Modest downturn projected for 2023 as Fed tightening tamps down activity

Current Trends

Growth readings continue to broadly weaken as another hot inflation report lifted expectations for further Fed tightening. Retail spending stagnated over the third quarter in response to sharply rising costs, while much higher mortgage rates continue to batter the housing market. Business sector growth remains in expansion, but investment and hiring trends are weakening as recession concerns build. Long-term interest rates continued their steep ascent into October, but the yield curve is flashing a recession warning — contributing to the dour outlook from investors with most equity market indices near year-lows.

Future Outlook

A recession call for 2023 is gaining broader consensus as economic activity is expected to weaken further under the weight of high inflation and Fed tightening. The timing of a potential downturn remains uncertain, but recessionary conditions with job losses and reduced spending should prevail within the next 12 months. But this recession is expected to be shorter and more modest, even with Fed stimulus support likely delayed by still above-trend price growth. Fed easing in 2024 and a more typical pace of inflation should shift the economy into recovery mode.