Could we (actually) see a recession in 2023?

Russell Price, Chief Economist -- Ameriprise Financial

July 17, 2023

The prospects of a recession have been top of mind for investors for two years now, but an economic downturn has still not materialized. In fact, the U.S. economy has defied these expectations in an impressively resilient fashion.

As we reach the midpoint of 2023, here’s our updated view on whether the economy could manage to avoid — or slip into — a recession before year’s end.

What has been fueling the drawn-out recession speculation?

Nearly two years ago, when inflation began to surge and it became apparent that the Federal Reserve would have to raise interest rates aggressively, many forecasters started to predict an imminent recession. And history was on their side: The economy typically slows under the weight of higher interest rates and if the hikes are large enough, economic activity often slows to a point of a contraction (i.e., a recession).

Despite the Fed’s hawkish stance, the U.S. economy has yet to see a recession. Instead, it has grown at a sound pace for more than a year.

Over the last five quarters, U.S. real Gross Domestic Product (GDP), the broadest measure of overall economic activity, has grown at an average year-over-year (y/y) rate of +2.0%, according to the Commerce Department.

Why haven’t we seen a recession? 

In our opinion, a key factor as to ‘why’ the economy has not seen a decline is that consumers entered this period in relatively strong financial shape. When the Fed raised interest rates to slow the economy, it intended to target consumer and business demand for borrowing. But borrowing had been weak before the Fed started to raise interest rates — so the negative impact from higher rates was more subdued than normal, in our view.  

Historically, consumers are deep in debt when the Fed starts an interest rate hiking cycle (as seen in the chart below). As such, higher interest rates interrupt their cycle of borrowing and spending, leading to a decline in spending overall. But this was not the case with the Fed’s most recent rate hiking cycle. 

Source: FactSet¹ 

Is a recession likely to occur in 2023?

Although we believe the economy remains on relatively solid footing, a short /shallow recession could still occur. In the coming months, many consumers will be incrementally burdened with a resumption of student loan repayments, which could reduce consumer spending. Many small businesses will soon face the start of federal pandemic-era loan repayments. And, bank lending, especially to the commercial real estate sector, is also expected to contract as loans come up for refinancing at higher interest rates and amid higher office vacancy rates.

What would a recession mean for investors?

If the economy does slip into a recession, it will likely be a different experience than past downturns. Importantly, we project the unemployment rate would likely remain well below 5%.  

It’s also likely that financial markets look past a temporary downturn and maintain a focus on 2024 when inflation should be much more contained, and the Fed could start cutting interest rates rather than hike them.

The bottom line

Despite an unfavorable backdrop, the U.S. economy has yet to see a recession and the odds of such a scenario seem to be fading. At 2023’s midpoint, we believe the U.S. economy is generally sound. It’s possible that a short and shallow recession could emerge in the back-half of the year — but any such decline, may prove transitory, in our view. 

We’re here to help you prepare for the unexpected

Whether a recession, market volatility or another unexpected financial event, your Ameriprise financial advisor will help you prepare. They will show you how your portfolio was built to weather different economic cycles and share steps you can take to prepare for uncertainty.