If there’s a recession in 2023, as many economic forecasters now predict, it’s widely expected to be a “mild” one—that is, not lasting very long, and with relatively few people losing their jobs compared to past recessions. And U.S. households, many of which were able to save large amounts of money during the pandemic, should be able to ride it out pretty well. In other words, if a recession comes, it probably won’t be catastrophic for most people’s finances. But that will be cold comfort to millions who could lose their jobs. The U.S. economy is facing the possibility of recession for one main reason: the Federal Reserve, which is attempting to restrain inflation by deliberately slowing down the economy through a series of interest rate hikes. The sharp increases to the benchmark fed funds rate have raised borrowing costs for all kinds of loans throughout the economy, especially for mortgages, and this is having the desired effect of discouraging individuals and businesses from borrowing and spending. The idea is that by reducing demand for goods and services, supply and demand will rebalance, and we’ll see an end to the skyrocketing prices of things like cars, houses, and the necessities of life. The danger of this approach, which critics have compared to hitting the economy with a sledgehammer, is that it risks not only beating inflation into submission but also slowing business down to the point we have a recession, defined as a period of economic decline in which workers lose their jobs and standards of living generally decrease. Recent economic data has convinced many experts that a recession is imminent next year. Economists at Wells Fargo expect a “mild” recession to officially begin in the second quarter of 2023. Forecasters at Oxford Economics, RBC Economics, PNC, the Mortgage Bankers Association, and other organizations have said a recession beginning at some point next year was likely. “A mild recession is looming with relatively high interest rates and persistent cost pressures set to spark the downturn,” Kathy Bostjancic, chief U.S. economist at Oxford Economics wrote in a commentary Thursday.
Mild for Whom?
What, exactly, would a “mild” recession feel like to the average person? It probably wouldn’t seem mild to people who lose their jobs in an economic downturn. Wells Fargo predicts the unemployment rate rising to 5.4% by the end of 2024, in comparison to the current 3.5% unemployment rate, which is near historic lows. That wouldn’t be nearly as bad as the 10% unemployment rate seen in 2009 in the depths of the Great Recession, but it would still mean more than 3 million people losing their jobs. It remains to be seen which groups of people and industries would bear the brunt of those job losses. “I remain on high alert to see when and where job losses first materialize since those workers are likely to tell us something about who will suffer the most in the next recession,” said John Leer, chief economist at Morning Consult, in an email. Certain industries are already feeling the pain. Companies including Compass, Redfin, Zillow, and others in the housing business have laid off large numbers of workers in recent months. Employment in the mortgage lending industry is expected to fall as much as 30% because of high interest rates, said Joel Kan, deputy chief economist of the Mortgage Bankers Association. In addition to the job losses, households would probably see lower wage growth and depleted savings, Leer said. However, he said the recession was not likely to last long or be particularly severe. There are a number of factors shielding U.S. households from the worst possible recession outcomes, said James Knightley, chief international economist at ING, in an email. Unlike Europe, for example, the U.S. enjoys plentiful energy resources like natural gas, and will not have to ration power. U.S. workers, even those who lost their jobs when the pandemic hit, received unemployment benefits, stimulus checks, and other support from the government, so people should have relatively good household finances going into a recession. Moreover, he argues, U.S. employers could prove reluctant to lay off many workers given that there are still many more job openings than people to fill them. “If companies feel it will be a short and shallow recession and the Fed will respond with rate cuts, they are likely to be reluctant to fire people because of the potential cost of having to hire people back in 12 months’ time for more money,” he said. And with prices for things like cars and homes now falling, inflation measures such as the Consumer Price Index could come down fairly quickly, encouraging the Fed to back off of its interest rate hikes relatively soon, Knightley said. The U.S. labor market, and household balance sheets are in such good shape that it’s likely the U.S. won’t actually experience a recession at all, and certainly not a severe one, Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note in October. “We’re going into this recession on pretty strong footing for the most part,” Kan said. “We see it as a fairly short recession with a mild hit overall compared to what we’ve seen the last two recessions.”
Ready, Set, Recession
So, how will we know if the recession has begun? We won’t—not until well after it’s already started, and possibly not until after it’s already over. That’s because the independent research organization that officially calls recessions—the National Bureau of Economic Research—looks at months-old data when determining when recessions begin and end. For example, it wasn’t until July 2021 that the NBER declared that we had a recession in March and April 2020 when the pandemic hit. Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.
