetary policy decisions, will also remain very significantly above the central bank’s average inflation target of two percent in 2023, following a year-on-year increase of 6.2 percent in September. Only in 2024 do I expect a decline to two percent. After all, many commodity prices seem to have come down sustainably and the problems in global supply chains are increasingly dissipating. And consumer demand in the U.S., which was strong until recently, is gradually becoming less dynamic, further reducing inflationary pressures. Interest rate hikes by the U.S. Federal Reserve are also likely to dampen inflation significantly in the coming months.
The U.S. Federal Reserve will probably raise its interest rates again significantly by the end of the year. Overall, I expect another increase of 0.75 percent. After that, I expect the central bank to raise interest rates twice more in the first quarter of 2023 (by 0.5 and 0.25 percent) and then leave them at a high level of five and a half percent until the end of 2023. I then expect slight interest rate cuts in 2024.
All in all, the U.S. economy will probably grow by only 1.9 percent in the current year compared with 2021. In 2023, the U.S. economy will go through a mild recession in my base scenario and stagnate on average for the year. Growth will also be low in 2024 in my baseline scenario, at 0.8 percent.
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