We may have a fighting chance against a recession, according to a top economist

Is recession inevitable? You would think so listening to everyone from CEOs — J.P. Morgan’s Jamie Dimon has proclaimed a coming economic “hurricane” — to my well-read next-door neighbor. Many economists are predicting a recession at some point in the coming year.

In over 30 years as a professional economist, I’ve never witnessed such pessimism regarding the economic outlook. But to me, this collective wisdom is overly glum. Recession is far from a done deal.

The economy will certainly struggle in coming months. Inflation is painfully high. The typical American family must shell out $433 more per month to purchase the same goods and services they bought just a year ago, according to analysis by Moody’s. This is financially unbearable for most families, and thus the Federal Reserve is jacking up interest rates in a frantic effort to cool the strong job market and the inflation.

There is a risk that something breaks under the weight of the higher rates. The stock market is down 20% from its peak at the start of the year, and house prices that had risen to stratospheric levels since the pandemic hit are quickly coming back to earth. I don’t worry much about speculators in crypto, but many of them are taking a bath.

More often than not, when the Fed has battled high inflation, its effort ultimately has precipitated a downturn.

But a recession this time is far from certain. There are good reasons, supported by recent data, to think the economy has a fighting chance to skirt a downturn.

Most significantly, inflation is moderating. Consumer price inflation, which peaked at 9% in June, slowed to 7.7% in October and should be half that by next summer. This is mostly arithmetic. Oil prices surged earlier this year due to the Russian invasion of Ukraine, and it is likely that year-over-year comparisons will become favorable in the first half of next year.

Recent weak rent increases for new leases will slow growth further in housing costs and consumer prices by the end of next year. The completion of more multifamily homes as supply chains ease is restraining rents, as is weaker demand, as unaffordable rents keep new households from forming.

Inflation should be back near the Fed’s inflation target of just over 2% by spring 2024. By then the job market and wage growth should have cooled enough to allow labor-intensive health-care and other service providers to throttle back their price increases.

Much of this script is still to be written, but it is in line with recent job-market data. Monthly job gains have slowed to near 250,000, which is not too different from the growth in labor force supply, and traditional measures of slack in the job market, such as unemployment, have eased.

Wage gains also appear to have topped out and are slowing quickly in industries like leisure and hospitality and retail where up until now they have been strong. To ensure inflation gets back in its box, job and wage growth will need to slow even more. But we are well on our way.

The underlying resilience of consumers and businesses adds to my conviction that a recession is far from a done deal. Recession is unlikely unless consumers pull back on their spending, and it is not clear why they would.

Aside from sturdy job growth and low unemployment, many households built up substantial excess savings during the pandemic. Lower-income households have tapped their savings to offset the inflation hit to their purchasing power, but many middle- and, especially, high-income households have plenty of cash in their bank accounts.

Households also have notably light debt loads and admirably locked in favorable payments by refinancing their mortgages when interest rates were at record lows. They are largely insulated from the recent run-up in rates. Consumers simply need to do their part, spending as they typically do, to forestall recession. There is no reason to think they won’t.

Moreover, recession is unlikely unless businesses lay off workers en masse, but that seems doubtful, despite recent headlines about tech companies like Amazon, Twitter, and Meta shedding thousands of employees.

Many businesses are sure to cut their still-significant number of open positions and rein in hiring. They’ve already begun to do so. But they will likely be loath to cut their workforces. They know that demographic trends, including baby boomers aging out of the workforce and restrained foreign immigration, ensure that their most significant and persistent problem will be finding good workers and holding on to them.

It is important not to be Pollyanna-ish. Under any reasonable scenario, the economy is set to have a difficult 2023. But it is also important not to convince ourselves that a recession is inevitable. It is not.

Mark Zandi is chief economist for Moody’s Analytics.