Despite more than a year of consistent recession predictions from Wall Street’s top minds and dozens of Fortune 500 CEOs, the U.S. economy has remained remarkably resilient in 2023. Stubborn inflation and rising interest rates that typically signal the peak of an economic cycle haven’t managed to spark the job-killing downturn that many feared was inevitable. And now, one of the world’s leading economists is making the case that his peers’ consensus forecast for a recession this year is “off base.”
“This time is different,” Mark Zandi, Moody’s Analytics chief economist, wrote in a CNN op-ed Tuesday titled, naturally: “Why I’m betting against a U.S. recession.”
“Yes, the economy is fragile and vulnerable to losing the script,” Zandi writes. “And goodness knows we have been off script more often than not in recent years. But odds are that we will buck history and avoid recession.”
Zandi isn’t alone in his increasingly optimistic outlook for the economy. With unemployment sticking near pre-pandemic lows and the latest inflation metrics continuing to fall, some investment banks are changing their previously melancholic tune. Goldman Sachs now believes there is just a 25% chance of a recession over the next 12 months, down from 35% in March. And Bank of America revised its 2023 recession forecast last week, arguing there’s going to be a “softer” downturn that won’t come until next year.
Gregory Daco, chief economist at EY-Parthenon, is also growing more bullish after consistently warning that a mild recession is likely to hit the economy. “As the Fed continues tightening policy and interest rate hikes work their way through the economy, we still believe a recession is more likely than not, but we have lowered our recession odds to 55%,” he wrote in a Wednesday note to clients.
For Zandi, there are five key reasons why the economy could avoid a recession entirely this year, and they’re all “more or less unique to this time.”
1. Excess savings
The first reason why Zandi believes this time is different is due to so-called excess savings. During the pandemic-era lockdowns, consumers weren’t able to spend as they typically would, no trips to the local diner, no movies, and no summer vacations. At the same time, in order to stave off a recession, the federal government launched several stimulus packages that injected roughly $5 trillion into the economy.
This period of reduced spending, coupled with stimulus that boosted incomes, helped consumers sock away more cash than they typically would have. Economists have labeled the phenomenon “excess savings.”
While excess savings peaked at $2.1 trillion in 2021, consumers still held $500 billion of these funds as of this May, according to research from the Federal Reserve Bank of San Francisco. And with consumer spending accounting for roughly 70% of GDP, that money could prompt Americans to shop, enabling the economy to avoid a recession.
“Consumers are the firewall between recession and a growing economy, and the firewall is holding firm,” Zandi explained.
2. Labor hoarding
Continued strength in the labor market due to “labor hoarding” is another reason why the economy could avoid a serious downturn, according to Zandi. The economist noted that businesses struggled to hire and find talent both before and during the pandemic, which makes them more likely to avoid layoffs at all costs moving forward.
“On the other side of the pandemic, businesses understand that labor shortages will be a persistent problem as the baby boomer generation retires in the coming decade,” he explained.
3. Light debt loads
There’s been a lot of concern about rising public and private debt over the past few years, but U.S. consumers and businesses actually have their finances in order, according to Zandi, and that could help prevent a recession.
“Households and businesses have borrowed prudently since the global financial crisis over a decade ago,” he argued, noting that although household debt is near a record high, when compared with disposable income, consumers aren’t overly burdened.
The economist pointed out that household debt service payments as a percentage of disposable income were just 9.6% in the first quarter. That’s compared with an average of over 11% since 1980 and over 13% before the Global Financial Crisis of 2008, Fed data shows.
Zandi also said that businesses are “devoting a near record low amount of their profits to debt payments, freeing up cash to finance hiring and investment.” Corporate interest payments as a percentage of cash flow are now roughly 7.5%, compared with over 20% before the Global Financial Crisis of 2008, according to a May Moody’s Analytics report.
4. Anchored inflation expectations
While year-over-year inflation, as measured by the consumer price index, fell to 4% in May, it was still well above the Fed’s 2% target rate. But Zandi noted that inflation has been on a consistent downward trajectory and consumers’ outlook on potential price hikes has also improved. That could enable the Fed to pause its rate hikes this year, and prevent the Fed-induced recession that some investment banks have forecast.
One-year-ahead inflation expectations declined to 4.1% in May, the lowest reading in two years, according to the Federal Reserve Bank of New York’s latest Survey of Consumer Expectations.
“The Fed’s success so far in pinning down inflation expectations makes its job easier,” Zandi wrote. “If consumers and businesses believe the Fed will do what is needed to ensure inflation recedes, then they will behave accordingly. And that makes it more likely to come true.”
5. Low oil prices
Finally, Zandi said, there have been a dozen recessions since World War II, and almost all of them were “preceded by a spike in oil prices”—but that hasn’t manifested this time around.
After Russia invaded Ukraine last year, analysts expected oil prices to not only soar, but remain elevated for years to come. However, a mix of sanctions work-arounds and fears over waning demand from China amid the country’s slower than expected post-COVID recovery have led crude prices to drop this year.
“Global oil markets have gracefully adjusted to prewar levels. Oil prices are down, and so too is inflation, both in the U.S. and globally,” Zandi wrote.
Falling oil prices should help to keep inflation low, and combined with stable consumer finances and the strong labor market, Zandi argues, it means this time is different. “Yes, the economy will ultimately slump, but odds are fading that a recession is dead ahead,” he wrote.
Of course, like every economic prognosticator, Zandi has been confident that recessions wouldn’t occur before, and been mistaken. In September of 2007, for instance, just months before the Global Financial Crisis kicked into full gear, Zandi said he believed a downturn wasn’t likely. “I’m fundamentally optimistic we won’t see job loss,” he said at the time.
