US Weekly Economic Commentary: 2023 Recession

Easing of financial conditions since October and the firmness of recent real data, including a solid increase in payroll employment in November, suggest a delay in the onset of recession from late 2022 to early 2023.

We expect that GDP will post annualized growth this quarter of 0.9%, aided by increases in consumer spending and in inventory investment as supply chains continue to recover. Nevertheless, a recession next year is more likely than not. The Federal Reserve is determined to slow demand and bring inflation down to 2% through higher interest rates that support a substantial tightening of financial conditions.

In that respect, the easing of financial conditions over approximately the last two months could prompt the Federal Reserve to tighten even more than otherwise. That will keep the economy headed into a period of soft demand, albeit delayed somewhat relative to earlier projections.

We expect a mild recession will begin early next year with the subsequent recovery to begin in the second half of 2023. On an annual basis, we expect GDP to expand just 0.3% from 2022 to 2023. (On a four-quarter change basis, we expect GDP also to grow 0.3% in 2023.)

More rate hikes coming

The Federal Open Market Committee (FOMC) is primed to raise interest rates by one-half percentage point at this week's scheduled policy meeting, lifting the target for the federal funds rate to a range of 4¼% to 4½%.

The Committee will signal additional rate hikes in 2023 through updated forecasts, its regular post-meeting statement, and the Chair's press conference on Dec. 14. We expect FOMC participants to raise their forecasts for the upper target of the federal funds rate in 2023, with the bulk of such projections likely to fall between 4¾% and 5½%, up from 4½% to 5% in forecasts that were submitted in September.

We expect this week's half-point rate hike by the FOMC to be followed by a pair of quarter-point increases at the first two scheduled meetings next year, on Feb. 1 and March 22, which would bring the upper end of the target range to 5%. We expect it to remain at that level for some time as policymakers assess the cumulative effects of tighter policy and until inflation has declined substantially toward the Fed's 2% target.

This week's economic releases:

• Consumer price index (Dec. 13): We estimate a 0.2% increase in November, compared with a 0.4% increase in October. For core CPI, which excludes the direct effects of food and energy prices, we estimate a 0.4% increase in November, compared with 0.3% in October. Elevated rates of consumer price inflation will keep the Fed on a tightening campaign into next year.
• Retail and food services sales (Dec. 15): We estimate a decline of 0.4% in November, compared with a 1.3% increase in October. Excluding motor vehicle and parts dealers, we estimate sales rose 0.1% in November, compared with a 1.3% gain in October.
• Industrial production (Dec. 15): If industrial production was flat in November, it would keep both total and manufacturing IP in line with recently softening trends and be consistent with our latest tracking forecast of below-trend GDP growth in the fourth quarter.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.