Analysis of recessions dating back to 1967 has revealed that certain economic behaviors provide 'indicators' that a recession may be in the cards. We have aggregated the indicators into a graphical representation of the six to twelve-month recession outlook. This provides an easy-to-read assistance tool to help you in making decisions on your investment portfolio.
To provide more accurate forecasts on whether we can expect a recession in 2023 we use two 'primary' data sources which have a direct correlation to economic activity; Inflation (which determines Federal Reserve behavior) and employment (which drives consumer behavior).
Rising Unemployment
Initial unemployment claims in the US provide an early indication of the rate at which people are losing jobs, This is different from the overall unemployment rate in that it is more sensitive to fluctuations and therefore will be the first indication of a sustained rise in people being forced out of work. The reverse is also true it provides a great indication of when a recession is over by observing a sustained drop in new unemployment claims.
Increasing Inflation
Used in conjunction with the initial unemployment claims historical recessions indicate there is usually a rise in inflation prior to a recession occurring. The reason for this seems to be that as the economy heats up, employment is high and everyone is flush with cash (including easy Debt), people spend freely and are happy to pay more for goods and services. Because the unemployment rate is low there is no more capacity in the economy to increase output and therefore prices increase for the limited goods and services that are available.
As the inflation increases the Federal Reserve steps in with restrictive measures like raising the official cash rate. Which makes it more expensive to borrow money and encourages saving rather than spending. Their priority is slowing the economy to maintain price stability and keep inflation within the mandated range of 2-3 percent. If you want to know more about the relationship between different market drivers we wrote a dedicated article on it.
Below you can observe directly before the prior two major recessions a significant increase in inflation from 1.4% to over 4% right before the recession was officially declared (indicated by the dotted line).
Current Projection for a Recession in 2023
In the current market environment, there is a very different dynamic in place, inflation (top) is currently on the way down and just reached 3%. Likewise, the initial unemployment claims (bottom) are currently stable at 237k with no signs of an upward progression. This is not to say that these conditions cannot change quickly but looking at the data this does not match the criteria for an imminent recession outlook.
In summary
Due to both inflation and unemployment claims being contrary to what we'd expect to see for a looming recession, I don't anticipate an economic recession in in 2023. Many other secondary sources could provide conflicting information (e.g. the inverted yield curve). But just like second-hand witness testimony in a crime is less reliable, in the same way, the primary data source will enable better timing and accurate predictions.
Always remember past performance may not be an accurate indication of future results. Before making any investing decisions please consult a qualified financial advisor or do your own research.
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