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Large Banks Expect Downturn in 2023

A number of large financial institutions are anticipating an economic downturn in 2023, according to The Wall Street Journal (subscription). However, they also expect the recession to be mild, with an economic rebound later in the year.

The evidence: The indicators they are pinpointing include a declining housing market, banks tightening lending standards and Americans spending their savings from the pandemic.

  • Short-term government bonds (maturing between three months and two years) hold higher yields than long-term bonds (10–30 years). This has been a dependable red flag for U.S. recessions for roughly the past 70 years.

The reason: Economists at these institutions point to the Federal Reserve as the likely cause of a predicted downturn, since the Fed has been raising rates for months in an attempt to bring down inflation.

  • “The Fed raised rates seven times in 2022, pushing its benchmark from a range of 0% to 0.25% to the current 4.25% to 4.50%, a 15-year high. Officials signaled in December that they plan to keep raising rates to between 5% and 5.5% in 2023.” 

A caveat: The economic consensus has been wrong before. Coming into 2022, economists expected that the economy would improve slowly after two years of COVID-19 and that any significant inflation would pass. Instead, inflation skyrocketed and has remained stubbornly high.

Stay tuned: The NAM’s outlook survey for the fourth quarter of 2022, which will reveal what manufacturers think about the economy, is coming out this week.

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