Credit Sesame discusses the possibility of a recession in 2023.
A new year is often met with a spirit of optimism that comes from a fresh start. However, many economists and market commentators are meeting 2023 with a wary eye on the possibility of a recession.
Economic signals were mixed in 2022. At times the U.S. seemed to be on the verge of a recession. At other times the economy seemed resilient.
What do the economic changes in 2022 mean for 2023? How can you insulate yourself from the impact of a recession in 2023, if it happens?
The economy in 2022
The economy got off to a slow start in 2022, but started to bounce back in the second half of the year.
After adjustment for inflation, the U.S. economy shrank slightly in the first half of 2022. With interest rates rising in response to high inflation, spending faced a headwind of increased borrowing costs.
At mid-year, things did not look good for the economy, but it responded with a surprisingly strong third quarter. The economy grew at a 3.2% annual rate in the third quarter after adjustment for inflation. Considering how high inflation was, it was an achievement for growth to outpace price increases in the third quarter.
While official estimates of fourth-quarter growth are not yet available, a Mastercard survey of holiday spending indicates that growth once again managed to stay ahead of inflation. It seems likely that the economy has grown at a decent rate in the year’s second half and has come out modestly ahead for the year as a whole.
What the Federal Reserve expects in 2023
Following its December meeting, the Federal Open Market Committee released a series of updated projections around what it expects from the economy in 2023.
The Fed expects inflation to ease in 2023. However, as part of their effort to beat back inflation, the Fed expects to continue raising interest rates. The Fed funds rate was at 4.33% as of late December, and the Fed expects it to rise to 5.1% by the end of 2023.
The Fed’s projections recognize that continuing to raise interest rates makes economic growth hard to sustain. They expect a U.S. economic growth rate of just 0.5% next year after adjustment for inflation.
What economists say about the economy in 2023
While the Fed’s growth forecast for 2023 is meager, the hope is to avoid a recession. Economists in general are less optimistic.
A recent Bloomberg survey of economists found a 70% chance of a recession in 2023. Not only does this suggest that a recession has become a probability, but the mood is worsening. According to the survey, by December the possibility of recession was more than twice what it had been six months previously.
Stock market investors seem to share this gloomy outlook. The S&P 500 stock index entered the last week of 2022 nearly 20% below where it had started the year.
Stocks face a sort of double jeopardy in this environment. Rising interest rates diminish the present value of their projected earnings, resulting in lower prices. Meanwhile, the prospect of slower economic growth means future earnings are likely to grow less than previously expected.
Consumer spending remains strong – but is it running on empty?
The persistence of consumer spending was one of the saving graces for the economy in 2022. Despite high inflation and rising interest rates, consumer spending stayed ahead of inflation.
However, that resilience may have come at a price. Consumer debt rose to a record level in 2022. People tapped into their retirement savings in growing numbers. Meanwhile, the personal savings rate dropped to its lowest level since 2005.
All of this paints a picture of consumers who are using up every resource they can get their hands on in order to keep spending. That bailed the economy out in 2022 but may be difficult to sustain in 2023.
Eventually, credit limits prevent further borrowing, or debt becomes too expensive. There are restrictions on tapping into retirement savings early, and in any case, people can only burn through those savings for so long. The drop in the personal savings rate shows how far family budgets are being stretched.
This does not make a recession in 2023 a certainty, but it does suggest that at growth is likely to be sluggish. The most optimistic outlook is for that slow growth to douse the inflation fire finally.
Prepare for the possibility of a recession in 2023
Given this outlook, here are five things you could do to prepare your finances for a possible recession in 2023:
- Get your budget back into the black. The sudden surge of inflation in 2022 caught many consumers short. They found their take-home pay couldn’t cover normal expenses, so they borrowed to make up the shortfall. However, that’s not a long-term solution. Going into 2023, plan to adjust your budget for inflated prices. Reduce spending so you have no need to borrow.
- Pay down debt. Interest rates rose over the past year, and they are slated to move even higher. This means borrowing costs may drain your budget even more severely than in the past. The best way to fight back against that is to pay down debt. That way less of your money goes towards interest payments, leaving more available for your needs.
- Delay major purchases. This may be a bad time for major expenditures that require you to borrow, such as buying a house or a car. If you wait, you might find that a slow economy brings some prices down over the course of a year.
- Make any career moves sooner rather than later. If you are thinking about a job change, going for a promotion or just asking for a raise, make your move before the economy cools down. Right now labor is in high demand, so you have a negotiating edge. The Fed expects the unemployment rate to rise in 2023, which could diminish that edge.
- Keep a close eye on your credit score. The economic pressures of high inflation and slowing growth may strain your credit score. However, keeping your credit in good shape in this environment is important. Good credit lowers your borrowing costs, which can take some of the burden off of your budget. Signing up for free credit monitoring is a way of keeping close track of your credit health.
You may also be interested in:
- Balancing the Inflation-Recession Tightrope with Interest Rates
- Recession and Inflation as Threats to Personal Finances: Which is worst?
Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.