US Economy Endures Stiff Headwinds: Is Recession Looming?
With the onset of 2023, the economy is enduring some stiff headwinds and the debate whether or not the US is in a recession has been reignited. Although households may experience recession-like conditions, National Retail Federation Chief Economist Jack Kleinhenz does not expect the downturn to be severe enough to become an official recession.
Kleinhenz characterized the US economy as “more resilient than expected” but nonetheless showing a mild slowdown as Federal Reserve interest rate hikes adopted to bring inflation under control “are having their desired effect”. Consumer spending grew 2.8% in 2022 but dropped 0.2% month over month in November, and another 0.3% in December. Overall retail sales dropped 1.1% in December, as gasoline prices and automobile sales fell sharply and holiday sales turned out to be choppy.
In December, the unemployment rate dropped to 3.5%, its lowest level in 50 years, despite the fact that large companies in the technology sector were making layoffs. Small businesses, however, are still hiring. Following two consecutive quarters of negative numbers in the first half of the year—a common but unofficial definition of a recession—gross domestic product grew 3.2% year-over-year in the third quarter, and slowed to 2.9% in the fourth quarter, but the year still came in at 2.1% above 2021.
The International Monetary Fund (IMF) is predicting a gradual decline in the US economy, with growth slowing to 1.4% in 2023. Morgan Stanley Economist Sarah Wolfe said that while they do not forecast a recession, they do expect growth to fall to 0.3% in 2023 – “a very painful year that’s well below potential”.
It is anticipated that the Federal Reserve will raise interest rates by a quarter of a percentage point during its two-day conference beginning on Tuesday. JPMorgan strategist Marko Kolanovic warned investors not to grow too bullish on the latest gains in stocks as recession risks are merely postponed rather than diminished. Unless the Fed starts cutting its nominal policy rates, these restrictive real policy rates would represent an ongoing headwind, keeping the risk of an eventual recession later in the year relatively high.
It is recommended that one should have an emergency fund to prepare for the unexpected. Financial experts generally advise that an emergency fund should be able to cover three to six months’ worth of living expenses.
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