Does The U.S. Economy Contracting In The First Quarter Of 2022 Portend A Recession In 2023?

According to a new AllianzLife study, roughly 6 in 10 Americans are apprehensive about the economy, with a big recession “just around the corner.” Their concern is obvious:
• The economy contracted in the first three months of this year.
• Hyperinflation is at a 40-year high.
• The stock market is in free fall.

Most stock market economists do not anticipate a crisis this year despite these indicators. Instead, they believe a “major crash” in 2023 is possible due to the Federal Reserve’s decision to raise interest rates. But, according to analysts, such a tightening cycle, which is intended to reduce inflation, could backfire if individuals and businesses withdraw too rapidly.
Although experts do not expect a recession this year, businesses and consumers face several financial challenges. Wages for workers, for example, are rising, yet inflation is eating away at those increases, putting household finances in the red. In addition, businesses are hampered by supply-chain constraints and staff shortages, increasing operating expenses. However, the Fed is raising interest rates to slow inflation. The central bank’s objective is to raise the cost of borrowing to reduce consumer and business demand. According to FactSet, the central bank’s rate-setting committee gathers in the week, yet many analysts predit it to increase rates by half a percentage point on Wednesday.

Notwithstanding these issues, Americans continue to open their pockets, providing critical backing for an economy dependent on consumer expenditure for 70% of GDP. Here’s what economists have to say about the risks of a recession.

Recession Explained

If an economy’s GDP falls for two consecutive quarters, it is in a recession. (The Fed Reserve Bank of St. Louis created this chart to demonstrate when the United States entered and left recessionary phases since 1970.) According to that definition, the 1.4 percent reduction in first-quarter GDP is not a recession, despite being the first recession since the short but deep coronavirus-driven downturn in 2020.

What happened with the economy this year?

The primary causes of the first-quarter decline were a dramatic reduction in U.S. exports, slower restocking of items in stores and warehouses, and less federal, state, and local government spending. However, consumers and corporations continued to spend extensively, with consumption expenditures, non – residential fixed investment, and residential investment demand expanding. As a result, according to FactSet, economists anticipate a 2.9 percent growth in second-quarter GDP from April to June. In addition, economists predict a 3.3 percent increase in development in 2022.

Risk factors of recession

Given the core strength of the U.S. economy, most analysts believe the chances of a recession this year are minimal. Consumers are spending more money, businesses are expanding, and wages are rising. The labor market is likewise in terrific shape. According to Fitch, the United States will recapture all the jobs lost during the COVID-19 epidemic by the third quarter of 2022. “Hawaii and Louisiana are now the only states that have not recovered and lost at least 70% of all jobs during the epidemic,” the firm stated in a research report on Monday.
While recognizing that consumer recession worries are “concerning,” Kathy Bostjancic, head U.S. economist at Oxford Economics, said to the CBS MoneyWatch in an emailed statement that “for the time being, they continue to spend.” In a research report, PNC Chief Economist Gus Faucher predicted that “the next few years will be turbulent for the country, with high inflation and weaker growth.” “The probability of a recession in the United States is currently at 30%, rising from 15% just before the Ukraine crisis.”

What to expect in 2023?

Economists believe the prospects of a recession in 2023 are higher, particularly if the Fed’s loan rate hikes suffocate consumer and corporate demand or if the Fed’s inflation-control policy fails. According to FactSet, the consensus projection for GDP growth in 2023 is 2.3 percent. Others are less optimistic.

According to Deutsche Bank experts, the economy will experience a rough landing next year due to the Fed’s tight monetary policy. “We do anticipate to see a recession by the end of next year,” the bank’s senior U.S. economist, Matthew Luzzetti, told the CBS News, alluding to the first-quarter drop in growth. “We believe we’ll see good growth for the rest of the year.” However, he noted that the United States will most certainly experience a “mild recession” by the end of 2023 due to Fed rate hikes. Deutsche Bank believes the Fed will raise interest rates by half a point on Wednesday and later this year.

In a research note, Deutsche Bank senior economist David Folkerts-Landau stated, “We judge that the only way to reduce the economic, financial, and societal damage of persistent inflation is to err on doing more.” “The job market and household financial statements are solid, and the only option to reduce consumer spending is to raise interest rates higher and quicker than appears rational.”
Whereas Deutsche Bank is the first big corporation to foresee an impending economic slump, consumers and professional investors share the group’s pessimistic perspective. As per a Bloomberg Markets Live survey done between March 29 and April 1, nearly half of investors anticipate a recession in the United States next year. Another 21% predict the slump in 2024, while 15% of the 525 participants forecast the recession to occur this year. The economic picture is clouded by uncertainties, with the pandemic persisting, Russia’s invasion of Ukraine placing extra pressure on increasing consumer prices, and Chinese lockdowns possibly disrupting supply lines. And when there are clouds, there is often the possibility of rain or, in this case, a downturn.