In 2023 so far, the U.S. economy has defied recession expectations. Latest early nowcasts from the Federal Reserve Bank of Atlanta’s GDPNow model are calling for very strong Q3 growth and professional forecasters are anticipating positive economic growth in Q3 too.
We’re now more than half-way through the third quarter, and the nowcasts adjust as further data comes in, but the current trend is positive, reducing the chance of a 2023 recession that was previously viewed as likely.
How Nowcasts Work
Nowcasts use currently available economic data to forecast future economic releases. GDP growth is released weeks after the quarter ends, but much of the data that feeds into the GDP numbers is released monthly, such as consumer spending and trade data.
Nowcasts aggregate and weigh that monthly data to determine where the quarterly growth figures may land. As the quarter progresses so the nowcasts becomes more accurate. Currently, the GDP Now model estimates almost 6% growth for Q3 2023, a forecast which will likely come down as more data comes in, but the strongly positive early signal makes it less likely that the U.S. economy will dip into negative growth in Q3. That in turn, when combined with positive growth for the first half of the year, makes a recession in 2023 less likely.
A Q4 Recession?
If current trends hold we’re running out of time for a 2023 recession. The only remaining window for a U.S. recession would be Q4 and economic growth appears to be accelerating. Despite the narrowing time window, there are some risks to the economy. These include the impact of the resumption of student loan repayments on the consumer, and some risk of a U.S. government shutdown, which could also stall growth. Signs of weakness in the Chinese economy may be a bad omen too.
Still, many forecasters now expect a slowdown in growth to come in 2024 rather than 2023. Economists at the Fed recently revised their forecast for a 2023 recession, now assessing that the U.S. would avoid it. Plus, of course, it is possible for U.S. growth to slow without the U.S. hitting a recession. However, relatively robust economic indicators such as the inverted U.S. yield curve continue to signal a high probability of U.S. recession on a 12-month view.
Ultimately, one of the best indicators that a recession is upon us, is that unemployment starts to move up by 0.5% or more. For now, and for much longer than expected, that hasn’t happened, with U.S. unemployment remaining at historically low levels for well over a year now. Still, it would be historically unusual for the U.S. to avoid a recession subsequent to aggressive interest rate hikes from the Federal Reserve and a deeply inverted yield curve, but maybe that’s exactly what will happen in 2023.
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