The Projected 2023 Recession Never Materialized--How Come?

New York, NY, June 29, 2023-"The 2023 recession is missing in action. At the end of last year, economists were more convinced than they’ve ever been that recession was on the way, but it refused to arrive. Now investors, economists and Federal Reserve policy makers are giving up on the idea, expecting the economy to be (a bit) stronger and stock prices and bond yields to be higher,” reports the Wall Street Journal.

“Why aren’t we in recession? Is it still on the way? And could it be that the recession forecasts perversely helped us avoid recession?

“The recession didn’t arrive because we had two pieces of surprising good news. First, energy prices dropped, helping support demand, as Europe secured supplies to replace Russian gas more easily than expected. 

“Second, the economy and the jobs market turned out to be far less sensitive to interest rates than economists thought, at least so far. Companies and consumers had locked in long-dated loans with low rates during the pandemic. Household savings piles took time to run down. And workers got big raises, more than inflation. All these factors supported consumption and business. Rebounding stock and credit markets and steadyish long-dated Treasury yields meant overall U.S. financial conditions have eased since October even as the Fed tried to tighten them.

“Many of these factors could reverse, as I discussed in my last column. But the biggest warning sign that recession has been delayed, not defeated, is that short-term interest rates remain well above 10-year Treasury yields, what’s known as an inverted yield curve.

“An inverted yield curve tells us one thing with reasonable certainty: Investors don’t think the current level of interest rates can last. At some point rates bite, the economy slows, inflation comes down and the Fed cuts rates again. There’s a complication in that Fed holdings of long-term Treasurys may be suppressing their yields, but the basic point is that markets and most economists agree that at some point rates are going to come down again.”