Is a Recession Inevitable in 2023?

Consider economic turmoil as akin to an iceberg. Most of what’s actually going on is happening beneath the surface, out of most people’s range of vision. By the time most people comprehend the scope and implications of what’s happening, it’s too late for them to brace for the impact.

In other words, recessionary conditions really start long before the government actually admits that there’s a recession, if they choose to acknowledge it at all. Don’t expect an admission regardless of what happens, as the next election year will be here in nine months.

Thus, it was shocking but not surprising when Treasury Secretary Janet Yellen went on Good Morning, America last month to declare, “You don’t have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years.” Actually, the complete opposite is true – but more on that later.

Relatively low unemployment is the only seemingly good piece of economic news that Yellen can point to right now. Inflation, far from being “transitory,” is still at 6% and Federal Reserve Chairman Jerome Powell’s preferred inflation gauge is also elevated. Used car prices are heading back toward all-time highs, and housing is still unaffordable for millions of struggling Americans.

On top of all that, we now have a fast-spreading banking crisis; bank runs have a modern twist in 2023 as they’re digital nowadays. It’s not a good look for today’s politicians to directly bail out banks with taxpayer money (or at least, not overtly), so some regional banks are bound to fall by the wayside while giant mega-banks gladly take their customers.

Thus, the question of whether a recession is inevitable in 2023 is practically moot, as common sense would suggest that we’re already in a recession and have been in one for at least a year now. Perhaps a better interpretation of the question is: Will the current economic crisis take a turn for the worse?

Courtesy: Visual Capitalist

Here’s where we circle back to the unemployment question. After the unemployment rate reached 3.4% in January – its lowest reading since 1969 – it was 3.6% in February, and is therefore starting to climb its way back up.

Each and every time this happened in the past (unemployment bottoming out and then starting to rise), a recession followed if it wasn’t already in progress. Sometimes the effect was delayed, but it’s a strikingly reliable indicator.

In this instance, there’s no reason to believe that the unemployment rate is going to come back down. For one thing, the lowest unemployment print in over 50 years is awfully difficult to maintain. Second, the Fed wants to see loosening in the tight labor market, as that’s part of the central bank’s plan to curb runaway inflation.

Hence, the Federal Reserve will continue to raise interest rates if that’s what it takes to get people out of the labor force and thereby tamp down inflation. It’s a cruel way to get the job done, but that’s the Fed’s plan whether we like it or not.

Speaking of interest rate hikes, some optimists might assume that we can avoid a recession because the Federal Reserve will pivot from rate hikes to a pause, and then to rate cuts soon. I wouldn’t assume this Goldilocks scenario, but even if we expect a Fed pivot to occur in the coming months, it might be a case of “be careful what you wish for.”

Courtesy: Alessio Rastani

Again, we can use history as our guide. Going back more than half a century, every time the Fed pivoted from interest rate hikes to cuts, the stock market collapsed. So, don’t assume that the end of interest rate hikes will usher in a huge relief rally – actually, the opposite is likely to happen.

Consequently, a recession looks like an inevitable outcome during the next couple of years, though the two charts shown above indicate that it’s hard to time a recession precisely. There’s often a lag between when the signal triggers and when the economy and markets actually crater.

The good news is that you don’t have to time anything perfectly. A diversified portfolio that includes some hard assets should stand you in good stead regardless of what happens, when it happens, and whom it happens to.