Home » The US economy came back to life this summer, but things are still likely to suck next year

The US economy came back to life this summer, but things are still likely to suck next year

  • Thursday’s GDP report showed a surprisingly strong US economy in the third quarter of 2022.
  • But despite beating estimates, the US economy is still vulnerable to slower growth going forward, with many expecting a recession.

The US economy is booming, and that means there’s no recession in sight — at least not yet.

Data released Thursday by the Bureau of Economic Analysis showed gross domestic product grew an annualized 2.6% in the third quarter of the year. That’s just above the median estimate of 2.4% of economists polled by Bloomberg.

That means the economy has grown after contracting for the first two quarters of 2022, a sign the US is not currently in a recession.

But despite a rosy GDP estimate compared to the first two quarters, there could still be a significant downturn in 2023.

Mike Schenk, chief economist for the Credit Union National Association, said in a statement that “healthy economic growth will not last.”

“The Federal Reserve’s recent aggressive policy response to stubbornly high inflation virtually guarantees that fourth-quarter output will slow — perhaps significantly,” Schenk said.

Even if the US doesn’t exactly fall into a recession, there will at least likely be slow growth.

“While we believe the economy is losing momentum, we are by no means certain that we are headed for a recession here,” David Kelly, chief global strategist at JPMorgan Asset Management, told Insider. “What we are certain of is that we are heading towards slow growth and lower inflation.”

But Kelly added that “another major hit to the economy” could lead to a US recession.

Alarm bells are already ringing in some sectors and economic sectors. Housing starts, which measure new homes being built, fell 8.1% in September – a sign that homebuilders are pausing on new projects, making it even harder to buy a home.

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And earnings at major tech employers are also showing signs of trouble; Meta, for example, saw revenue decline in the third quarter. And while Alphabet posted sales growth, it was the lowest since the second quarter of 2020. And some retailers have had to cut prices as Americans cope with elevated inflation.

CEOs are pessimistic about the future and the hot job market is cooling

CEOs, for one, aren’t too comfortable with the economy. According to a KPMG survey, 91% of CEOs in the US believe the country is headed for a recession in the next 12 months, and only a third of CEOs believe the downturn will be short and mild.

Still, the prospects for when a recession will start and how severe it will be are mixed. But almost everyone seems to agree that one is imminent. Elon Musk has a super “bad feeling” about the economy and believes there could be a mild 18-month recession. Goldman Sachs CEO David Solomon believes that “there’s a good chance we’re going to have a recession in the United States.” Ken Griffin, the billionaire CEO of Citadel, has said there will be a recession – “it’s just a matter of when and frankly how hard.”

At the same time, the job market continues to boom. Job postings on Indeed are up 48.8% from pre-pandemic levels, according to a report by the Indeed Hiring Lab. New job postings are also robust, showing a “healthy appetite for new hires,” wrote Nick Bunker, economic research director at Indeed Hiring Lab. But that attitude isn’t as voracious as last year’s highs.

“The job market remains hot, even if it’s cooled off a bit since earlier this year,” Bunker told Insider.

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For every unemployed person there are 1.7 vacancies, the number of layoffs is still low and there are millions of vacancies. The robust job market is helping keep the US out of a recession – for now.

The Federal Reserve has attempted to cool hiring and wage increases by raising interest rates to curb inflation. And the Fed won’t stop tweaking until the job market cools much more dramatically — and risks triggering a recession in the meantime.

Federal Reserve Chairman Jay Powell said in September the Fed had “always understood” that bringing inflation down while only slightly increasing unemployment would be “very challenging”.

“No one knows if this process will lead to a recession or, if so, how significant that recession would be,” Powell said.

After last year’s strong demand, “it makes sense that you’d see some moderation in job postings, and we’ve seen that,” Bunker told Insider. “Where we’re seeing it is signaling that sectors are normalizing rather than dramatically pulling back posts on concerns about near-term economic growth.”

“The aggressive monetary tightening by the Federal Reserve risks turning this normalization into a prolonged downturn,” Bunker wrote in a jobs report.

It all adds up to a likely downturn in 2023

“If the economy is really slowing down or slowing even more and we see a sustained slowdown, a significant slowdown in aggregate demand and the underlying pace of economic growth, that’s going to have employers saying, ‘okay, now we’re really bearish.’ .” Bunker said.

Michael Gapen, head of US economics at BofA Global Research, told Insider that the US economic research team thinks “a recession is more likely than not next year.”

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“The Fed wants to bring inflation down and seems poised to tighten sooner or later to prevent inflation expectations from rising and inflation from becoming more entrenched,” Gapen added, saying it will be in the first quarter of the year could, but isn’t sure about things like “sustainability of consumer spending.”

Consumer spending has continued to grow in 2022; it rose 1.4% in the third quarter of the year. However, that’s less than the 2.0% increase in the second quarter and similar to the first quarter of the year.

When a downturn comes next year, it will look different than the recessions Americans have weathered over the past two decades.

While the recession caused by the pandemic sent millions of hourly and gig workers home indefinitely, a 2023 downturn would likely hit a different group. Office workers – many of whom were hired and reshuffled during the Great Retirement – are at greater risk of layoffs this time.

Kelly said a recession would be “much milder” if it materialized compared to recent recessions because the financial crisis and recession during the pandemic were not normal ones. He noted that the excess demand for labor “gives a lot of leeway here before the job market actually softens.”

Another reason is that there was no overbuilding like the housing bubble that led to the 2008 financial crisis. “We didn’t build too many houses, or too many cars, or build too much inventory, or invest too much,” Kelly said. “There is no real boom. If you don’t have a boom, it’s really hard to get a big bust.”

But a recession still won’t be kind to workers, though it might be less frighteningly apocalyptic.

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