As the economy perseveres through current challenges, economic indicators are sending mixed signals. Despite a general slump in the economy since the middle of the previous year, businesses continue to maintain robust employment rates, consumers are keeping a steady spending pace, and inflation seems to be receding from the high it experienced last June.
Certain sectors, particularly residential and commercial real estate, are encountering difficulties. However, the highly anticipated economic downturn has yet to occur. Recent statistical findings have prompted many analysts to revise their projections, and fewer economists are predicting an imminent recession.
Nonetheless, some remain steadfast in their belief of an inevitable recession, predicting it to occur within the next year or two.
Among these are Oxford Economics, a global macroeconomic data provider for CoStar, which forecasts a minor recession to hit in the latter half of 2023, according to their most recent publication on June 8. Their prediction, consistent since March, attributes the potential downturn to high inflation and stricter lending conditions resulting from the Federal Reserve's rate hikes, leading to a decrease in consumer spending and business investment.
Compared to the Blue Chip consensus estimates—derived from an average of forecasts by approximately 50 financial, corporate, and academic experts—Oxford Economics' prediction seems more pessimistic. The consensus estimates anticipate a peak-to-trough decline of approximately 0.1%.
Public data indicators that traditionally forecast recessions accurately, like the Conference Board’s Leading Economic Index (LEI), suggest a looming recession. The LEI, which amalgamates 10 economic data components across labor and housing markets, financial conditions, and business activity, has been on a steady decline for 13 consecutive months.
Similarly, a model by the Federal Reserve Bank of New York, which is based on the spread between the 10-year Treasury and the three-month bill, indicates about a 70% chance of a recession in the next year. However, Goldman Sachs has recently lowered its forecast of a recession within the next year from 35% to 25%, attributing this to improved labor market conditions, growth of disposable income, and slowing inflation.
An alternate model from the New York Fed depicts a minor gain in real gross domestic product in Q4 2023 but predicts stalled growth in 2024 and 2025. Each new version of the quarterly Dynamic Stochastic General Equilibrium (DSGE) model has gradually lowered expectations due to consistently positive labor market and consumer spending data.
Predicting a recession becomes complicated due to the dynamic relationship between the Federal Reserve's efforts to control inflation and the underlying causes of inflation, which may not be easily influenced by the Fed's actions.
While the headline consumer price index rose 4% in May from a year earlier, marking its 12th consecutive month of deceleration, the core inflation rate at 5.3% higher than a year ago is slightly worrying. Much of this can be attributed to shelter costs. As housing prices and rental rates moderate or even decline in many markets, we should see the core consumer price index slow down in the coming months. However, if this trend doesn't exhibit a significant drop soon, the Federal Reserve may opt for higher rates again, enhancing the risk of a recession.