Admittedly, growth was already negative in the first half of 2022. But this technical decline has coincided with a strong labor market, to the point that the National Bureau of Economic Research, whose job it is to officially identify recessions, declined to comment. apply this term to the current episode. He will be less reluctant to do so in 2023. As growth slows, the unemployment rate will climb, leaving little doubt that the economy is shrinking.
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Bearing on bearing
The first cause of the recession will be the Federal Reserve, which is determined to continue its policy of fiscal tightening in 2023. In December 2022, the median forecast of the Fed was that it would raise interest rates to 5.1% in 2023 , against 4.25% currently. But inflation will persist throughout the beginning of the year, so it will probably go beyond this threshold, raising rates to around 5%. Financial markets, already strained by rate hikes in 2022, will face renewed concerns that indebted companies and spendthrift households will struggle to cover their higher interest costs.
But all will not be black. Throughout 2022 the number of unfilled jobs has far exceeded the number of available employees. This implies that, even if a contraction in growth causes companies to revise their hiring intentions downwards, they will probably refrain from any massive layoffs. The unemployment rate will rise above 2022 lows, but not explode.
The United States has many other shock absorbers that will help reduce the impact of a recession. This is partly due to the duration of post-pandemic stimulus programs. At the end of 2021, state governments held cash reserves of more than $250 billion, about twice as much as in 2019. Households have about $1.5 trillion in excess savings compared to the pre-Covid period. . Companies also have strong reserves. All of this will be eaten away by a recession, but should be enough to avoid drastic spending cuts despite the slowdown.
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The outlook for the US economy is expected to change significantly over the course of the year. Disinflation will come eventually – it had even started to take effect at the end of 2022 even before the recession hit. This should mark the end of the Fed’s rate hike cycle towards the middle of the year, which will then concern itself with determining when it can embark on an easing policy. The Fed won’t be in a hurry to make a major rate cut after having struggled so much to rein in rising prices. But the combination of a recession and rapidly waning inflation will lead it to cut rates before the end of 2023 in an attempt to ease downside pressures.
Investment package
Although the short-term vicissitudes of the United States will make headlines in 2023, the most important developments will have longer-term consequences. President Joe Biden scored a string of major legislative victories with the passage of the climate, infrastructure and technology investment package. The arduous task of implementing these measures will really begin in 2023. But, as growth slows, it will be difficult to find enough workers to complete large projects, which will increase their cost. Ambitious government investments will face a growing volley of criticism as wasteful, especially in semiconductors, as this industry moves from global scarcity to glut.
At the end of 2023, the US economy will gradually emerge from its mild recession, while inflation will be in retreat. The concern then will be whether America’s costly plans to reshape its industrial landscape, largely government-led, will prove a savvy strategy or a pretentious mistake.
Simon Rabinovitch, journalist specializing in the American economy for The Economist
