Will there be a recession in 2023?

Near the end of 2022, economists predicted that there would be a recession in 2023. We are halfway through the year, and that is yet to happen. Many economists, investors, and Federal Reserve policymakers are optimistic, and expect the economy to get stronger, with stock prices and bond yields going up.

 A recession refers to a declining GDP and low employment and production rates. When an economy is unable to produce goods and services to its maximum potential, it goes into a recession. A boom is an opposite scenario, where an economy produces more goods and services than it would normally be capable of. 

The US hasn't suffered a recession as of June 2023, because energy prices have decreased, and the economy and job market are less sensitive to interest rates. Low energy prices mean higher demand, and thus, easily replace Russian gas. With the economy being less sensitive to interest rates, people have more time to pay off loans. The loans also have lower rates. However, according to economists, we are not out of the woods yet. A recession is still possible because short-term interest rates still exceed ten-year treasury yields. Currently, the yield curve is inverted, which means that people have less time to pay off loans with higher rates. An inverted yield curve also provides an incentive for investors to take fewer risks and for banks to reduce the number of loans that they lend. These factors are what often lead to a recession.

    Normal Yield Curve:

    Inverted Yield Curve:

Normally, when the yield curve is inverted, that is a sign a recession will hit the economy in the near future. Fortunately, the good news is this isn't always the case. In 1966, the US economy had an inverted yield curve but faced no recession. That is because if stock prices are low, and there is an inverted yield curve at the same time, then corporate investment goes down. That is still a bad thing because the economy will no longer face a boom, but at least it won't go into a recession. That is what is happening with the US in 2023. 

The moral of the story is that an inverted yield curve doesn't necessarily mean that an economy will face a recession, but it isn't something that should be dismissed.