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The U.S. economy added nearly half a million jobs in March. The Dow Jones industrial average is within 6% of its record high. And U.S. households accumulated roughly $2.5 trillion in excess savings throughout the pandemic.
Still, despite all the good news, predictions of an impending recession are widespread on Wall Street.
Billionaire investors, former Federal Reserve officials, and now even investment banks have repeatedly warned that the economy may hit a wall in 2023.
What’s driving the recent string of downtrodden economic forecasts?
Will history repeat itself?
For some, it’s a matter of historical comparison. Former Treasury Secretary Lawrence Summers emphasized in a recent Washington Post op-ed that current economic conditions are undeniably reminiscent of previous pre-recession periods in U.S. history.
“Over the past 75 years, every time inflation has exceeded 4% and unemployment has gone below 5%, the U.S. economy has gone into a recession within two years,” Summers wrote.
Today, the U.S. inflation rate is nearing 8%, and the unemployment rate fell to just 3.6% in March. As a result, Summers now sees an 80% chance of a U.S. recession by next year.
The yield curve inversion
Gary Pzegeo, the head of fixed income at CIBC’s U.S. Private Wealth division, told Fortune that he believes the majority of current recession predictions come from “market signals” like the recent, albeit brief, inversion of the yield curve.
A boom in commodity prices, the Federal Reserve’s decision to raise interest rates, and the war in Ukraine’s effects on global economic growth have acted to flatten the yield curve recently, Pzegeo argued. And when it inverted, it ignited fears of a recession.
After all, a 2s/10s yield curve inversion—where yields on short-term two-year government bonds outpace those on long-term 10-year government bonds—has predicted every recession since 1955, with only one false signal during that time. The average time frame for a recession after the yield curve inverts: between 6 and 24 months—hence, all the predictions of a recession by 2023.
Still, Pzegeo said that while the odds of an economic downturn have gone up in recent months as market signals have flashed red, CIBC still isn’t predicting a recession as its “base case.”
Inflation, war, and slowing growth
Other banks aren’t as optimistic. Deutsche Bank economists now see a recession coming by the end of 2023 as inflation becomes more broad-based.
“Two shocks in recent months, the war in Ukraine and the buildup of momentum in elevated U.S. and European inflation have caused us to revise down our forecast for global growth significantly,” a Deutsche Bank team led by economist David Folkerts-Landau wrote on Tuesday. “We are now projecting a recession in the U.S.…within the next two years.”