A month into 2023, the economy is facing stiff headwinds and – with the exception of easing inflation – will likely face more challenges before it gets better. This is according to Jack Kleinhenz, chief economist for the National Retail Federation, who believes that while households will feel recession-like conditions this year, the downturn will not be severe enough to become an official recession.
Kleinhenz indicated that the economy is more resilient than expected, but is still showing a mild slowdown as Federal Reserve interest rate hikes adopted to bring inflation under control “are having their desired effect.” The debate on whether or not the economy is in a recession will heighten over the next few months, just like it did last year.
According to DataTrek Research, underlying strength in the bond market is signaling that the US economy is not on the verge of entering a recession anytime soon. The U.S. yield curve implies a recession is unlikely, as the spread between corporate bond yields and US Treasuries is steadily narrowing. This comes as a surprise to some investors, as the prevailing wisdom has been that almost a year of high interest rates and elevated inflation meant the economy would enter a recession sometime in 2023.
As of December 2022, the New York Federal Reserve has estimated the likelihood of a U.S. recession over the next 12 months to be 47%. The jobs market also seems to be in good shape, as the U.S. is adding jobs and unemployment is historically low.
Kleinhenz remains optimistic, noting that the good news is that corporate and household balance sheets are in the best shape possible going into a downturn. This should make any economic slowdown mild and limit the downside risks, despite his outlook for the economy to straddle a zero-growth path during 2023.
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