University of Michigan economists expect the U.S. economy to move into a mild recession in the second half of 2023, as rising interest rates drag on growth.
The updated outlook issued today by the university’s Research Seminar in Quantitative Economics issued forecasts 0.3-percent Real GDP growth in the first six months of 2023, followed by negative 0.8 percent from July to December. The U.S. should then return to 0.8-percent Real GDP growth for all of 2024 as the Federal Reserve eases monetary policy.
“We think the current momentum in the labor market and consumption spending is strong enough to keep the economy from turning over for a few quarters,” said Daniil Manaenkov, forecast lead at the Research Seminar in Quantitative Economics. “But as the housing market contracts, businesses turn cautious due to deteriorating economic projections, banks tighten credit further and households increase their savings, the economy’s momentum will fade.”
Despite the mild downturn predicted and higher interest rates, U.S. auto sales should remain strong, providing Michigan some protection from the worst effects of a national recession.
The University of Michigan researchers expect U.S. auto sales to grow from 13.9 million units in 2022 to 15.1 million units in 2023.
“We are forecasting continued job growth here in Michigan, even as the national economy slips into a mild recession,” said Gabriel Ehrlich, director of the university’s Research Seminar in Quantitative Economics. “Experienced observers of the state economy know that is not the typical pattern.”
An updated statewide outlook also issued today predicts slowed job growth in 2023, although the state should still add 9,200 jobs a quarter.
“Our forecast calls for continued growth in Michigan’s blue-collar industries, which have now recovered to their pre-pandemic employment level. The state’s construction and non-automotive manufacturing industries face a challenging environment with rising interest rates, a strong dollar, and weak national growth. We are hoping that continued strength in the automotive sector will shield Michigan from the brunt of the recession,” the Michigan outlook states.
Still, employment in Michigan is not expected to return to pre-pandemic levels until the second half of 2024, according to the outlook.
Nationally, University of Michigan economists predict that inflation, which was 7.7 percent as of October, will finish 2022 at a 7.1-percent annualized rate, then ease for 2023 to 4.6 percent and to 2.6 percent in 2024.
The Federal Reserve could halt interest rate increases by mid-2023 as the economy slows and high inflation wanes, then begin to reduce rates in 2024, according to the outlook.
“We expect monthly inflation to tick back up in the next few months,” the University of Michigan outlook states. “As a result, we judge that the Fed will have to keep raising the federal funds rate through mid-2023, and it will likely take a mild recession to drive inflation down for good.”
Other recent outlooks have offered similar perspectives on the U.S. economy with expectations for a recession.
Wells Fargo economists predict a recession in the second half of 2023 and into 2024, with a 2.5-percent decline in Real GDP in the third quarter next year and negative 3.2 percent in the fourth. Wells Fargo also expects the Federal Reserve to increase the federal funds by 0.05 percentage points each in December and February then another 0.25-percentage point increase in March.
PNC Bank expects a 0.5-point increase in December and another 0.25-point increase in February.
“At that point inflation should be softening and job growth should be slowing to a more sustainable pace, allowing the FOMC to stop raising the fed funds rate,” PNC economists wrote in a briefing after a 0.75-point increase this month.
As well, inflation should ease with a 4.1 percent Consumer Price Index in 2023 and 2.7 percent in 2024, according to Wells Fargo. The Producer Price Index, estimated to finish 2022 at 9.9 percent, will decline to 3.9 percent in 2023, and further in 2024 to 2.4 percent, according to Wells Fargo.