Economy Survives Technical Recession—But Worst Could Come Next Year, Experts Warn

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The U.S. economy grew for the first time this year in the third quarter, a preliminary estimate from the Bureau of Economic Analysis showed Thursday—pulling the economy out of a so-called technical recession but doing little to quell economist concerns that the nation will ultimately plunge into an official recession in the next few months

Despite a return to growth, the economy could shrink and lose millions of jobs next year.

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Key Facts

The U.S. economy grew at an estimated annual rate of 2.6% in the third quarter after falling 0.6% and 1.6% in the first two quarters—thereby signaling the end of a technical recession, the Bureau of Economic Analysis reported Thursday.

The increase primarily reflected increases in exports and consumer spending that were offset by declines in the housing market, which has suffered from a dearth in demand spurred by higher mortgage rates, the government said.

Despite the return to growth, economists have increasingly predicted the U.S. economy will likely contract next year as markets digest the impact of the Federal Reserve’s interest rate hikes, which work to tame inflation by tempering consumer demand.

In a Thursday note, EY chief economist Gregory Daco said he anticipates real gross domestic product growth of about 1.7% this year followed by a 0.7% contraction in 2023, as the ongoing war in Ukraine and rapidly tightening financial conditions lead to a global recession.

As a result, the economy should lose about 2.8 million jobs next year, with the unemployment rate rising to 5.5% by mid-year, EY projects.

LPL Financial chief economist Jeffrey Roach agrees, saying recession risks “appear more probable” by the beginning of next year as the economy absorbs the spillover effects of declines in many sectors, such as housing.

Tangent

Though a technical recession comprises two consecutive quarters of negative GDP growth, the definitive recession call is up to the National Bureau of Economic Research, which defines a recession as “a significant decline in economic activity” lasting “more than a few months.”

Key Background

Skyrocketing prices have forced central banks around the world to reverse pandemic-era policy measures meant to bolster markets—and the Fed’s rate hikes have hit the formerly booming housing and stock markets particularly hard. New home sales plunged to a six-year low this summer, and the S&P 500 has tanked 20% this year. As the economy faces a potential recession, many experts predict the downturn may only get worse. Morgan Stanley, for example, projects the S&P will ultimately hit a bear-market low of between 3,000 and 3,400 points—suggesting the index could still plummet another 10% to 20%.

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