Recession Predictions Are All Over the Map
The economy continues to defy expectations. Despite an overall slowdown in activity since the middle of last year, firms today are continuing to hire at a healthy clip, consumers are spending at comfortable levels, and inflation is moderating from its peak reached last June.
There are troubled sectors, to be sure, including residential and commercial real estate, but so far, the most anticipated recession in history has been held at bay. Given recent data releases, many forecasters are revising their outlook and fewer are even calling for a recession at all.
Still, several have held their ground, insisting a recession is inevitable, if not this year then next.
Among the remaining recession callers, Oxford Economics, CoStar’s global macroeconomic data provider, is expecting the economy to dip into a mild recession in the second half of 2023, per its latest forecast published on June 8, a call it has stood by since March.
In the firm’s estimation, elevated inflation and tightening lending conditions brought about by the Federal Reserve’s rate increases will lead to a continuing pullback in consumer spending and business investment, inevitably triggering a downturn. The recession in this scenario will last only two quarters, with a peak-through-trough contraction in the order of about 1%, far milder than the 10% pandemic contraction in 2020 and the 4.3% contraction during the Great Financial Crisis.
This recession call is somewhat more pessimistic than Blue Chip consensus estimates, which are calculated as an average of forecasts provided by about 50 financial, corporate and academic forecasters. The consensus estimates show a peak-through-trough decline of about 0.1% — don’t blink or you might miss it.
While forecasts vary widely among private providers, there are other indicators using public data that presage recessions with surprising accuracy. For example, the Conference Board’s Leading Economic Index (LEI) , a compilation of 10 economic data components across labor and housing markets, financial conditions and business activity, has a remarkable track record in signaling a coming recession.
The index, which was last published on May 18, has been in decline for 13 consecutive months. The Conference Board points to the index's six-month average change as the best recessionary indicator. This has fallen below its historical threshold for recessionary conditions for 10 consecutive months, suggesting the economy to fall into recession in coming months.
Another strong predictor of recessions is a model based on the spread between the 10-year Treasury and the three-month bill produced by the Federal Reserve Bank of New York . This model puts the probability of the U.S. economy falling into recession within the next 12 months at about 70%. The spread was -171 basis points on May 31, when the model was last updated, driven partly by uncertainty in debt ceiling negotiations which increased risk in short-term bills. Since then, yields on 10-year notes have edged higher supported by a strong labor market report, but not enough to move the needle on the probability.
Meanwhile, Goldman Sachs recently moved its probability of a recession occurring within the next 12 months lower, from 35% to 25% based on a loosening of labor market conditions, recovery of disposable income and deceleration of inflation.
A separate model produced by the New York Fed paints a different picture, where real gross domestic product ekes out a minor gain in the fourth quarter of 2023 but growth stalls in 2024 and 2025. Prior iterations of the quarterly Dynamic Stochastic General Equilibrium (DSGE) model were more pessimistic in the immediate short run but more optimistic in future years, showing a contraction this year followed by a moderate recovery. Each iteration has been downgraded given continued positive data readings on the labor market and consumer spending, however, and this last revision suggests the economy might avoid a recession but will suffer a fairly long period of stagnation. (While the DSGE model is not an official forecast of the New York Fed, it is frequently used for policy analysis.)
What We’re Watching …
Part of the problem forecasting a recession is the interplay between the Federal Reserve’s efforts to rein in inflation and the causes of inflation, which can be tough to tackle and may not easily respond to the Fed’s intervention.
May’s inflation data looked promising, with the headline consumer price index rising 4% in May from a year earlier, its 12th consecutive month of deceleration. But core inflation, coming in at 5.3% higher than a year ago and 0.4% over the month, is a bit more worrisome.
A large part of that is shelter costs. With housing price gains and rental rates moderating and even turning negative in many markets, especially those that saw the fastest price gains over the pandemic, we should see core consumer price index slowing in coming months. But the wait seems interminable, and if the trend doesn’t move lower appreciably soon, the Fed is likely to push rates higher again, raising the risk the economy falls into recession.
CoStar Economy is produced weekly by Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.