The public views recessions as bleak economic times. Investors typically associate the concept with drastic and prolonged asset price falls. Yet, the U.S. recession forecast to start mid-2024 will look and feel very different from recent recessions.
However, the economy can show strength now and still be headed for a recession. Monetary policy often works with long and variable lags, and given how quickly interest rates have been increased, policy has only been restrictive for a reasonably short period, suggesting that the pressure on economic activity is just getting started.
Today, the U.S. economy’s interest-rate sensitivity is much lower. Indeed, the unique starting conditions created by the postpandemic environment mean that today’s economy looks very different from the start of those two earlier recessions. By contrast, the various support structures for households are expiring. Pandemic-related fiscal support is ending and much of the excess savings cushion has now been exhausted, with only an estimated $230 billion left. By early 2024, many households will be exposed to the full burden of higher interest rates.