Quarterly Outlook Q3 2023: Recession Predictions Linger

Main Takeaway

Although many economists have predicted a recession for 2023, the economy is proving resilient. Several factors are keeping the economy in expansion mode — the strong labor market, strong corporate and consumer balance sheets and the stabilizing housing market — despite significant headwinds. The Federal Reserve paused its rate hike in June as inflation continued to show signs of steady decline, yet it remains well above the central bank’s 2% target.

Top Risks

While the trajectory of inflation remains the top story for the economy, one risk that has taken over the spotlight in recent months is the stability of the office sector. With occupancy rates hovering at about 50% on average, this segment of commercial real estate is under considerable stress. In response to the heightened risks, as well as spillover from the banking turmoil in March, banks have tightened credit standards, making lending less available and more expensive.

Sources of Stability

Fiscal policy is still stimulative. Many corporations extended the maturity of their loans during the low-rate environment of the pandemic, making them less vulnerable to higher interest rates. Households still have significant savings built up to support spending. Since the pandemic, consumers have ramped up spending on services while cutting spending on goods. However, the services sector is now the sole driver of growth for U.S. business activity.

For our latest perspectives on markets and economic conditions, view our Quarterly Outlook for Q3 2023.

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