Key Takeaways
- Many economists predicted a recession in 2023 that didn't come to fruition.
- Consumer spending and the labor market have remained healthy despite inflation and the rate hikes implemented to quell it.
- Recession is less likely in the coming year as data now point to a successful soft landing.
In future histories, 2023 may be known as the year of the recession that never came.
Last January, the Wall Street Journal asked a panel of 70 economists to rate the chances of a recession in the next year. The average answer was 63%. Unless something drastic happens in the next few days, most of them got it wrong—2023 came and went with no recession in sight.
The question now is, has the recession been avoided, or just delayed?
Economists have been grappling with the possibility of a recession since late 2021 when prices for certain products began to rise rapidly as the economy re-opened from pandemic lockdowns. By mid-2022, prices for all kinds of goods and services were rising at their fastest pace since the early 1980s, and to many experts, a recession—defined as a sustained economic downturn—looked increasingly inevitable.
Yet, somehow, the economic growth has continued at a blistering pace, joblessness has barely budged from its near-record lows, and inflation has fallen dramatically from its 2022 peak. Forecasters had expected consumers to cut back on their spending, and instead, they've ramped it up.
Officials at the Federal Reserve have become hopeful that high inflation can be put to rest with the economy coming in for a “soft landing” rather than the crash of a recession.
Fed officials have indicated they will likely dial back their influential fed funds rate from its 22-year high next year. In turn, interest rates on many kinds of loans such as mortgages have already fallen.
James F. Smith, an independent economist who runs EconForecaster, thought the chance of a recession this year was remote, and pegged it at just 1% nearly a year ago. That view has been vindicated so far, and he doesn’t see any signs of that changing any time soon.
“We have record numbers of people employed, earning more money than ever before,” Smith said. “They’re feeling reasonably confident, not phenomenally confident, but reasonably so. People are in pretty good financial shape. The inflation rate is coming down rather dramatically, and interest rates are following suit, also dramatically.”
If the U.S. economy does manage to avoid a recession, it would be bucking history. Eight of the last nine times the Fed has raised interest rates to combat inflation, a recession has resulted. So, what’s different about this time?
Smith points to two major factors. First, the Fed’s anti-inflation measures were so drastic that the supply of money in circulation fell for the first time in 70 years, helping to quench inflation’s fires more effectively than past rate hike campaigns.
The cash aid that the government distributed to households during the pandemic may have helped stoke inflation in the first place, but it also helped mitigate a recession. Things like stimulus checks, rental aid, and extra unemployment benefits gave households enough financial resources to stay afloat and keep on spending despite the job losses caused by the pandemic, and the subsequent surge of inflation.
As with many things in economics, the exact reasons behind a recession, or a lack of one, will be debated but never known for certain.
“Every recession is different,” Smith said. “We’re just trying to figure out how or why, and we don't always figure that out. We just say, ‘It's a mystery.’"
