How much will the economy grow in 2023? Will there be a recession in 2023?

by calculated risks 01/13/2023 02:08:00 PM

I previously posted some questions on my blog for next year: Ten Economic Questions for 2023. Some of these are related to real estate (inventory, house prices, housing construction, new home sales), and I’ll be posting thoughts on those in the newsletter (there will be others like GDP Gross and employment on this blog).

I’m adding some thoughts, maybe some predictions to each question.

1) Economic growth: Economic growth will likely be close to 1% in 2022 as the economy slows in the wake of the economic recovery in 2021. The FOMC expects growth of just 0.4% to 1.0% in the fourth quarter compared to the fourth quarter in 2023. How much Will the economy grow in 2023? Will there be a recession in 2023?

In December, I followed Recession Watch for only the third time in the 18 years that I’ve been writing this blog, but I noticed that I hadn’t predicted a recession coming yet. The other two times were in early 2007 (the housing crisis), and in March 2020 (the pandemic).

The FOMC expects a slump in employment, and many Wall Street analysts predict a recession in 2023. The Bank of Canada expects GDP to contract by 0.3% in 2023. In addition, Congress threatens to shut down the government in October and – most worryingly – default on US debt. A debt default with an already weak economy is likely to tip the economy into recession.

Two leading indicators point to a recession in 2023.


One of the main indicators of recessions is the yield curve. Here is a graph of the 10-year Treasury fixed maturity minus the 2-year FRED Treasury fixed maturity.

Click here for FRED’s interactive chart.

When the yield curve turns negative — 2-year yields are more than 10-year yields — this indicates that investors believe interest rates will fall, which usually indicates an upcoming recession. However, economist Harvey Campbell (inventor of the yield curve) notes:

My yield curve indicator has now turned red. It’s 8-for-8 in predicting recessions since 1968 – without false alarms. However, I have reasons to believe that it is flashing the wrong signal.

The yield curve has now inverted for the ninth time since 1968. Doomsday? I’m not very sure.

These circumstances raise the possibility of bullet dodging. Ideally, we avoid a sharp downturn recession and achieve slow growth or slightly negative growth. If stagnation occurs, it will be mild.

The main one is the Federal Reserve, which has been late in raising interest rates. The Fed cannot make a mistake twice by overshooting — that is, continuing to increase rates beyond the time when it should have stopped. I think the time to end the tightening is now.

One of my favorite business cycle forecasting models uses new home sales (also new housing and residential investment). The purpose of the mext chart is to show that these three indicators generally reach tops and bottoms together. Note that residential investment is quarterly and that single family starts and new home sales are monthly.Beginnings, New Home Sales, Residential InvestmentThe arrows indicate some of the previous highs and lows of these three metrics – and the most recent ones.

New home sales and single-family starts fell last year, but that’s partly due to a huge spike in sales during the pandemic — and then rebounded somewhat. Now both new home sales and single-family start-ups have declined in response to higher mortgage rates. Residential investment has also peaked.

New home sales change year on yearThis third graph shows the annual change in new home sales from the Census Bureau. New home sales are currently (on a 3-month average basis) down 18% year-over-year.

Usually when the annual change in new home sales drops by about 20%, a recession will follow. The exception to this data series was the mid-1960s when growth in Vietnam kept the economy out of recession. Another exception was late 2021 – we saw a significant year-over-year decline in new home sales related to the pandemic and increase in new home sales in the second half of 2020. I ignored that pandemic distortion. Also note that the sharp decline in 2010 was related to the housing tax credit policy in 2009 – and it was just a continuation of the housing depression.

Here is a table of the annual change in real GDP since 2005. Before the pandemic, economic activity had been mostly in the 2% range since 2010. Given current demographics, this is about what we would expect: See: 2% is the new 4 %..

Note: This table includes both the year-over-year change and the fourth quarter compared to the previous fourth quarter (two slightly different metrics). For 2022, I used a 2.6% annualized growth rate in Q4 2022 (that gives -2.2% Q4 compared to Q4 or -3.4% real annual growth). This is based on Goldman Sachs’ estimate: “We left the Q4 GDP tracking estimate unchanged at +2.6% (QoQ).”

Real GDP growth
year annual
gross domestic product
Q4 / Q4
2005 3.5% 3.0%
2006 2.8% 2.6%
2007 2.0% 2.2%
2008 0.1% -2.5%
2009 -2.6% 0.1%
2010 2.7% 2.8%
2011 1.5% 1.5%
2012 2.3% 1.6%
2013 1.8% 2.5%
2014 2.3% 2.6%
2015 2.7% 1.9%
2016 1.7% 2.0%
2017 2.2% 2.8%
2018 2.9% 2.3%
2019 2.3% 2.6%
2020 -2.8% -1.5%
2021 5.9% 5.7%
20221 2.0% 0.9%
1 2022 estimate based on 2.6% Q4 SAR
annual real growth rate.

My sense is that growth will still be slow in 2023, but the economy will avoid a recession. Although monetary policy is restrained, the burden of fiscal policy is gone. Car sales will likely rise in 2023, but housing will remain down.

My guess is that real GDP growth will most likely be positive in the 1.0% range in 2023 with downside risks if the FOMC defaults or Congress forces a debt default. With two of the best leading indicators pointing towards a recession, I will remain on a recession watch, and may change my view of a recession in 2023.

Here are the 10 economic questions for 2023 and some predictions:

• Question #2 for 2023: How slow will job growth be in 2023? Or will the economy lose jobs?
• Question No. 3 for the year 2023: What is the unemployment rate in December 2023?
• Question No. 4 for the year 2023: What is the participation rate in December 2023?
• Question No. 5 for the year 2023: What was the core inflation rate on an annual basis in December 2023?
• Question No. 6 of 2023: What is the federal funds rate in December 2023?
• Question No. 7 for the year 2023: How much will wages increase in 2023?
• Question No. 8 for the year 2023: How much will housing investment change in 2023? What about new housing and home sales in 2023?
• Question No. 9 of 2023: What will happen to housing prices in 2023?
• Question No. 10 for the year 2023: Will the stock increase further in 2023?

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