Is Recession a Self-Fulfilling Prophecy? Moody’s Mark Zandi Thinks So

one dollar bill with negative red recession line

Warnings of a deep U.S. recession have been going on for so long that it’s hard to remember when they weren’t a part of the conversation. But while the economy briefly flirted with a recession in 2022, it has so far avoided a major downturn, and recent trends have been positive.

If a recession does happen, at least one economist suggests it could be due to negative sentiment as much as economic fundamentals. In a new report, Moody’s Chief Economist Mark Zandi wrote that “given how deep this recession pessimism runs there is reason to worry that it could be self-fulfilling.”

In the report, Zandi noted that recessions are “ultimately a loss of faith — a loss of faith by consumers that they will hold on to their jobs, causing them to curtail their spending, and a loss of faith by businesses that they will be able to sell what they produce, causing them to lay off workers. A self-reinforcing vicious cycle–a recession–takes hold.”

Moody’s has a different take. Instead of a recession, it projects that the U.S. economy could be headed for a “slowcession,” in which economic growth “comes to a near standstill” but “never slips into reverse.”

That doesn’t mean there will be smooth sailing in 2023. Even Zandi concedes that the economy “will struggle in 2023 with halting growth and higher unemployment,” and calls recession “a serious threat.”

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At the same time, the economy has been bolstered by a number of positive trends. Prices of oil and gas have fallen sharply since hitting historic highs in the middle of 2022. About a month ago the price of gasoline fell on a year-over-year basis for the first time since January 2021 and remains there today.

Meanwhile, the “inflationary impact of the COVID-19 pandemic is also set to finally fade away,” Zandi wrote, and economic fundamentals remain solid.

“Typically, prior to recessions, the economy is plagued by significant imbalances such as overleveraged households and businesses, speculative asset markets, an undercapitalized financial system that has extended too much credit, overbuilt real estate markets, or financially stretched state and local governments,” Zandi added. “For the most part none of these imbalances exist today.”

The annual inflation rate fell to 7.1% in November 2022 from 7.7% the previous month, The Hill reported. That’s still much higher than normal, but an improving outlook allowed the Federal Reserve to limit its interest rate hike to 0.50 points in December following four straight hikes of 0.75 points.

The employment picture also remains strong, despite recent layoffs in the tech sector.

“Jobs related to economic reopening have fared well in terms of employment status and wage growth, especially for lower income workers,” Lauren Goodwin, an economist and portfolio strategist at New York Life Investments, wrote in an email to GOBankingRates. “The pain of labor shortages from the past couple of years, plus an expectation of a shallower recession makes a quick deterioration in the labor market potentially less likely in this cycle than has been the case in the past.”

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In a separate email to GOBankingRates, Comerica Bank Chief Economist Bill Adams noted that initial claims for unemployment insurance “are still low,” although continued claims rose by more than 300,000 in the second half of 2022.

“That said, the near-term economic outlook is a little better than it looked a month ago,” Adams added. “Household finances are taking less of a hit from winter heating costs, with natural gas prices down and milder-than-usual weather across much of the country.”

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