Resilient U.S. economy continues to avoid recession – so far

A mild recession could be in the future depending on Federal Reserve policy according to the June 2023 UCLA Anderson Forecast, which said the U.S. is not currently in a recession, but economists say that the central bank will likely err on the side of further tightening of monetary policy if data continue to show a robust labor market.

The forecast projects that, regardless of which path the Federal Reserve’s policy actions take the U.S. economy, the good news comes with a caution.

“With core inflation coming down slowly, it’s possible the Fed may continue to tighten monetary policy until we’re in a recession,” the report reads, adding that even with three months of additional data since the previous report, in March, “there has not been much more clarity as to the trajectory of the economy.”

Consequently, as they did in the previous two quarters, Anderson Forecast economists have issued a forecast with two scenarios: one involving a recession the other without a recession.

At the conclusion of 2022, the UCLA Anderson Forecast described economic conditions that could head in different directions. As the Federal Reserve continued raising interest rates to stave off high inflation rates, uncertainty about the direction of the economy hung in the balance.

Simply put, aggressive action by the Fed could eventually push the economy into a mild recession. So far, it has not, but the possibility of a recession still looms, depending on future Fed actions.

For June 2023, the forecast remains the same: Anti-inflation actions by the Fed, past and future, could still trigger a near-term recession.

The important difference between the two scenarios hinges on the Fed’s decisions in setting monetary policy. The Fed has said emphatically that its actions will be data dependent.

If data continue to show that the labor market remains robust — as evidenced by the latest figures from the Bureau of Labor Statistics — and if another jobs report shows strong growth in payroll employment and inflation remains sticky, the Fed will likely err on the side of further tightening of monetary policy. If that scenario plays out, a mild recession later this year is the most likely result.

Like the national outlook, the Anderson Forecast for California features two scenarios.

According to Forecast director Jerry Nickelsburg, author of the California report, the two-scenario approach is based on the unknown impact of continuing increases in interest rates. The economists’ belief is that the impact will become more evident throughout the summer, and by the time the fall rolls around, the forecast will return to a singular outlook for the state.

The Forecast anticipates that, unlike during the past four slowdowns in economic growth, there will be a mild impact on California’s economy, regardless of which path the Federal Reserve’s policy actions takes the U.S. economy. That is good news for the state, according to the report.

Given the uncertain macroeconomic environment, the UCLA Anderson national forecast again presents two scenarios: one in which economic growth slows below long-run trends and then picks up again, and one in which the economy experiences a comparatively mild and brief recession that starts in the third quarter of 2023 and lasts through the first quarter of 2024.

The economy has remained resilient over the past year, consumers have continued to spend and, despite business leaders’ earlier warnings of an imminent recession, businesses have continued investing. Whether the U.S. experiences a recession later in 2023 will depend largely on inflation, the job market and the and the Fed’s reactions.

As in the past two quarterly forecasts, the reason UCLA economists are uncertain about Federal Reserve policy is that the Fed itself seems uncertain.

While the Fed has signaled that it might be time for a pause in increasing interest rates, it has also stated in numerous Federal Open Market Committee press briefings that, based on the data, a pause might not be forthcoming.

Recent data on employment, job openings, personal consumption expenditures and inflation all suggest that monetary policy might not yet be as restrictive as policymakers would like it to be.

Under the recession scenario, the UCLA Anderson Forecast projects quarterly GDP growth in the second quarter of 2023 at a seasonally adjusted annual rate, or SAAR, of 1.2%, and then for the economy to contract from the third quarter of 2023 through the first quarter of next year before beginning to grow again in the second quarter of 2024.

In the no-recession scenario, quarterly GDP growth would grow at an SAAR of 2.6% in the second quarter, and the economists do not expect quarterly GDP growth to dip too far below a 1.0% SAAR; the economy would continue to grow throughout 2023 and into 2024, but the pace of that growth would be moderate.