Strong job growth and slower inflation boost the near-term outlook, but clouds remain for 2023

Current State

Inflation finally turned downward in July as the sharp drop in gasoline prices and steady improvement in supply chains eased price pressures — but prices were still broadly higher. Job growth was robust again for July while the unemployment rate matched its 50-year low as strong hiring trends continue within many industries. The stock market has rebounded too, pushed higher by expectations that the Fed won’t have to tighten as much as previously feared. But survey data from consumers and small businesses remain dreary and the yield curve is closing in on a full inversion — historically, a strong signal of recession conditions about a year later.

Future Outlook

Storm clouds continue to build over the outlook. Recession odds for 2023 (although far from certain) climb with each rate tightening by the Fed, while economic growth is likely to be below-trend in coming years even if a soft landing can be achieved. But the chances of a severe downturn at the end of this cycle are relatively small. Balances sheets for consumers and businesses are in solid shape with few signs of at-risk debt burdens, while household wealth has risen sharply. This suggests fewer cutbacks in spending and investment if conditions worsen over the next year, and a more modest overall recession — should one occur.