The burning problem: is a recession coming in 2023

WILL THERE BE A RECESSION IN 2023—AND HOW LONG WILL IT LAST?

?INTRODUCTION

Recession is not a new phenomenon. It varies per duration, intensity, reason, and spread (global or regional). But, it has been appearing from time to time but its impact is always negative. The moment economists saw that inflation was not transitory but longer-lasting, they began sensing considering the potential for a recession. With higher prices persisting even after the Federal Reserve raised interest rates, the expectation for a recession only mounted. Most economists believe that a recession is likely in 2023. Recessions are a regular part of a healthy economy and their length varies. Calling the start and end of a recession is too complex due to the various moving parts of the economy. How the economy stands now and if economists still believe a recession is likely—plus whichever which way the markets move.

Fears of recession mounting

The Federal Reserve has been on a steady path of increasing interest rates to draw money out of the economy and slow down the rate of inflation. Its efforts are yielding some results as inflation slowed down again in December 2022 to a rate of 6.5%, according to the Consumer Price Index (CPI). The cost of food at home increased by 0.2%, while the cost of food away from home rose by 0.4%. Gasoline prices decreased by 9.4% from November. These numbers make it sound like the economy is recovering, but inflation is still higher than the Federal Reserve would like. As a result, they will continue to keep rates high and possibly increase them more.

A recession is defined as a slowdown in economic activity that's spread across all sectors of the economy and lasts for a significant period. It can be preceded by inflation, but not always. Many economists and financial experts are confident a recession will happen in 2023, but some, like Jamie Dimon, CEO of JP Morgan, are pushing predictions for a recession toward the end of 2023, feeling they might have overestimated the severity of and potential for a slowdown in the economy. Still, other economists see a?1960s-style recession?in the near future. In contrast, the Federal Reserve still feels the economy is too strong and would prefer the employment rate to slow down or decline. The Fed is looking to create a soft landing for the economy, hoping to avoid what happened in 2008.

How long the recession might last

Predicting the length of a recession is difficult. The National Bureau of Economic Research (NBER) has the official duty of calling a recession, but even the NBER can't predict how long it will last. The general indicator of a recession is two-quarters of negative gross domestic product (GDP) growth, but that's only one indicator. There were two-quarters of declining real GDP in 2022, but other economic indicators showed that the economy was not recessionary.

Every recession is unique, and the length of each one varies. The recession in the mid-1970s lasted 16 months, from November 1973 to March 1975. The early 1980s saw two recessions, the first lasting six months, from January 1980 to July 1980, and the second from July 1981 to November 1982, 16 months. The Great Recession of 2008 lasted from December 2007 to June 2009, a total of 18 months. Finally, the pandemic recession was only two months, from February 2020 to April 2020. Recessions tend to be short-lived in terms of duration, but they can feel like they go on for years as the economy takes time to shake off their effects.???????is because it takes time to recover from a recession. While economic indicators might show that a recession is over, each sector of the economy will not recover instantly. For example, while the Great Recession in 2008 only lasted 18 months, it took until 2015 for the unemployment rate to return to pre-recession levels.

Important economic indicators to watch

As previously mentioned, there are multiple economic indicators to watch to assess whether we’re in a recession. While they are usually reliable indicators and can demonstrate slowdowns across all sectors of the economy, they're not always definitive. The NBER looks at multiple factors before calling a recession. For the layperson, the following economic indicators help predict the near future of certain industries and represent changes in different areas of the economy. The indicators include Gross domestic product (GDP), Consumer Price Index (CPI), Producer Price Index (PPI),

\]\Non-farm payrolls, Unemployment rate, Consumer Confidence and Consumer Sentiment, Durable goods orders, and Retail sales. If all of these indicators show negative numbers, it can be assumed that the economy is in a recession. There may be no official statement from the NBER because it takes time for a recession to become visible. However, the general public can use these indicators to determine if the current state of the economy has turned negative.

How to know the recession is over

Recessions tend to end with a whimper, not a bang. While calling a recession is difficult, it is just as challenging to announce it is over. The same issue with the NBER officially calling a recession after it started also happens at the end. The recession could end and may not be officially announced for a few months. The best indicator that a recessionary period has ended is when economic activity returns to an upward trend and stabilizes. The main indicators that suggest a recession has ended include, but are not limited to, the following: , Consumer Price Index (CPI), Gross domestic product (GDP), and Unemployment rate. When these and other economic indicators are relatively stable and show nominal gains – for example, the annual rate of inflation reaching 1.0% over a period of time – the recession can be considered over. It's worth noting that all of these indicators don't move in lockstep with each other, but if they turn positive within months of each other, it shows that the economy is recovering.

The bottom line

Signs point to a recession in 2023, not just in the?U.S. but globally, though many experts remain hopeful it will not be too severe. This is good news for everyone, as it could mean fewer people lose their jobs, and household financial impacts will be mild. A 2023 recession may be on the way, with economists predicting a 70% chance of economic downturn this year. However, economists haven’t agreed on when it will begin or how long it will last – though most believe it will be relatively mild and s recession fears ramp up, it’s important to pinpoint which recession-proof investments could benefit your portfolio. We all have listened and probably heard for months that a recession is on the way. But no one seems to know if it will be long or short,?double-dip?or?pasta-bowled?– if it happens at all.

When it comes to economic events, knowing when, where, and how isn’t that unusual. What?is?strange is how far ahead economists forecasted this particular downturn – and how many agree it’s all but inevitable. In fact, a Bloomberg survey finds that economists see a?70% chance?of a recession in the next year. But even then, they haven’t rallied around a unified vision. The Wells Fargo Investment Institute expects the U.S. to see a full recession, recovery, and rebound by year’s end. Goldman Sachs and JPMorgan Chase see the economy coming out a little bruised, but otherwise relatively unscathed. ?Barclays Capital says that 2023 will be the worst global economy in four decades.

Recession fears: Are they warranted?

The potential 2023 recession is unusual in another way: it’s likely to be (somewhat) intentional. In response to climbing inflation through the latter half of 2021 and into 2022, the Federal Reserve began hiking interest rates. Effectively, these serve to increase the cost of borrowing money in different areas of the economy. (Think mortgages, credit cards, personal loans, business loans, etc.). Then borrowing costs rise, and businesses and individuals rely on credit less, which means they generally make fewer or smaller purchases. That drives down demand, which means that businesses may lower prices (or at least stop raising them) in response. But historically, hiking interest rates don’t just slow inflation down a little bit not fully. ?Moody’s Analytics chief economist Mark Zandi notes that “We’ve seen this story before. When inflation picks up and the Fed responds by pushing up interest rates, the economy ultimately caves under the weight.”

Back in September 2022, Federal Reserve Chair?Jerome Powell admitted?that the Fed’s fight against inflation could cause a recession. And though he?recently acknowledged?that he believes “there is a path to a soft, or a softish, landing,” that opportunity has “tapering.” To steer the U.S. economy back to its target 2% inflation, the Fed has already hiked interest rates from near-zero to the 4.25-4.50% range. Currently, it predicts that its target rate could top 5% by 2024.

Already, higher rates have seeped into various markets as annual inflation stubbornly sticks around 7.1%. November’s data shows home sales down over 35% in the last year as 30-year mortgage rates neared 7%. The average?credit card interest rate?hit 16.27% for existing accounts and 21.59% for new offers. And though?consumer spending rose overall?in the third quarter of 2022, people spent less overall on food, beverages,tion.

Jobs and wages data confound the issue

Altogether, the data suggest that people are definitely spending less thanks to higher interest rates, sticky inflation, or both. But even as budgets bloat and?savings rates shrink, recession fears have yet to bear fruit. During 2022, the economy added 4.5 million jobs, with new unemployment claims hitting historically low levels in December. Additionally, average hourly wages rose to an annual 4.6% in December, compared to November’s revised 4.8%. But for inflation to decrease, this will likely have to change. During last month’s meeting,?Fed officials predicted?that unemployment would rise from around 3.5% now to 4.6% in 2023, which would coincide with recession-level numbers. And though current numbers remain strong, the cracks have begun to show. Back in November,?several major tech firms?announced a combined 51,000 job cuts as the bloated industry trimmed the fat. Hiring has also begun to slow. While December notched 223,000 new jobs, that’s just over half the 400,000 monthly averages seen earlier in the year.

Recession 2023: How long will it last?

While the potential for a recession has been on the horizon for months, the Fed has so far failed to wrangle inflation – let alone cause an entire economic downturn. And even if a recession?does?lie?around the corner, no one can definitively say when it will hit or how long it will last. But that hasn’t stopped?economists and high-profile financial firms?from giving it their best shot.

Bank of America notes that a recession is “all but inevitable” in the U.S., UK, and euro area. The firm expects a “mild US recession in the first half of 2023.” BCA Research swings another way entirely: the firm predicts that “growth will surprise to the upside in 2023,” with the U.S. averting a recession entirely. However, the firm won’t rule out a downturn over the next 24 months, though it predicts that “it will probably not start until 2024.” More importantly, the firm says, “Any US recession is likely to be a mild one…[perhaps] almost indistinguishable from a soft landing.” Tim Simons, a money market economist at Jefferies, thinks that 2023 will see a “classic recession.” He predicts that the downturn will begin at the corporate level in the first half of 2023, leading to reduced headcounts. By mid-2023, he predicts that economic growth will slow and inflation will begin to dissipate. JPMorgan Asset Management’s position?is short and sweet: “Our core scenario sees developed economies falling into a mild recession in 2023.” Diane Swonk, the chief economist at KPMG, hopes for a “short, shallow” recession that we can recover from quickly. She holds that balance sheets remain strong overall and that “Fed-induced recessions are not balance sheet recessions.” In other words, “We’ll have [a recession] because the Fed is trying to create one.” Swonk sees a recession running through the end of 2024 if interest rates remain high. Trust Wealth?calls for a recession?in 2023, though it expects economic growth will remain strong relative to its global counterparts.

UBS takes a particularly weak outlook, predicting global growth of just 2.1% annually with “13 out of 32 economies expected to contract” by the end of 2023. The firm forecasts “something akin to a ‘global recession.’” The Wells Fargo Investment Institute?sees a recession occurring?in the first half of 2023 that impacts corporate earnings while creating “important inflection points for investors” in the coming year. The firm also predicts that the economy will hit recovery by midyear and “a rebound that gains strength into year-end.”

?Essential industries

Typically, recession-proof stocks pop up in industries that people can’t or won’t go without. They may provide essential goods, like groceries, household cleaning supplies, or internet services. Others fit the category of “sin stocks,” such as alcohol, tobacco, and even marijuana. Examples of essential recession-resistant stocks include: Consumer staples, like grocers, food and beverage makers, and wholesale stores, Guilty Pleasures like alcohol and tobacco, Shipping and transportation, Utilities, Healthcare, IT, communication, and digital service firms

Recession-proof business models

Some business models are also uniquely designed to capitalize on declines, such as discount retailers or repair shops. During economic declines, customers may look for ways to slash their grocery bills, such as shopping at Walmart?+0.8%?and Dollar Tree?+2.2%. They may also find deals elsewhere – think Spirit or United Airlines, Poshmark instead of Macy’s, or repairing tech and cars rather than switching to new models. And if we are feeling particularly thrifty, we might consider restaurants like Wendy’s and McDonald’s “discount” opportunities, too. After all, people still want to eat out when times are tough – but?where?they eat may have to change.

Recession-specific opportunities

A few particular?types?of investments may also be more likely to perform during a 2023 recession. For example, many economists and investment firms predict that bonds could see their first real heyday in years as interest rates climb to outpace inflation. Short-term US Treasuries and high-yield savings accounts may also present preferable alternatives to your regular savings and checking accounts for short-term cash needs. Some investors also rely on riskier investments to see them through recessions. For instance, if commodity prices decline, investors may buy in at lower prices to ride the upside on the way out. Investors may also short-sell investments, or bet that a particular security will decline, to shore up their profits. Whether we’re wearing our consumer hat or our investor hat, recessions are often anxiety-inducing. But with some foresight and financial planning, we can prepare for these short-term blips in our long-term plan. Of course, the usual advice applies: buff up your emergency savings, budget wisely, pay off your debts, and don’t sell out at the first sign of decline. But?that’s not all you can do.? Recessions over the last half a century have ranged from 18 months to just two months. Federal Reserve economists believe the next downturn may stick around for longer than usual. Amid a barrage of headlines about?layoffs?and?turmoil for banks, fears about an upcoming?recession?are mounting. Some people may be wondering how long a downturn last would last. Looking back at the length of previous economic slumps may provide some clues. There’s a committee of economists at the National Bureau of Economic Research —?the Business Cycle Dating Committee?—?that identifies when a recession officially starts and stops. (It defines a recession as a significant decline in economic activity across different sectors that lasts for several or more months.). “Expansion is the normal state of the economy,” the committee notes on the NBER site. “Most recessions are brief.”

How long do economic recessions last

In 2021, the committee confirmed that the pandemic downturn lasted just two months, from February 2020 to April 2020, “which makes it the shortest U.S. recession on record.” That economic bust was cut short by massive stimulus from the government. Yet the next slowdown may not leave so quickly. Federal Reserve economists are predicting that there will be?a mild recession?later this year, “with a recovery over the subsequent two years,” according to?the minutes?of the Fed’s March 21-22 meeting. Because the economists blame the recent?turmoil in the banking industry?for the impending economic trouble, they expect the pain to endure for longer than usual: “Historical recessions related to financial market problems tend to be more severe and persistent than average recessions,” staff noted in the minutes.

Indeed, the longest recession in recent decades was the 2008 financial crisis, which slogged on for 18 months. Another tricky aspect of the current economic conditions is that the Federal Reserve is deliberately trying to slow economic growth in the hopes of getting inflation under control, said?Preston Caldwell, the chief U.S. economist at Morningstar. Cutting rates usually helps the economy rebound from downturns. Still, Caldwell expects that the central bank will tame inflation by the end of this year, and be able to start bringing rates down in 2024, at which point the economy would start its recovery.

Preparing for a downturn

If we are worried about a recession and possible job loss,?Cathy Curtis, founder, and CEO of Curtis Financial Planning in Oakland, California, recommends updating our resume so that we’re as prepared as possible to look for a new position should you need to. Having a?solid emergency savings account, anywhere from three months to a year’s worth of expenses salted away, is one of the best safeguards to help ride out a downturn without having to go into debt, experts say.A recession in 2023 is now inevitable. Layoffs in tech and finance will spread to other sectors

?After tech and finance, more sectors will have to adapt to a new reality of high-interest rates and weak demand. More than a year ago, a forecast of a recession?would begin in the second half of 2023. That was a no-brainer. Years of virtually zero interest rates ignited stock markets, bond markets, and housing bubbles. To deal with the spike in the inflation rate to 9% in June 2022, the Federal Reserve began to increase the Fed funds rate–the rate banks lend to each other overnight–expecting to cool demand for goods and services and thus bring the rate of inflation down to its target rate of 2%. With inflation increasing at the fastest pace in more than 40 years, the Fed had to act to deal with the pain families were feeling as wage increases lagged the rise in the cost of living. In short, the wage-price spiral is a myth. More accurately, a price-wage spiral unfolds during inflationary cycles.?In an effort to cool off the economy and get inflation to its target rate, the Federal Reserve began to increase the Fed funds rate rapidly throughout 2022. Rates increased from virtually zero in March of that year to a target range of 4.75-5.00 for March 2023. Nevertheless, the latest CPI data reveal prices rose 6% in February 2023 compared with the same month the previous year–well above the new Fed funds target rate of 5%. Historically, the Fed would raise its fund's rate above the inflation rate to break the back of inflation. In short, Jerome Powell is no Paul Volcker, who raised the Fed funds rate more than four decades ago to nearly 18%–well above the 12% inflation rate (see above). We will have to wait and see if the Fed will raise the Fed funds rate in the coming months to bring the inflation rate down. However, Chairman Powell has another concern besides tweaking the Fed funds rate to slay the inflation dragon, which he addressed during his Mar. 23 press conference after the Fed announced the new fund's rate target. The collapse of?Silicon Valley Bank?and?Signature Bank?complicates the Fed’s task of “managing” the macroeconomy by moving the Fed funds rate up and down to dampen inflation (and inflation expectations) and boost economic activity when the economy eventually slides into a recession. Additionally, the Fed is responsible for ensuring financial stability when banks fail and preventing more bank runs throughout the country. Only time will tell if Chairman Powell’s assertion that the banking system is “sound” turns out to be true. The truth of the matter is a combination of fractional reserve banking, easy money, and FDIC depositor insurance has created a moral hazard that promotes risky bank lending. Thus, when a rumor of a bank’s shaky financial condition gains traction, a run unfolds, revealing tenuous liquidity situations and weak balance sheets.?The conundrum the Fed faces is of its own making. Once price inflation accelerates, expectations take hold–and it typically takes a large move in interest rates to dampen the public’s appetite for debt, which would reduce demand and hence cause prices to decelerate, if not actually decline.

Meanwhile, one of the best indicators of an impending recession is the inverted yield curve, particularly the difference between the 10-year Treasury note and the three-month T-bill.?The curve inverted at the end of October 2022. Historically, when short-term rates rise above the long-term rate a recession begins about a year later. Interestingly, when the yield curve inverted in 1998, a recession did not follow until the curve inverted again in 2000 when the Fed tightened credit to deal with the dot-com bubble. In other words, there are exceptions to every “rule.”Furthermore, the yield curve inverted in March 2019, when the Fed began to raise the Fed funds rate in response to what was perceived to be an “overheated” economy and robust financial markets.

The Federal Reserve then “pivoted”–and the yield curve went positive after then-president Trump criticized the Fed for raising interest rates before the 2020 election. This is one of many episodes in the history of a president making his views known to the “independent” Federal Reserve, which usually responds to a president’s wishes going into an election year. All presidents want the Fed to keep the monetary spigot open and interest rates low to make sure the economy is humming when they seek another term. The massive monetary stimulus of 2020 to deal with the economy’s implosion because of the COVID-19 lockdown came home to roost in 2022. The Fed’s unprecedented increase in its balance sheet from $3.8 trillion in early 2020 to $7.1 trillion by the end of 2022 provided the fuel to raise prices across the board. With M2 declining in recent months and the Fed continuing to shrink its balance sheet, effectively withdrawing liquidity from the economy, what effect will this have on prices, unemployment, and GDP? We are witnessing the beginning of increasing unemployment in the financial sector and high-tech, which have benefitted from the Fed’s easy money policies since the Great Recession of 2008.?

Recently,?Goldman Sachs, a bellwether of Wall Street profitability and employment, announced layoffs of around 4,000 employees and cut bonuses. If Goldman’s announcement is a forerunner of 2023’s Wall Street’s downsizing, then higher unemployment is unfolding in the canyons of lower Manhattan–and soon in the rest of the country as 2023 unfolds.?Facebook parent Meta and Amazon?recently announced another major downsizing of their workforces. If layoffs accelerate in the next few months, a recession–a readjustment to the end of the easy money policies of the past few years–will be underway.

The job market may seem strong overall–but according to a long-term chart of the unemployment rate (above), layoffs tend to begin early in the recession phase of the business cycle, and then accelerate markedly as companies realize they must cut expenses to deal with the new economic reality of tight money and slowing demand. When the unemployment rate reaches a trough as the economy peaks, it tends to “stabilize” at the lowest level of the cycle–and then it is off to the races. When unemployment reaches politically intolerable levels, that’s when the Fed “pivots” and begins to lower the Fed funds rate. Another easy money boom is ignited. When will the Fed pivot? 2023? 2024? Later? It is too early to tell–but watching the unemployment rate ratchet up is the best indicator for the next episode of easy money and the next upswing in the economy.

?How to Prepare For a Recession in 2023?

We should know that during the last recession, India saw the highest unemployment rate in the last 45 yrs. Especially with the looming threat of the upcoming recession in 2023. Whether it happens or not, one should be prepared for it. We can’t control the market but can learn how to prepare and protect ourselves from losses. Here are six tips to recession-proof your professional life and portfolio.

1. Identify your financial priorities,?2. Focus on budgeting, 3. Build an emergency fund, 4. Prioritize paying off high-interest debt, 5. Evaluate your investment options and diversify 6. Invest in yourself

Signs of a recession

There are five indicators that economists and analysts look to determine whether or not the economy is in a recession –

·??????Negative GDP for two or more quarters.

·??????A decline in consumers’ purchasing power, i.e. consumers’ real income.

·??????Inflation-adjusted retail and wholesale sales of goods.

·??????The strength of the manufacturing sector (whether there is a trade surplus or deficit)

·??????A high unemployment rate (A rate of about 6% or higher indicates that the economy has already entered a recession.)

·???????

What Typically Happens in a Recession?

Recession repeats itself, but every recession is different. During a recession, the economy slows down, meaning there is less production, fewer jobs, and lower wages. This leads to a decrease in consumer spending and a decrease in business investment. As businesses experience lower profits, they may cut back on their investments or lay off employees, leading to higher unemployment. This, in turn, leads to further decreases in consumer spending, creating a vicious cycle.?

Difference between the great depression and the Recession

You might have heard about the ‘Great Depression’, which had captured the entire world in its darkness. But what is the difference between the great depression and the recession? Let’s find out.

Points of difference

Great Depression

Recession

Definition

Severe decrease in economic activity due to a slowdown in industrial production, trade problems, etc.

The slowdown in economic activities is similar to the great depression, but the scale and severity are lower.?

Time duration

It lasts for years.

It lasts for months.

Reach

It can impact almost the entire globe.

It is relatively narrower than the great depression and generally impacts a small group of nations.

Recovery

It takes years to recover from the impacts of the great depression.

It takes months to recover from a recession.

Mistakes to avoid during a recession

Apart from preparing for a recession, it is crucial to make a note of things that we should not do during a recession. Here are the top five things –Do not take on any additional debt. Do not take financial decisions from fear, do not forget to build and maintain an emergency savings fund, avoid increasing your fixed expenses, and do not forget to have a backup plan in place.

Recession-proof jobs

There are some jobs that are recession-proof. They are usually less volatile and may even see growth during economic turbulence. For instance, the telehealth and cleaning sectors have seen massive growth during the Covid pandemic. Here are six recession-proof sectors –Health care, Public Safety, Education, Utilities, Financial Services, and Social work.

Is a recession coming in India in 2023?

The last recession India faced was during the Covid pandemic. According to?Statista, the GDP of India fell to -6.6% in the year 2020. As you can see in the below-mentioned chart, the GDP fell in the year 2019 and then in 2020, causing a recession.

?

However, in the year 2021, the GDP grew and reached 8.68%. Now, if you look at the same graph, it is predicted that in the year 2023, the recession will come again. The?International Monetary Fund?predicted that growth in the Indian economy will slow down to 6.1% in 2023-2024 from 6.8% in the current financial year.

Going back to the chart, after 2021, the GDP fell to ~6.7%. And it is predicted that the GDP will fall even further in 2023 to ~6.06%, which technically means the recession may come. But will it really happen? Only time will tell. Therefore, it is worthwhile to stay prepared for another economic slowdown.

Conclusion

Whether the world will face another recession or not is not in our control. But, ??can gauge the financial instabilities it brings by focusing on recession-proofing your portfolio and professional life. To research various assets, analyze, and manage our portfolio, gauge the stocks with red flags, and invest easily. The last recession in India was seen during the Covid pandemic. In the year 2020, the GDP of India fell to -6.6% from 3.74% in 2019, according to?Statista.

What was the Great Depression?

The great depression was one of the greatest and longest economic turndowns in the history of the world. It lasted for ten years from the year 1929. Recessions usually last between two and 18 months, with an average of ten months. Depressions are much longer and can last for several years. For instance, the great depression lasted ten years.