The case for a 2023 US recession is crumbling

New York

Many CEOs, investors and economists had penciled in 2023 as the year when a recession would hit the American economy.

The thinking was that the US economy would grind to a halt because the Federal Reserve was effectively slamming the brakes to squash inflation. Businesses would lay off workers and inflation-weary Americans would slash spending.

But the case for a 2023 US recession is crumbling for a simple reason: America’s jobs market is way too strong.

Hiring unexpectedly accelerated again last month, with employers adding an impressive 339,000 jobs in May. Not only is that more than any major forecaster expected, but it’s more jobs than the US economy added in any single month in 2019, a very strong year for the jobs market.

“This economy is incredibly resilient, despite all the slings and arrows – despite the banking crisis, rate hikes, the debt ceiling,” Mark Zandi, chief economist at Moody’s Analytics, told CNN in a phone interview on Friday.

Zandi is growing more confident that 2023 won’t be the year when a downturn will begin.

“For this year, given these jobs numbers, it’s hard to see a recession. Increasingly, the odds of a recession this year are fading,” Zandi said. “A lot of economists who have called for a recession are now in the uncomfortable position of pushing back the start date.”

Although it’s possible, things would have to deteriorate very quickly in the economy, and the jobs market specifically, for a downturn to start this year.

“We’re running out of time for a 2023 recession,” Justin Wolfers, an economics professor at the University of Michigan, told CNN. “We’ve never had a recession when the labor market was running this hot. In fact, it would be absurd to use r-word at a time when we’re creating jobs at this rate.”

Not only did nonfarm payrolls soar by 339,000 jobs in May, but the government revised the prior two months of job growth significantly higher, too. Now the Bureau of Labor Statistics says payrolls increased by 217,000 jobs in March and 294,000 in April.

That’s miles away from the dark predictions issued not long ago. Last fall, Bank of America warned payrolls would begin shrinking in early 2023, translating to the loss of about 175,000 jobs a month during the first quarter followed by job losses through much of the year.

Conflicting signals

Some companies are indeed cutting jobs, especially in the tech and media industries.

The number of announced job cuts has quadrupled so far this year, according to Challenger, Gray & Christmas. But the economic indicators suggest many people who are laid off are quickly getting rehired.

Friday’s jobs report did offer some conflicting signals, especially in the household survey, which economists put less weight on because it tends to be noisier.

The household survey showed the unemployment rate, which had been tied for a 53-year low, jumped by 0.3 percentage points – the most since April 2020 – as employment fell sharply.

Yet Wolfers noted the three-month moving average for the unemployment remains extremely low at 3.5%. He described the jobs market as “really freaking good” and said the latest report further disputes the notion that the US economy is already in recession – a belief many Americans have. (In a May CNN poll, 76% of respondents described the economy as in poor shape).

“We are not in a recession. People have been telling us we’re in a recession for the last two years. They’ve been wrong each and every day,” Wolfers said. “Employment has grown gangbusters. The data is crystal clear on this. There is no recession.”

What could change

Of course, it’s possible that something happens to change that story in the coming months. And there is a significant risk of a recession in the medium-term as well as growing evidence that consumers are feeling real financial pain following two years of high inflation.

Dollar General slashed its forecast for the year and warned customers are being forced to “rely more on food banks, savings and credit cards.” Macy’s blamed slowing customer demand for cutting its own forecast. Federal Reserve researchers have found that auto loan delinquencies are rising, surpassing pre-Covid levels.

The other problem is the Fed’s war on inflation is hitting the economy with a lag. That means the full effect of the most aggressive interest rate hikes in four decades may not have been felt yet. This raises the risk the Fed overdoes it – or already has.

Zandi sees a one in three chance of a recession this year, but that rises to “uncomfortably high” odds of 50/50 in 2024.

Still, there is nothing about the latest jobs reports that signal an ongoing or imminent recession.

“As long as the economy continues to produce above 200,000 jobs per month this economy simply is not going to slip into recession,” Joe Brusuelas, chief economist at RSM, wrote in a report.

Morgan Stanley seems to agree, telling clients that the May jobs report “continues to point to a soft landing for the economy,” a Fed term for raising rates without triggering a recession.

Wolfers, the University of Michigan professor, said the risk of a hard landing “looks quite remote.”

If anything, the hot jobs market keeps alive a no-landing scenario: The economy grows so rapidly that the Fed has to slam the brakes even harder, risking a recession. But that would take time to play out, making it a problem for 2024.