Recession or no recession, economists continue to ponder the possibility.
“The debate on whether we are in a recession will heighten over the next few months, just like last year. But while households will probably feel recession-like conditions this year, I do not expect that the downturn will be severe enough to become an official recession,” said Jack Kleinhenz, chief economist for the National Retail Federation.
He said the economy is expected to see slight growth in 2023 as consumers continue to cope with inflation and high interest rates. “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,” said Kleinhenz, whose remarks came in the February issue of NRF’s Monthly Economic Review.
“The good news is that corporate and household balance sheets are in the best shape we’ve seen going into a downturn,” Kleinhenz said. “This should make any economic slowdown mild and limit the downside risks despite my outlook for the economy to straddle a zero-growth path during 2023.”
Kleinhenz characterized the U.S. 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.”
“We do not forecast a recession in our outlook,” said Sarah Wolfe, economist at Morgan Stanley, during a presentation at NRF’s “Big Show” convention at the Jacob K. Javits Center in New York last month. “But we do have growth falling to about 0.3 percent in 2023. I think that’s a very painful year that’s well below potential, which is about 1.7 percent growth, and is definitely slower than some of the very strong growth that we’ve seen over the last two years.”
“Our viewpoint from KPMG economics is that we believe the U.S. economy [could] enter a recession in the first half of 2023,” said Kenneth Kim, senior economist at KPMG, offering a different outlook from Wolfe’s during the convention. “We don’t know whether the recession might arrive within a couple of months, or it could still be a year out. So that is a long time span. We do expect to see negative GDP [gross domestic product] in both the first and second quarter. For the first quarter, down 2 percent; second quarter, down 1.6 percent. So a 1.8 percent decline for the first half, but in the second half, we see a recovery.”
It’s commonly believed that a recession is determined by two quarters of negative growth in the economy. But as the NRF indicated, it’s the National Bureau of Economic Research that officially declares when the economy is in recession and it has so far declined to do so because only certain sectors of the economy have been in decline. Following two consecutive quarters of negative numbers in the first half of the year, gross domestic product grew 3.2 percent year-over-year in the third quarter and slowed to 2.9 percent in the fourth quarter, but the year still came in at 2.1 percent above 2021.
The NRF indicated that consumer spending grew 2.8 percent in 2022 but dropped 0.2 percent month over month in November and another 0.3 percent in December. Overall retail sales dropped 1.1 percent in December as gasoline prices and automobile sales fell sharply and holiday sales turned out to be choppy. NRF retail sales tallies exclude auto dealers, gas stations and restaurants. Combined November to December holiday sales were up 5.3 percent over 2021 yet a few points slower than expected.
According to the NRF, “With spending slowing, the Personal Consumption Expenditure Index — the Fed’s preferred measure of inflation — eased to 5 percent in December, its slowest annual pace in over a year. That was down from 5.5 percent in November and the core PCE index, which excludes volatile food and energy prices, was at 4.4 percent. Following those results, the Fed increased interest rates by only a quarter of a percentage point at its February meeting Thursday rather than repeating the half-point increase imposed in December.
“The labor market is cooling as some major companies, particularly in technology, announce layoffs, but small businesses are continuing to hire and the December unemployment rate was at a 50-year low of 3.5 percent,” the NRF indicated.
Whether the economy will see a “sluggish pace of growth” or slips into a “considerable falloff” depends largely on whether the Fed can strike the right balance between interest rates and inflation, Kleinhenz said. While the slowing momentum of inflation could pave the way for reassessment of future rate hikes or even a reduction in rates, rates will likely remain “in restrictive territory” for the remainder of the year, he said.