This article is provided by ITR Economics in partnership with IMEC.
Consumers and businesses alike are expressing increasing concern over the possibility of a recession for the US economy in 2022 or 2023. Analysts have referenced rising interest rates, high inflation, and a brief inversion of a portion of the yield curve, among other datapoints, as evidence that may indicate upcoming contraction. We at ITR Economics are here to cut through the headlines and reassure you that the US economy will grow through at least 2024 – we do not anticipate a recession until 2026. Our forecast for US Real Gross Domestic Product (GDP) calls for a general slowing growth trend to culminate in relatively flat GDP around early 2023. The pace of growth will then pick up steam into 2024.
Consumer strength is a central tenet of our "no-recession" GDP forecast for 2022-23. Although consumers will not enjoy the same massive fiscal and monetary stimulus in 2022–23 as they did in late 2020 and into 2021, they nonetheless remain in a strong position to drive growth. Consumers were able to both save stimulus money and use it to pay down debts, contributing to current low debt payment liabilities. Specifically, US Household Debt Service Payments as a Percentage of Disposable Personal Income remain below the levels observed prior to the early-1990s downturn, the early-2000s downturn, and the Great Recession of 2008–09. The takeaway here is that the US consumer can comfortably take on more debt to fuel future consumption. Tapping into savings is also an option for many. While US Personal Savings as a Percentage of Disposable Income has in recent months dipped to rates not seen since 2013, prior excess savings resulting from stimulus payments and debt suspension programs means consumers still have plenty of cash stored away for future spending.
You may be asking yourself: “Why should my business care about consumer strength? I don’t sell to retailers.” The answer lies in the makeup of the overall US economy. Roughly two-thirds of US Gross Domestic Product (GDP) is a result of consumer spending. Our industrial clients are often surprised by how closely their businesses relate to consumer spending – today’s economy is highly interlinked, and the US consumer has the financial strength to withstand the punch of higher inflation and interest rates and still drive the economy forward, albeit at a slower pace.
Yield Curve Inversions, Inflation, and Interest Rates
The Consumer Price Index rose 8.5% over the 12 months through March, the fastest pace of rise in over 40 years. A significant portion of the increase is attributable to the spiking commodity prices that are a result of the war in Ukraine. However, declining leading indicators signal softening demand-side pressures, and we expect some incremental supply chain improvement as 2022 progresses and producers catch back up with demand. On net, we expect that disinflation – i.e., easing inflation – will characterize the second half of 2022 and all of 2023. Our analysis indicates that Federal Reserve rate hikes – as currently anticipated – will not be severe enough to push the US economy into recession at this time. If rates rise faster than anticipated, or if inflation does not moderate, the risk of recession will likely increase.
A final note on the “yield-curve inversion” – ITR Economics tracks the 10-year-versus-3-month treasury yield spread, which is not only positive but above its trailing 20-year average. The 10-year-versus-2-year spread briefly went negative in early April, but this signal is less reliable than the 10-year-versus-3-month spread. We continue to monitor the risk of recession using a multitude of leading indicators and signals.
The good news for many businesses is that most indications point to a soft landing, or no-recession scenario, through at least 2024. While your competitors retrench due to the uncertainty, take comfort in the strong US consumer. Make your money during the economic expansion that will characterize the coming years. At the same time, begin preparing your business for the 2026 recession.