Resilient U.S. Economy Continues to Avoid Recession — So Far
Resilient U.S. Economy Continues to Avoid Recession — So Far
Inflation-fighting Fed policy could still trigger a brief recession later this year, UCLA Anderson Forecast says
With the release of the UCLA Anderson Forecast’s June 2023 report, there is some good news: The U.S. economy is not in a recession — yet. But the latest forecast comes with a caution.
“With core inflation coming down slowly, it’s possible the Fed may continue to tighten monetary policy until we’re in a recession,” the report reads, adding that even with three months of additional data since the previous report, in March, “there has not been much more clarity as to the trajectory of the economy.”
Consequently, as they did in the previous two quarters, Anderson Forecast economists have issued a forecast with two scenarios: one involving a recession the other without a recession.
At the conclusion of 2022, the UCLA Anderson Forecast described economic conditions that could head in different directions. As the Federal Reserve continued raising interest rates to stave off high inflation rates, uncertainty about the direction of the economy hung in the balance. Simply put, aggressive action by the Fed could eventually push the economy into a mild recession. So far, it has not, but the possibility of a recession still looms, depending on future Fed actions.
For June 2023, the forecast remains the same: Anti-inflation actions by the Fed, past and future, could still trigger a near-term recession.
The important difference between the two scenarios hinges on the Fed’s decisions in setting monetary policy. The Fed has said emphatically that its actions will be data-dependent. If data continue to show that the labor market remains robust — as evidenced by the latest figures from the Bureau of Labor Statistics — and if another jobs report shows strong growth in payroll employment and inflation remains sticky, the Fed will likely err on the side of further tightening of monetary policy. If that scenario plays out, a mild recession later this year is the likeliest result.
Like the national outlook, the Anderson Forecast for California features two scenarios.
According to Forecast director Jerry Nickelsburg, author of the California report, the two-scenario approach is based on the unknown impact of continuing increases in interest rates. The economists’ belief is that the impact will become more evident throughout the summer, and by the time the fall rolls around, the forecast will return to a singular outlook for the state.
The Forecast anticipates that, unlike during the past four slowdowns in economic growth, there will be a mild impact on California’s economy, regardless of which path the Federal Reserve’s policy actions takes the U.S. economy. That is good news for the state, according to the report.
The national forecast
Given the uncertain macroeconomic environment, the UCLA Anderson national forecast again presents two scenarios: one in which economic growth slows below long-run trends and then picks up again, and one in which the economy experiences a comparatively mild and brief recession that starts in the third quarter of 2023 and lasts through the first quarter of 2024.
The economy has remained resilient over the past year, consumers have continued to spend and, despite business leaders’ earlier warnings of an imminent recession, businesses have continued investing. Whether the U.S. experiences a recession later in 2023 will depend largely on inflation, the job market and the and the Fed’s reactions.
Monetary policy is, of course, a moving target. The real rate of interest is what matters in determining whether policy is restrictive. The Fed sets nominal interest rates with a forecast of how those rates translate to inflation-adjusted interest rates. Recent banking stress that has led to a tightening of credit standards, and over which the Fed has less control, complicates the Fed’s policy decisions.
As in the past two quarterly forecasts, the reason UCLA economists are uncertain about Federal Reserve policy is that the Fed itself seems uncertain. While the Fed has signaled that it might be time for a pause in increasing interest rates, it has also stated in numerous Federal Open Market Committee press briefings that, based on the data, a pause might not be forthcoming. Recent data on employment, job openings, personal consumption expenditures and inflation all suggest that monetary policy might not yet be as restrictive as policymakers would like it to be.
Under the recession scenario, the UCLA Anderson Forecast projects quarterly GDP growth in the second quarter of 2023 at a seasonally adjusted annual rate, or SAAR, of 1.2%, and then for the economy to contract from the third quarter of 2023 through the first quarter of 2024 before beginning to grow again in the second quarter of next year.
In the no-recession scenario, quarterly GDP growth would grow at a SAAR of 2.6% in the second quarter, and the economists do not expect quarterly GDP growth to dip too far below a 1.0% SAAR; the economy would continue to grow throughout 2023 and into 2024, but the pace of that growth would be moderate.
The California forecast
The California economy continues to roll toward a crossroads. One path leads toward a soft economic landing that sees the state’s economy continue to grow — and grow faster than the nation’s — and the other in which the state’s economy shrinks but by a lower percentage than the U.S. overall.
A number of factors — including more construction, an ample rainy-day fund for state government, increased demand for defense goods, and increased demand for labor-saving equipment and software — could lead to the no-recession path. In that scenario, the unemployment rate averages for 2023, 2024 and 2025 are expected to be 4.1%, 4.0% and 4.0%, respectively, and non-farm payroll jobs are expected to grow at rates of 2.0%, 1.3% and 1.6% during the same three years.
Also under the no-recession scenario, real personal income is forecast to grow by 2.0% in 2023, by 2.8% in 2024 and by 2.6% in 2025. In spite of higher mortgage interest rates, the continued demand for limited housing stock, coupled with new laws throughout the state that permit accessory dwelling units to be built in single-family-zoned neighborhoods, would lead to a forecast of increased homebuilding through 2025. The Forecast economists expect the number of permits to grow to 159,600 in 2025.
In the recession scenario, the California economy would decline, but by less than the U.S. economy. Unemployment rates for 2023, 2024 and 2025 would be expected to be 4.4%, 4.8% and 4.6%, respectively, and growth in non-farm payroll jobs is expected be 1.4%, 0.2% and 1.6% during the same three years. Real personal income is forecast to grow by 1.5% in 2023, by 1.8% in 2024 and by 0.6% in 2025. The economists would expect 91,000 net new housing units to be permitted in 2023 and the number of permits to grow to 154,000 in 2025.
What factors led to previous “soft landings”?
In an accompanying essay, Edward Leamer, a UCLA distinguished professor emeritus and the longtime director of the Anderson Forecast, offers a new kind of study intended to predict the severity of the coming recession induced by the Fed’s tightening.
Leamer first reports a probit monthly time series model that predicts a 90% chance that the expansion will end within 12 months of April 2023, based on the slope of the yield curve and the rate of inflation. He then identifies 15 different episodes of Fed tightening since 1953, followed by periods of rising unemployment. Features of the tightening period are used to predict features of rising unemployment. The features of the current episode of Fed tightening are not compatible with a soft landing, but they are not yet at the really hard landings that have sometimes occurred.
About UCLA Anderson Forecast UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state’s rebound since 1993. The Forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun. uclaforecast.com
About UCLA Anderson School of Management UCLA Anderson School of Management is among the leading business schools in the world, with faculty members globally renowned for their teaching excellence and research in advancing management thinking. Located in Los Angeles, gateway to the growing economies of Latin America and Asia and a city that personifies innovation in a diverse range of endeavors, UCLA Anderson’s MBA, Fully Employed MBA, Executive MBA, UCLA-NUS Executive MBA, Master of Financial Engineering, Master of Science in Business Analytics, doctoral and executive education programs embody the school’s Think in the Next ethos. Annually, some 1,800 students are trained to be global leaders seeking the business models and community solutions of tomorrow. anderson.ucla.edu