Recession or soft landing? Five reasons to be cautiously optimistic about 2023

New York
CNN
—

Last year was dominated by scary headlines about crushing inflation, huge interest rate hikes and growing recession fears.

It was a brutal period for the stock market, with about a fifth of the value of the S&P 500 disappearing and the Nasdaq falling by more than a third. All three major US markets suffered their worst years – by far – since 2008.

And yet now that 2022 is over, there are clear bright spots in this economy that give hope that 2023 will not be the year the next recession begins.

Hiring remains surprisingly robust. The economy added 263,000 jobs in November, and the unemployment rate is just 3.7% – down dramatically from nearly 15% in spring 2020.

This is just a touch above the lowest half figure that was tied earlier this year. Although major tech and media companies, including Amazon, Twitter and Meta, have laid off thousands of workers, unemployment remains low. And new figures published last week show that first-time applications for unemployment benefits have increased to 225,000. It remains historically low and almost exactly where jobless claims were a year ago, long before recession fears emerged.

“This is a reason to be optimistic that the economy can move past a recession,” Moody’s Analytics chief economist Mark Zandi told CNN on Thursday. “Without mass layoffs, it is unlikely that consumers will stop spending and the economy will suffer a downturn.”

The cost of living is still far too high, but the rate of inflation appears to have peaked.

Consumer prices rose by 7.1% year-on-year in November. At almost any other time in the past 40 years, it would have been alarmingly high. But this marked the fifth consecutive month of improvement and a significant cooling from 9.1% in June. It is also the lowest annual inflation rate in almost a year.

If this trend continues, it could significantly reduce the risk of a recession. But if inflation remains well above the Federal Reserve’s 2% target, that will be problematic.

The No. 1 headache for consumers for much of this year has subsided considerably.

After topping out above $5 a gallon for the first time in June, gas prices have plunged. The national average for regular gasoline recently fell to $3.10 a gallon, an 18-month low, though it has crept higher in recent days to around $3.22 a gallon.

Gas prices are expected to rise again this spring and summer, but for now at least, experts don’t expect a return to $5 a gallon.

For large parts of the past year, wages have been warm, but inflation has been warmer.

That means adjusted for inflation, paychecks have been shrinking.

But that trend has begun to reverse, at least when measured on a monthly basis. Real wages have grown faster than consumer prices, a significant shift that could give consumers firepower to keep spending next year.

The Fed’s war on inflation is why the risk of a recession is significant. The central bank effectively slows down the economy.

The increase in borrowing costs has already triggered a deep downturn in the housing market, the most interest-sensitive part of the economy.

The fear is that the Fed will eventually overdo it, raising interest rates so high and keeping them there for so long that it causes a recession — if the Fed hasn’t already done so.

But Fed officials have signaled they may be ready to pause their inflation-fighting campaign in late winter or early spring.

Federal Reserve Chairman Jerome Powell has made it clear that the Fed is nowhere near ready to hit the gas on the economy by cutting interest rates. But just taking your foot off the brake would be a positive.