Moody’s Expects ‘Slowcession’ in 2023: No Growth, Rising Unemployment

U.S. one-dollar banknotes are seen in front of a stock graph in this illustration taken on Feb. 8, 2021. Dado Ruvic/Illustration/Reuters

The U.S. economy might face a “slowcession” this year rather than a recession, according to a new report from Mark Zandi, chief economist at Moody’s Analytics.

While the growing base-case scenario among investors, market analysts, and economists is an economic downturn, Moody’s expects “halting growth and higher unemployment” in 2023, effectively “avoiding a downturn.”

With the Federal Reserve continuing to raise the benchmark federal funds rate from nearly zero percent last year to a current range of 4.25 to 4.5 percent—the Summary of Economic Projections suggests a peak of 5.1 percent this year—the U.S. economy will be “sure to have a difficult 2023.” However, sound economic fundamentals and moderating inflation should help the country avert a downturn.

“With a bit of luck and some reasonably deft policymaking by the Fed, the economy should avoid an outright downturn,” Zandi wrote in the report (pdf). “If so, we may dub it a slowcession. It is important not to be Pollyannish, but it is also important not to convince ourselves that a recession is inevitable. It is not.”

Traders work as Federal Reserve Chair Jerome Powell is seen on a screen delivering remarks at the New York Stock Exchange on Mar. 16, 2022. Brendan McDermid/Reuters

The report notes that the central bank will need to balance boosting interest rates high and fast enough to quash wage and price pressures, “but not so high and fast that it knocks the wind out of the economy.”

Moody’s further explained that it doesn’t see similar trends that would be ubiquitous in an economy about to slip into a recession. Typically, before a recession, “the economy is plagued by significant imbalances” from overleveraged businesses and households to undercapitalized financial markets that have extended too much credit.

“For the most part, none of these imbalances exist today,” Zandi said.

He also alluded to real estate developers constructing too many homes and state and local governments facing a cash crunch before a recession. This time, however, homebuilding will face a shortfall of roughly 1.6 million properties, while state and local governments are in “tip-top financial shape with overflowing rainy-day funds.”

However, this doesn’t mean that the U.S. economy doesn’t face any threats, Zandi noted.

The biggest concern is that the Fed makes “an error in setting monetary policy, sparking a recession that would have been unnecessary to achieve its inflation target.” This is not out of the realm of possibility, considering that the Fed made a mistake by “[waiting] too long to begin normalizing policy from the extraordinary measures it took at the height of the pandemic.”

The other vulnerability in the U.S. economy would be that “the financial system breaks under the weight of the high and quickly rising rates.”

According to Moody’s top economist, there are a series of “known unknowns” that include developments as a result of Russia’s invasion of Ukraine or the U.S. political “partisan showdown” over the national debt limit, which is scheduled to take place later this year.

Over the next two years, one notable development might be a lack of fiscal stimulus and relief, with potential political gridlock in Washington.

Ultimately, Zandi said, “the economy will also be on its own.”

“Recessions can take on a life of their own, and if one turns out to be more severe and long-lasting than expected, lawmakers will not be there to save the day,” he said. “The government will not have the economy’s back.”

Can a Recession Be Averted in 2023?

Zandi isn’t the only expert who thinks the United States can avoid sliding into a recession this year.

The official position of Goldman Sachs is that the country can still “stick to a soft landing” as inflation slows and the unemployment rate edges higher. According to the bank’s economists, there’s a 35 percent chance of a recession in 2023 (pdf).

“Why is our recession probability—while more than twice as high as the unconditional probability of entering recession in any given 12-month period—still clearly below 50 percent? One immediate reason is that the incoming activity data are nowhere close to recessionary,” said Jan Hatzius, head of Goldman Sachs Research and the firm’s chief economist. “More fundamentally, there are strong reasons to expect positive growth in coming quarters.”

Morgan Stanley also shares the opinion that the economy “just skirts recession” this year, forecasting a 0.5 percent expansion.

“The U.S. economy just skirts recession in 2023, but the landing doesn’t feel so soft as job growth slows meaningfully and the unemployment rate continues to rise,” bank analysts wrote in the report. “The cumulative effect of tight policy in 2023 spills over into 2024, resulting in two very weak years.”

The International Monetary Fund projects that the United States could also refrain from having to go through a recession, with the gross domestic product growth rate estimated to be 1.6 percent in 2023.