Big Banks: Recession In 2023

“More than two-thirds of the economists at 23 large financial institutions that do business with the Federal Reserve are betting the U.S. will have a recession in 2033. Two others are predicting a recession in 2024.”

This is from Dion Rabouin in the Wall Street Journal.

The main reason for the recession?

Well, the Federal Reserve is the culprit as it moves into 2023 pursuing a policy of “quantitative tightening” aimed at bringing inflation back towards the Fed’s target of 2.0 percent.

More details.

The Fed will continue to raise its policy rate of interest in the first quarter of 2023, but will pause raising the rate in the second quarter. In the third and fourth quarters of 2023, the Fed will begin to cut its policy rate of interest.

In terms of the stock market, the average outlook is for the S&P 500 stock index (SP500) to be 5 percent higher at the end of 2023 than it is right now.

Note that the S&P 500 stock index was down 20.0 percent in 2022.

There are a few of the bank economists that contend that the S&P 500 will be lower at the end of 2023 than it is right now.

In terms of the economy as a whole, the average outlook is for real Gross Domestic Product to rise by about 0.5 percent, fourth-quarter over fourth-quarter.

This is consistent with the forecast of the Federal Reserve for 2023.

The concerns in the U.S. economy are that the private sector is spending down the savings set aside from the pandemic, the housing market is in decline, and banks, as a whole, are tightening up their lending standards.

Globally, the bank economists are expecting that there will be a recession in the eurozone as well as in the United States in 2023.

This picture of 2023 is a relatively calm narrative compared with what some other economists are projecting.

And, the forecasts are very close to the one that the Federal Reserve put out in December following the Fed’s meeting of the Federal Open Market Committee.

I believe that the forecasts of the large bank economists are important for two reasons.

First, it indicates that they believe that the Federal Reserve will be able to carry out its quantitative tightening well into 2023.

In other words, the Fed may “pivot” sometime during the year, sometime earlier than the Federal Reserve has originally proposed, but, it will not be pivoting way too early, so early that its policy impact on inflation will not be very productive.

In other words, the bank economists believe that the Fed will be mostly successful in achieving its goal of monetary tightness.

Second, the bank economists are not seeing an “overreaction” in the financial markets to the Fed’s policy, one that could be counter-productive in the longer run by leaving the financial system and the economy in major disarray, a disarray that would only leave them susceptible to further disruptions in attempting to stabilize the whole economy.

To me, the evidence of this is the forecast about the stock market that accompany the overall efforts.

Although the forecast suggest that the stock prices will be relatively volatile in 2023, it suggests that the S&P 500 will rise by 5.0 percent from the 2022 close.

This, as reported, will not bring the market anywhere close to the 2022 high, but it does suggest some modest recovery.

This reflects, I think, the fact that stock investing has shifted somewhat.

For most of this century, up to through the time the Federal Reserve flooded the banks with liquidity to fight the spreading pandemic, the stock market has been the creation of the Federal Reserve.

And, this is what the Federal Reserve seemed to want.

If the Federal Reserve was flooding the financial markets through “quantitative easing” to secure rising stock prices, then what you saw in the rising stock prices was not a really strong economy, but financial markets pushing up asset prices, something I called “credit inflation.”

One consequence of this was that investors could “buy the market” and prosper. Diligent study to identify “value investments” was not worth the time.

The stock market, in general, was going up. Buy the market.

Well, over the past two years or so, the situation has changed.

The Fed has gone away…and, “buying the market” has gone with it. The word is out, study individual stocks. Value investing is back.

I believe that the forecasts of stock performance put out by the bank economists reflects this change.

The Federal Reserve is not going to be underwriting the stock market. Market volatility will be up. But, overall, market performance will not be grand.

Stock prices up by the end of 2023, but not by a lot.

The Future

So, this picture of the future is not the most uplifting one, but it includes the narrative that the economic adjustment taking place will be relatively calm, not too devastating, but will get the job done on inflation.

If this is what the largest banks in the United States are expecting, then we should really listen to it.

This environment is what the banks are preparing for.

Yes, there will be pain, but the economy can adjust to it. And, can get by.

Real growth at 0.5 percent for 2023, but what comes next?

Looking at the Federal Reserve forecasts, we see the predictions are for 1.6 percent growth in 2024 and 1.8 percent growth in 2025.

The future has to take into consideration that if the Fed is going to get the inflation rate back down around 2.0 percent, its target goal, the Fed cannot immediately start “pumping” up economic growth once the correction has been made.

My guess is that the largest banks in the United States feel that way too.

The problem with this is that 2024 is another election year. Can the existing administration accept these forecasts and go into the next presidential election with such a low expectation to present the electorate? Can re-election hopes float on economic growth that is less than 2.0 percent?

The call is for a recession in 2023.

Beyond that, radical uncertainty.