S&P Issues Economic Outlook U.S. Q3 2022: The Summer Of Our Discontent

GDP growth: Economic momentum will likely protect the U.S economy from recession in 2022. But, with supply-chain disruptions worsening as the weight of extremely high prices damage purchasing power and aggressive Federal Reserve policy increases borrowing costs, it's hard to see the economy walking out of 2023 unscathed.

Our U.S. GDP growth forecast is 2.4% for 2022 and 1.6% for 2023 (compared with 2.4% and 2.0%, respectively, in May).

Recession: While our baseline signals a low-growth recession, the chances of a contraction (a technical recession) are rising. We assess recession risk at 40% (35%-45% band), reflecting a larger spike in prices with even more aggressive Fed policy heading into 2023. The wider band reflects increased uncertainty over the Russia-Ukraine armed conflict.

Supply chain: Supply-chain disruptions, worsened by the Russia-Ukraine conflict and the China slowdown, remain the largest stumbling block for the U.S. economy. As inflation expectations become more entrenched, extreme price pressures will likely last well into 2023.

Labor force: The jobs market remains tight as unemployed workers quickly find jobs. Offering the COVID-19 vaccine to young children may help reverse the decline in labor force participation--now at a 45-year low--particularly for women.

Unemployment: The unemployment rate, at 3.6% in May and just over its pre-pandemic level, will remain near that rate until early 2023 when it climbs higher as successive Fed hikes take hold. With economic pressures worsening as the Fed tightens the screws, we now expect the unemployment rate to top 4.3% by the end of 2023 and climb over 5.0% by the end of 2025.

The Fed: Fed is now likely to push rates from zero at the beginning of the year to 300 basis points (bps) by year-end and reach 3.50%-3.75% by mid-2023. The Fed will keep monetary policy tight until inflation decelerates and nears its target in second-quarter 2024. We expect the Fed will start to cut rates in third-quarter 2024. Our lower GDP and inflation forecasts for 2023 and 2024 reflect this more aggressive policy stance.

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