Predicting a recession — especially the timing — is difficult. And even when you’re right, you can be wrong.
In March 2019, the yield on three-month and 10-year Treasuries inverted. And two-thirds of finance chiefs surveyed by Duke University and CFO expected the U.S. economy to be in a recession by the third quarter of 2020. Those CFOs were right — sort of. The U.S. did experience a short-lived recession in 2020 (at least according to the National Bureau of Economic Research) but not for the reasons anyone had previously anticipated; the COVID-19 pandemic and lockdowns saw to that.
On Monday, the yield on 2-year Treasuries rose above the 10-year yield. Later in the week, the Federal Reserve Open Market Committee took an aggressive step to combat inflation by raising the Federal Funds rate by 75 basis points. The question now is, when is the recession coming? (Recession is usually indicated by a proclamation from the NBER and represented by two consecutive quarters of real gross domestic product contraction).
The Federal Reserve Bank of Atlanta’s GDPNow forecast uses data from 13 subcomponents of gross domestic product (GDP) to project the upcoming quarter’s growth rate. The subcomponents include net exports, government spending, changes in private inventories, and residential investment. It’s a rolling forecast based on a mathematical model (no judgment included) — adjusted more than 20 times during a quarter as U.S. economic data is released from other agencies and the inputs change.
Despite all the adjustments, GDPNow is a forecast — it is imperfect. The best use of it is directional — as the quarter progresses, which way is the GDP estimate moving? The second-quarter GDPNow estimate started at 1.9%, reached 2.5% on May 17, and dropped in June. It fell to 0.0% on June 16.
Even mathematical models fall short of pinpointing recessions. Since U.S. GDP already contracted in the first quarter, we could already be in a recessionary period. But the experts see a recession farther out in the future. The CNBC poll of CFOs last week had 75% of respondents expecting a recession in the first half of 2023. The May outlook from the National Association of Business Economics found that 53% of its professional forecasters indicated there was a 25% probability of a recession in the next 12 months.
The U.S. economy has had near-term momentum because of consumer spending from strong employment numbers and growth in nominal wages, reported Fitch Ratings this week. But by mid-2023, those effects will wear off, and Fitch sees a “significant risk” of a U.S. recession “in the wake of sharp monetary tightening.”