- Thursday’s GDP report showed a surprisingly strong US economy in the third quarter of 2022.
- But despite beating estimates, the US economy is still vulnerable to slower growth ahead, and many expect a recession.
- Still, any future recession would likely be milder than those spurred by the Global Financial Crisis and pandemic.
The US economy is booming, and that means there’s no recession to be found — at least not yet.
Data released Thursday by the Bureau of Economic Analysis showed gross domestic product grew at an annualized rate of 2.6% in the third quarter of the year. That’s just above the 2.4% median estimate from economists surveyed by Bloomberg.
That means the economy grew after it shrunk in the first two quarters of 2022, a sign that the US isn’t in a recession right now.
But despite a rosy GDP estimate compared to the first two quarters, a significant downturn could still happen in 2023.
Mike Schenk, chief economist of Credit Union National Association, said in a statement that the “healthy economic growth will not last.”
“The Federal Reserve’s recent aggressive policy response to stubbornly high inflation virtually guarantees that fourth-quarter output will decelerate — perhaps significantly,” Schenk said.
Even if the US doesn’t exactly fall into a recession, at the very least it will likely see growth slow.
“While we think the economy is losing momentum, we are by no means sure that we are headed for a recession here,” David Kelly, chief global strategist at JPMorgan Asset Management, told Insider. “What we are sure of is we’re headed for slow growth and lower inflation.”
But Kelly added that “one more bad hit to the economy” could lead to a US recession.
A few sectors and areas of the economy are already sounding quiet alarm bells. Housing starts, which measures new homebuilding, fell by 8.1% in September — signaling that homebuilders are pausing on new projects, making it even harder to buy a house.
And earnings from large tech employers also show signs of trouble; Meta saw revenue drop in the third quarter for instance. And even though Alphabet saw revenue growth, it was the lowest since the second quarter of 2020. And some retailers have had to cut prices as Americans deal with elevated inflation.
CEOs are pessimistic about the future and the hot labor market is cooling
CEOs, for one, aren’t feeling too good about the economy. 91% of chief executives in the US believe the country is heading towards a recession in the next 12 months, according to a KPMG survey, and just a third of CEOs believe the downturn will be short and mild.
Still, outlooks are mixed around when a recession will start, and how serious it’ll be. But almost all seem to be in agreement that one is imminent. Elon Musk has had a super “bad feeling” about the economy, and thinks there could be an 18-month long mild recession. Goldman Sachs CEO David Solomon thinks “there’s a good chance that we have a recession in the United States.” Ken Griffin, the billionaire CEO of Citadel, has said there will be a recession — “it’s just a question of when, and frankly, how hard.”
At the same time, the labor market is still booming. Job postings on Indeed are 48.8% above their pre-pandemic levels, according to a report from the Indeed Hiring Lab. New job postings are also robust, showing a “healthy appetite for new hires,” Nick Bunker, the economic research director for Indeed Hiring Lab, wrote. But that hiring isn’t as voracious as last year’s highs.
“The labor market continues to be hot, even if it’s cooled a little bit since the beginning of this year,” Bunker told Insider.
There are 1.7 job openings per unemployed person, layoffs are still low, and there are millions of openings. The robust labor market is helping keep the US away from a recession — for now.
The Federal Reserve has been trying to cool off hiring and wage increases through rate hikes in an attempt to curb inflation. And the Fed won’t stop turning the screws until the labor market cools much more dramatically — and risks causing a recession in the meantime.
Jay Powell, the chair of the Federal Reserve, said in September that the Fed “always understood” that bringing inflation down while increasing unemployment only slightly “would be very challenging.”
“No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” Powell said.
After last year’s strong demand, “it makes sense that you’d see some moderation in job postings, and that’s what we’ve seen,” Bunker told Insider. “Where we’re seeing it does signal that it is sectors normalizing, rather than dramatically pulling back postings because they are concerned about short term economic growth.”
“The Federal Reserve’s aggressive tightening of monetary policy risks turning this normalization into a sustained downturn,” Bunker wrote in a labor market report.
That all adds up to a likely downturn in 2023
“If the economy really slows or slows even more and we start seeing consistent decline, significant contraction in aggregate demand and underlying pace of economic growth, that’s going to lead to employers then saying, ‘Okay, now we’re really pessimistic,'” Bunker said.
Michael Gapen, head of US Economics at BofA Global Research, told Insider that the US economics research team thinks “that a recession next year is more likely than not.”
“The Fed does want to bring inflation down and appears willing to tighten sooner than later to prevent inflation expectations from rising and inflation from becoming more embedded,” Gapen added, saying it could be in the first quarter of the year but that’s not certain due to things like “durability in consumer spending.”
Consumer spending has kept growing in 2022; it increased in the third quarter of the year by 1.4%. That is, however, less than the 2.0% increase seen in the second quarter and is similar to the rate in the first quarter of the year.
If and when a downturn comes next year, it’ll look different than the recessions Americans have weathered over the last two decades.
While the pandemic-induced recession saw millions of hourly and gig workers sent home indefinitely, a 2023 downturn would likely impact a different group. White-collar office workers — many of whom were snapped up and reshuffled amidst the Great Resignation — are in greater danger of layoffs this time around.
Kelly said a recession would be “much milder” if it happens compared to the most recent recessions because the financial crisis and recession during the pandemic weren’t normal ones. He noted that excess labor demand “gives you a lot of running room here before the labor market actually gets soft.”
Another reason is because there hasn’t been overbuilding like what was seen in the housing bubble that lead up to the 2008 financial crisis. “We haven’t been building too many houses or too many cars or building too much inventory or doing too much investment spending,” Kelly said. “There’s no real boom. If you don’t have a boom, it’s really hard to get a big bust.”
But a recession either way still won’t be pleasant for workers, even if it could be less startlingly apocalyptic.