Last Updated on July 5, 2023 by Luke Feldbrugge
Is a recession coming in the near future? Many economists have debated this point and even considered whether or not the U.S. dropped into a recession last year. Experts believe a recession is likely on the horizon for the second half of 2023.
Gross domestic product (GDP) increased in the first quarter, growing by 1.3%, according to the second estimate from the Bureau of Economic Analysis (BEA). But this was down from the 2.6% growth in the final quarter last year.
Last year, GDP decreased for two consecutive quarters in the first and second quarters year, BEA data showed.
Traditionally, a recession is indicated by two consecutive quarters of negative GDP. And the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The bureau can sometimes wait as long as a year to declare a recession as it awaits incoming economic data.
Before the BEA released the second quarter GDP data last year, the White House economic team published a blog post, explaining why it did not believe the U.S. was in a recession.
“What is a recession? While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle.”
“Based on these data, it is unlikely that the decline in GDP in the first quarter of this year – even if followed by another GDP decline in the second quarter – indicates a recession.”
Other economists agreed, saying other strong indicators such as the labor market show the U.S. was not in a recession. And the economy bounced back from its negative GDP reading in the second half of last year.
But now, economists have begun once again looking at the possibility of a recession even as the labor market remained strong in May, adding 339,000 jobs, according to the Bureau of Labor Statistics (BLS). This is coming off of the increase of 253,000 jobs added in March, rising after two consecutive months of declines.
Is There a Recession Coming?
Despite the growth seen in the economy in the first quarter, it is not expected to last, according to the latest forecast from Fannie Mae’s Economic and Strategic Research Group. The economist group forecasted GDP will see a contraction of -0.3% in 2023 that began with a growth rate of 1.1% in the first quarter before falling slightly lower in the second quarter and going negative for the remainder of the year. The economic growth could move up to 1.2% in 2024.
Fannie Mae predicts that a mild recession will likely begin in the second half of 2023 as GDP begins contracting.
“There are select data available to support several alternative views of the path of the economy, though we maintain our view that a modest recession will begin in the second half of 2023,” said Doug Duncan, Fannie Mae senior vice president and chief economist.
How Will a Recession Affect Your Wallet?
Currently, the economy is slowing down, and could soon enter a recession, or already be in one. That could have several effects on consumers.
Affect on Home Sales and Home Loans
Fannie Mae predicts that home sales will fall in 2023 as economic conditions worsen and interest rates remain significantly higher than the beginning of last year. In fact, total home sales for the year could drop by 14.3% from 2022, according to the mortgage giant’s forecast.
But interest rates have dropped in recent weeks, with the average 30-year mortgage rate falling back into the upper-6% range in May. This is down from previous months when it surpassed 7%, according to data from Freddie Mac.
The housing market could pick up in 2023 and even help moderate any upcoming recession. Fannie Mae forecasted that mortgage rates will waiver in 2023, with the 30-year rate ending the year at 6%.
“Housing remains exhibit number one for why we expect the recession to be modest, Duncan said. It continues to outperform our expectations, and we expect that its relative strength will help kickstart the economy into expanding again in 2024. Inflation has been resistant to Fed efforts to drive it down, and we view the risks to our baseline forecast as tilted toward more tightening rather than easing – although, for the moment, the Fed has adopted a wait-and-see approach.”
Interest Rates and the Federal Reserve
Over the past year, the Federal Reserve has begun raising interest rates in order to tame rising inflation. At its June meeting, the Fed pushed pause on its interest rate hikes after 10 consecutive rate hikes. This held the target range for the federal funds rate to 5% to 5.25% as inflation remains high.
The Consumer Price Index (CPI), a measure of inflation, increased by 4% annually in May, according to BLS. This was down from the 40-year high of 9.1% in June but remains at historically high levels.
But now, the Federal Reserve said it may be done raising interest rates this year. But economists are forecasting that the Fed may pick back up with more rate hikes this year as inflation remains above its target range.
“The downtrend in overall prices is encouraging, but inflation remains persistent within certain areas of the economy,” NAFCU Economist Noah Yosif said. “This will require further fine-tuning of monetary policy from the Fed, which remains unlikely to deviate from its forward guidance given an immaterial change in May’s readings, suggesting a pause to the current tightening cycle at this meeting. More aggressive action via additional rate hikes will likely be necessary.”
If the Fed votes to raise the federal funds rate, it would have an upward impact on interest rates for products such as personal loans, student loans, credit cards and other loan products. Homebuyers can take advantage of the temporary decrease in mortgage rates to lock in a lower interest rate before rates rise once again. And while some Americans can choose to purchase a home once interest rates fall and the economy is better, many first responders such as military members’ moves are job-related, and the timing is not flexible.
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