Will We See A 2023 Recession? These Are The Metrics To Watch

Wall Street fears a recession may be coming. Key indicators including the inverted U.S. yield curve and the U.S. Federal Reserve raising rates aggressively also imply a looming recession. However, so far, economic data, and especially employment data, has come in ahead of expectations. If a recession does occur, here are some of the key early signals to watch.

Employment

Employment is a robust near-term recession tracker. If people lose jobs, they cut back on spending. That reduced spending can trigger a recession.

So far U.S. unemployment remains close to historic lows. However, that can change fast with even relatively small increases in unemployment potentially triggering a recession. Economist Claudia Sahm estimates that a sustained absolute 0.5% increase in unemployment be an early recession signal. So far in 2023, unemployment has remained at relatively low levels.

However, if we see unemployment move up from its current level of 3.4%-3.6% in recent months to over 4% then that may imply we’re heading for a recession. So far in 2023 we’ve seen more noise than signal in unemployment data, but the unemployment trend appears to be flat more than improving. Just a few months of weakening unemployment numbers may be enough to imply a recession, though the employment situation has come in ahead of expectations for some time now.

The Housing Market

The housing market is not as important to the overall economy as unemployment data. However, the swings in housing activity can be dramatic. A housing boom can fuel a lot of incremental growth and a slack housing market can see stark spending cuts. In fact, it has been argued that the housing cycle is important enough to drive the overall business cycle. We’ve seen home prices weaken since summer 2022 and prices are starting to fall in year-over-year terms, especially on the West Coast. A collapse in housing activity may be enough to trigger a recession.

GDP

Then, of course, Gross Domestic Product data is the crucial, but lagging indicator. However, the Federal Reserve Bank of Atlanta produces nowcasts of GDP based on incoming datapoints. Currently this suggests that Q1 2023 GDP will grow at around 2.5%. That’s certainly not recession territory, if Q2 is similarly robust, then a 2023 recession becomes less likely. However, growth in the first half of 2022 was negative setting up an easier year-on-year comparison.

Will We See A Recession?

Many are calling for a 2023 recession and to some extent this view is priced into fixed income markets with the expectation that rate cuts are coming later this year. However, so far, the economic data does not suggest a recession is imminent. There is time for that to change in 2023 and historically sharp increases in interest rates and inverted yield curves have generally signaled a recession ahead, even if the timing is imprecise. If we do avoid a recession it will be unusual. Yet, we’re almost a third of the way through 2023 and a recession has not arrived just yet.