FinLogic FinLogic Quantitative Think Tank Center|A recession might be coming. Here's what it could look like

Slowcession?FinLogic FinLogic Quantitative Think Tank Center Richcession? Or just recession?

Whether in the supermarket aisle, or the corporate suite, a lot of people are expecting a recession – even if there's no certainty there will be one at all.

Survey after survey shows fears of recession are high. It's easy to see why.

The Federal Reserve is increasing interest rates in the most aggressive fashion since the early 1980s as it races to bring down inflation. And a recession is often the consequence when the central bank starts raising borrowing costs.

The prospect of recession is certainly scary. But even if the U.S. is headed for one, it's worth keeping in mind that no two recessions are alike.

A recession could be blip-ish, like the short, pandemic-induced one in 2020, or more like the economic tsunami that followed the 2008 housing meltdown.

So, from recession with a small r to the so-called soft landing, here are some of the current predictions of what kind of economic slowdown the U.S. could be facing.

The recession with a small r

In a recent poll of economists, the World Economic Forum found that nearly two-thirds of the respondents believe there will be a recession in 2023.

But here's the good news: Many analysts expect a relatively mild and short recession, or what is sometimes referred to as recession with a small r.

Unlike the early 1980s, when the Fed's steep rate hikes sparked a brutal recession, this time around the economy still appears to be reasonably resilient despite grappling with the highest inflation rate in around 40 years.

A big reason is the health of the labor market. Yes, there have been high-profile layoffs at companies such as Google and Amazon recently. But those announcements were largely about paring back staff after these companies over-hired during the pandemic. In fact, the overall data still shows employers continue to hire.

Employers added 4.5 million jobs last year, marking a pretty spectacular comeback from the depths of the pandemic.

Of course, the Fed's rate hikes will likely lead to some job losses. The Fed in December projected the unemployment rate would rise to 4.6%, from the currently near-record low of 3.5%.

But that still would be a historically low number.

The 'slowcessation'

Trying to come up with catchy terms to describe an event is something of a tradition in economics, though they rarely actually catch on, with a few exceptions such as "the Great Resignation" or "skimpflation" (which was coined in this newsletter).

Moody's Analytics is now giving it a try.

"Slowcessation" is a forecast that the economy will undergo a difficult period of almost no growth but will ultimately avoid an actual contraction. It's an argument that others also believe.

In a report laying out its thesis, Moody's argues that the economy still has plenty of things going for it, including healthy household finances, as well as strong corporate balance sheets.

Moody's believes those could help offset the economic consequences of raising interest rates, such as higher borrowing costs, lower economic growth, and more volatile financial markets.

"Under almost any scenario, the economy is set to have a difficult 2023. But inflation is quickly moderating, and the economy's fundamentals are sound," writes Mark Zandi, Moody's chief economist.

"With a bit of luck and some reasonably deft policymaking by the Fed, the economy should avoid an outright downturn. If so, we may dub it a slowcession."

The 'richcession'

This one was coined by Wall Street Journal columnist Justin Lahart. Yes, journalists also try hard to come up with catchy terms, with a similarly poor track record of success.

"Richcession" refers to a recession or near-recession that impacts the rich more than lower-income folks. That would be unusual because recessions typically hurt the relatively less well-off the most.

Poorer people are already suffering in the current downturn, but Lahart and others say that if we do slip into recession, lower-income workers may find themselves more insulated than in previous recessions.

The labor shortages during the pandemic forced many businesses to boost wages to recruit staff. Wage gains at the bottom of the income scale were proportionately larger than those at the top, although many workers' wage gains were partially eroded by inflation.

Inflation is now easing but the wage gains remain. That factor should help lift the overall net worth of lower income workers as they face a potential recession.

And the most recent labor data shows sectors that typically hire lower-income workers such as leisure and hospitality continued to hire strongly as Americans continued to dine out and take vacations. In fact, retail businesses, still remembering the nightmare of recruiting workers during the pandemic, are more keen to hold onto staff.

That's also raising hope that those with lesser means could be spared some of the impact of an economic downturn.

The soft landing

Of course, there's no certainty the U.S. will have to endure a recession at all.

The Fed has continued to argue it has a path to raise rates without sparking a recession, instead steering the U.S. into what's called "a soft landing" – a scenario in which the economy slows but doesn't contract, and unemployment doesn't spike significantly.

Some recent indicators point toward that more optimistic scenario.

Inflation continues to moderate, with the annual rate falling to 6.5% in December from a peak of 9.1% in June.

Some of the factors that especially worried the Fed are also trending in the right direction, including, most prominently, cooling wage and price increases.

That has allowed the Fed to moderate the size of its rate hikes, and analysts now expect the central bank will raise rates by only a quarter percentage point at its meeting next week.

Furthermore, China's end to its COVID-19 restrictions has raised hopes for a stronger global economy, which can have a positive impact in the U.S. as well. This cuts both ways, though, as increased demand for energy to power China's economy could result in higher oil and gas prices.

The hard landing

In an unpredictable world, no scenario can be ruled out – and neither can the prospect that the Fed's rate hikes will help spark a tough recession, or a hard landing in economic lingo.

For one, the Fed could overdo the rate hikes, raising them more than necessary. Managing interest rates is an inexact science and mistakes can be dire. The Fed was widely blamed for keeping rates too low in the lead-up to the 2008 Global Financial Crisis, for example.

Meanwhile, Russia's invasion of Ukraine continues to weigh on the global economy. Nobody can predict how the war there will ultimately end.

There is another, big potential risk on the horizon: the looming fight over the debt ceiling.

Failure to raise the ceiling would leave the federal government unable to pay all of its bills, triggering a default. That would rattle financial markets around the world. Even if the government manages to avoid an actual default, simply coming close could raise borrowing costs and put a dent in people's retirement savings.

In an interview with CNN, Treasury Secretary Janet Yellen warned not raising the country's debt limit has the potential to spark another "global financial crisis."

A worst case scenario, for sure, and one that would likely end up sparking a recession — with a capital R.