The U.S. Economy In 2023: To Worry or Not To Worry?
Pictured above is Federal Reserve Chairman Jerome Powell, in June 2022, announcing the first in a series of 75 basis point interest rate increases. These were bold steps taken by the Federal Reserve to help tame inflation and preclude a recession in the U.S.
Not to worry, say some economists and business leaders. Three good reasons not to worry: One, economic recessions don’t last forever. Two, you can prepare for economic downturns and survive. Three, you can “capitalize” on the downside of the economic cycle and get a leg up.
You can add a number four to that: U.S. GDP increased at an annual rate of 3.2 percent in the third quarter of 2022 and 2.9 percent in the fourth quarter of 2022, according to data released by the Bureau of Economic Analysis.
Economic Recession Defined
When the U.S. GDP decreases for two consecutive quarters, typically, it signals the start of an economic recession. So when the Bureau of Economic Analysis released data showing that the U.S. GDP had decreased 1.6 percent in the first quarter of 2022, and then 0.6 percent in the second quarter of 2022, that’s just what happened. The two consecutive decreases in GDP sent markets tumbling; businesses and consumers started to cut back on spending, and economists declared another U.S Recession.
However, the National Bureau of Economic Research (NBER) Business Cycle Dating Committee (BCDC) defines recessions differently. It states, “A recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.” In the committee’s view, three criteria — depth, diffusion and duration — each must be met to some degree to declare a recession. Thus, emphasis is placed on a variety of measures of economic activity rather than on a single measure, such as GDP growth.
More specifically, the NBER considers these additional economic indicators:
• Real personal income less transfer payments
• Nonfarm payroll employment
• Employment as measured by the household survey
• Real personal consumption expenditures
• Wholesale-retail sales adjusted for price changes (real manufacturing and trade sales)
• Industrial production
So far, the NBER has not declared that the U.S. economy is in a recession.
In fact, many more economists are sharing this sentiment. For example, Moody’s Analytic is predicting the U.S. economy “will struggle in 2023 with halting growth and higher unemployment,” but calling it more of a slowing of the economy, and not a definitive recession.
“Recession is a serious threat,” states Mark Zandi, Chief Economist of Moody’s Analytics. But the Moody’s Analytics baseline forecast, he says, the most-likely outlook, holds that the economy will avoid a downturn. “Call it a slow-cession,” he concludes.
Moody’s Perspective: Recession Pessimism Leads To Recession Reality
“Expectations are strong that high and quickly rising interest rates will push the economy into recession at some point in 2023,” continues Zandi. “This includes everyone from CEOs — J.P. Morgan’s Jamie Dimon has proclaimed a coming economic ‘hurricane’ — to a meaningful majority of economists in various consensus surveys. Most recently, economists put the probability of a recession starting in 2023 at close to two-thirds.
“Given how deep this recession pessimism runs there is reason to worry that it could be self-fulfilling. Recessions are ultimately a loss of faith—a loss of faith by consumers that they will hold on to their jobs, causing them to curtail their spending, and a loss of faith by businesses that they will be able to sell what they produce, causing them to lay off workers. A self-reinforcing vicious cycle — a recession — takes hold.”
Recession Now or Later
The U.S. Chamber of Commerce Says A Recession-Proof Business Strategy Should Be In-Place For Certain
“Whether we are technically in a recession is a more difficult question to answer than usual,” says Curtis Dubay, Chief Economist of the U.S. Chamber of Commerce. “… we are not in normal economic times, so the typical pattern may not hold. In fact, income growth has been steady, job gains consistent, job openings are at record levels, [and] consumers continue to spend. It would be difficult to call a period where this continues a recession, even if the economy meets the technical definition of one.”
In fact, Dubay is encouraging businesses to plan ahead for a looming economic boon. “Inflation will come down and conditions will feel more like normal, probably within a few years. At that point, the economy is poised to grow strongly. It would be helpful to be ready to enjoy that coming boom period so as not to miss out on it at the beginning."
Still, Dubay advises small businesses to take precautions that will help them survive the economic storms. “As risks of an economic downturn increase, small businesses should prepare accordingly,” he says.
Following are a few of his tips to recession-proof your business and withstand any economy.
Be adaptable. Strategies and offerings that have worked in the past may no longer be feasible, or may not meet your customers’ current needs. Be aware of the current economic climate, listen to your client base, and conduct the necessary research. Based on the information you find, prepare to adapt or pivot accordingly.
Know your finances. Monitor your cash flow, profit margins, and other financial metrics to understand where your business stands. Cut unnecessary costs to prevent overspending and offer a safety net in the event of a recession.
Keep investing in your business. Cutting your budget doesn’t mean you should stop investing in your company — you just want to put your funds where they’ll make the most impact. Continue to invest in marketing and advertising efforts and seek growth opportunities whenever possible.
Communicate openly with your team. Economic downturns are stressful for business owners and employees alike. Keep your team informed about the state of your business and the “why” behind important decisions. You may also consider supplementing your business with freelancers prior to a recession to ensure agility and adaptability.
The Upside of Economic Recessions
• Higher Interest on Savings
• Discounted Prices on Depreciated Assets
• Lowering of Interest on Loans to Spur Recovery
Yes, there is an upside to a declining economy, according to some financial experts. “…if you have the patience and are able to adopt a long-term perspective, a recession can be a good time to hunt for bargains and purchase undervalued assets,” states Michael Bromberg, financial editor of Investopedia, a leading source of financial news and data.
“Although it is impractical to expect to reap a financial reward from a struggling economy, recessions have a few silver linings” he continues. “Heightened interest rates at the beginning of a recession may allow you to earn more on your savings deposits, while lower rates moving out of the recession may provide opportunities to secure a favorable mortgage loan. You may also be able to buy assets at a discounted price after they have depreciated in value.”
Recessions are a natural, unavoidable stage of the economic cycle, says Bromberg, and these bright spots could be helpful in weathering the storm and positioning for an eventual recovery.
The gross domestic product (GDP) is the total value of all goods and services produced in a given year. It is usually a good indicator for gauging the strength of an economy. And its growth can be influenced by a number of factors, including labor force participation, technological advances, and public policy changes in areas like regulations and taxes. The Bureau of Economic Analysis, a subsidiary of the U.S. Department of Commerce, releases U.S. GDP growth figures quarterly.
The Federal Reserve is the central bank of the United States. It controls the three tools of U.S. monetary policy--open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.