Will US Dodge A Recession? Analysts Weigh In On Outlook

Signs are emerging that the U.S. economy may not enter into a recession in 2023, as previously predicted.

In interviews with the International Business Times, economic observers said the U.S. economy may achieve a so-called soft landing, which involves bringing the rate of inflation down to a targeted 2% rate without a recession.

On Wednesday, the Bureau of Labor Statistics released its June report on the Consumer Price Index. The data indicated the price of goods contained in the CPI, over the past 12 months, increased by 3%. It was the smallest such increase since March 2021.

The news was well-received on Wall Street. The S&P 500 closed trading on Thursday up by .85%. But average Americans may not be as enthused as they still face stubbornly high prices for food, energy and housing.

Steven Kamin, a senior fellow at the American Enterprise Institute, said the June CPI report is just one data point that cannot totally predict the future trajectory of inflation or the U.S. economy. However, it does suggest the likelihood of recession is waning.

Kamin, formerly a director of the Division of International Finance at the Federal Reserve, said inflation fell sharply over the past year after a long period of increases following the coronavirus pandemic.

In June 2022, the same CPI figure was 9.1% for a 12-month period. At the time, it was the largest increase in 40 years.

This trend, Kamin said, indicates the pace of inflation could continue to slow. Lower inflation, he said, means the Fed will not have to increase interest rates as much as it would otherwise. The rate may decrease faster than expected, too.

The Fed's current effective rate for federal funds is 5.08%. Generally, a higher interest rate can reduce non-financial corporate investments, reduce stock prices, reduce housing investments and cuts into profits and returns in the financial sector. "It dampens the economy," Kamin told IBT.

Ryan Chahrour, a professor of economics at Cornell University, said prices rose sharply during the pandemic years due to various supply chain disruptions. Nevertheless, inflation remained high after those issues resolved, forcing the Fed to raise rates in an effort to control price increases.

"It could be a blip," Chahrour told IBT. "Or a sign that monetary policy is doing the work that we've been expecting it to do and we may be returning to something closer to normal."

The Fed's goal, Chahrour said, is to achieve a soft landing where inflation returns to its target rate of 2% by 2025 without the U.S. economy falling into a recession. While there are some outstanding issues, he said he's more confident now than he was in March that the U.S. will avoid a recession.

However, Patrick Horan, a research follow at the Mercatus Center at George Mason University, warned if the U.S. doesn't achieve that soft landing it's likely the U.S. economy will slip into a recession or into a stagflation scenario.

Horan said the U.S. economy is on the right track, but this single report does not indicate that all is well. He said a few more months of similar results would indicate inflation is under control. He said the Fed should have gradually increased interest rates, rather than waiting for inflation to rise sharply then raising interest rates to match it.

Curtis Dubay, chief economist in the U.S. Chamber of Commerce's Economic Policy Division, said he's not so sure the U.S. economy is headed away from a recession. He said its still likely to enter into recession either at the end of 2023 or beginning of 2024. This recession, he said, would be caused by long-standing, cumulative drags on the economy.

As for the business impact, Dubay said a lower inflation rate won't significantly change the business outlook in the U.S. The Fed, he said, is still likely to raise the interest rate at least one more time. There could, however, be more cause for optimism due to shrinking inflation.

For consumers, the picture remains somewhat bleak. Horan said although the rate at which prices are rising may well be slowing that will not bring prices down to a pre-pandemic level anytime soon. Dubay noted consumer confidence remains low and people still do not feel great about the economy.

A Pew Research Center article published in June 2023 indicated 65% of Americans still view inflation as a "very big problem" in the U.S. today.