Moody’s assesses that the most likely scenario is an economic slowdown

Many CEOs, investors and consumers are worried about a recession in 2023. But Moody’s Analytics says the most likely scenario is a “downturn”, where growth almost stops but a full-blown economic recession is narrowly avoided.

“Under almost any scenario, the economy is set to have a tough 2023,” Moody’s Analytics chief economist Mark Zandi wrote in a report on Tuesday. “But inflation is coming down fast and the fundamentals of the economy are solid. With a little luck and some reasonably adroit Fed policy, the economy should avoid a full-blown downturn.”

Moody’s said that in a slow recession – a phrase coined by Zandi’s colleague Cristian deRitis – economic growth “almost stalls, but never goes backwards”. Unemployment would rise, but it would not.

Given all the recent worries about the economy, such a slow recession would be a relief for many.

Recession fears helped make 2022 the worst year for US equities since 2008. In fact, the S&P 500’s 19.4% drop last year was the fourth biggest drop since 1945, according to CFRA Research.

With the Federal Reserve putting the brakes on the US economy to end inflation, business leaders and CEOs have become increasingly confident about a recession in 2023.

Bank of America CEO Brian Moynihan recently told CNN’s Poppy Harlow that a “mild” recession is likely. Economists polled by Bloomberg see a 70% chance of a recession in 2023.

Goldman Sachs bets on a soft landing

Moody’s, whose research is frequently cited by the White House, does not rule out the risk of a downturn, warning that a recession remains a “serious threat” and saying the economy is “especially vulnerable” to a shock. The company also expects unemployment to rise to 4.2% by the end of 2023, from the current reading of 3.7%.

There is also a real risk of a self-fulfilling prophecy, where nervous businessmen and consumers crouch so low that they cause the very recession they fear.

However, there are valid reasons to be cautiously optimistic about what’s to come.

The job market remains historically strong, inflation is cooling off, real wages are warming up, gas prices have plummeted, and the Fed may be preparing to halt its interest rate hike campaign.

Last week, Goldman Sachs said it still believes the US economy will avoid a recession and instead head into a “soft landing” where inflation moderates but growth continues.

Why Moody’s Doesn’t Predict a Recession

In addition to cooling inflation, Moody’s expressed optimism about consumers’ ability to weather the storm in 2023.

“Buyers are the firewall between an economy in recession and an economy skirting a recession,” wrote Zandi. “While the firewall is certainly under pressure, especially as financially hard-pressed low-income households struggle, it should continue to hold.”

Zandi also pointed to relatively strong fundamentals in the US economy, including profitable business, healthy consumer balance sheets and a banking system that is “in financial terrain stronger than ever”.

The Moody’s economist noted that the economy is not plagued by worrying imbalances that were evident before past recessions, such as overbuilt housing markets or huge asset bubbles.

“It is important not to be Polyanese, but it is also important not to convince ourselves that a recession is inevitable,” wrote Zandi. “Is not.”