The Surprising Resilience of the US Economy in 2023: A Reassessment of Recession Models

Introduction

The resilience of the US economy in 2023 has caught many economists off guard. In the first half of the year, numerous pundits issued dire warnings of an impending recession. However, the economic expansion continued, defying these predictions. This turn of events has prompted a reassessment of recession models, which have been shown to be unreliable in light of recent data.

Inaccurate Recession Warnings

In the first half of 2023, many economists predicted that a recession was imminent. These predictions were based on a variety of factors, including the inverted yield curve, the Leading Economic Index, and weakness in the housing market. However, these indicators have not proven to be reliable predictors of a recession in this instance.

The inverted yield curve, which occurs when short-term interest rates are higher than long-term rates, has historically been a strong indicator of an impending recession. However, this time, the yield curve remained inverted for an unusually long period without a recession materializing.

The Leading Economic Index, a composite of 10 economic indicators, also failed to predict the recession. The index declined in the first half of the year, but it has since rebounded, suggesting that the economy is still growing.

Weakness in the housing market was another factor that led many economists to predict a recession. However, the housing market has shown signs of improvement in recent months. Home sales and prices have risen, and builder sentiment has rebounded.

The Missing Link: Residential Construction Payrolls

One possible explanation for the failure of recession models in 2023 is the resilience of residential construction payrolls. Historically, a decline in employment in the housing construction industry has been a reliable predictor of a recession. However, this time, construction employment has remained strong, even as other sectors of the economy have weakened.

Logan Mohtashami, lead analyst for HousingWire, believes that the strength of residential construction payrolls is the “missing link” that explains why traditional recession models have failed. He argues that the housing sector is a key driver of the business cycle, and that its resilience in 2023 has prevented a recession.

The Implications for Recession Forecasts

The resilience of the US economy in 2023 has forced economists to reassess their recession forecasts. Many now believe that a recession is less likely in the near term. However, some economists still believe that a recession is likely in the next year or two. They point to the Federal Reserve’s aggressive interest rate hikes, which are intended to slow the economy and bring down inflation. These rate hikes could eventually lead to a recession, even if they do not cause one in the immediate term.

Conclusion

The resilience of the US economy in 2023 has surprised many economists and led to a reassessment of recession models. The strength of residential construction payrolls is one possible explanation for the failure of these models. The housing sector is a key driver of the business cycle, and its resilience in 2023 has prevented a recession. However, the Federal Reserve’s interest rate hikes could eventually lead to a recession, even if they do not cause one in the immediate term.