The US economy is at a critical juncture, with the potential for a recession toward the end of 2023, according to the UCLA Anderson Forecast released today.
The forecast has again presented two possible scenarios for the economy. The first predicts that the economy will slow down but remain positive, with a robust labor market and lower inflation due to a less aggressive monetary policy tightening. However, in the second scenario, the Federal Reserve would take more aggressive actions to combat inflation, leading to a mild recession and higher unemployment rates.
The report notes the Federal Reserve’s approach to monetary policy will play a key role in determining which scenario unfolds.
The forecast also notes the economy continued to expand in the fourth quarter of 2022 despite many economists predicting a recession. According to the March report, a majority of US consumers believed the country was in a recession throughout most of 2022, despite the economy’s continued growth and job creation.
In both scenarios, the Anderson Forecast expects GDP growth to continue in the first quarter of 2023, driven by consumption and business investment, at a seasonally adjusted 2.3% annual rate. In the no-recession scenario, quarterly GDP growth would slow to 1.8% in the second quarter of 2023 and remain below 1.0% in the following two quarters before picking up in 2024 and 2025. In the recession scenario, the economy would contract in the third quarter of 2023, with the contraction deepening in the fourth quarter of 2023 and the first quarter of 2024 before beginning to rebound.
Overall, inflation would remain elevated throughout 2023 in both scenarios, with tighter monetary policy to achieve disinflation in the recession scenario due to a greater proportion of observed inflation being demand-driven. In the no-recession scenario, the forecast assumes supply chain pressures would ease more rapidly, leading to a more moderate monetary policy. However, in neither scenario do the forecast authors expect a return to the Fed’s 2.0% inflation target by the end of the forecast horizon.
“While the economy has so far remained resilient to higher interest rates outside of some moderate softening in construction, that resiliency is what might lead to the recession scenario path,” the report’s authors write. “The more consumers continue to spend despite higher prices and higher interest rates, the more gradually demand-induced inflation will come down, and the more the Federal Reserve might be expected to tighten monetary policy to combat inflation. The ‘might’ here could well be mitigated by falling commodity prices and new rental lease contracts.”