Survey: U.S. has a 64% chance of entering recession this year
More likely than not, the U.S. economy will enter a recession this year, Bankrate’s Fourth-Quarter Economic Indicator poll found.
The U.S. economy has a 64% chance of contracting in 2023, according to the average forecast among economists. Just two experts (or 15%) said the financial system could avoid a downturn, putting the odds of a recession at 40%. Meanwhile, one economist arrived at 100% odds — signifying he was absolutely certain of a recession.
Recession odds for 2023 have jumped sharply as the Fed’s massive tightening campaign has unfolded. The fourth-quarter forecast is up from just 33% in the first-quarter poll and 52% in the second quarter.
Forecasting is a practice destined for failure almost as much as predicting the weather or a hurricane’s path. Yet, economists have rarely been so aligned on a recession’s probability like this. That could have more to do with history than anything. The last time the Fed combatted surging inflation, it intentionally manufactured a recession by raising interest rates and slamming the brakes on the economy.
Key takeaways on recession odds from Bankrate’s Fourth-Quarter Economic Indicator survey
• The U.S. economy has a 64% chance of entering a recession this year.
• Just 15% of economists said the chances of a downturn this year are less than 50%.
• The unemployment rate is projected to hit 4.7% a year from now, according to the average forecast among economists. That would be the lowest unemployment rate of any recession, if a downturn does indeed occur.
Why recession odds are high this year
Recession fears are far and wide right now. Almost 7 in 10 Americans (or 69%) said in an August Bankrate poll they’re worried about a possible recession by the end of the year. At the same time, few Americans have an optimistic outlook for the year, with 66% in a separate December survey saying they don’t see their finances improving this year.
Fed officials since the 1980s haven’t approved as many rate hikes in a single year as they did in 2022. Rate-sensitive sectors felt the impact of higher rates almost immediately. Mortgage rates more than doubled while stocks slumped. The year ahead is when the full effect of those rate hikes could be felt, spreading to consumer spending and the job market.
“As the lagged effect of higher interest rates begins to show greater effects in 2023, it is likely that there will be a greater cautionary impact on consumer spending leading to a reduction in expenditures,” says Nayantara Hensel, senior economic advisor at Seaborne Defense. “The resulting decline in demand for products will lead to lower labor demand, as reflected in declining job openings and increasing job losses, thus increasing the unemployment rate.”
The Fed is shifting from massive rate hikes to more traditionally sized ones to avoid damaging the economy too much in its inflation fight. But it’s not so much the rate hikes anymore that risk bringing the most disastrous economic consequences. Instead, it’s how long Fed officials have to hold rates historically high to get the job done.